EX-3.5 7 file7.htm MANAGEMENT'S DISCUSSION & ANALYSIS Q3

[PHOTO OMITTED]

MANAGEMENT'S DISCUSSION & ANALYSIS
Q3 2006

ALGONQUIN
[LOGO OMITTED] POWER
INCOME FUND

Third Quarter Report
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MANAGEMENT'S DISCUSSION AND ANALYSIS

[All figures are in thousands of dollars, except per unit values]

Algonquin Power Income Fund (the "Fund") has prepared the following discussion
and analysis to provide information to assist its unitholders' understanding of
the financial results for the three and nine months ended September 30, 2006.
This discussion and analysis is supplemental to and should be read in
conjunction with the Fund's unaudited interim consolidated financial statements
for the three and nine months ended September 30, 2006 as well as the audited
consolidated financial statements and the related Management's Discussion and
Analysis contained in the 2005 Annual Report.

The Fund's financial statements are prepared in accordance with accounting
principles generally accepted in Canada. The Fund's reporting currency is the
Canadian dollar. This material is available on SEDAR at www.sedar.com and on the
Fund's website at www.AlgonquinPower.com. Additional information about the Fund,
including the Annual Information Form for the year ended December 31, 2005, can
be found on SEDAR at www.sedar.com.

This Management's Discussion and Analysis is based on information available to
management as of November 7, 2006.

FORWARD-LOOKING DISCLAIMER

Certain statements contained in the information herein are forward-looking and
reflect the views of the Fund and Algonquin Power Management Inc. (the
"Manager") with respect to future events. Since forward-looking statements
address future events and conditions, by their very nature, they involve
inherent risks and uncertainties. Forward-looking statements are not guarantees
of the Fund's future performance or results and are subject to various factors,
including, but not limited to, assumptions such as those relating to: the
performance of the Fund's assets, commodity market prices, interest rates, and
environmental and other regulatory requirements. Although the Fund and its
Manager believe that the assumptions inherent in these forward-looking
statements are reasonable, undue reliance should not be placed on these
statements, which apply only as of the dates hereof. The Fund and its Manager
are not obligated nor do either of them intend to update or revise any
forward-looking statements, whether as a result of new information, future
developments or otherwise.

KEY FINANCIAL INFORMATION

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2006 2005 2006 2005
--------------------------------------------------------------------------------
REVENUES 51,109 42,790 147,677 128,406
NET EARNINGS 5,001 9,462 26,159 12,871
DISTRIBUTION TO UNITHOLDERS 17,443 16,015 49,474 48,045
CASH AVAILABLE FOR DISTRIBUTION* 17,566 14,601 50,014 45,137
PER TRUST UNIT
Net earnings 0.07 0.14 0.36 0.18
Distribution to unitholders 0.23 0.23 0.69 0.69
Cash available for distribution* 0.23 0.21 0.70 0.65

* Non-GAAP measurement, see 'Cash Available for Distribution' in this
Management's Discussion and Analysis.

Third Quarter Report
--------------------------------------------------------------------------------

For the quarter ended September 30, 2006, the Fund reported total revenue of
$51.1 million as compared to $42.8 million during the same period in 2005.
Revenue for the third quarter of 2006 increased from the same period in the
prior year primarily due to the acquisition of the St. Leon Wind Energy facility
("St. Leon"), continued organic growth in the Infrastructure Division combined
with the positive impact of the water distribution and waste-water facilities
purchased during 2005. These factors were partially offset by a stronger
Canadian dollar as compared to the same period in 2005.

For the nine months ended September 30, 2006, the Fund reported revenue of
$147.7 million as compared to $128.4 million during the same period in 2005.
Revenue for the nine months ended September 30, 2006 increased due to increased
energy generated as a result of improved long term average hydrology experienced
in the Hydroelectric Division, the Fund's decision to close the Sanger Facility
for a six month period and sell natural gas at favourable rates, combined with
the reasons indicated in the discussion of the third quarter results above. A
more detailed analysis of these factors is presented within the divisional
analysis.

For the quarter and nine months ended September 30, 2006, the average US
exchange rate dropped by approximately 7% from the same periods in 2005. As
such, any quarterly variance to revenue or expenses, in local currency, at any
of the Fund's US entities may be distorted by a change in the average exchange
rate, upon conversion to the Fund's reporting currency. Although the stronger
Canadian dollar has an impact on both revenue and expenses generated by its US
subsidiaries, the Fund has foreign exchange forward contracts in place, which
partially mitigate the impact on cash available for distribution.

For the quarter ended September 30, 2006, net earnings were $5.0 million as
compared to $9.5 million during the same period in 2005. Net earnings for the
third quarter of 2006 decreased from the same period in 2005 due to lower
unrealized foreign exchange gains on US dollar denominated debt, increased
expected future income taxes and increased interest expense. These factors were
partially offset by earnings from the St. Leon facility.

Net earnings for the nine months ended September 30, 2006 were $26.2 million as
compared to $12.9 million during the same period in 2005. Net earnings for the
nine months ended September 30, 2006 increased from the same period in 2005 due
to increased energy generated as a result of improved hydrology, the addition of
earnings from the St. Leon facility, continued growth in the Infrastructure
Division and a reduction in expected future income taxes. Additionally, the 2005
results included a write-down of the Fund's investment in the Crossroads
facility. A more detailed analysis of these factors is presented within the
divisional analysis.

Net earnings per trust unit were $0.07 in the quarter ended September 30, 2006
as compared to $0.14 during the same period in 2005. For the nine months ended
September 30, 2006, net earnings per trust unit were $0.37 as compared to $0.18
during the same period in 2005.

The Fund generated $0.23 per trust unit of cash available for distribution for
the quarter ended September 30, 2006, as compared to $0.21 per trust unit during
the same period in 2005. During the third quarter of 2006, the Fund maintained
distributions at $0.23 per trust unit, consistent with the same period in 2005.
In the nine months ended September 30, 2006, the Fund generated $0.70 per trust
unit of cash available for distribution as compared to $0.65 during the same
period in 2005. The Fund distributed $0.69 per trust unit, consistent with the
same period in 2005.

