2015 Results Presentation 17 August 2015 1 Year ended 30 June 2015 Dennis Barnes, Chief Executive Officer Graham Cockroft, Chief Financial Officer Disclaimer This presentation may contain projections or forward-looking statements regarding a variety of items. Such forward-looking statements are based upon current expectations and involve risks and uncertainties. Actual results may differ materially from those stated in any forward-looking statement based on a number of important factors and risks. Although management may indicate and believe that the assumptions underlying the forward-looking statements are reasonable, any of the assumptions could prove inaccurate or incorrect and, therefore, there can be no assurance that the results contemplated in the forward-looking statements will be realised. EBITDAF, underlying earnings after tax, OCAT and free cash flow are non-GAAP (generally accepted accounting practice) profit measures. Information regarding the usefulness, calculation and reconciliation of these measures is provided in the supporting material. Furthermore, while all reasonable care has been taken in compiling this presentation, Contact accepts no responsibility for any errors or omissions. This presentation does not constitute investment advice. 2 Results for the year ended 30 June 2015 Key themes for today 4 Increased cash flow • Free cash flow improvement » Sales volumes stable » Strong retail competition continues to impact margins » Transition phase following investment in new systems and plant complete Distribution of free cash flow • • • 15 cps final dividend (76 cps distributed to shareholders) Share buyback programme to commence in 1H16 Continued commitment to investment grade credit rating Smooth transition from sale • • • Dennis Barnes confirmed as CEO, employed by Contact Recruitment of new board members and chairman progressing ASX application on track Focus on structural efficiency • • • • 80MW contract with Meridian supports ongoing Tiwai operation Otahuhu to close September 2015 Major maintenance at TCC Ongoing transition to flexible thermal capacity » Ahuroa gas storage a key enabler FY16 outlook • • • Increased renewable availability New gas and Te Rapa supply contracts in place Retail business stabilised; benefits realisation commences Results for the year ended 30 June 2015 Safety culture and performance improvement continues • Safety is our number one priority and we continue to advance our cultural journey towards “generative”, to realise our goal of zero harm • 55% reduction in TRIFR in FY15 • Over 9,000 safety conversations – eligible employees receive an award of Contact shares for exceeding our target • Integrated safety improvement programme underway to improve our process safety performance and capability, and simplify our safety processes Dashboard will provide realtime information on the status of our critical process safety controls. (per million hours worked) 7 6 5 TRIFR » Total recordable injury frequency rate 4 3 2 1 0 FY11 5 FY12 FY13 FY14 FY15 Results for the year ended 30 June 2015 Statutory profit down 43% to $133m Underlying earnings per share down 29% Year ended 30 June 2015 EBITDAF1 $525m down 11% from $587m Profit $133m down 43% from $234m 18.2 cps down 43% from 32.0 cps $161m down 29% from $227m Underlying earnings per share (cents) 21.9 cps down 29% from 31.0 cps FY15 declared dividends (cents) 76.0 cps up 192% from 26.0 cps $452m up 11% from $406m Free cash flow 2 $363m up 21% from $299m Capital expenditure $105m down 62% from $274m Earnings per share (cents) 1 Underlying earnings after tax Underlying operating cashflow after tax (OCAT) 1 ¹ Refer to slides 33-37 for a definition and reconciliation of EBITDAF, UEAT, OCAT and free cash flow 2 Refer to slide 15 for a reconciliation of OCAT and free cash flow Free cash flow up 21% 6 Results for the year ended 30 June 2015 Margin pressure in mass market and C&I reduces EBITDAF Integrated Energy segment EBITDAF: down $67m (12%) to $484m • EBITDAF Movement Netback: unfavourable $61m (7%) • Netback down $7/MWh driven by increased discounting, network and operating costs Cost of energy: unfavourable $6m (2%) » » Renewable generation increased from 69% to 76% led by geothermal FY14 Intergrated Energy $67m adverse » Volumes remained stable despite lower customer numbers and reduced C&I sales Other Segment $5m favourable » 587 Retail netback (61) Cost of energy (6) LPG 9 Meters & other Increased electricity purchases and unit generation costs reduced contribution FY15 450 unfavourable (4) 525 500 550 $m favourable 600 Other segment EBITDAF increased $5m (14%) to $41m 7 • LPG: favourable $9m due to a combination of higher sales volumes and lower costs • Meters & Other: unfavourable $4m reflecting