MANAGEMENT S DISCUSSION AND ANALYSIS

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1 MANAGEMENT S DISCUSSION AND ANALYSIS This Management s Discussion and Analysis ( MD&A ) was prepared as of March 16, 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 Income Fund (the Fund ) for the twelvemonth financial year ended December 31, This MD&A should be read in conjunction with the audited consolidated financial statements for the financial year ended December 31, 2008, and the accompanying notes to the audited consolidated financial statements contained in this annual report. The consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ( GAAP ). The Fund reports its results in Canadian dollars. Certain amounts included in this MD&A are rounded, to make reading easier. These rounded numbers may affect certain sums. Effectiveness of Disclosure Controls and Procedures The President and Chief Executive Officer and the Vice President and Chief Financial Officer of Innergex Renewable Energy Inc. (the Manager ), have designed, or caused to be designed under their supervision: o o Disclosure controls and procedures ( DC&P ) to provide reasonable assurance that (i) information required to be disclosed by the Fund in its annual filings, interim filings or other reports filed or submitted by it under applicable securities legislation is recorded, processed, summarized and reported within the prescribed time periods; and, (ii) material information regarding the Fund is accumulated and communicated by others to the Fund s Manager, including its President and Chief Executive Officer and the Vice President and Chief Financial Officer in a timely manner, particularly during the period in which the annual filings are being prepared. internal controls over financial reporting ( ICFR ) to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes, in accordance with Canadian GAAP. In accordance with Regulation respecting certification of disclosure in issuers annual and interim filings, the President and Chief Executive Officer and the Vice President and Chief Financial Officer of the Manager have evaluated the effectiveness of the DC&P and ICFR for the year ended December 31, 2008 and have concluded that they were effective and that there were no material weakness relating to the DC&P and ICFR. There was no change in the ICFR during the most recent period that have materially affected, or are reasonable likely to affect, the ICFR. ForwardLooking Statements In order to inform holders of units of the Fund as well as potential investors on future prospects of the Fund, sections of this MD&A may contain forwardlooking statements within the meaning of securities legislation ( Forwardlooking Statements ). Forwardlooking Statements can generally be identified by the use of words and phrases, such as may, will, estimate, anticipate, plans, expects or does not expect, is expected, budget, scheduled, forecasts, intends or believes, or variations of such words and phrases that state that certain events will occur. Forwardlooking Statements represent, as of the date of this MD&A, the estimates, forecasts, projections, expectations or opinions of the Manager relating to future events or results. Forwardlooking Statements involve known and unknown risks, uncertainties and other important factors which may cause the actual results or performance to be materially different from those expressed or implied by the Forwardlooking Statements. The material risks and uncertainties that may cause the actual results and developments to be materially different from the current expressed expectations are discussed in this MD&A under the heading Risk and Uncertainties and include risks relating to operations, hydrology and wind regime, large customers; interest rates, exchange rate, separation agreement, tax treatment of distributions and amendments to laws, regulations and permits. Although the Manager believes that the expectations instigated by the Forwardlooking Statements are based on reasonable and valid hypotheses, there is a risk that the Forwardlooking Statements may be incorrect. The reader of this MD&A is cautioned not to rely unduly on these Forwardlooking Statements. The Forwardlooking Statements, expressed verbally or in writing, by the Fund or by a person acting on its behalf, are expressly qualified by this cautionary statement. The Fund does not undertake any obligation to update or revise any Forwardlooking Statements, whether as a result of events or circumstances occurring after the date hereof, unless required by legislation. Innergex Power Income Fund 1

2 OVERVIEW General Innergex Power Income Fund is a Canadian income fund listed on the Toronto Stock Exchange under the ticker symbol IFE.UN, that indirectly owns interests in ten hydroelectric power plants and two wind farms, with a total installed capacity of 340 megawatts ( MW ), representing a net interest of 210 MW. These hydroelectric facilities and wind farms, commissioned between 1994 and 2007, have a weighted average age of approximately six years and sell the power produced under longterm Power Purchase Agreements ( PPA ). Seven hydroelectric facilities and two wind farms are located in the province of Quebec, and the power produced is sold to HydroQuébec. A hydroelectric facility is located in Ontario, and the power produced is sold to the Ontario Electricity Financial Corporation. A hydroelectric facility is located in British Columbia and sells the power produced to the British Columbia Hydro and Power Authority. The last hydroelectric facility is located in the State of Idaho (USA), and the power produced is sold to the Idaho Power Company. The Manager operates and manages the hydroelectric facilities and wind farms under longterm agreements with the Fund. Innergex Power Income Fund was created in October It completed its initial public offering in July 2003 and began making monthly cash distributions to its unitholders in August Standard & Poor s Rating Service ( S&P ) has assigned a stability rating of SR2 (stable outlook and moderate distribution profile) for the Fund s