POWER INCOME FUND QUARTERLY REPORT TO UNITHOLDERS

Transcription

1 POWER INCOME FUND Chute à Magnan, Saint-Paulin, Québec QUARTERLY REPORT TO UNITHOLDERS For the three-month and six-month periods ended June 30, 2004

2 MESSAGE TO UNITHOLDERS On behalf of the Board of Trustees, we are pleased to present the financial results of the Innergex Power Income Fund (the Fund ) for the three-month and six-month periods ended June 30, RESULTS During the quarter, Innergex hydroelectric facilities continued to benefit from good hydrological conditions due to precipitations and water flow levels slightly higher than the historic mean. With the additional contribution of the Windsor facility, we generated 126,574 megawatt hours or 7% more than forecast. The second quarter of the year is the Fund s most important in terms of gross revenues and cash flows due to the melting snowpack accumulated during the winter months. Gross revenues for the quarter amounted to $7.67 million, or 5% higher than forecast. Distributable Cash from operating activities of $5.58 million was 6% higher than forecast. For the first six months of the year, gross revenues of $12.84 million were 2% above forecast while Distributable Cash from operating activities amounted to $9.11 million or 4% more than forecast. ACQUISITION AND INCREASED DISTRIBUTION The Windsor power station acquired on April 27, 2004 started to contribute to the results of the group and, as such, allowed the Fund to increase its monthly cash distribution. On an annualized basis, cash distributions were increased from $0.925 to $0.935 per unit effective May 31, INTEREST RATE SENSITIVITY We would like to take this opportunity to address the impact that raising interest rates could have on the Fund. Interest rate for 25% of the long-term debt is fixed with an interest rate swap agreement until September 2007 and a further 16% of the long-term debt is at fixed-rate until year For the quarter, the combined interest rate was 4.47% compared to forecast rate of 6%. The Fund is currently benefiting from a favourable margin between prevailing interest rates and the interest rates used in the forecast. To date, Innergex Power Income Fund s journey reflects the forecast presented on June 2003 and we intend to continue maximizing the returns to our Unitholders. [Signed] Gilles Lefrançois, CA President and Chief Executive Officer Innergex Management Inc. Manager of the Fund [Signed] Jean La Couture, FCA Chairman of the Board of Trustees Innergex Power Trust August 2004

3 SUMMARY TABLE OF FACILITIES Facilities Installed Capacity (MW) Expected Annual Production (GW-hr) Electricity Purchaser Expiry of Power Purchase Agreement St-Paulin Hydro-Québec 2014 Windsor Hydro-Québec 2016 Chaudière Hydro-Québec 2019 Portneuf Hydro-Québec 2021 Portneuf Hydro-Québec 2021 Portneuf Hydro-Québec 2021 Montmagny Hydro-Québec 2021 Batawa OEFC (1) 2029 TOTAL (1) Ontario Electricity Financial Corporation HIGHLIGHTS FOR THE THREE-MONTH PERIOD ENDED JUNE 30, 2004 FOR THE SIX-MONTH PERIOD ENDED JUNE 30, 2004 ACTUAL FORECAST ACTUAL FORECAST Power Generated (MW-hr) 126, , , ,020 Gross Revenues $ 7,669,757 $ 7,288,509 $ 12,839,111 $12,600,616 EBITDA $ 6,198,761 $ 6,012,509 $ 10,248,495 $10,272,173 Net Income $ 3,004,294 $ 3,475,699 $ 4,641,439 $ 5,612,135 Distributable Cash from Operating Activities $ 5,581,845 $ 5,261,222 $ 9,110,671 $ 8,769,598 (Addition to Levelization Reserve) $ (749,061) $(1,027,317) $ (24,378) $ (302,634) (Reimbursement of long-term debt) $ (113,153) $ - $ (113,153) $ - Net Distributable Cash $ 4,719,631 $ 4,233,905 $ 8,973,140 $ 8,466,964 Net Distributable Cash per Unit $ $ $ $ Distributions declared $ 4,518,011 $ - $ 8,758,541 $ - Distributions declared per Unit $ $ - $ $ - Page 3