Third Quarter Report
--------------------------------------------------------------------------------

The term 'cash available for distribution' is used throughout this Management's
Discussion and Analysis. Management uses this calculation to monitor the amount
of cash generated by the Fund as compared to the amount of cash distributed by
She Fund. The term 'cash available for distribution' is not a recognized measure
under accounting principles generally accepted in Canada. The Fund's method of
calculating 'cash available for distribution' may differ from methods used by
other companies and accordingly may not be comparable to similar measures
presented by other companies. A calculation and analysis of 'cash available for
distribution' can be found in this Management's Discussion and Analysis.

At the beginning of the third quarter, the Fund completed the acquisition of all
of the outstanding partnership units of AirSource Power Fund I LP ("AirSource")
and as a result acquired the St. Leon facility. Under the offer, the Fund issued
a total of 2,382,978 Fund units and Algonquin (AirSource) Power LP, an affiliate
of the Fund, ("Algonquin AirSource") issued a total of 4,070,372 exchangeable
units. During the third quarter 2006, approximately 487,000 Algonquin AirSource
Units were exchanged for approximately 478,000 Fund Units. Total unit purchase
price, including acquisition costs, was $61.1 million. Algonquin AirSource units
provide the holder with the distribution privileges equivalent to what they
would receive if the units were exchanged for Fund trust units, as long as
AirSource generates adequate cash flow. Algonquin AirSource units are
exchangeable into Fund trust units at the holder's option at the rate of one
Algonquin AirSource unit for 0.9808 Fund trust units.

OUTLOOK

Management anticipates that the Fund's four divisions will continue to generate
cash available for distribution for the remainder of 2006 in line with
distributions to unitholders. Management also expects that continued organic
growth in the water distribution and waste-water business, continued average
long term hydrologic conditions, the achievement of projections at the St. Leon
facility, improvements at the Algonquin Power Energy-from-Waste facility
("EFW"), and the continued stable performance of the Cogeneration Division,
coupled with no unforeseen events will enable the Fund to achieve current levels
of cash available for distribution.

Management continues to identify opportunities to optimize the performance of
its portfolio as well as ensuring that the recently acquired facilities
including the St. Leon facility and water distribution and waste-water
facilities are integrated into the Fund's operations. Management is integrating
the recent acquisition of AirSource into the operations of the Alternative Fuels
Division.

The Fund maintains continuous health and safety training for all its operations
and maintenance staff. All of the Fund's facilities are in compliance in all
material respects with local and federal environmental regulations.

Management will continue to further invest in information technology to reduce
administrative costs by continuing the implementation of supply chain management
systems and integrated billing and customer protocols.

In keeping with the emerging Ontario Securities Commission requirements,
management continues to move towards the completion of the review and
documentation of its controls and procedures for annual certification of the
financial statements.

Third Quarter Report
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[LOGO OMITTED] HYDROELECTRIC DIVISION

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2006 2005 2006 2005
--------------------------------------------------------------------------------
PERFORMANCE (MW-HRS SOLD)
Quebec Region 61,073 55.044 217,146 187,008
Ontario Region 23,195 17,504 91,141 71,779
New England Region 13,101 9,117 61,889 60,479
New York Region 14,959 5,381 63,466 44,276
Western Region 21,018 30,228 50,508 61,784
-------------------------------------------------
Total 133,346 117,274 484,150 425,326

REVENUES
Energy sales $ 8,765 $ 8,679 $ 33,406 $ 30,230
EXPENSES
Operating expenses $ (4,109) $ (4,342) $ (12,138) $ (11,044)
Other income 154 84 1,021 407
DIVISION OPERATING PROFIT
(incl. other income) $ 4,810 $ 4,421 $ 22,289 $ 19,593

For the quarter ended September 30, 2006, revenue in the Hydroelectric Division
was $8.8 million as compared to $8.7 million during the same period in 2005.
During the third quarter of 2006, the Hydroelectric Division generated
electricity equal to 91% of long term averages as compared to 82% during the
same period in 2005. In the Ontario region, energy production improved to 72% of
long term averages as compared to 54% for the same period in 2005, primarily due
to improved hydrology at the Long Sault facility. Generated electricity in the
New York and the New England regions was higher than the same period in 2005 as
as result of improved hydrology experienced in these regions during the third
quarter. The Quebec region as also experienced improved energy production due to
improved hydrology as compared to the same period in 2005. The increase in
revenue was also a result of improved energy rates at the Canadian facilities,
partially offset by lower average energy rates at the US facilities and the
impact of a stronger Canadian dollar.

For the nine months ended September 30, 2006, revenue from the Hydroelectric
Division was $33.4 million as compared to $30.2 million during the same period
in 2005. During the nine months ended September 30, 2006, the Hydroelectric
Division generated electricity equal to 98% of long term averages as compared to
87% of long term averages during the same period in 2005.

Operating expenses decreased to $4.1 million for the quarter ended September 30,
2006 as compared to $4.3 million during the same period in 2005. The decrease in
operating expenses was primarily due to lower expenses, in Canadian dollars,
from its US operations, as the result of a stronger Canadian dollar, partially
offset by an increase in repair and maintenance projects initiated in the
quarter as compared to the same period in 2005.

For the nine months ended September 30, 2006, operating expenses were $12.1
million as compared to $11.0 million in the prior year. The increase in
operating expenses was primarily due to an increase of $0.7 million in repair
and maintenance projects for the division initiated in the period as compared to
the same period in 2005, partially offset by lower expenses from its US
operations as the result of a stronger Canadian dollar.

Third Quarter Report
--------------------------------------------------------------------------------

For the quarter ended September 30, 2006, the Hydroelectric Division's operating
profit increased to $4.8 million as compared to $4.4 million during the same
period in 2005. For the nine months ended September 30, 2006, operating profit
increased to $22.3 million as compared to $19.6 million during the same period
in 2005. 5ince energy generation was below long term averages due to hydrology.
for the quarter ended September 30, 2006, operating profit was below
management's expectations.