the continued transition to smart meters Results for the year ended 30 June 2015 Netback – $61m lower (7%) to $826m Mass market discounting prevents full recovery of rising distribution costs • Electricity sales in line with FY14 at 8,392 GWh » » • FY14 887 C&I electricity revenue (11) MM electricity revenue (9) (31) Mass market netback $13/MWh unfavourable » » Gas Margin 2 Approaching 70% of mass market customers Operating costs now on non-standard tariff discounts (12) Increased network costs include $5m ($1/MWh) one-off changes in network billing timing and absorption of cost increases for fixed price customers FY15 760 826 800 840 880 920 $m unfavourable favourable Cost to serve increased $12m ($3/MWh) due to increased ICT and consultancy costs offsetting a reduction in bad debts. Change to corporate cost allocation $6m ($1/MWh) Commercial and industrial netback unfavourable $3/MWh » 8 C&I sales down 30 GWh (1%), 2H15 sales increased 24 GWh Retail Netback Movement Electricity pass through costs » • Mass market sales up 44 GWh (2%) due to additional small business customers offsetting residential losses Competition and a lower forward curve reduced 1H15 netback. C&I netback flat 2H15 Results for the year ended 30 June 2015 Cost of energy – unfavourable $6m (2%) to $342m Renewable generation increased from 69% to 76% of total generation • • Wholesale spot market down $6m due to higher electricity purchases (up 200 GWh) being partially offset by increased generation $43m Te Mihi liquidated damages in FY14 ($9m in FY15) • Fuel mix favourable $42m with renewable generation increasing from 69% to 76% » Geothermal volumes up 742 GWh; 2H15 increased 350 GWh to 1,600 GWh » Gas used in generation down 3.7 PJ (15%) Wholesale spot market (6) Wholesale financial market (3) Te Mihi compensation (34) Fuel mix 42 Unit generation cost (5) (342) (400) FY14 (350) unfavourable (300) $m (250) FY15 (200) favourable Unit generation cost unfavourable $5m due to increased cost of carbon units and gas transmission costs, partially offset by lower gas unit prices and lower corporate cost allocation » 9 (336) Wholesale financial market unfavourable $3m due to 1H14 including HVDC commissioning revenue • • Cost of Energy Movement New gas contracts resulted in unit generation costs being $4m favourable in 2H15 Results for the year ended 30 June 2015 Other segment – favourable $5m (14%) to $41m • LPG margin up $9m » » • Profit margin up $103/tonne (32%) with continued margin pressure offset by lower product and operating costs (incl. change to corporate cost allocation $4m) Meter business unfavourable $4m reflecting the transition to smart meters offset by lower depreciation » 10 LPG sales up 4,864 tonnes (7%) with reticulated demand responding to cooler weather and additional wholesale sales Smart meter deployment continues with approximately 261,000 customers with a smart meter Other segment movements FY14 36 LPG margin 9 Meters & other (4) FY15 41 0 10 unfavourable 20 30 40 $m favourable 50 Results for the year ended 30 June 2015 Other operating expenses increased by $10m during transitional year • Other Operating Expenses Labour costs increased $2m » Return of project resources to business as usual 250 Partially offset by reduced incentive accruals reflecting FY15 performance 200 98 104 105 100 102 83 $m » 300 150 • Other operating costs increased $8m » » » 11 Timing of repairs and maintenance expenditure relating to the Clyde unit one repairs and full year impact of the Te Mihi operating costs Increased SAP-related and retail consultancy costs offsetting a $3m reduction in bad debts Review of international growth options 100 145 153 158 147 153 161 FY10 FY11 FY12 FY13 FY14 FY15 50 0 Other opex 1 1 Labour costs Repairs and maintenance costs create year-onyear variability Results for the year ended 30 June 2015 Innmun-II. 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I I I Ijz?ih?j L?i a Financial Review Graham Cockroft Statutory profit down 43% to $133m Underlying earnings per share down 29% Year ended Year ended 30 June 2015 30 June 2014 $m Variance $m $m % Profit 133 234 (101) (43%) Earnings per share (cents) 18.2 32.0 (13.8) (43%) Revenue and other income 2,443 2,446 (3) (0%) EBITDAF1 525 587 (62) (11%) Underlying EBIT 321 397 (76) (19%) Underlying earnings after tax 161 227 (66) (29%) Underlying earnings per share (cents) 21.9 31.0 (9.1) (29%) Underlying OCAT1 452 406 46 11% 363 299 64 21% 49.5 40.7 8.8 22% 105 274 (169) 1 Free cash flow 2 2 2 Free cash flow per share (cents) 2 Capital expenditure (62%) ¹ Refer to slides 33-37 for a definition and reconciliation of EBITDAF, UEAT, OCAT and free cash flow 2 Refer to slide 15 for a reconciliation of OCAT and free cash flow Free cash flow up 21% 13 Results