units, indicating a high level of cash distribution stability. This rating does not represent a recommendation to acquire, sell or hold Fund units and could be revised or withdrawn at any time by the rating agency. Business Strategy The Fund s primary objective is to ensure the stability and sustainability of the net distributable cash payable to its unitholders and, wherever possible, to increase the amount of net distributable cash per unit. The Fund seeks to achieve its objectives by: Supervising and enhancing the operation of its hydroelectric facilities and wind farms; and, Acquiring or by investing in new electricity generating facilities. The Fund s hydroelectric facilities and wind farms are supervised by the Manager s experienced personnel, who have been engaged in the development, acquisition, construction, ownership and operation of hydroelectric power plants since 1990, and of wind farms since This team is particularly capable in the area of renewable energy projects. The Fund has three reserve accounts designed to help ensure the stability of cash distributions. The Levelization reserve was established using a portion of the proceeds from the initial public offering, and was increased following the acquisition of the Windsor facility. Additional amounts are annually added to the Levelization reserve by the Horseshoe Bend facility over a number of years in order to levelize Horseshoe Bend s cash contributions over the life of its PPA. The Hydrology / wind power reserve was also created using a portion of the proceeds from the initial public offering, and was increased following the Fund s acquisitions in 2004, 2005 and This reserve is to be used in the event that the net distributable cash for any year is lower than expected, due to normal changes in hydrology or wind conditions or other unpredictable factors. Finally, amounts invested quarterly in the Major maintenance reserve account total approximately $980,000 on an annual basis. The Major maintenance reserve account has been created in order to fund any major plant repairs that may be required to maintain the Fund s generating capacity. The Fund is well positioned to acquire new energygenerating facilities, given the Fund s reasonable debt level, the market price of the Fund s unit that has proven to be quite resilient given the actual economic and financial crisis and the Manager s seasoned team. Furthermore, the Fund has entered on July 4, 2003 into a cooperation agreement with Innergex II Income Fund ( Innergex II ), a separate trust created to build, own and operate renewable energy projects throughout North America. Innergex II became a whollyowned subsidiary of the Manager on December 6, Pursuant to the terms of the cooperation agreement the Fund and the Manager grant each other a mutual right of first offer with respect to any of their respective renewable powergenerating projects or any assets owned by their respective entities, which could be owned by one of them, directly or indirectly, and which it would wish to sell or offer to a third party purchaser. However, this right of first offer does not apply to a partner in an existing or future project who has negotiated such a right of first offer with one or the other parties in relation with a project and has signified in writing to the relevant party his intention to exercise its right of first offer in respect of an offer of such party to sell its interest in the related project. The cooperation agreement also states that if the offerer acquires power generating assets from a third party, and that these assets are later sold to the other party within a specified time frame following their acquisition by the offerer, the offerer will be entitled to the reimbursement of costs and expenses incurred in relation with the assets being sold. New power plants will only be acquired if they are likely to increase the Fund s net distributable cash per unit, and enhance the stability and sustainability of cash distributions. Consideration will be limited to renewable energy projects. The Fund plans to use new acquisitions to diversify its assets in terms of geography, watersheds, customers and energy sources. The Fund s acquisitions up to this date have been consistent with this strategy. Innergex Power Income Fund 2

3 Key Performance Indicators The Fund measures its performance using key performance indicators that include power generated in megawatthours (MWhr), net distributable cash, net distributable cash per trust unit, adjusted net income (loss) and EBITDA, defined as earnings before interest, provision for income taxes, depreciation and amortization, other revenues and expenses, and minority interest. Other revenues and expenses include investment revenues, realized or unrealized losses and gains on derivative financial instruments, compensation for defective equipment and realized or unrealized foreign exchange losses and gains. These indicators are not recognized measures under Canadian GAAP. Consequently, they may not be comparable to measures presented by other issuers. The Fund believes that these indicators are important since they provide the reader with additional information about production, available cash and the Fund s ability to meet its cash distribution objectives to unitholders. The Fund also believes that they facilitate the comparison of results over different periods. Seasonality The results of the Fund have a seasonal character due to changes in the water and wind conditions from one quarter to another during a typical year. The second and fourth quarters of the year are generally those in which gross operating revenues are higher. The results of an interim period should not be considered to be representative of the results of a full year. Seasonal variations are partially offset due to the complementary nature of the production from hydroelectric facilities and from wind farms. The chart presented on the right side shows the actual 2008 annual revenues broken down by sources of production. Given that hydrology and wind conditions registered during the third quarter of 2008 were