OUTLOOK

The Fund's 2006 forecast production is based on long term hydrological
conditions. The Fund's hydroelectric facilities located in the New York, New
England and Quebec regions are expected to perform near long-term averages
during the fourth quarter of 2006. The Fund's facilities located in northern
Ontario and Alberta are expected to perform below long-term averages during the
fourth quarter due to below average hydrologic conditions expected in these
regions.

The Fund will continue to seek accretive hydroelectric acquisitions throughout
the remainder of 2006, with emphasis placed on the acquisition of facilities
that provide diversification of regional hydrologic and market conditions.

Certain hydroelectric generating facilities owned by the Fund qualify for
consideration as "green" energy and the Fund continues to pursue revenue
opportunities presented by the emerging markets for renewable energy credits in
the United States and the trading of greenhouse gas credit emissions in Canada.
The Fund is also pursuing longer term power purchase agreements for the sale of
energy from those facilities that are currently selling electricity in the open
market.

[LOGO OMITTED] COGENERATION DIVISION

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2006 2005 2006 2005
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PERFORMANCE (MW-HRS SOLD) 129,706 133,993 345,565 399,020
REVENUES
Energy sales $ 18,512 $ 19,164 $ 50,355 $ 56,123
Other revenue 806 -- 8,186 --
-----------------------------------------------
TOTAL REVENUE $ 19,318 $ 19,164 $ 58,541 $ 56,123

EXPENSES
Operating expenses $(12,451} $ (12,351) $ (39,723) $ (38,294)
Interest and dividend income 732 753 2,650 2,196
DIVISION OPERATING PROFIT (incl. interest
and dividend income) $ 7,599 $ 7,566 $ 21,468 $ 20,025

For the quarter ended September 30, 2006, revenue from the Cogeneration Division
totaled $19.3 million as compared to $19.2 million during the same period in
2005. For the quarter ended September 30, 2006, the division's production
decreased as compared to the same period in 2005. Production in the third
quarter decreased as a result of lower production at the Windsor Locks and
Crossroads facilities, offset by increased production at the Sanger facility, as
compared to the same period in 2005. The decrease in energy sales revenue
resulted from lower production, as noted above, and lower revenue, in Canadian
dollars, as the result of a stronger

Third Quarter Report
--------------------------------------------------------------------------------

Canadian dollar. These effects were partially offset by higher energy rates at
the Windsor Locks and Crossroads facilities where increased fuel costs are
passed on to the customer in the form of higher energy prices.

For the nine months ended September 30, 2005, revenue was $58.5 million as
compared to $56.1 million during the same period in the prior year. The decrease
in energy sales is attributable to reduced production at the Windsor Locks
facility due to the planned overhaul and at the Sanger facility due to the sale
of natural gas, as well as lower revenue as the result of a stronger Canadian
dollar. These decreases were partially offset by improved energy rates. Other
revenue primarily consists of sales of natural gas at the Sanger facility during
the first half of 2006 and revenue from Dyna Fibers Inc. for the first nine
months of 2006.

The Fund earned $0.7 million in dividend income from its portfolio investments
during the third quarter, consistent with the same period in 2005. The Fund
earned $2.7 million from its portfolio investments for the nine months ended
September 30, 2006 as compared to $2.2 million from the same period in 2005.

For the quarter ended September 30, 2006, operating expenses increased to $12.5
million as compared to $12.4 million during the same period in 2005. Operating
expenses increased as a result of higher gas prices, partially offset by lower
operating expenses, in Canadian dollars, due to a stronger Canadian dollar.

For the nine months ended September 30, 2006, operating expenses increased to
$39.7 million from $38.3 million as compared to the same period in 2005,
primarily due to higher utility and fuel expenses of $2.2 million. These
increases were partially offset by lower expenses, in Canadian dollars, due to a
stronger Canadian dollar.

For the quarter ended September 30, 2006, operating profit remained consistent
at $7.6 million as compared to the same period in 2005. Operating profit for the
nine months ended September 30, 2006 was $21.5 million as compared to $20.0
million during the same period in 2005. Operating profit in the Cogeneration
Division for the third quarter met management's expectations.

OUTLOOK

The Fund's Sanger facility is scheduled for a planned 14 day preventative
maintenance inspection during the fourth quarter of 2006. The facility is
expected to continue to meet management's expectations throughout the quarter.
The recommendation for the replacement of the existing gas turbine at the Sanger
facility with a newer, more efficient unit has been approved and the project is
estimated for completion during the fourth quarter of 2007. Expected benefits of
replacing the turbine include higher efficiency, lower fuel usage, and greater
ease of maintenance as well as supplying additional capacity and energy demands
to the California energy market and a significant extension of the useful life
of the facility.

The Fund is waiting for regulatory approval to exercise the buy-down option of
the Power Purchase Agreement at the Crossroads facility. The decision by the
regulator is expected during the fourth quarter.

In the fourth quarter, the division's facilities are expected to perform in line
with management's expectations.

Third Quarter Report
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[LOGO OMITTED] ALTERNATIVE FUELS DIVISION

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2006 2005 2006 2005
-------------------------------------------------------------------------------------------

PERFORMANCE (MW-HRS SOLD) 123,163 50,033 240,541 156,197
PERFORMANCE (TONNES OF WASTE PROCESSED) 38,182 32,855 115,498 104,387
REVENUES
Energy sales $ 4,309 $ 3,933 $ 12,575 $ 11,848
Waste disposal sales 3,511 2,983 10,647 9,335
Other revenue 5,642 -- 5,642 --
------------------------------------------------
TOTAL REVENUE $ 13,462 $ 6,916 $ 28,864 $ 21,183

EXPENSES
Operating expenses $ (6,678) $ (6,331) $ (20,247) $ (18,398)
Interest and other income 990 1,795 4,928 3,971

DIVISION OPERATING PROFIT
(incl. interest and other income) $ 7,774 $ 2,380 $ 13,545 $ 6,756

For the quarter ended September 30, 2006, revenue in the Alternative Fuels
Division was $13.5 million as compared to $6.9 million during the same period in
2005. During the third quarter of 2006, the division's production increased
primarily as a result of an increase at its land-fill gas ("LFG"] facilities,
and from the EFW facility. Revenue at EFW increased due to greater production in
the quarter as compared to the same period in 2005. The division reported lower
revenue from its US operations as a result of a stronger Canadian dollar.