for the year ended 30 June 2015 Statutory profit down 43% from $234m to $133m Underlying earnings after tax down 29% from $227m to $161m Contact's statutory profit movement 250 (7) 200 (62) (14) $m 150 (21) 234 (28) 31 227 100 161 133 50 0 FY14 statutory profit Net items excluded from UEAT FY14 UEAT EBITDAF Depreciation Net financing & costs amortisation Tax FY15 UEAT Net items excluded from UEAT FY15 statutory profit • Depreciation, amortisation and interest costs increased following full year of Te Mihi and new retail system operation • Net items excluded from UEAT primarily relate to Retail Transformation stabilisation with costs of $7m in 2H15. FY16 cost expected to be $3m • $31m favourable tax movement due to lower profit » 14 Tax depreciation adjustment on powerhouses is excluded from UEAT Results for the year ended 30 June 2015 Free cash flow up 21% Year ended 30 June 2015 30 June 2014 $m $m EBITDAF Variance Free cash flow 400 $m % 525 587 (62) (11%) 20 (103) 123 119% (45) (53) 8 15% 15 21 (6) (29%) Underlying operating cash flows 515 452 64 Stay in business capital expenditure (63) (46) (17) Underlying OCAT1 452 406 46 11% Net interest paid (89) (107) 18 17% Free cash flow 2 363 299 64 21% 4,659 3,997 662 17% 9.2% 9.4% Change in working capital Tax paid Other Average funds employed excluding CAPWIP Underlying OCAT ratio (0.2%) 14% (37%) (2%) 363 350 312 299 300 265 250 $m Year ended 200 150 100 50 0 FY12 FY13 FY14 FY15 1 Operating cash flow after tax. Refer to slide 39 for a definition of OCAT and the OCAT ratio 2 Cash available to fund distributions to shareholders and growth capital expenditure. Refer to slide 39 for a definition of free cash flow • Favourable working capital movement primarily due to natural gas inventory movements and favourable retail collections • Stay in business capex of $63m was within expected ongoing range of $60m - $75m and follows a period of growth capital expenditure where stay in business capex was deferred • Retail receivables continue positive trend 15 Results for the year ended 30 June 2015 Timing of special dividend increased year end gearing ratio Considering retail bond offer; expected to open 24 August Funding maturity profile Funding Diversity 350 6% NEXI USPP Domestic Bank Funding Maturity ($ million) 300 250 36% 14% 200 150 6% 100 26% 50 0 2016 2017 2018 2019 2020 Maturity (financial year) • • 2021 to 2025 2026 to 2030 Bank Facilities $600m NEXI $90m USPP $416m Retail Bonds $222m Wholesale Bonds $200m CP $100m Balance sheet gearing ratio increased to 34.6% at 30 June 2015 » Net debt increased $282m to $1,698m to support June 2015 special dividend » $900m total committed bank facilities ($639m drawn and $100m commercial paper) » Weighted average tenor of funding facilities 4.7 years (excluding bridge facility) The above graphs exclude $300m bridge facilities in place to provide timing flexibility for funding of the March 2015 USPP maturity and June 2015 special dividend » 16 12% Since balance date, $225m of refinancing for the bridge facilities has been secured via additional bank facilities ($80m) and USPP issuance (US$100m / NZ$145m) Results for the year ended 30 June 2015 Net financing costs increased by $21m due to the reduction in capitalised interest Year ended Year ended 30 June 2015 30 June 2014 Variance $m $m $m % Interest income 1 6 (5) (83%) Interest expense (99) (120) 21 18% Financing costs (98) (114) 16 14% 37 (37) (100%) (98) (77) (21) (27%) 5.9% 6.5% (0.6%) (9%) Financing costs capitalised Net financing costs Weighted average interest rate on borrowing - • Lower weighted average interest rate reflects success of the 2014 refinancing programme • Interest income of $6m in FY14 was due to partial pre-funding of 2014 debt maturities • No interest was capitalised in FY15 following the completion of Te Mihi and Retail Transformation projects 17 Results for the year ended 30 June 2015 FY15 declared dividends 76 cents per share Unimputed final dividend 15 cents per share Share buyback programme to commence in FY16 • 700 » 600 » • Origin sale reduced imputation credits to zero. Imputation of dividends expected to restart March 2016 Record date 2 September 2015; payment date 15 September 2015 Greater certainty provides opportunities for further cash returns with a share buy back programme to commence in 1H16 500 400 300 200 100 0 FY08 FY09 Dividend (cash) FY10 FY11 FY12 Growth capex net of asset sales FY13 FY14 FY15 Free cash f low Options around future distributions remain within commitment to investment grade credit rating » 18 In the event that free cash flow exceeds ordinary dividends, additional distributions will be made FY15 declared dividends 76 cps including an unimputed final dividend of 15cps » • Free cash flow and allocations