4 C ONSOLIDATED B ALANCE S HEETS A S AT J UNE 30, 2004 WITH COMPARATIVE FIGURES OF D ECEMBER 31, 2003 June 30, 2004 (unaudited) December 31, 2003 (audited) ASSETS Current assets Cash and cash equivalents Receivables Current portion of reserve accounts Other current assets Funds held in trust (Note 2) Reserve accounts (Note 6) Capital assets (Note 3) Intangible assets (Note 3) $ 4,207,904 2,537,160 1,484, ,226 $ 3,530,457 2,939,933 1,096, ,275 $ 9,210,997 $ 8,125,665 $ - 10,601, ,424,286 71,063,542 $ 439,778 7,727, ,435,601 66,627,906 $ 250,300,782 $ 232,356,781 LIABILITIES AND EQUITY Current liabilities Accounts payable and accrued liabilities Distributions payable to Unitholders Current portion of long term debt (Note 4 ) $ 2,758,941 1,511, ,567 $ 2,478,573 1,413,510 - $ 4,747,334 $ 3,892,083 Long-term debt (Note 4) Other liabilities (Note 2) Future income taxes Non-controlling interest $ 59,292,866-2,439,107 10,366,698 $ 50,000, ,778 2,298,239 10,089,925 Unitholders equity 173,454, ,636,756 $ 250,300,782 $ 232,356,781 See accompanying notes to unaudited consolidated financial statements. Page 4

5 C ONSOLIDATED S TATEMENTS OF I NCOME (Unaudited) Gross revenues Operating expenses Operating income General and administrative expenses Earnings before interest, taxes, depreciation, amortization, investment income and non-controlling interest ("EBITDA") Interest on long-term debt Depreciation and amortization (Note 3) Investment income Three-month period ended June 30, 2004 $ 7,669,757 1,068,971 $ 6,600, ,025 $ 6,198, ,243 2,184,138 (86,337 ) Six-month period ended June 30, 2004 $ 12,839,111 1,811,831 $ 11,027, ,785 $ 10,248,495 1,177,761 4,194,091 (171,947 ) Income before provision for income taxes and non-controlling interest Provision for income taxes Current Future $ 3,464,717 $ 5,048,590 (10,490 ) 80,179 (10,490 ) 140,868 69, ,378 Income before non-controlling interest Income allocated to non-controlling interest 3,395, ,734 4,918, ,773 Net Income $ 3,004,294 $ 4,641,439 Weighted average number of Trust Units outstanding 19,314,959 18,836,113 Net Income per weighted average Trust Unit $ 0.16 $ 0.25 See accompanying notes to unaudited consolidated financial statements. Page 5

6 C ONSOLIDATED S TATEMENTS OF U NITHOLDERS EQUITY (Unaudited) Unitholder's capital account, beginning of period Issued Trust Units April 8, 2004 Issuance costs Three-month period ended June 30, 2004 Number of units 18,357,267 1,050,000 Amount $ 169,427,161 $ 12,337,500 $ (402,377 ) Unitholders capital account, end of period 19,407,267 $ 181,362,284 Deficit, beginning of period $ (6,393,790) Net income 3,004,294 Distributions declared to Unitholders (Note 5) (4,518,011) Deficit, end of period $ (7,907,507) Unitholders equity, end of period 19,407,267 $ 173,454,777 Unitholder's capital account, beginning of period Issued Trust Units April 8, 2004 Issuance costs Six-month period ended June 30, 2004 Number of units 18,357,267 1,050,000 Amount $ 169,427,161 $ 12,337,500 $ (402,377 ) Unitholders capital account, end of period 19,407,267 $ 181,362,284 Deficit, beginning of period $ (3,790,405 ) Net income 4,641,439 Distributions declared to Unitholders (Note 5) (8,758,541) Deficit, end of period $ (7,907,507) Unitholders equity, end of period 19,407,267 $ 173,454,777 See accompanying notes to unaudited consolidated financial statements. Page 6

