2002Q4

Creating Shareholder Value

Our principal operating businesses – real estate, power generation and financial services – fared well during 2002, each generating record cash flows.

Furthermore, the strength of our balance sheet enabled us to expand our business base and broaden the foundation for future cash flow growth and higher shareholder values.

While there are different ways to increase shareholder value, building sustainable cash flows is what we have chosen to concentrate on. We have, therefore, focused much of our reporting to you on our operating cash flows and on the free cash flow available for reinvestment.

In this report we will also try to convey our business strategies and recent achievements, so that you can make your own assessment on how we are doing and where we are heading.

To start with, and particularly for those of you who are just getting to know us, summarized below are the five main building blocks upon which our business strategies are based:

> Focussing on Quality Assets – purchased on a value basis to generate increasing cash flows, which in turn lead to higher values over time.

> Delivering Sustainable Cash Flows – supported by long-term revenue contracts, locked in place for a number of years.

> Building Competitive Advantages – to give us an edge in our efforts to increase our return on capital invested.

> Disciplined Return on Capital – which drives our daily decisions and sets the parameters for our long-term strategic plans.

> Maintaining a Solid Financial Position

– based on investment grade ratings and access to diverse sources of capital in order to expand our businesses when opportunities arise.

These five building blocks are an integral part of our business model. The objectives are twofold: first, to safeguard your capital; and second, to generate superior returns measured over the longer term.

Delivering on Our Commitments

Last year, we shared with you our vision for refocusing the company in three main areas, each of which is capable of generating sustainable and growing cash flows.

Focusing on Quality Assets

Our focus on high quality assets is one of the reasons that we have been able to deliver strong financial results in a difficult business environment.

It has always been our practice to focus on achieving long-term sustainable growth rather than seeking short-term gains. We therefore endeavor to own quality assets with secure income streams that can be maintained during difficult times, and as a result are more likely to generate higher returns over the longer term.

Our strong operating cash flows in 2002 largely reflect the quality of our businesses. In recent years, we worked proactively to put long-term escalating revenue contracts in place in our real estate and power generating operations with the objective of earning sustainable cash flows throughout the business cycle.

We have found that quality assets, which generate increasing cash flows, also tend to rise in value, especially those that require little sustaining capital.

With assets such as these, the cash flow generated is also free for selective investment in additional quality assets to expand the base of our operations.

With our high quality asset base as a foundation and a company-wide commitment to achieve higher returns on capital, we believe we are well positioned to deliver on our commitment to you to maintain our growth, even in these more difficult times.

Building Competitive Advantages

We strengthened our operating model in 2002 by acquiring 100% of our financial businesses.

This was a natural next step for us, after privatizing our power generating operations in 2001. It enabled us to integrate key aspects of our financial operations with our other businesses and increase our return on the capital invested.

What this means from an operational perspective is that we are better able to share the expertise of our financial services team across our other operations in order to sharpen our Building Competitive Advantages

We strengthened our operating model in 2002 by acquiring 100% of our financial businesses.

It has also enabled us to make available, more effectively, our extensive industry-specific knowledge and operating strengths to our now wholly-owned financial businesses.

The integration of our operations should ensure that our capital commitments start off with a competitive advantage.

We have actively narrowed the areas of business to which we commit capital, but broadened our exposure to those where we have a competitive advantage. We believe that the benefits we gain from this approach will lead to higher returns over time.

One example of our businesses working together to achieve higher returns is the recent formation of the Brascan Real Estate Finance Fund. As a result of our strong position in the North American real estate market, we identi-fied an opportunity to establish a real estate financing fund providing mezzanine financing to commercial property owners. Managed by an experienced New York-based team, the fund was launched in 2002 with an initial investment of US$200 million.

Another example of our competitive advantages in action is our restructuring of a gold mine in British Columbia. We recapitalized the mine several years ago based on a $250 per ounce gold price and today we are earning very positive returns with significant cost reductions and higher gold prices. .

Our ability to withdraw and reallocate capital among businesses is another strategy that gives us a competitive advantage and differentiates us from many single sector companies.

By leveraging our competitive advantages we will endeavour to acquire, on a value basis, quality operating assets when they are out of favour, such as real estate in the early to mid-1990s and power generating assets today.

While we will continue to focus on increasing our cash flow from operations as a key ingredient to the creation of value, we do recognize that increasing cash flow is only part of the long-term value creation

equation.

Disciplined Return on Capital

The effective allocation of resources among our operations is critical to the achievement of superior risk adjusted returns on the capital invested in the business. In doing so, we aim to invest capital in assets when they trade below net asset value, and sell assets when they trade above their net asset value

During 2002, we extracted capital from our real estate operations and invested capital to earn higher returns in our power generating operations.

In total, we generated $450 million through the sale of half interests in two commercial office towers to institutional investors seeking solid returns with limited capital risk. We invested $650 million in the acquisition of 16 hydroelectric power plants in Ontario, New Hampshire and Maine. In addition, we acquired an additional half interest in our Lake Superior Power natural gas-fired cogeneration facility in northern Ontario. These acquisitions almost doubled our generating capacity and solidified our position in our selected markets.

Achieving superior returns is partly dependent on the continued reduction in our cost of capital. We plan to achieve this by maintaining high investment grade credit ratings which provide us with access to a wide range of low-cost financing options.

In 2002, we reduced our overall cost of capital by 20 basis points to 9.6%, adding approximately $40 million or $0.20 per share annually to the future bottom line of the company. This was accomplished in part through the issuance of low-cost preferred equity and the use of income trusts and other investment funds favourably leveraged by institutional investors.