Dividend policy revised in May to target average ordinary dividends of 100% of UEAT $m • S&P re-confirmed BBB on 3 August 2015 Results for the year ended 30 June 2015 an. w. Transition update • Dennis Barnes confirmed as CEO, employed by Contact • Contact has commenced the process of finding suitable replacements for departing directors including Bruce Beeren who will retire at the next AGM » The permanent chairman will be one of the new directors » AGM will be later than normal to facilitate due process • The Transitional Relationship Arrangement with Origin ensures the current operations of both companies are not adversely impacted by the change of control and details a timetable for the separation of shared arrangements • ASX listing in progress, remains on track to be listed by mid September • Contact’s share register is now more diverse and liquid » 20 Management and board to meet new and existing investors in the coming months Results for the year ended 30 June 2015 Contact’s capital investments have positioned it well for the New Zealand market … Upstream FuelFuel Generation Generator Largely renewable fuel Flexible generation portfolio • Renewable generation increased from 69% to 76% • Resource consents in place until 2026 and beyond • Growth capital programme completed • Peakers and gas storage provide risk management flexibility • CCGT operation dependent on market conditions • Gas secured for the next 2-3 years Wholesale/Retail Retailer Significant customer base • Retail volumes stable in highly competitive market • Retail Transformation provides platform for efficiency and innovation … with limited need for further investment in the operating business 21 Results for the year ended 30 June 2015 Contact’s cost of energy continues to track down with minimal capital requirements to support cash flow » » » Improved plant availability following maintenance programme in FY15 Geothermal generation expected to exceed 3,300GWh Greater gas flexibility and lower unit cost $50 12,000 $45 10,000 $40 8,000 $35 6,000 $30 4,000 $25 2,000 $20 FY12 FY13 Cost of energy ($/MWh) FY14 FY15 Generation volumes Electricity purchase volumes Capital expenditure remains low » » » Capital expenditure 120 Plant maintenance over the next 2 years focused on asset upgrade and long-term maintenance program 100 Excludes TCC refurbishment cost 80 Continued investment in products and process enhancements in the retail business drive corporate spend $m • 60 40 Additional geothermal wells not forecast until 2018. FY16 and FY17 spend relates to modifications to increase Ohaaki generation from FY18 20 FY15 FY16 Plant maintenance 22 for Wairakei Investment Results Programme Gas infrastructure FY17 FY18 Corporate/ Retail the year ended 30 June 2015 Resources GWh Cost of energy FY16 cost of energy expected to continue to improve $/MWh • Continued wholesale oversupply despite dry conditions and some demand growth National demand FY15 demand increased 2.1% from FY14 160 4,000 140 3,500 120 3,000 100 2,500 80 2,000 60 1,500 40 1,000 20 500 0 4% 4% 3% 2% National storage (GWh) 7 day average price ($/MWh) Price and national storage levels 3% 0% 2% (4%) (4%) 4% (3%) 8% 0 Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May Jun Hayward price FY15 Storage level FY15 23 Hayward price FY14 Storage level FY14 Historical storage level 1% 4% Results for the year ended 30 June 2015 Contact to close Otahuhu power station from September 2015 Continued oversupply makes hold costs uneconomic Market currently oversupplied » » • 24 Capacity factor of Contact’s CCGTs has averaged 24% over past year despite periods of low hydrology 6,500 Otahuhu 6,000 Southdown Huntly Rankine 5,500 Tender for Otahuhu to provide capacity to the market unsuccessful 5,000 4,500 Otahuhu power station to close from September 2015 » • System Operator North Island security of supply assessment MW • Peak demand forecast 4,000 Efficient level of required capacity 3,500 Consolidation of thermal operations to Stratford. Staff redeployment opportunities to be actively sought » Annualised cost savings of ~$15m » Sale of plant expected to cover site remediation costs 3,000 2,500 2015 2016 2017 2018 Peak Demand 2019 2020 Peak Demand (Incl Capacity Margin) Available Generation (Incl HVDC) Source: Electricity Authority (March 2015), Contact » 37 hectares of flexible use land will be sold » Accounting book value $253m and tax book value $56m Action taken to reduce costs while providing clarity and time for the market to respond Results for the year ended 30 June 2015 2018 Huntly closure too long dated to support hold costs Cost reduction outweighs revenue uncertainty • • 25 Alternative to closing is to put Otahuhu into storage until Huntly closes » Otahuhu expected to