7 C ONSOLIDATED S TATEMENTS OF C ASH F LOWS (Unaudited) Three-month period ended June 30, 2004 Six-month period ended June 30, 2004 Cash flows from operating activities: Net income Adjustments for : Depreciation of capital assets Amortization of intangible assets Future income taxes Non-controlling interest Changes in non-cash working capital Cash flows from financing activities: Distributions to Unitholders Net proceeds from issuance of Trust Units after issue costs of $ 402,377 Reimbursement of long-term debt Cash flows from investing activities: $ 3,004,294 1,036,265 1,147,873 80, ,734 (229,999 ) $ 4,641,439 1,999,488 2,194, , ,773 (805,470 ) $ 5,429,346 $ 8,447,701 (4,419,695 ) (8,660,225 ) 11,935,123 11,935,123 (113,153) (113,153) $ 7,402,275 $ 3,161,745 Acquisition of tangible assets Business acquisition, net of cash acquired of $723,825 (Note 6) Addition to Reserve accounts - (7,657,666) (3,876,630) (11,500) (7,657,666) (3,987,516) Release from Reserve account - 724,683 $ (11,534,296) $ (10,931,999) Net increase in cash and cash equivalents $ 1,297,325 $ 677,447 Cash and cash equivalents, beginning of period 2,910,579 3,530,457 Cash and cash equivalents, end of period $ 4,207,904 $ 4,207,904 Supplemental cash flow disclosure: Interest expense paid $ 666,509 $ 1,198,956 See accompanying notes to unaudited consolidated financial statements. Page 7

8 N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS (Unaudited) Innergex Power Income Fund (the ''Fund'') is an unincorporated open-ended 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 hydroelectric power generating facilities (the Facilities ) and to indirectly acquire loans relating to some of the Facilities. As at June 30, 2004, the Fund indirectly owned interests in: (i) Innergex, Limited Partnership ("Innergex LP") which owns the three Portneuf facilities, the Chaudière facility and the St-Paulin facility; (ii) Trent-Severn Power, Limited Partnership ( Trent LP ) which owns the Batawa facility; (iii) Innergex Montmagny, Limited Partnership ( Innergex Montmagny LP ) which owns the Montmagny facility; and (iv) Hydro-Windsor, Limited Partnership ( Windsor LP ) which owns the Hydro-Windsor facility. Innergex Management Inc. (the Manager ) administers the Fund and manages Innergex Power Trust ( IPT ), a wholly-owned subsidiary of the Fund, which indirectly owns the assets and investments of the Fund. The Manager also provides management services to Innergex GP Inc., the general partner of Innergex LP and Innergex Holding LP, and to the operators of the Facilities. 1. Basis of presentation: The interim consolidated financial statements included in this report are unaudited and reflect normal and recurring adjustments which are, in the opinion of the Fund's management, considered necessary for a fair presentation. These financial statements have been prepared in conformity with Canadian Generally Accepted Accounting Principles. The same accounting policies as described in the Fund's latest annual report have been used, with the exception of the new accounting change described in note 3. 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 business is seasonal 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. Page 8

9 N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS (CONT D ) (Unaudited) 2. Funds held in trust: A subsidiary of the Fund had placed these funds in trust to settle claims and counter-claims related to the construction of a hydroelectric power generating facility. An equal amount had been recorded as a liability and presented as other liabilities on the balance sheet. These funds were released as the settlements were completed. 3. Change in accounting policy: In order to comply with the Generally Accepted Accounting Principles as promulgated by the Accounting Standards Board, the following change in accounting policy became effective on January 1, The sinking fund method of depreciation and amortization is no longer considered acceptable under the Generally Accepted Accounting Principles. The Fund was using this method of depreciation and amortization for its capital and intangibles assets. The Fund changed depreciation and amortization method starting January 1, 2004 to the straight line method over the same useful life as before. This should result in additional depreciation and amortization of $2.6 million for the year ending December 31, This change was applied prospectively using the respective net book values as at December 31, Long-term Debt: As part of the acquisition of Hydro-Windsor Inc. and Windsor LP, the Fund assumed a $ 8,312,500 debt bearing interest at a fixed rate of 11.7% until its maturity in November The debt is repayable by monthly blended payments of $ 105,399. The debt is accounted for at $ 9,882,586, its fair market value as at April 27, 2004, for an effective interest rate of 8.25%. The principal repayments for the next five years on this debt are as follows : Period ending : Amounts June 2005 $ 476,567 June 2006 $ 517,405 June 2007 $ 561,742 June 2008 $ 609,879 June 2009 $ 662,141 Thereafter $ 6,941,699 $ 9,769, Distributions to Unitholders: The Fund pays, on or about the 25 th day of each month, cash distributions that are made payable to Unitholders of record on the record date in the preceding month. Page 9