greater than longterm averages, revenues realized during this quarter were above those recorded during the fourth quarter, contrary to what is usually expected based on longterm averages. Actual 2008 gross operating revenues M$ per quarter Q1 Q2 Q3 Q4 Hydroelectric facilities and wind farms Hydroelectric facilities Wind farms Market Trends Electricity has traditionally been generated, transmitted and distributed to customers by monopolistic utilities. However, rapid growth in demand, rising electricity rates, technological advances and environmental concerns have led to a restructuring of the electricity industry. While the amount of electricity generated by independent power producers has so far been relatively modest compared to that generated by public utilities, planners have recognized the benefits of independent power projects, particularly where power is produced from renewable sources or at higher efficiency levels than conventional, utilityowned generating facilities. Consequently, independent power producers, who typically generate electricity from sources such as water and wind, are expected to play an increasing role in filling future energy needs. Selected annual information December 31, 2008 December 31, 2007 December 31, 2006 Gross operating revenue $ 59,430,461 $ 40,371,641 $ 41,153,741 EBITDA $ 47,097,496 $ 31,293,233 $ 32,427,252 Net (loss) income $ (3,238,170) $ (28,370,027 ) $ 11,899,262 Net (loss) income per trust unit $ (0.11) $ (1.13 ) $ 0.48 Total assets $ 530,007,626 $ 547,555,957 $ 345,360,681 Long term financial liabilities $ 245,770,307 $ 212,264,979 $ 107,175,495 Distributions declared to unitholders $ 29,392,514 $ 24,196,093 $ 23,816,170 Distributions declared per trust unit $ $ $ The growth of gross operating revenue during the year is mainly due to the acquisition of a 38% interest in the BaiedesSables ( BDS ) and AnseàValleau ( AAV ) wind farms, concluded on December 6, 2007, (collectively the Wind Farm Acquisitions ) and to more favourable hydrology conditions than in In 2008, the Fund recorded a significant improvement to its net loss compared to This improvement is due to the nonrecurring nature of the adjustments to the provision for future income taxes of $40.2 million recorded in 2007, to the Wind Farm Acquisitions and to the acquisition of IHI Hydro Inc. ( IHI ) on May 29, These effects were partially offset by an unrealized loss on derivative financial instruments of $21.2 million resulting from a general decrease in benchmark interest rates. As the Fund does not use hedge accounting, changes in the market value of derivative financial instruments have a direct effect on net income. It should be noted that the nonrecurring adjustments to the provision for future income taxes of $40.2 million recorded in 2007 followed the adoption of amendments relating to the taxation of income trusts during the second quarter of 2007 and the decrease in income tax rates adopted during the fourth quarter of 2007 by the Government of Canada. Innergex Power Income Fund 3

4 The slight decrease in total assets posted in 2008 compared to 2007 is mainly due to the decrease in accounts receivable, to the amortization of intangible assets and to the depreciation of property, plant and equipment, partially offset by the IHI acquisition. The growth in total assets in from 2006 to 2007 was a result of the Wind Farm Acquisitions. In 2008, the increase in longterm financial liabilities is due to the IHI acquisition and the increase in liabilities related to derivative financial instruments. The latter is due to a general decrease in benchmark interest rates. It should be noted that the Fund maintains a debttoenterprise value ratio of only 45.9%. In addition, as at December 31, 2008, interest rates on 92% of the Fund s total debt were effectively fixed at a weighted average rate of 5.98% and included the prevailing applicable margin. Due to the abovementioned acquisitions, the Fund was able to increase distributions declared to unitholders, which have increased from $0.965 per unit (annualized) in 2007 to $1.00 per unit (annualized) since January 1, This increase in distributions per unit, combined with the private placement of 4,724,409 units completed in 2007 to complete the Wind Farm Acquisitions, explains the growth of annual distributions declared to unitholders from 2007 to Adjusted Net Income The manager believes that adjusted net income represents important additional information for the reader because it provides a profitability measure which excludes certain elements that have no impact on cash on hand. Adjusted net income excludes unrealized foreign exchange loss / gain and unrealized loss / gain on derivative financial instruments as well as any future income tax impact associated. Adjusted net income also excludes some nonrecurring items such as the impact on future income taxes emanating from modifications to fiscal laws or from changes in tax rates. The Fund calculates adjusted net income as demonstrated below: Adjusted Net Income December 31, 2008 December 31, 2007 December 31, 2006 Net (loss) income $ (3,238,170 ) $ (28,370,027 ) $ 11,899,262 Add / (deduct): Unrealized loss (gain) on derivative financial instruments $ 21,192,791 $ (1,601,744 ) $ (145,111) Unrealized foreign exchange loss (gain) $ 426,585 $ (351,112 ) $ 86,070 Future income taxes relating to taxation of trusts $ $ $ Increase (decrease) in future income tax rates $ (2,680,653) $ (6,713,967 ) $ (77,103) Future income taxes relating to unrealized (losses) gains on foreign exchange and on derivative financial instruments $ (3,222,054) $ 6,795 $ Adjusted net income $ 12,478,499 $ 9,880,408 $ 11,763,118 Adjusted net income per unit $ 0.42 $ 0.39 $ 0.48 OPERATING RESULTS The Fund s operating results for 2008 are compared with operating results for the same period in When evaluating its operating results, the Fund compares generation of electricity with a longterm average for each hydroelectric facility and each wind farm. These longterm averages are determined carefully and prudently to allow longterm forecasting of the expected generation for each of the Fund s facilities. To define the longterm average of a power generating facility, independent engineers carry out studies that take into consideration a number of important factors: for hydroelectricity, engineers consider the historically observed flows of the river, the operating head, and the reserved aesthetic and ecological flows; and for wind energy, they consider wind conditions. The engineers also take into account the site topography, installed capacity, energy losses, operational features, maintenance, etc. Year to year, production will fluctuate, but over an extended period, production should approach the forecasted longterm average. Innergex Power Income Fund 4