Revenue from the St. Leon facility consists of liquidated damages earned by the
St. Leon facility and is included in other revenue. While all the wind turbines
at the facility have been constructed and commissioned, completion of the
project under She turnkey construction contract has been delayed due to a number
of technical concerns which remain to be addressed by the prime contractor,
Vestas-Canadian Wind Technology, Inc. ("Vestas"). As a result of receiving the
liquidated damages from Vestas, all earnings from electricity sales, after
deducting certain costs, are payable to Vestas to the time of commercial
operation, as defined in the turnkey construction contract.

For the nine months ended September 30, 2006, revenue was $28.9 million as
compared to $21.2 million during the same period in 2005. Revenue increased due
to the inclusion of the St. Leon facility in the third quarter results, and
increased energy generated and higher waste processed at the EFW facility in the
period as compared to the same period in 2005. The division reported lower
revenue from its US operations as a result of a stronger Canadian dollar.

For the quarter ended September 30, 2006, operating expenses were $6.7 million
as compared to $6.3 million during the same period in 2005. The increase in
operating expenses for the quarter was primarily the result of the integration
of operations of the St. Leon facility at the end of the second quarter of 2006
as compared to the same period in 2005.

For the nine months ended September 30, 2006, operating expenses were $20.2
million as compared to $18.4 million during the same period in 2005. The
increase in operating expenses

Third Quarter Report
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for the quarter was primarily the result of the purchase of the St. Leon
facility, increased fuel related costs of $1.1 million at the Fund's LFG
facilities and an increase in repair and maintenance costs of $0.7 million for
the division as compared to the same period in 2005. The division reported lower
operating expenses, in Canadian dollars, from its US operations as a result of a
stronger Canadian dollar.

The Fund earned lower interest and other income on its investments within the
Alternative Fuels Division during the third quarter of 2006 and for the nine
months ended September 30, 2006, as compared to during the same periods of 2005,
primarily as a result of the acquisition of AirSource and consequently
consolidating AirSource into the Fund accounts resulting in a reduction of $1.3
million in other income for the quarter. Included in other income for the
quarter was $0.5 million related to the recognition of a receivable associated
with the generation of landfill gas production tax credits.

For the quarter ended September 30, 2006, operating profit was $7.8 million as
compared to $2.4 million during the same period in 2005. Operating profit for
the nine months ended September 30, 2006 was $13.5 million as compared to $6.8
million during the same period in 2005. Improvements continue to be made in the
Fund's EFW and LFG facilities but operating profit were still below management's
expectations for the quarter and nine months ended September 30, 2006.

OUTLOOK

For the remainder of 2006, the Alternative Fuels Division will continue with
initiatives in place to improve availability and overall performance of the LFG
facilities, with the first phase of the initiative planned for completion by the
end of the fourth quarter.

At the EFW facility, as part of the recovery action plan, component replacements
will be partially completed during the fourth quarter, slightly behind schedule
due to equipment delivery delays. The replacement of these components are
expected to provide improved equipment availability and related improvements in
production levels in both waste processing and power generation starting in the
first quarter of 2007.

The Fund's recently acquired St. Leon facility is expected to meet management's
expectations during the fourth quarter of 2006. During the fourth quarter of
2006, the Fund will continue to integrate the operations of the St. Leon
facility into the Alternative Fuels Division.

Third Quarter Report
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[LOGO OMITTED] INFRASTRUCTURE DIVISION

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2006 2005 2006 2005
------------------------------------------------------------------------------------

NUMBER OF
Waste-water customers 28,747 23,635 28,747 23.635
Water distribution customers 32,162 24,518 32,162 24,518

REVENUES
Waste-water and water distribution $ 9,564 $ 8,031 $ 26,866 $ 20,870

EXPENSES
Operating expenses $ (4,068) $ (2,970) $(11,285) $ (8,437)
Other income 10 6 36 23

DIVISION OPERATING PROFIT
(incl. other income) $ 5,506 $ 5,067 $ 15,617 $ 12,456

For the quarter ended September 30, 2006, revenue in the Infrastructure Division
increased to $9.6 million as compared to $8.0 million during the same period in
2005. The increase in revenue for the third quarter was primarily due to the
inclusion of the Rio Rico facility purchased in December 2005, continued organic
growth at existing facilities as well as average water consumption in the region
during 2006 as compared to 2005, which was below average. The division reported
lower revenue, in Canadian dollars, from its operations as a result of a
stronger Canadian dollar, which partially offset the increases noted above.

The growth in the division's waste-water and water distribution customer base
includes organic growth of 7.5% for the quarter ended September 30, 2006. The
remaining increase in customers results from the inclusion of the Rio Rico
facility (located in Arizona) which was purchased on December 2, 2005. Overall,
the Rio Rico facility generated additional revenue of approximately $1.0 million
during the third quarter of 2006.

Revenue for the nine months ended September 30, 2006 increased to $26.9 million
from $20.9 million during the same period in 2005. The increase in revenue for
the nine months ended September 30, 2006 was the result of the reasons indicated
in the discussion of the quarterly results above. The new facilities generated
$3.1 million during the nine months ended September 30, 2006.

For the quarter ended September 30, 2006, operating expenses were $4.1 million
as compared to $3.0 million during the same period in 2005. For the nine months
ended September 30, 2006, operating expenses were $11.3 million as compared to
$8.4 million during the same period in 2005. The increase in operating expenses
was primarily due to the inclusion of the operating costs of the Rio Rico
facility of approximately $0.5 million during the third quarter of 2006 and $2.0
million during the first nine months of 2006 as compared to $nil during the same
periods of 2005. The division reported lower expenses from its operations as a
result of a stranger Canadian dollar, which partially offset the increases.