10 N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS (CONT D ) (Unaudited) 6. Acquisition of Hydro-Windsor Inc. and Windsor LP: Pursuant to an underwriting agreement, the Fund issued 1,050,000 Trust Units on April 8, 2004, at a price of $ per Trust Unit for net proceeds totaling $ 11,935,123. An amount of $ 11,387,900 was used for the following purposes : Acquisition of Hydro-Windsor Inc. and Windsor LP $ 8,381,491 Funding of the Levelization Reserve Account $ 2,356,409 Funding of the Hydrology Reserve Account $ 650,000 $ 11,387,900 As part of the acquisition plan, the Fund will upgrade the facility by investing $ 500,000 on improvements over the next 18 months, which amount has been raised by the issuance of the Trust Units and is included in the cash and cash equivalents account in the current assets of the Fund. The acquisitions of Hydro-Windsor Inc. and Windsor LP were accounted for using the purchase method at their respective acquisition costs on April 27, The earnings of Hydro-Windsor Inc. and Windsor LP have been consolidated with the Fund's results since the date of acquisition. The total purchase price was preliminary allocated as follows: Cash and cash equivalents $ 723,825 Net working capital (excluding long-term debt) (1,066,660) Capital assets 11,976,673 Intangible assets 6,630,239 Long-term debt (9,882,586) $ 8,381, Related party transactions: The amounts payable to Innergex Management Inc. under the Management Agreement ($165,115 for the three-month period and $311,115 for the six-month period) and the Administration Agreement ($25,250 for the three-month period and $50,500 for the six-month period) are included in the general and administrative expenses of the statement of income. Page 10

11 M ANAGEMENT S D ISCUSSION AND A NALYSIS O VERVIEW Innergex Power Income Fund is an unincorporated open-ended income trust that indirectly owns eight hydroelectric power generating facilities with a total installed capacity of 70.5MW. The facilities are operated and managed by Innergex Management Inc. (the Manager ) under long-term agreements with the Fund. The objective of the Fund is to distribute the resulting cash flow of the Fund to Unitholders on a monthly basis. The following Management Discussion and Analysis should be read in conjunction with the accompanying unaudited consolidated financial statements of the Fund for the three-month and six-month periods ended June 30, 2004 and the notes thereto as well as the Fund s Annual Report for the period ended December 31, For the benefit of the reader, we are comparing the actual operating results with the Fund's forecast. We are also including a comparison of the first year actual operating results of the Fund to the forecast included in the prospectus dated June 16, K EY PERFORMANCE INDICATORS The Fund measures its performance through key financial indicators that include power generated in megawatt hours (MWh), distributable cash from operating activities, distributable cash per unit and EBITDA defined as earnings before interest, taxes, depreciation and amortization, investment income and non-controlling 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 of the available cash and the capacity of the Fund to meet its objectives in terms of distributable cash to Unitholders. O PERATING R ESULTS During the quarter ended June 30, 2004, the Fund had gross revenues of $7.67 million and EBITDA of $6.20 million compared to forecast gross revenues of $7.29 million and forecast EBITDA of $6.01 million. These results are respectively 5% and 3% higher than forecast. This can be explained by the contribution from the Windsor facility acquired on April 27, 2004 and by hydrological conditions being close to their historical averages. During the quarter, the Fund produced 126,574 MWh of electricity, up 7% from forecast. On the other hand, operating expenses of $1.07 million were 9% above forecast and general and administrative expenses of $0.40 million were $0.10 million above forecast. Higher insurance premiums, office expenses and non-recurring legal fees were partly offset by a non-recurring gain on the settlement of a claim. The Fund s average electricity selling price for the quarter was close to forecast at $58.53/MWh. Page 11