5 Gross Operating Revenue For the twelve months of operation in 2008, the Fund recorded gross operating revenue of $59.4 million, an increase of 47% compared to gross operating revenue of $ 40.4 million in This increase is mainly due to more favourable hydrology conditions in 2008 and to the impact of the Wind farm Acquisitions for a full year. In 2007, the BDS and AAV wind farms contributed to the gross operating revenue over a period of only 26 days. In 2008, hydrology conditions provided for electricity production that was 7% higher than the longterm average whereas it was 3% lower than the longterm average in For the year ended December 31, 2008, the Fund s ten hydroelectric facilities and two wind farms produced 862,394 MWhr of power, 42% more than the 608,509 MWhr for the twelvemonth period in 2007 and 3% above the longterm average. Results for 2008 also benefited from increases related to inflation in electricity rates under the longterm PPAs with HydroQuébec and the British Columbia Hydro and Power Authority. The PPAs of the hydroelectric facilities located in the province of Quebec include an increase in electricity rates, based on the Consumer Price Index ( CPI ), of a minimum of 3% and a maximum of 6% per year. The PPA for the Rutherford Creek facility located in British Columbia includes an electricity rate adjustment which takes into account 50% of the CPI. Finally, the PPAs for the two wind farms located in the province of Quebec include an increase in electricity rates based on approximately 18% of the CPI. Inflation has a positive impact on the Fund s results because the related increase in revenue is greater than the related increase in operating expenses. Operating results Operating period from Operating period from January 1 to December 31, 2008 January 1 to December 31, 2007 Production Longterm Production Longterm (MWhr) average (MWhr) average (MWhr) (MWhr) SaintPaulin 59,223 41,082 39,159 41,082 Portneuf1 41,633 40,822 37,757 40,822 Portneuf2 67,511 68,496 61,331 68,496 Portneuf3 42,690 42,379 38,978 42,379 Chaudière 152, , , ,651 Montmagny 7,847 8,000 6,845 8,000 Batawa 39,262 32,938 27,398 32,938 Windsor 36,633 31,000 33,854 31,000 Horseshoe Bend 40,162 46,800 46,147 46,800 Rutherford Creek 161, , , ,000 BaiedesSables 1 110, ,360 10,762 10,830 AnseàValleau 1 102, ,240 7,495 11,458 Total 862, , , ,456 1 Representing the 38% interest in the wind farm acquired on December 6, 2007 by the Fund. SaintPaulin The SaintPaulin facility consists of an 8 MW plant at Magnan Falls in the municipality of SaintPaulin, Quebec. The plant was built and commissioned in The PPA for the SaintPaulin facility expires in 2014 and is renewable for an additional 20year period. The facility generated 59,223 MWhr of power during the Fund s twelvemonth operating period. This was 44% more than expected and 51% better than in In 2008, the electricity produced was sold at an average rate of $59.15/MWhr compared to an average rate of $67.79/MWhr in Under the PPA, electricity delivered beyond the agreed maximum quantity deliverable of 45,677 MWhr is paid at a price of $16.00/MWhr. This excess quantity represented 11,784 MWhr in 2008 (nil in 2007), and explains the lower average rate in For the SaintPaulin facility and for the other facilities located in the province of Quebec, the reference period for the calculation of the excess quantity of electricity goes from December 1 st to November 30 th. SaintPaulin GWhr days Actual production Longterm average Innergex Power Income Fund 5

6 Portneuf The Portneuf facilities consist of three power plants with a combined installed capacity of 25.9 MW, located a few kilometres apart on the Portneuf River in the municipalities of SainteAnnedePortneuf and LonguePointe, Quebec. All commissioned in 1996, the plants produce an average of 151,697 MWhr of energy per year, representing 18% of the Fund s total expected annual production. The Portneuf PPA expires in 2021 and is renewable for an additional period of 25 years. In addition to revenue from the power generated at the Portneuf facility, the Fund receives cash payments from HydroQuébec to compensate for the partial diversion of the water flow that had been available to the Fund s plants. These payments are based on longterm average annual water flows over 20 years, but are also contingent on turbine availability and maximum production with the water resources made available by HydroQuébec. In 2008, the three Portneuf facilities generated, or were compensated for, the equivalent of 151,834 MWhr of power, which is slightly above the longterm average and 10% more than the 138,066 MWhr of power paid in In 2007, the three Portneuf facilities were shut down during the last weeks of the second quarter and the first week of the third quarter for maintenance of the HydroQuébec TransEnergie s Les Basques substation. In addition, the three Portneuf facilities were shut down again during the two last weeks of October 2007, as requested by the Ministère des Transports du Québec, for moving the transmission line. The average selling price in 2008 was $69.76/MWhr, compared with the average selling price of $67.75/MWhr in Portneuf GWhr days Actual production Longterm average Chaudière The 24 MW Chaudière power plant lies on the Chaudière River in Lévis, Quebec, on the south shore of the St. Lawrence River. The plant was commissioned in The Chaudière PPA expires