For the quarter ended September 30, 2006, operating profit increased to $5.5
million as

Third Quarter Report
--------------------------------------------------------------------------------

compared to $5.1 million during the same period in 2005. Operating profit for
the nine months ended September 30, 2006 increased to $15.6 million from $12.5
million during the same period in 2005. Operating profit met management's
expectations for the quarter ended September 30, 2006.

OUTLOOK

In the fourth quarter of 2006, strong performance is expected, particularly at
the water distribution facilities in Arizona due to the historical strong
residential customer growth rales in the Fund's service areas. The current rate
of growth in the areas that the Fund's Infrastructure Division operates is
expected to stabilize during the remainder of 2006, primarily in Arizona.

The Fund has rate cases under way for its Black Mountain and Gold Canyon
facilities. The regulatory review of these rate cases is expected to be
completed by the end of 2006 and mid-2007 respectively. In addition, a rate case
is in progress for three facilities in Missouri, and is expected to be completed
early in the second quarter of 2007. Rate cases help to ensure facilities earn a
fair rate of return on capital investments, as allowed by the regulatory
authority under which each facility operates. Management expects that the
resolution of these rate cases will positively impact results in the Division.

Additional planned capital improvement projects are expected to occur in the
Infrastructure Division during the fourth quarter of 2006. In particular,
capital improvement projects to increase water distribution capacity in the
Litchfield Park Services Company service area will occur during the fourth
quarter and into 2007. These projects will help meet the expected growth in the
area and satisfy the requirements of the regulatory authorities in Arizona.

The Fund continues to pursue accretive opportunities to expand the
Infrastructure Division in areas where the Fund already operates and to acquire
other utilities in high growth areas in the United States.

ADMINISTRATIVE EXPENSES

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2006 2005 2006 2005
-----------------------------------------------------------------------------------

Administrative expenses $ 2,178 $ 1,577 $ 5,955 $ 4,551
Management costs 217 206 652 619
Gain on foreign exchange (66) (2,975) (2,329) (1,860)
Interest expense 6,293 4,123 15,944 12,002
Write down of fixed and intangible -- -- -- 2,721
assets
Interest, dividend and other income (38) (5) (75) (67)
Income tax expense (recovery) 921 (1,213) (1,281) 2,285

During the quarter ended September 30, 2006, administrative expenses increased
to $2.2 million from $1.6 million as compared to the same period in 2005. The
increase for the quarter is due to the added requirements to administer the
Fund, including additional staff. During the nine months ended September 30,
2006, administrative expenses increased to $6.0 million from $4.5 million. The
increase for the nine months relates to the added requirements discussed above
and the costs associated with several business development opportunities
undertaken.

Foreign exchange gains and losses primarily represent unrealized gains or losses
on US dollar denominated debt and do not impact cash available for distribution.
For the quarter ended September 30, 2006 the Fund posted a foreign exchange gain
of $0.1 million versus $3.0 million

Third Quarter Report
--------------------------------------------------------------------------------

during same period in 2005. For the nine months ended September 30, 2006 the
Fund posted a foreign exchange gain of $2.3 million versus $1.9 million during
same period in 2005. At the end of the third quarter, the Fund had approximately
$38.6 million in US dollar denominated debt.

For the quarter ended September 30, 2006, interest expense increased to $6.3
million as compared to $4.1 million during the same period in 2005. For the nine
months ended September 30, 2006, interest expense increased to $15.9 million as
compared to $12.0 million during the same period in 2005. The increase is due to
increased average levels of debt during the year, in part a result of the funds
borrowed to construct the St. Leon facility and a higher interest rate charged
on the Fund's credit facility.

An income tax expense of $0.9 million was booked in the third quarter of 2006 as
compared to an income tax recovery of $1.2 million during the same period in
2005. An income tax recovery of $1.3 million was booked in the nine months ended
September 30, 2006 as compared to an expense of $2.3 million during the same
period in 2005. The recovery was the result of a reduction in expected future
income taxes due to a reduction in expected future tax rates and the impact of
tax losses generated by certain facilities of the Fund.

CASH AVAILABLE FOR DISTRIBUTION

THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
2006 2005 2006 2005
-------------------------------------------------------------------------------------

Cash flow from operating activities $ 14,568 $ 15,682 $ 50,596 $ 38,181
Changes in working capital 3,613 !899| 320 5,792
Operating cash flow before
working capital changes 18,181 14,783 50,916 43,973
Receipt of principal on
notes receivable 618 1,103 2,654 4,155
Repayment of long-term liabilities (199) (229) (809) (911)
Maintenance capital expenditures (865) (577) (2,305) (1,578)
Other (169) (479) (442) (502)
Cash available for distribution $ 17,566 $ 14,601 $ 50,014 $ 45,137
Cash available for distribution
per trust unit $ 0.23 $ 0.21 $ 0.70 $ 0.65
Distribution to unitholders $ 17,443 $ 16,015 $ 49,474 $ 48,045
Distribution to unitholders
per trust unit $ 0.23 $ 0.23 $ 0.69 $ 0.69
Average number of trust units (OO0's) 75,906 69,692 71,764 69,692

During the quarter ended September 30, 2006 the Fund generated $17.6 million in
cash available for distribution as compared to $14.6 million for the same period
in 2005. During the nine months ended September 30, 2006, the Fund generated
$50.0 million in cash available for distribution as compared to $45.1 million
for the same period in 2005.

The Fund's distribution as a percentage of 'cash available for distribution'
("Payout Ratio") was improved to 99.3% during the third quarter of 2006 and
98.9% during the nine months ended September 30, 2006. The Fund achieved
improving annual Payout Ratios of 123.4% in 2002, 106.9% in 2003, 105.8% in 2004
and 98.7% in 2005.

In prior years, the shortfalls have been funded primarily by working capital.
Should any future shortfall arise, management expects to be able to cover the
difference between cash generated

Third Quarter Report
--------------------------------------------------------------------------------

and cash distributed through working capital, cash on hand or its credit
facility. Working capital has been built up over time from public offerings.