12 M ANAGEMENT S D ISCUSSION AND A NALYSIS (CONT D ) O PERATING R ESULTS (CONT' D ) For the six-month period ended June 30, 2004, the Fund had gross revenues of $12.84 million and EBITDA of $10.25 million. Gross revenues were higher than forecast by 2% while EBITDA was close to forecast. Electricity production during the six-month period was 189,420 MWh or 3% above forecast. On a consolidated basis, the Fund enjoyed hydrological conditions close to the historical average and benefited from the contribution of the Windsor facility since its acquisition. Operating expenses amounted to $1.81 million, up 5% from forecast and general and administrative expenses of $0.78 million were $0.18 million higher than forecast mostly due to higher insurance premiums and office expenses. For the six-month period, the Fund s average electricity selling price was $65.02/MWh. During the quarter, interest expense of $0.64 million on long-term debt was 15% lower than forecast. The average interest rate for the quarter was 4.47% compared to forecast interest rate of 6%. For the six-month period, interest expense of $1.18 million was 21% lower than forecast. The average interest rate for the six-month period was 4.39% compared to forecast interest rate of 6%. Effective January 1, 2004, the sinking fund method of depreciation and amortization is no longer considered acceptable under GAAP. Therefore, the Fund has modified its depreciation and amortization method and is now depreciating its capital and intangibles assets using the straight line method over the same useful life as before. This unforeseen change in GAAP had a significant impact on net income when compared to forecast. However, this modification has no impact on cash flows or Net Distributable Cash. This change is the main reason in the increased to depreciation and amortization. For the three-month period, depreciation and amortization totaled $2.18 million, 41% higher than forecast and $4.19 million for the six-month period, or 35% higher than forecast. The income allocated to the non-controlling interest in Innergex Holding LP for the three-month period amounted to $0.39 million, $0.08 million higher than forecast. For the six-month period, the income allocated to the non-controlling interest was $0.28 million, $0.06 million higher than forecast. For the quarter, the Fund recorded net income of $3.0 million or $0.16 per unit, compared to net income of $3.48 million or $0.19 per unit and for the six-month period, the Fund had net income of $4.64 million or $0.25 per unit, compared to net income of $5.61 million or $0.31 per unit. Lower than forecast net income is mainly the result of the higher than forecast non-cash depreciation and amortization expense due to the modification to GAAP mentioned above. Page 12

13 M ANAGEMENT S D ISCUSSION AND A NALYSIS (CONT D ) L IQUIDITY AND C APITAL R ESOURCES For the quarter, cash flows from operations before changes in non-cash working capital stood at $5.66 million. Changes in non-cash working capital was negative at $0.23 million, which brings total cash flows from operating activities to $5.43 million. For the six-month period, cash flows from operations before changes in non-cash working capital stood at $9.25 million. Changes in non-cash working capital was negative $0.81 million, which brings total cash flows from operating activities to $8.45 million. During the quarter, distributions declared to Unitholders increased to $4.52 million or $ per unit due to the acquisition of the Windsor facility. Distributable Cash from operating activities was 6% higher than forecast at $5.58 million. For the six-month period, distributions declared to Unitholders increased to $8.76 million or $ per unit. Distributable Cash from operating activities was 4% higher than forecast at $9.11 million. There were no material capital expenditures at the facilities during the threemonth or six-month periods. The table below summarizes the 2004 distributions to date Distribution Record Date Payment Date Amount Amount per unit January 30, 2004 February 25, 2004 $ 1,413,510 $ February 27, 2004 March 25, 2004 $ 1,413,510 $ March 31, 2004 April 23, 2004 $ 1,413,510 $ Total, three-month period ended March 31, 2004 $ 4,240,530 $ April 30, 2004 May 25,2004 $ 1,494,360 $ May 31, 2004 June 23, 2004 $ 1,511,825 $ June 30, 2004 July 23, 2004 $ 1,511,826 $ Total, three-month period ended June 30, 2004 $ 4,518,011 $ Total, six-month period ended June 30, 2004 $ 8,758,541 $ As a result of the seasonality of the Fund s operation and as anticipated, a net amount of $ 0.75 million generated from the Fund s operations was invested back into the Levelization Reserve account to replenish the account in view of future distributions to Unitholders. Page 13