We also continuously review whether or not to use a portion of the equity you have invested in the business to repurchase common shares and hence increase your ownership interest in each of our operations.

We have believed for some time that our common shares represent an attractive place to invest surplus capital, and consequently we have repurchased shares consistently over the past three years.

In 2002, we repurchased over 7 million common shares for cancellation. These re-purchases went part of the way to offsetting the dilution arising from the issuance of 11 million common shares to privatize our financial operations during the year. Although we would have preferred not to have issued these shares, we believed it was the only way to complete this strategic initiative.

We continue to believe that the case for repurchasing our shares is compelling. At the same time, we know we must maintain a balance between capturing immediate value through share repurchases and utilizing capital to create long-term strategic value in our operations.

With these factors in mind, we will continue repurchasing shares for value while remaining cognizant of the need to maintain a strong capital base, financial ratios which exceed debt rating targets, and sufficient free capital in order to pursue attractive investment opportunities as they arise.

Maintaining a Solid Financial Position

Two years ago, we set out to enhance our liquidity in anticipation of unsettled capital markets and the opportunities that a more challenging business and financial environment might present.

Our solid financial position enabled us to make a number of key acquisitions and stillconclude 2002 in the strongest financial position in the company’s history, including investment grade credit ratings from three recognized North American rating agencies.

Today, we have access to over $2 billion of capital for investment and our operations are expected to generate free cash flow of close to $1 billion in the current year.

As we enter 2003 we are in the fortunate position of being able to finance additional growth opportunities for each of our businesses, should opportunities present themselves.

We have had a relatively high dividend pay-out policy for the past five years. There are a number of reasons for this. In the mid-1990s, when there were fewer investment opportunities

to expand our businesses, we decided to pay out a larger portion of our free cash flows. Recently, we have been retaining more of our cash flow in order to strengthen our financial ratios and lower our overall cost of capital.

Longer term, we will look at our dividend payouts on a relative and absolute basis and weigh the views of our shareholders, some of whom would like to see lower dividends and some higher. We are also paying close attention to new dividend taxation

regulations being introduced in the U.S.

Growth Opportunities

During the past year, we continued to favour organic growth to expand our operations rather than making major acquisitions.

At the same time, we withdrew capital from mature assets which had limited growth prospects and invested capital in other more strategic assets with higher return prospects.

Our objective is to seek balanced, profitable growth, and not growth for its own sake. We have previously assured you that we will only pursue business expansions, acquisitions or development opportunities that meet our return objectives and build long-term value for shareholders.

In this regard, we are exploring further opportunities in the U.S. power generation industry to acquire assets on a deep value basis in relation to their replacement cost. We believe we have a unique, once in a multi-decade opportunity to add quality assets to our power operating base. This is a result of the turmoil in this industry caused by short-term over-supply and the financial difficulties faced by many industry participants.

Our preference is to acquire long-life hydro generating facilities with extensive water storage reservoirs. We will also invest in thermal generating facilities, but only when these can be acquired with a knowledgeable partner at significant discounts to their replacement costs.

The opportunities to acquire high quality real estate at this point in the business cycle are fewer. We did, however, purchase a half interest this year in the American Express Tower at the World Financial Center, the only tower in this premier office complex in which we did not already have an ownership interest. We are confident that we can use our strong market presence in Manhattan to re-lease and refinance the property to create exceptional long-term value for shareholders.

Alternative asset management initiatives represent the strongest area of growth in our financial operations. The launch of the Tricap Restructuring Fund in 2001 and the Brascan Real Estate Finance Fund this year are targeted at meeting the needs of institutional investors seeking alternatives to the equity markets.

Our real estate services and reinsurance operations also made strong progress during 2002 in implementing their business plans. Our finite risk reinsurance business, conducted through Imagine Reinsurance, has established itself as a partner of choice for many U.S. and European insurers.

With our focus on the three areas in which we have solid expertise and distinct competitive advantages, we believe that broadening our range of activities within these areas is the least risky method to implement our growth strategy.

We are often asked if we would consider moving into sectors that are outside of our core expertise. While the simple answer is “No”, there may well be exceptions.

Although we may invest relatively small amounts of capital in unrelated businesses through our financial operations, or through restructuring or refinancing opportunities, you will not see us acquiring or building totally unrelated businesses, or businesses that do not fit the sustainable cash flow model that is at the heart of our business strategy.

Looking ahead, you can expect that the investments we make will be consistent

with our strategy of building long-term shareholder value through the ownership of high quality assets which generate sustainable cash flows. These criteria will guide us as we deploy our capital resources in order to increase returns.

Strengthening Corporate Governance

We embrace sound and effective corporate governance as a priority for building and managing our businesses.

With the recent attention given to corporate governance, we took the opportunity to review our current policies and practices, benchmarking them against companies acknowledged as leaders.

As a result, we made several governance changes during the year to ensure that we remain abreast or ahead of evolving governance practices in both the U.S. and Canada.

We re-aligned our audit and compensation committees to ensure that they are comprised totally of independent directors. We commenced expensing management options and introduced minimum hold periods for options exercised as well as share ownership requirements for senior executives.

Management also certified our financial statements ahead of any regulatory requirement to do so. The roles of the board Chair and Chief Executive within the company have been separated and, for a number of years, our board has met independently from management under the leadership of a Lead Director.

We aim to continually review and improve our corporate governance practices, which are outlined in our Management Information Circular and which can also be accessed on our web site.

In Closing

You should expect our actions in the years ahead to reflect our determination to build long-term shareholder value by owning quality assets which generate sustainable cash flows.