On a per trust unit basis, the Fund generated $0.23 of cash available for
distribution during the quarter ended September 30, 2006 as compared to $0.21
during the same period in 2005. The Fund distributed $17.4 million during the
quarter ended September 30, 2006 as compared to $16.0 million during the same
period in 2005. For the nine months ended September 30, 2006, on a per trust
unit basis, the Fund generated $0.70 of cash available as compared to $0.65
during the same period in 2005. The Fund distributed $49.5 million during the
nine months ended September 30, 2006 as compared to $48.0 million during the
same period in 2005.

On a per trust unit basis, the Fund maintained distributions at $0.23 for the
quarter ended September 30, 2006, and $0.69 during the nine months ended
September 30, 2006, consistent with 2005.

LIQUIDITY AND CAPITAL RESERVES

For the quarter ended September 30, 2006, the Fund had $10.4 million at cash and
cash equivalents. As at September 30, 2006, the Fund had negative net working
capital of $32.6 million. The shortfall is primarily the result of construction
costs to complete the St. Leon facility, which are now included in accrued
liabilities. The Fund has adequate credit capacity to meet these requirements.

During the quarter ended September 30, 2006, the Fund incurred capital
expenditures of $4.5 million, as compared to $2.7 million during the comparable
period in 2005. During the nine months ended September 30, 2006, the Fund
incurred capital expenditures of $17.0 million, as compared to $13.3 million
during the comparable period in 2005. Capital expenditures during the quarter
and nine months ended September 30, 2006 were primarily growth related
expenditures in the Infrastructure Division and the planned major maintenance at
the Windsor Locks facility. Capital expenditure requirements, excluding the
Fund's commitment to AirSource, are anticipated to be approximately $7.5 million
during the remainder of fiscal 2006. The majority of these expenditures pertain
to the Infrastructure Division and are required due to growth and to comply with
regulatory requirements.

Long term debt increased to $268.4 million at September 30, 2006 as compared to
$176.6 million at September 30, 2005. Long term liabilities primarily consist of
project level debt of approximately $159.8 million and an amount of $108.6
million drawn on the Fund's revolving credit facility compared to project level
debt of $89 million and an amount of $88 million drawn on the Fund's revolving
credit facility at the end of the third quarter at 2005. Project debt increased
primarily due to the inclusion of senior debt totalling $73.3 million related to
the St. Leon facility. Project debt is paid at the project level where adequate
cash flows are available to fund project debt requirements and the debt is
generally non-recourse to the Fund. Project debt repayments are deducted in the
calculation of cash available for distribution.

The Fund has in place a $175 million revolving credit facility of which $155
million is to be used for acquisitions, investments and letters of credit and
$20 million is to be used for operating requirements. At the quarter ended
September 30, 2006, the Fund had drawn $108.6 million on its revolving credit
facility in addition to letters of credit. During the quarter ended September
30, 2006, the Fund's lenders converted $30 million of the credit facility that
was temporary to permanent and extended the total credit facility for a one year
term to mature August 2008.

During the quarter ended September30, 2006, the Fund drew $2.8 million on its
credit facility to

Third Quarter Report
--------------------------------------------------------------------------------

fund capital requirements. Subsequent to the end of the quarter, the Fund drew
an additional $3.0 million on its credit facility. Since the Fund utilizes the
revolving credit facility for growth capital expenditures including
acquisitions, the revolving credit has been reduced in the past by the issuance
of trust units and/or debentures to the public.

Subsequent to the end of the quarter, the Fund filed an amended prospectus for
the sale and issue of $60.0 million in convertible debentures, resulting in net
proceeds to the Fund of $57.3 million. The Fund intends to finance its capital
expenditures and other commitments through working capital, its revolving credit
facility and through additional trust unit and/or debenture offerings.

For the quarter ended September 30, 2006 the Fund maintained a long term
debt-to-equity ratio (including long term liabilities, other long term
liabilities, and convertible) of 74.2%. The exchangeable trust units issued in
conjunction with the purchase of AirSource have been included in equity for
purposes of this calculation. The Fund may settle the outstanding convertible
debentures, at its option, in cash, or, subject to certain conditions, in Fund
units. Accordingly, if the convertible debentures are excluded from debt in this
calculation (included as equity the long term debt-to-equity ratio as at
September 30, 2006 would be reduced to 48.5%.

CONTRACTUAL OBLIGATIONS

Information concerning contractual obligations as of August 10, 2006 is shown
below:

TOTAL DUE LESS DUE 2 TO DUE 4 TO DUE AFTER
THAN 1 YEAR 3 YEARS 5 YEARS 5 YEARS
-------------------------------------------------------------------------------------

Long term debt obligations $354,812 $ 1,447 $112,654 $ 4,612 $ 236,099
Other obligations 24,765 4,705 5,807 1,020 13,233
--------------------------------------------------------
Total obligations $379,577 $ 6,152 $118,461 $ 5,632 $ 249,332

Long term obligations normally include regular payments related to long term
debt and other obligations. These payments are included as a reduction to cash
available for distribution. Included in the other obligations in the due less
then 1 year time frame is the Fund's commitment as of October 30, 2006 of $8.6
million regarding the installation of the additional steam generation and
transmission assets required for the sale of steam from the EFW facility.

UNITHOLDERS' EQUITY AND CONVERTIBLE DEBENTURES

Pursuant to the takeover bid of AirSource, on June 29, 2006, 2,099,261 Fund
trust units were issued. In addition, Algonquin Air Source issued trust units,
which are exchangeable into 3,789,373 Fund trust units at the holder's option.
As Algonquin AirSource trust units provide the holder with distribution
privileges equivalent to what they would receive if the trust units converted
into Fund trust units, the Fund effectively issued, on a fully diluted basis,
5,888,634 trust units on June 29, 2006.