14 M ANAGEMENT S D ISCUSSION AND A NALYSIS (CONT D ) L IQUIDITY AND C APITAL R ESOURCES (CONT' D ) Following the Windsor acquisition, an additional amount of $2.35 million was invested in the Levelization Reserve. As at June 30, 2004, the Levelization Reserve totaled $7.17 million. At the same time, an amount of $0.65 million was added to the Hydrology Reserve, which now stands at $4.65 million. During the quarter, as per forecast, an amount of $77,500 was invested into the Major Maintenance Reserve which now amounts to $272,500. As at June 30, 2004 the Fund had cash and cash equivalent of $4.21 million. In addition, the Fund also had $12.09 million accumulated in its three reserve accounts. Working capital stood at $4.46 million with a working capital ratio of 1.94:1. During the quarter, the Fund s long-term debt was increased from $50 million to $59.77 million. This additional amount represents the market value of the fixed-rate debt assumed by the Fund following the acquisition of Hydro-Windsor. At the end of the quarter, the Fund also had access to an unused revolving credit facility of $5 million providing the Fund with significant additional liquidity, if required. As at June 30, 2004, the Fund had total assets of $250.3 million. The long-term debt-to-enterprise value ratio slightly increased from 18.8% as at March 31 to 21.6% as at June 30 mainly as a result of the indebtedness the Fund assumed with the acquisition of Hydro-Windsor. The Fund calculates Net Distributable Cash as follows: NET DISTRIBUTABLE CASH THREE-MONTH PERIOD SIX-MONTH PERIOD ACTUAL FORECAST ACTUAL FORECAST Earnings before interest, taxes, depreciation, amortization, investment income and noncontrolling interest ("EBITDA") $ 6,198,761 $ 6,012,509 $10,248,495 $10,272,173 Add (Less): Investment income 86, , , ,288 Major Maintenance Reserve account provision (77,500) (65,000) (142,500) (130,000) Distributions to minority interest - (40,431) - (80,863) Interest expense (636,243) (750,000) (1,177,761) (1,500,000) Current income taxes 10,490 (1,500) 10,490 (3,000) Distributable Cash from operating activities $ 5,581,845 $ 5,261,222 $ 9,110,671 $ 8,769,598 (Less): Reimbursement of long-term debt Addition to Levelization Reserve account (113,153) (749,061) - (1,027,317) (113,153) (24,378) - (302,634) Net Distributable Cash $ 4,719,631 $ 4,233,905 $ 8,973,140 $ 8,466,964 Cash distributed to Unitholders $ 4,518,011 $ 8,758,541 Page 14

15 M ANAGEMENT S D ISCUSSION AND A NALYSIS (CONT D ) C OMPARISON OF ACTUAL RESULTS WITH THE F UTURE- O RIENTED F INANCIAL I NFORMATION As part of the Initial Public Offering of the Fund, the Manager presented in the prospectus dated June 16, 2003, Future-Oriented Financial Information in the form of a Consolidated Statement of Forecasted Net Income and consolidated statement of Forecasted Distributable Cash for the twelve-month period ending June 30, 2004 ( FOFI ). For the benefit of the reader, the following tables compare the actual results of the Fund with the FOFI. However, it is important to note that the actual results only include 363 days of operations compared to a full year of 366 days as presented in the FOFI. Consolidated Statement of Income for the twelvemonth period ending June 30, 2004 (unaudited) Gross revenues Operating expenses Operating income Actual (363 days of operations) $ 23,624,739 $ 3,526,627 $ 20,098,112 FOFI (366 days of operations) $ 23,254,341 $ 3,306,829 $ 19,947,512 General and administrative expenses $ 1,433,123 $ 1,193,000 Earnings before interest, taxes, depreciation, amortization, investment income and non-controlling interest ("EBITDA") $ 18,664,989 $ 18,754,512 Interests on long-term debt $ 2,299,018 $ 3,000,000 Depreciation and amortization $ 6,857,441 $ 6,213,252 Investment income $ (366,135) $ (422,575) Income before provision for income taxes and non-controlling interest $ 9,874,665 $ 9,963,835 Provision for income taxes Current Future Income allocated to non-controlling interest $ (10,490) $ 196,951 $ 186,461 $ 539,685 $ 6,000 $ 97,000 $ 103,000 $ 130,611 Net income $ 9,148,519 $ 9,730,224 Weighted average number of Trust Units outstanding Net income per Trust Unit 18,596,690 18,357,267 $ 0.49 $ 0.53 Page 15

16 M ANAGEMENT S D ISCUSSION AND A NALYSIS (CONT D ) C OMPARISON OF ACTUAL RESULTS WITH THE F UTURE- O RIENTED F INANCIAL I NFORMATION( CONT' D ) Gross revenues of $23.62 million and operating expenses of $3.53 million are respectively higher than the FOFI by 1.6% and 6.6%. This can generally be explained by the acquisition of Hydro-Windsor completed on April 27, 2004, which was not included in the FOFI. For the 12-month period, general and administrative expenses of $1.43 million, were $0.24 million higher than forecast due to higher insurance and office expenses. Higher revenues mostly offset by higher expenses resulted in EBITDA of $18.66 million, somewhat in line with forecast EBITDA of $18.75 million. Interest expense on long-term debt of $2.3 million was 23% lower than forecast of $3.0 million. In the FOFI, the Manager forecast average interest rate of 6% while the actual effective interest rate was 4.44% including the additional interest expense incurred on the fixed-rate long-term debt assumed with the acquisition of Hydro-Windsor. The Fund was using the sinking fund method of depreciation and amortization for its capital and intangibles assets. As mentioned above, this method is no longer considered acceptable under GAAP. Effective January 1, 2004, the Fund changed its depreciation and amortization method to the straight line method over the same useful life as before. This resulted in actual depreciation and amortization of $6.86 million, 10% higher than forecast. Investment income was $0.06 million lower than forecast due to lower rates of interest for fixed term investments. The income allocated to non-controlling interest of $0.54 million was higher than forecast of $0.13 million due to better than anticipated results at the subsidiary in which the non-controlling interest is held. Net income for the period totaled $9.15 million, or $0.49 per unit, compared to forecast net income of $9.73 million, or $0.53 per unit. The decrease in net income resulted from the modification to GAAP described above and does not affect cash generated from operating activities. Page 16