in 2019 and is renewable for an additional period of 20 years. The Chaudière PPA includes a power rate premium for the power generation capacity made available to HydroQuébec from December to March. For the twelve months ended December 31, 2008, the Chaudière plant generated 152,217 MWhr of power, 30% above the longterm average and 29% more than the 118,147 MWhr produced in The average selling price in 2008 was $71.66/MWhr, compared to the average selling price of $74.45/MWhr in Under the PPA, the electricity delivered beyond the agreed maximum quantity of 131,321 MWhr is paid at a lower price of $16.00/MWhr. The excess quantity represented 17,095 MWhr in 2008 (nil in 2007), explaining the lower average price in 2008 compared to Chaudière GWhr days Actual production Longterm average Montmagny The Montmagny power plant has an installed capacity of 2.1 MW and is located on the Du Sud River in Montmagny, Quebec. It was commissioned in The PPA for the plant expires in 2021 and is renewable for an additional 25year period. The Montmagny PPA includes a rate premium for power generation from December to March. In 2006, work was conducted in order to increase the longterm annual production average to 8,000 MWhr. The Montmagny plant generated 7,847 MWhr of power for the twelve months ended December 31, 2008, representing 2% less than the longterm average but 15% more than the 6,845 MWhr produced in The average selling price in 2008 was $70.82/MWhr, an increase compared with the average selling price of $68.60/MWhr in Montmagny GWhr days Actual production Longterm average Batawa Located on the TrentSevern waterway near Trenton, Ontario, the Batawa hydroelectric power plant has an installed capacity of 5 MW. The facility was commissioned in The PPA entered with the Ontario Electricity Financial Corporation has an initial term of 30 years until 2029, and will subsequently remain valid unless one of the parties to the agreement gives a oneyear cancellation notice. The Batawa PPA provides for a premium on power sold in the winter and during peak hours, versus production sold in the summer or during offpeak hours. For the twelve months of 2008, the Batawa facility generated 39,262 MWhr of electricity, which is 19% above the longterm average and 43% better than the 27,398 MWhr produced in The average selling price in 2008 was $61.88/MWhr, which was slightly lower than the average selling price of $62.15/MWhr in 2007, due to a lower winter and peakhour production in Batawa GWhr days Actual production Longterm average Innergex Power Income Fund 6

7 Windsor The Windsor facility is located on the St. François River near the city of Windsor, Quebec. The 5.5MW facility was commissioned in 1996 and acquired by the Fund on April 27, The PPA for the facility expires in 2016 and is renewable for an additional period of 20 years. The Windsor PPA includes a power rate premium for the power generation capacity made available to HydroQuébec from December to March. During 2008, the Windsor plant generated 36,633 MWhr of electricity, which is 18% higher than the longterm average and 8% better than in The average selling price for the period was $80.30/MWhr compared with $78.53/MWhr in Windsor GWhr Actual production Longterm average Horseshoe Bend The 9.5 MW Horseshoe Bend facility is located in the city of Horseshoe Bend on the Payette River in the State of Idaho (USA). It was commissioned in 1995 and acquired by the Fund on December 31, The Horseshoe Bend PPA entered with the Idaho Power Company expires in The selling price under this PPA has a fixed component per MWhr that fluctuates seasonally and represents approximately 85% of the total selling price, plus a variable component that is set each year by the Idaho State Public Utility Commission and represents nearly 15% of the total selling price. In 2008, the facility generated 40,162 MWhr, which is lower than the longterm average of 46,800 MWhr and 13% lower than in During the fourth quarter of 2008, the facility was shut down for a period of 45 days to perform maintenance work and repairs to the dam. For 2008, the average selling price was C$68.90/MWhr, the same as in Horseshoe GWhr Actual production Longterm average Rutherford Creek The Rutherford Creek facility is located near Pemberton, British Columbia. This 49.9 MW facility was commissioned in 2004 and has an annual longterm average production of 180,000 MWhr. The facility was acquired by the Fund on December 15, For 2008, the facility generated 161,584 MWhr, which is 10% below the longterm average and 11% lower compared to the 180,636 MWhr produced in During the first quarter of 2008, the facility was shut down for a period of 49 days to perform mechanical maintenance work and an inspection of the penstock. In 2008, the average selling price was at $54.73/MWhr compared to $54.09/MWhr in The plant's PPA entered with the British Columbia Hydro and Power Authority has a term of 20 years and expires in Rutherford GWhr days Actual production Longterm average BaiedesSables The BaiedesSables wind farm is a MW windpower facility located in Baiedes Sables and MétissurMer, Quebec, which Innergex II developed jointly with its partner, through the Cartier Wind Energy joint venture. The facility was commissioned in November 2006, and is expected to produce 298,317 MWhr annually. The Fund acquired a 38% interest in this facility on December 6, 2007, representing a net installed capacity of 41.6 MW and a net expected annual production of 113,360 MWhr. For the twelvemonth period ended December 31, 2008, the BaiedesSables wind farm generated 110,657 MWhr, which represents the Fund's interest. This level is 2% below the longterm average. From the time of its acquisition, to the end of the year 2007 (26 days), the wind farm generated 10,762 MWhr, which represents the Fund's interest. Electricity produced by the BaiedesSables wind farm is sold to HydroQuébec under a PPA expiring in The average selling price in 2008 was $78.30/MWhr, compared with the average selling price of $77.96/MWhr recorded during the 26 days of BaiedesSables GWhr days 2008 Actual production Longterm average Innergex Power Income Fund 7