have ~8,000 operating hours at the end of September 2015 providing ~2,400 GWh, or ~2 winters » Not expected to get a return on these hours whilst Huntly is operating » Huntly announced closure timing consistent with Contact’s internal assumption » Deferring land sale and tax benefit and incurring storage and operational costs would require at least $70m or ~$29/MWh in addition to gas and carbon costs to be recovered over 2 years » Hydrology and demand (incl. Tiwai) variability provide no certainty on revenues as far out as 2019 400MW marginal unit not well suited to New Zealand market so unlikely to be refurbished Results for the year ended 30 June 2015 TCC will be refurbished to gain 24,000 additional operating hours • Capex cost of $45m over FY16/17 • 377 MW but can operate down to 140 MW with limited heat rate degradation. Potential to operate down to 100MW • Consolidated operation with Stratford Peakers and Ahuroa gas storage • Portfolio no longer requires a spare CCGT » More liquid hedging market 30 » More flexible use of Hawea storage 25 » Whirinaki peaker 20 Thermal flexibility maintained with no additional gas contracted » Current gas contracts plus storage allow for 15PJ to be flexibly supplied PJ • Actual and available gas sources Maui Max Swap Maui Min Genesis Potential stored gas 17 PJ Potential stored gas 17 PJ 15 10 Potential stored gas 17 PJ Potential stored gas 17 PJ 5 0 26 CY15 CY16 CY17 CY18 CY19 CY20 Results for the year ended 30 June 2015 Max contract volume only applies if min volumes taken CY16 From 2019 the market will likely require additional flexible capacity not energy Contact well positioned to support flexible development when it is needed • • 27 Ahuroa gas storage provides 45TJ/day gas extraction and 27TJ/day of gas injection » Two options to expand injection and extraction capacity at 50 TJ/day increments » Expansion timing ~30 months » Capacity available to third parties Contact has a range of thermal peaking options that would be supported by existing Stratford operations if required Results for the year ended 30 June 2015 Retail Transformation provides a platform for efficiency and innovation in a highly competitive market Stabilise Data Insight driven using SMART, customer & demographic data Digital channels Leading online energy provider Flexible products Customer centric products offering choice and options Service model Highest levels of customer satisfaction Optimise • Stabilise customer numbers • Leaner operating model with prioritised costout initiatives • Industry processes that support simplicity and transparency Lower cost to acquire • Target customers by region and value • Optimise touch points to improve customer experience Lower cost to retain Sustain Lowest cost to serve • Expand beyond energy • Seek scale efficiencies • Tailored products and services for priority segments » Omni» Data analytics » System » Improved » Real-time » Cost to serve channel and CLV go-live front office credit checking reductions platform operationalised metrics » Competitive pricing 28 » At market churn Current position » Prepay price revision » Product and pricing pilots Results for the year ended 30 June 2015 Retail stabilisation substantially complete Customer service metrics all now close to pre go-live levels Key front and back office metrics now at, or close to, pre go-live levels » Customer satisfaction survey now back at pre go-live target range » First time call resolution doubled since June 14 » SAP support work force now fewer than 50, down 80% from go-live and in line with stabilisation plan Customer satisfaction survey 10 CEM (3 month rolling average) • 8 6 4 2 0 • Approaching 70% of Contact customers are now taking advantage of discounted offers and products • Customer churn for the last 6 months in line with market churn 245 • SAP to deliver cost to serve reductions of ~10% 235 Leveraging data and insight to drive targeted customer retention and acquisition offers » Delivery of streamlined credit checking to reduce credit exposure and deliver material reductions in write-offs » 29 Contact is planning to exit residential door to door sales by the end of FY16 $/customer » Cost to serve per customer (11%) 225 215 205 195 FY14 FY15 FY16e Results for the year ended 30 June 2015 Outlook 30 • Continued strong free cash flow • Lower cost to serve to offset continued intense retail competition • C&I load reduced following the non-renewal of the Fonterra electricity contract • Customer business begins to move beyond stabilisation to optimisation • No repeat of 1H15 one-off network costs or retail stabilisation costs • LPG costs reflective of lower oil prices • Increased geothermal production offsets return to mean hydrology • New gas contracts and Te Rapa agreement