Brookfield Renewable Strategy

PART III: BROOKFIELDS CURRENT STRATEGY AND ITS ADVANTAGE

EMPHASIS ON HYDRO:

Brookfield Renewable’s strong and high quality hydroelectric asset portfolio, which comprises 81% of its total revenue and above 80% of total power generation, helps it to generate stable and long-term cash flows. Its portfolio consists of more than US$17 billion of hydroelectric renewable power assets with over 7,398 MW of installed capacity, and long-term average generation from operating assets of 26,105 GWh in Canada, the US and Brazil. Company’s assets include 209 hydroelectric generating stations on 75 river systems. Among these, North American assets have the ability to store water in reservoirs up to approximately 38% of its annual generation which provides partial protection against short-term changes in water supply. Brookfield Renewable’s management intends to maintain its 80% weight in hydroelectric facilities going forward because of their estimate that the energy market is currently at cyclical lows in terms of power prices i.e. $40 - $50 per MWh on a historical basis. Hence, company management believes that power prices will trend toward $80 - $100 per MWh in the long run as natural gas prices trend toward $4 - $5 per MMbtu. This strategy is evident from Brookfield Renewable’s recent sale of its 102 MW contracted operating Coram wind farm, California, which resulted in a $270 million enterprise value and approximately 30% Internal Rate of return.

NET WORKING CAPITAL:

Brookfield Renewable’s net working capital during FY2014 increased to US$7 million, as compared to working capital deficit of US$294 million in FY2013. This increase in net working capital was due to increase in company's total current assets by 10.8% to US$694 million, as compared to US$626 million in FY2013. Also, a decline in its current liabilities by 25.3% to US$687 million in FY2014 from US$920 million in FY2013. Improved net working capital coupled with adequate cash reserves could help the company’s short term business operations and to meet capital expenditures.

COST AND OPERATION EFFICIENCY:

In the FY2014, Brookfield Renewable reported a decrease in its operating costs as a percentage of sales which stood at 65.1% compared to 66% and 76.7% in FY2013 and FY2012 respectively. As a result of this the operating margin increased to 34.8% in FY2014 from 33.9% in FY2013. This increase in operating margin indicates that the company's revenue increased at a higher rate than that of its expenses.

DEVELOPING MARKET:

Developing markets, such as Brazil, are significantly undersupplied from power generation perspective. The income elasticity of demand for electricity in Brazil is estimated by Eletrobras at above unity. Investment is therefore needed to boost generation and transmission capacity because there is limited excess supply. To be noted, many emerging market economies slow down and their currencies devalue, the opportunity to invest in these markets with little competition could generate exceptional returns. Considering this, Brookfield Renewable invested $0.8 billion of equity alongside institutional partners in Brazil between 2011 and 2015.

ANTICIPATED RISKS:

Brookfield Renewable’s operations in Brazil are exposed to changes in legislation, market rules, currency exchange rate fluctuation and supply/demand fundamentals. To mitigate currency risks outside the U.S. specially in Brazil, Brookfield Renewable engaged itself in the forward currency contracts to the extent possible.

Also, Brookfield Renewable has extended maturities, with approximately nine years of weighted average debt duration and predominantly fixed-rate liabilities which insulates them from any risk due to interest rate increase. They posses over $1 billion of near-term liquidity, including cash; approximately $500 million of near-term incremental financing proceeds from underleveraged projects; and over $1 billion of potential capital net from further asset sales, if pursued.

BUSINESS ECONOMY:

Operating Period

2014

2013

2012

2011

2010

Direct Operating Costs ($ Millions)

524

530

486

407

328

Actual Generation (GWh)

22,548

22,222

15,942

15,877

14,480

Actual Average Cost ($ Millions)

0.023239312

0.023850239

0.03048551

0.025634566

0.022651934

Total Capacity (MW)

6,707

5,849

5,304

4,536

4,309

EXHIBITS:

s

Preliminary price allocations, annual revenue and power generation, at fair values, with respect to the acquisitions were as follows:

1. 2014

($ millions unless stated)

Maine (Hydro)

California (Hydro)

Pennsylvania (Hydro)

Ireland

(Wind)

Cash and cash equivalents

7

4

15

35

Restricted cash

0

0

0

12