8 AnseàValleau The AnseàValleau wind farm is a MW windpower facility located in the city of Gaspé, Quebec, which Innergex II developed jointly with its partner, through the Cartier Wind Energy joint venture. The facility was commissioned in November 2007, and is expected to produce 298,000 MWhr annually. The Fund acquired a 38% interest in this facility on December 6, 2007, representing a net installed capacity of 38.2 MW and a net expected annual production of 113,240 MWhr. In 2008, the wind farm generated 102,975 MWhr, which is 9% below the longterm average. From the time of its acquisition, to the end of 2007 (26 days), the AnseàValleau wind farm generated 7,495 MWhr. Electricity produced by the AnseàValleau wind farm is sold to HydroQuébec, pursuant to a PPA expiring in The average selling price in 2008 was $78.42/MWhr, a slight increase compared with the average selling price of $77.91/MWhr recorded during the 26 days of AnseàValleau GWhr days 2008 Actual production Longterm average EXPENSES Operating Expenses Operating expenses consist primarily of the operators salaries, water rights, royalties, insurance premiums, taxes, property taxes, and maintenance and repairs for the hydroelectric facilities and wind farms. These expenses totalled $9.1 million, compared to $6.4 million in This increase results from the contribution of the Wind Farm Acquisitions for a full year compared to only 26 days in Excluding the impact of the wind farms, operating expenses increased by 13% in 2008 over This increase is due to higher royalties paid in relation to a higher production level in 2008 compared to 2007 and to certain works performed at the Horseshoe Bend facility. General and Administrative Expenses For the twelvemonth operating period, the Fund incurred general and administrative expenses of $3.3 million, which is $0.6 million higher than the $2.7 million reported in This increase in general and administrative expenses is mainly due to the Wind Farm Acquisitions and to the higher incentive fee paid to the Manager in relation with the increase in distributions from $0.965 to $1.00 per trust unit on an annual basis. Under the Management Agreement, the Manager is entitled to an incentive fee corresponding to 25% of the annual distributable cash per trust unit exceeding $0.925 per trust unit. Interest Expenses For the twelvemonth operating period, the Fund incurred $12.9 million in interest expenses on its longterm debt, compared to $7.2 million in This increase in interest expenses is mainly due to the increase of the Fund s indebtedness following the acquisitions of the two wind farms and of IHI. The effective interest rate for the period was 5.82% compared to 6.23% in As at December 31, 2008, the interest rate on 92% of the Fund s total debt was effectively fixed at a weighted average rate of 5.98%, including the applicable margin, a decrease from the level of 6.11% in 2007, which results from the general decrease in benchmark interest rates and from the low interest rates applicable to the indebtedness related to the wind farms. Depreciation and Amortization Depreciation and amortization for the twelvemonth period in 2008 totalled $20.6 million, which is $7.6 million more than the depreciation and amortization of $13.0 million in This increase mostly results from the acquisition of the BaiedesSables and AnseàValleau wind farms. Other Expenses and Revenues Other expenses and revenues include investment revenues, realized or unrealized loss or gain on derivative financial instruments, compensation for defective equipment and realized or unrealized foreign exchange loss or gain. Investment revenues consist of interest earned on the reserve accounts and cash on hand. Other expenses and (revenues) For the year ended For the year ended December 31, 2008 December 31, 2007 Investment revenues $ (809,834) $ (929,389 ) Unrealized loss (gain) on derivative financial instruments 21,192,791 (1,601,744 ) Realized loss on derivative financial instruments 1,001,325 Compensation for defective equipment (644,910) Realized foreign exchange loss 124,128 10,616 Unrealized foreign exchange loss (gain) 426,585 (351,112 ) $ 21,290,085 $ (2,871,629 ) Innergex Power Income Fund 8

9 Investment income for the Fund s twelvemonth operating period ended December 31, 2008 totalled $0.8 million, $0.1 million less than the investment income of $0.9 million for the year This reduction is mainly due to the decrease in rates of return. As at December 31, 2008, the unrealized loss on the changes in the fair market value of derivative financial instruments shown in the statement of income was at $21.2 million (unrealized gain of $1.6 million in 2007) and is due to the general decrease in benchmark interest rates used for fair market valuation of the derivative financial instruments. This unrealized loss did not have an impact on the Fund s distributable cash. This variation represents the changes in the fair market valuations of derivative financial instruments imbedded in the PPAs and swap contracts. See the Derivative Financial Instruments section of this report for more details on this subject. In addition, the Fund realized a $1.0 million net loss on derivative financial instruments (nil in 2007) because a bond forward contract matured and was replaced by a swap contract. It should be noted that these derivative financial instruments provide the Fund s assets with an economic hedge and ensure the longterm stability of its cash flows. By its hedging program, the Fund is protecting itself from changes in interest rates and is ensuring the stability of financing costs of its projects. The Fund does not own or issue financial instruments for speculative purposes. Furthermore, the Fund obtained a $0.6 million compensation for defective equipment related to the Rutherford Creek facility as part of a settlement with the main contractor at the facility. The Fund also realized a $0.1 million foreign exchange loss for the year compared to $0.01 million loss in Finally, the unrealized foreign exchange loss was $0.4 