As at September 30, 2006, the Fund had 72,554,551 issued and outstanding trust
units with a total of 76,068,642 trust units issued and outstanding on a fully
diluted basis. During the quarter ended September 30, 2006, a further 283,717
Fund trust units and 206,818 exchangeable units were issued to acquire the
remaining un-tendered AirSource units, in conjunction with the takeover bid and
478,128 trust units were issued as a result of Algonquin AirSource trust units
being exchanged.

In 2004, the Fund issued 85,000 convertible unsecured debentures at a price of
$1 for each debenture. The debentures bear interest at 6.65% per annum and are
convertible into trust units

Third Quarter Report
--------------------------------------------------------------------------------

of the Fund at the option of the holder at a conversion price of $10.65 per
trust unit, being a ratio of approximately 93.9 trust units for each $1
principal. The debentures may not be redeemed by the Fund prior to July 31,
2007. As at September 30, 2006, there were 84,980 convertible debentures
outstanding as a result of the conversion of certain debentures into units.

As discussed in the liquidity and capital reserve section, subsequent to the end
of the quarter, the Fund issued 60,000 convertible unsecured debentures at a
price of $1 for each debenture maturing on November 30, 2016. The debentures
bear interest at 6.2% per annum and are convertible into trust units of the Fund
at the option of the holder at a conversion price of $11.00 per trust unit,
being a ratio of approximately 90.9 trust units for each $1 principal. The
debentures may not be redeemed by the Fund prior to November 30, 2010.

DEALINGS WITH ALGONQUIN POWER GROUP

Companies related to the Manager provide operations and technical services on a
cost-recovery basis. Two of these companies meet the definition of a variable
interest entity ("VIE"), and are consolidated with the Fund. As such, any
inter-company balances with respect to these companies have been eliminated.

In addition, the Fund's head office premises are leased from an entity related
to the Manager. Details are outlined in note 6 of the Fund's unaudited
consolidated financial statements for the quarter ended September 30, 2006.

When appropriate for use in its operations, the Fund utilizes chartered
aircraft, including the use of an aircraft owned by an affiliate of the Manager.
The Fund entered into an agreement for the Fund's business use of this aircraft.
Under the terms of this arrangement, the Fund will have priority access to make
use of the aircraft for a specified number of hours at a cost equal solely to
the third party direct operating costs incurred when flying the aircraft; such
direct operating costs do not provide the affiliate with any profit or return on
or of the capital committed to the aircraft.

RISK MANAGEMENT

There are a number of risk factors relating to the business of the Fund. Some of
these risks include the dependence upon Fund businesses, regulatory climate and
permits, US versus Canadian dollar exchange rates, tax related matters,
commodity prices, gross capital requirements, labour relations, reliance on key
customers and environmental health and safety considerations. A more
comprehensive assessment of the Fund's business risks is set out in the 2005
Annual Information Form.

The Fund is entirely dependant upon the operations and assets of the Fund
businesses. Accordingly, distributions to unitholders are dependent upon the
profitability of each of the Fund businesses. This profitability could be
impacted by equipment failure, the failure of a major customer to fulfill its
contractual obligations under its power purchase agreement, reductions in
average energy prices, a strike or lock-out at a facility and expenses related
to claims or cleanup to adhere to environmental and safety standards. These
risks are mitigated through the diversification of the Fund's operations, both
operationally (Hydro, Cogeneration, Alternative Fuels and Infrastructure) and
geographically (Canada and US), the use of regular maintenance programs,
maintaining adequate insurance and the establishment of reserves for expenses.
In addition, the Fund's existing long term power purchase agreements minimize
the risk of reductions in average energy pricing.

Profitability of the Fund businesses will be in part dependent on regulatory
climates. In the case of some hydroelectric facilities, water rights are
generally owned by government who reserve

Third Quarter Report
--------------------------------------------------------------------------------

the right to control water levels which may affect revenue. The water
distribution and waste-water facilities are highly regulated and are subject to
rate settings by state regulators. Management continually works with these
authorities to manage the affairs of the business.

The hydroelectric operations of the Fund are impacted by seasonal fluctuations.
These assets are primarily "run-of-river" and as such fluctuate with the natural
water flows. During the winter and summer periods, flows are generally lower
while during the spring and fall periods flows are higher. The ability of these
assets to generate income may be impacted by changes in water availability
changes or other material hydrologic events within a watercourse. It is,
however, anticipated that due to the geographic diversity of the facilities,
variability of total revenues will be minimized.

The strength and consistency of the wind resource will vary from the estimate
set out in the initial wind studies that were relied upon to determine the
feasibility of the Facility. If weather patterns change or the historical data
proves not to accurately reflect the strength and consistency of the actual
wind, the assumptions underlying the financial projections as to the amount of
electricity to be generated by the facility may be different and distributable
cash could be impacted.

There remain certain completion risks associated with the St. Leon facility.
Although the wind turbines are operational, there are certain deficiencies that
must be completed in order to finalize the project. Management is working with
Vestas to resolve these deficiencies.

Currency fluctuations may affect the cash flows the Fund would realize from its
operations, as certain of the Fund businesses sell electricity in the United
States and receive proceeds from such sales in US dollars. Such Fund businesses
also incur costs in US dollars. The Fund attempts to manage this risk through
the use of forward contracts. At the quarter ended September 30, 2006, the Fund
had forward contracts to sell US dollars for fiscal 2006 to fiscal 2010
totalling US$ 73.1 million carrying an average rate of $1.33. The Fund generally
follows hedge accounting to account for these transactions. The Fund's policy is
not to utilize derivative financial instruments for trading or speculative
purposes.

The Fund has a credit facility and project specific debt of approximately $268.4
million. In the event that the Fund was required to replace these facilities
with borrowings having less favourable terms or higher interest rates, the level
of cash generated for distribution may be negatively impacted. The Fund attempts
to manage the risk associated with floating rate interest loans through the use
of interest rate swaps. The Fund has a fixed for floating interest rate swap on
its AirSource project specific debt until September 2015 in the notional amount
of $73.3 million in order to minimize volatility in the interest expense on this
debt facility. The Fund has effectively fixed its interest expense on its senior
debt facility at 5.47%. At September 30, 2006 the interest rate swap had a value
of $2.1 million.