17 M ANAGEMENT S D ISCUSSION AND A NALYSIS (CONT D ) C OMPARISON OF ACTUAL RESULTS WITH THE F UTURE- O RIENTED F INANCIAL I NFORMATION( CONT' D ) Consolidated statement of distributable cash for the twelve-month period ending June 30, 2004 (unaudited) Net income Add (Less): Depreciation and amortization Future income taxes Income allocated to non controlling interest Major maintenance account Distributions to non-controlling interest Distribuable cash from operating activities Release from Reserve Account Reimbursement of long-term debt Actual (363 days of operations) $ 9,148,519 6,857, , ,685 (272,500 ) - $ 16,470,096 1,402,413 (113,153 ) FOFI (366 days of operations) $ 9,730,224 6,213,252 97, ,611 (260,000 ) (161,725 ) $ 15,749,362 1,231,110 - Net Distribuable cash for the period $ 17,759,356 $ 16,980,472 Weighted average number of Trust Units outstanding 18,596,690 18,357,267 Net Distributable cash per Trust Unit $ $ As described above, Distributable cash from operating activities was $16.47 million or 4.6% higher than forecast. During the period the Fund did not make any cash distributions to non-controlling interest. As a result of the Hydro-Windsor facility acquisition, the Fund released a larger amount from the Levelization Reserve account. The Fund disbursed $113,153 for reimbursement of long-term debt related to Hydro-Windsor. Net Distributable cash for the period of $17.76 million was $0.78 million or 4.6% higher than forecast. With the issuance of 1,050,000 additional units on April 8, 2004, the weighted average number of units outstanding was higher than anticipated. Net Distributable cash per unit was $0.955 compared to forecasted Net Distributable cash per unit of $ Page 17

18 M ANAGEMENT S D ISCUSSION AND A NALYSIS (CONT D ) R ISK M ANAGEMENT The Manager reduced the Fund s risk of an unforeseen upward movement in short-term interest rates by entering into a swap transaction with a major Canadian bank and effectively fixing the interest rate on 25% of the Fund s consolidated long-term debt until September In addition, the interest rate on approximately 16% of the consolidated long-term debt of the Fund is fixed until R ISKS AND U NCERTAINTIES 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. O UTLOOK The Manager is confident that the Fund will continue to generate stable operating cash flow. The operating performance of the Fund remains in line with our expectations. F ORWARD-LOOKING S TATEMENTS Investors should take note that certain statements in this Management s Discussion and Analysis are forward-looking and may not give full weight to all of the potential risks and uncertainties. Forward-looking 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 forward-looking statements. Any forward-looking statements speak only as of the date made. The Fund is not undertaking to update any forward-looking statements. Page 18

19 I NVESTOR I NFORMATION TRANSFER AGENTS, REGISTRAR AND TRUSTEE: National Bank Trust Inc. 1100, University Street, 9 th floor, Montreal, Quebec H3B 2G7 FOR PUBLIC AND INVESTMENT ANALYST INQUIRIES PLEASE CONTACT: Jean Trudel, Vice-President Finance 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 and trade under the symbol IEF.UN. INNERGEX POWER INCOME FUND 1111, Saint-Charles Street West, East Tower, Suite 1255 Longueuil, Quebec J4K 5G4 Telephone: (450) Fax: (450) info@innergex.com

20 POWER INCOME FUND 1111, Saint-Charles Street West, East Tower, Suite 1255 Longueuil, Québec J4K 5G4 Telephone: (450) Fax: (450)