million in 2008 (unrealized gain of $0.4 million in 2007) due to a revaluation of debts denominated in US dollars following the depreciation of the Canadian dollar since the beginning of Provision for Income Taxes In 2008, income taxes payable increased $1.6 million to a total of $2.1 million compared to $0.5 million in This increase is mainly due to the acquisition of IHI on May 29, The provision for future income taxes was $40.6 million in 2007 compared to a recovery of $7.6 million in The recovery in 2008 results primarily from the decrease in tax rates following the approval of Bill C50 by the Government of Canada in June 2008 and from the unrealized loss on derivative financial instruments. On the other hand, the provision recorded in 2007 reflected the adoption of amendments by the Government of Canada relating to the taxation of public income trusts during the second quarter of 2007, which was partially offset by the decrease in tax rates adopted in the fourth quarter of Amendments to the law in 2007 include the implementation of an income tax equivalent to that of corporations for public income trusts. Pursuant to the amendment, the Fund would be taxed on taxable income earned after December 31, Consequently, an additional future income tax liability of $46.9 million, calculated on the remaining life of assets, was recorded in the Fund s financial statements for the second quarter of 2007, when the law was enacted. This provision for future income taxes has no impact on the Fund s distributable cash, cash distributions to unitholders, or on its liquidities until 2011, and is nonrecurring. The Government of Canada announced in December 2007 that tax rates for income trusts would be lowered for the year 2011 and for subsequent years. This allowed the Fund to recognize a decrease of $6.7 million in future income taxes in Furthermore, in June 2008, Bill C50 was approved by the Government of Canada which resulted in an additional decrease in tax rates for the Fund for the year 2011 and for subsequent years. Following this recent tax rate decrease, the Fund recorded another reduction of $2.7 million in future income taxes in Minority Interest On May 29, 2008, the Fund completed the IHI acquisition. IHI owned a net interest of 22.4% in five hydroelectric facilities of the Fund, namely the SaintPaulin and Chaudière facilities as well as the three Portneuf facilities. The minority interest represents the share of pretax earnings attributable to IHI. For the year ended December 31, 2008, the amount allocated to the minority interest was $0.9 million compared to $1.2 million in The Fund does not have any minority interest since the IHI acquisition on May 29, Net Income (Net loss) For the twelvemonth operating period ended December 31, 2008, the Fund posted a net loss of $3.2 million (net loss of $0.11 per trust unit) due to an unrealized loss on derivative financial instruments of $21.2 million, partially offset by a related recovery of future income tax of $3.2 million and by a recovery of future income tax of $2.7 million stemming from a decrease in future tax rates. In the corresponding period of 2007, the Fund posted a net loss of $28.4 million (net loss of $1.13 per trust unit) due to an additional provision for future income taxes of $40.2 million, as a result of the adoption by the Government of Canada of the law regarding the taxation of income trusts, which was partially offset by lower tax rates adopted in the fourth quarter of Innergex Power Income Fund 9

10 The Fund completed a private placement of 4,724,409 units in December 2007 to realize the Wind Farm Acquisitions. Consequently, earnings per unit are based on a weighted average number of 25,016,400 units outstanding for the year ended December 31, 2007, compared to a weighted average number of 29,404,276 units outstanding for the year ended December 31, As at December 31, 2008, the Fund had a total of 29,404,276 outstanding units. EBITDA Earnings before interest, provision for income taxes, depreciation and amortization, other expenses and revenues, and minority interest ( EBITDA ) totalled $47.1 million for the twelvemonth operating period ended December 31, This is an improvement of 51% over the EBITDA of $31.3 million for the twelvemonth period in 2007, which is mainly due to hydrology conditions that were more favourable in 2008 than in 2007 and to the contribution of the BDS and AAV wind farms. The Fund calculates EBITDA as follows: EBITDA For the year ended For the year ended December 31, 2008 December 31, 2007 Net loss $ (3,238,170) $ (28,370,027) Add (Deduct) Interest on longterm debt 12,930,125 7,168,294 Depreciation and amortization 20,612,011 12,990,524 Other (revenues) and expenses 21,290,085 (2,871,629) Provision for income taxes (5,426,304) 41,130,965 Earnings allocated to minority interest 929,749 1,245,106 EBITDA $ 47,097,496 $ 31,293,233 LIQUIDITY AND CAPITAL RESOURCES Cash Flows from Operating Activities For the twelvemonth operating period, the Fund generated positive cash flows from operating activities of $32.4 million, compared to positive cash flows of $26.1 million in This increase is mainly due to the improvement in EBITDA, which is explained in the preceding paragraph, partially offset by higher interest expenses and by the negative change in noncash working capital items. For the twelvemonth period ended December 31, 2008, the change in noncash working capital items negatively impacted cash by $0.3 million. In 2007, changes in noncash working capital items increased cash by $1.6 million. Cash Flows from Financing Activities For the year 2008, cash flows used in financing activities totalled $18.5 million. This amount includes $29.3 million paid to unitholders, $59.2 million in repayments of longterm debt, $70.8 million in proceeds from the issue of a new longterm debt and $0.8 million in financing fees. The $70.8 million debt allowed the Fund to: (i) refinance the $52.6 million unpaid balance of the debt related to the BDS wind farm; (ii) pay for the $14.5 million acquisition price of IHI; (iii) refinance a portion of its $3.2 