The cash available for distribution generated from several of the Fund's
facilities are subordinated to senior debt. In the event that there was a breach
of covenants or obligations with regards to any of these particular loans which
was not remedied, the loan could go into default which could result in the
lender realizing on its security and the Fund losing its investment in such
facility. The Fund actively manages its operations to minimize the risk of this
possibility.

Changes to income lax laws and the current tax treatment of mutual fund trusts
could negatively impact the Fund. Although the Fund is of the view that it
currently qualifies under current

Third Quarter Report
--------------------------------------------------------------------------------

legislation as a mutual fund trust, there can be no assurance that the
legislation will be changed in the future or that Canada Revenue Agency ("CRA")
will agree with this position, if the Fund ceases to qualify as a mutual fund
trust, the return to unitholders may be adversely affected.

On October 31, 2006, the Minister of Finance announced proposals to impose a tax
on distributions from certain publicly traded income trusts and partnerships and
subsequently released a Notice of Ways and Means Motion in that regard, (the
"SIFT Proposals"). The SIFT Proposals wilt apply to "specified investment
flow-throughs" which will include trusts resident in Canada whose units are
listed on a stock exchange or other public market if the trust holds one or more
"non-portfolio properties". Based on the SIFT Proposals, the Fund is a specified
investment flow through entity ("SIFT"). As a SIFT the Fund will not be entitled
to any deduction in computing its income in respect of any part of its
distributions to Unitholders that are attributable either to a business it
carries on in Canada or to income (other than dividends from taxable Canadian
corporations] from, or capital gains in respect of, non-portfolio properties
("non-portfolio earnings"). Non-portfolio properties include investments in a
"subject entity". The main kinds of subject entities are corporations and trusts
resident in Canada and partnerships which meet certain residence related
criteria. A subject entity will be a non-portfolio property if the Fund holds
securities of the entity that have a fair market value that is greater than 10%
of the entity's equity value or more than 50% of the equity value of the Fund is
attributable to the subject entity and affiliated entities.

Starting with the 2011 taxation year, a SIFT will be subject to tax in respect
of non-portfolio earnings which it distributes at a rate that is equivalent to
the federal general corporate tax rate plus 13% on account of provincial tax.
Any non-portfolio earnings distributed by a SIFT will be taxable to the
unitholder as if the distribution were a taxable dividend from a taxable
Canadian corporation and will be deemed to be an "eligible dividend" eligible
for the enhanced gross-up and tax credit under the draft legislation released by
the Minister of Finance on October 16, 2006.

No assurance can be given as to whether the SIFT Proposals wilt be enacted as
proposed. The SIFT Proposals did not include draft legislation and no assurance
can be given as to the precise form that the SIFT Proposals will take if and
when enacted. If the SIFT Proposals apply to the Fund in 2011 and, provided the
corporate rate reductions and the enhanced dividend and tax credit proposals are
enacted as proposed, it is anticipated that generally the tax paid by the Fund
and a Unitholder who is a taxable Canadian resident individual on distributed
non-portfolio earnings would be substantially equivalent to the tax that would
be payable on such distributions by such Unitholders if the SIFT Proposals were
not enacted. However, no assurance can be given in this regard. Non-resident
Unitholders and Canadian resident Unitholders which are exempt from tax would be
negatively affected by the application of the SIFT Proposals if enacted as
proposed based on the Fund's current investments.

Although the Fund is of the view that all expenses being claimed by the Fund are
reasonable and that the cost amount of the Fund's depreciable properties have
been correctly determined, there can be no assurance that CRA or the Internal
Revenue Service will agree. A successful challenge by either agency regarding
the dedutibility of such expenses or the correctness of such cost amounts could
impact the return to unitholders.

The Fund's water distribution and waste-water utilities may be located within
areas of the United Stales experiencing high growth. These utilities may have an
obligation to service new residential, commercial and industrial customers.
While expansion to serve new customers will likely result in increased future
cash flows, it may require significant capital commitments in the

Third Quarter Report
--------------------------------------------------------------------------------

immediate term. Accordingly, the Fund may be required to access capital markets
or obtain additional borrowings to finance these future construction
obligations.

The Fund has fixed the price of its natural gas exposure at the EFW facility
until 2007. The EFW facility is the Fund's only natural gas exposure as all
other facilities have pass through provisions in their energy agreements.
Natural gas at the EFW facility will be re-contracted on a rolling basis.

The Fund maintains adequate insurance on all of its facilities. This includes
property and casualty, boiler and machinery, and liability insurance.

QUARTERLY FINANCIAL INFORMATION

The following is a summary of unaudited quarterly financial information for the
two years ended September 30, 2006.

Millions of dollars except per trust unit amounts

4TH 1ST 2ND 3RD
QTR 2005 QTR 2006 QTR 2006 QTR 2006 TOTAL
--------------------------------------------------------------------------------------

Revenue $ 50.9 $ 49.5 $ 47.1 $ 51.1 $ 198.6
Net earnings 8.9 7.3 13.8 5.0 35.0
Net earnings per trust unit 0.13 0.11 0.20 0.07 0.51
Total Assets 823.8 839.0 1,030.0 1,024.2 1,024.2
Long term debt 271.5 300.1 376.6 379.6 379.6
Distribution per trust unit 0.23 0.23 0.23 0.23 0.92

4TH 1ST 2ND 3RD
QTR 2004 QTR 2005 QTR 2005 QTR 2005 TOTAL
--------------------------------------------------------------------------------------

Revenue $ 40.7 $ 40.6 $ 45.0 $ 42.8 $ 169.1
Net earnings (0.1) 1.8 1.6 9.5 12.8
Net earnings per trust unit 0.00 0.03 0.02 0.14 0.19
Total Assets 824.8 813.1 822.1 838.2 838.2
Long term debt 226.2 235.6 261.8 286.8 286.8
Distribution per trust unit 0.23 0.23 0.23 0.23 0.92

The quarterly results are impacted by various factors including seasonal
fluctuations and acquisition of facilities as noted in this Management's
Discussion and Analysis.