million bank credit facility; and (iv) use the $0.5 million balance to pay a portion of the $0.8 million in financing fees. For the same period in 2007, $23.8 million were paid to unitholders, repayments of longterm debt were $1.1 million and amounts drawn on the credit facility were $3.2 million. The increase in distributions paid to unitholders results mainly from the increase of the amount of the distributions from $0.965 to $1.00 per trust unit starting January 1, 2008 and from the increase in the number of trust units outstanding. Cash Flows from Investing Activities For the twelvemonth operating period ending December 31, 2008, cash flows used in investing activities totalled $17.4 million compared to cash flows provided by investing activities of $0.8 million in In 2008, the acquisition of IHI used $14.5 million and additions to property, plant and equipment used another $3.4 million. These capital asset acquisitions were mainly related to unpaid property, plant and equipment when the wind farms and the Rutherford Creek facility were acquired, which were paid for in During the year, the Fund also paid $1.0 million into the Major maintenance reserve account and withdrew $0.2 million and $0.9 million from the Major maintenance and Levelization reserves, respectively. Finally, a surplus of $0.2 million was withdrawn from the Hydrology / wind power reserve. For the corresponding period in 2007, the Wind Farm Acquisitions generated cash flows of $2.9 million stemming from cash acquired and an investment of $2.2 million in the Hydrology / wind power reserve. Also in 2007, $0.9 million was also released from the Levelization reserve and an amount of $0.6 million was invested in the Major maintenance reserve account. During the year 2008, the Fund used $3.5 million in cash and cash equivalents. As at December 31, 2008, the Fund had cash and cash equivalents of $8.6 million. In 2007, the Fund generated $4.8 million in cash and cash equivalents and had cash and cash equivalents of $12.2 million as at December 31, Innergex Power Income Fund 10

11 Use of Financing Proceeds During the year 2008, the Fund borrowed an amount of $70.8 million to finance the IHI acquisition ($14.5 million) and to refinance debt associated with the BDS wind farm ($52.6 million) and the bank credit facility ($3.2 million). In 2007, the Fund completed a private placement to pay for the Wind Farm Acquisitions, assumed the longterm debt related to the wind farms for a total of $108.0 million and borrowed an additional amount of $3.2 million pursuant to its bank credit facility. Use of Financing Proceeds For the year ended For the year ended December 31, 2008 December 31, 2007 Issue of trust units: December 6, 2007 private placement (net of unit issue expenses) $ $ 61,610,906 Proceeds from issue of longterm debt 70,800,000 3,200,000 $ 70,800,000 $ 64,810,906 Business acquisitions : IHI Hydro Inc. $ 14,481,924 $ BaiedesSables and AnseàValleau wind farms 62,251,782 Refinancing of longterm debt 52,564,235 Financing fees 842,690 Repayments of bank credit facility 3,200,000 Investments in reserve accounts 2,200,000 $ 71,088,849 $ 64,451,782 (Utilization of) Contribution to working capital $ (288,849) $ 359,124 FINANCIAL POSITION Assets As at December 31, 2008, the Fund's total assets amounted to $530.0 million, compared with total assets of $547.6 million in This decrease is due to the reduction in cash and cash equivalents, lower accounts receivable, to the depreciation of property, plant and equipment and to the amortization of intangible assets, partially offset by the IHI acquisition. As at December 31, 2008, working capital was close to zero with a working capital ratio of 1.00:1, compared to a working capital of $3.3 million and a working capital ratio of 1.09:1 as at December 31, If necessary, the Fund can use a $10.0 million bank credit facility maturing in May 2013, of which only $0.8 million was used to secure a letter of credit as at December 31, The Fund can also use its significant reserves as shown in the following table. Accordingly, the Fund believes its current working capital to be sufficient to meet all of its needs Reserve Accounts Reserve Account Breakdown December 31, 2008 December 31, 2007 Levelization reserve $ 1,528,508 $ 2,428,799 Hydrology / wind power reserve 10,774,548 10,774,548 Major maintenance reserve 2,793,517 1,955,284 Total $ 15,096,573 $ 15,158,631 As at December 31, 2008, the reserve accounts totalled $15.1 million, including $1.5 million in the Levelization reserve, $10.8 million in the Hydrology / wind power reserve, and $2.8 million in the Major maintenance reserve. As at December 31, 2007, the reserve accounts totalled $15.2 million, including $2.4 million in the Levelization reserve, $10.8 million in the Hydrology / wind power reserve, and $2.0 million in the Major maintenance reserve. For additional information about the Fund s reserve accounts, please see the Business Strategy section of this report. The Fund did not invest amounts in any of assetbacked commercial paper. LongTerm Debt As at December 31, 2008, longterm debt was $229.4 million and the debttoenterprise value ratio was 45.9%. As at December 31, 2007, longterm debt was $215.5 million, and the debttoenterprise value ratio was 38.1%. The increase in longterm debt results from the IHI acquisition while the higher ratio is the result of this additional debt combined with the decrease in the trust s unit price listed on the Toronto Stock Exchange. If they are not met, certain financial and nonfinancial covenants included in the credit agreements or PPAs entered into by certain subsidiaries of the Fund could limit the capacity of these subsidiaries to transfer sums, including amounts from their reserve accounts, to the Fund. These transfer restrictions could have a negative impact on the Fund s capacity to meet its obligations, such as cash distributions paid to unitholders. Since the beginning of year 2008, the Fund and its subsidiaries met all financial and nonfinancial covenants related to their credit agreements and PPAs. Innergex Power Income Fund 11