commence • Reduced operating costs following the closure of Otahuhu • Opportunities to support market requirements for flexible capacity from 2019 Results for the year ended 30 June 2015 Key themes from today 31 Increased cash flow • Free cash flow improvement » Sales volumes stable » Strong retail competition continues to impact margins » Transition phase following investment in new systems and plant complete Distribution of free cash flow • • • 15 cps final dividend (76 cps distributed to shareholders) Share buyback programme to commence in 1H16 Continued commitment to investment grade credit rating Smooth transition from sale • • • Dennis Barnes confirmed as CEO, employed by Contact Recruitment of new board members and chairman progressing ASX application on track Focus on structural efficiency • • • • 80MW contract with Meridian supports ongoing Tiwai operation Otahuhu to close September 2015 Major maintenance at TCC Ongoing transition to flexible thermal capacity » Ahuroa gas storage a key enabler FY16 outlook • • • Increased renewable availability New gas and Te Rapa supply contracts in place Retail business stabilised; benefits realisation commences Results for the year ended 30 June 2015 Supporting material Non-GAAP profit measure - EBITDAF • EBITDAF is Contact’s earnings before net interest expense, tax, depreciation, amortisation, change in fair value of financial instruments and other significant items • The CEO monitors EBITDAF as a key indicator of Contact’s performance at segment and group levels, and believes it assists investors to understand the performance of the core operations of the business • Reconciliation of EBITDAF to statutory profit: Year ended Year ended 30 June 2015 30 June 2014 $m EBITDAF Depreciation and amortisation • 33 $m Variance $m % 525 587 (62) (11%) (204) (190) (14) (7%) Change in fair value of financial instruments (37) 7 (44) (629%) Other significant items (24) 1 (25) (2500%) Net interest expense (98) (77) (21) (27%) Tax expense (29) (94) 65 69% Profit 133 234 (101) (43%) Depreciation and amortisation, change in fair value of financial instruments, net interest and tax expense are explained in the following slide Results for the year ended 30 June 2015 Explanation of reconciliation between EBITDAF and profit • 34 The adjustments from EBITDAF to reported profit are as follows: » Depreciation and amortisation: Costs increased by $14m (7%) reflecting commissioning of Te Mihi and go-live of the Retail Transformation in 2H14. This is partially offset by a decrease in Meter depreciation due to an extended timeline to replace these with smart meters, and a decrease in depreciation following asset useful life reviews » Change in fair value of financial instruments: the balance of -$37m reflecting an unfavourable movement in interest swap rates over the period. » Other significant items: these are detailed on the next two slides » Net interest expense increased $21 million (27 per cent) to $98 million in FY15 due to no interest being capitalised ($37 million in FY14) following the commissioning of major projects. This is offset partially by lower interest costs on debt due to lower average interest rates as a result of debt refinancing completed over the past 2 years » Tax expense for FY15 is $29 million compared to $94 million for FY14 due to lower profit. Tax expense represents an effective tax rate of 18 per cent compared to 29 per cent in FY14. The variance from the statutory rate of 28 per cent is a result of tax expense credits relating to powerhouses historically treated as buildings and subject to a tax depreciation rate of zero per cent now able to be depreciated for tax purposes Results for the year ended 30 June 2015 Non-GAAP profit measure – underlying earnings • The CEO monitors underlying earnings and believes it assists investors to understand the ongoing performance of the business • Underlying earnings after tax is calculated by adjusting reported profit for the year for significant items that do not reflect Contact’s ongoing performance • Other significant items are determined in accordance with the principles of consistency, relevance and clarity. Items considered for classification as other significant items include impairment or reversal of impairment of assets; business integration, restructure, acquisition and disposal costs; and transactions or events outside of Contact’s ongoing operations that have a significant impact on reported profit • Reconciliation of statutory profit for the year to underlying earnings after tax: Year ended Year ended 30 June 2015 30 June 2014 $m Profit 35 133 $m 234 Variance $m % (101) (43%) Change in fair value of financial instruments 37 (7) 44 629% Transition costs 24 11 13 118% 7 100% Clutha land sales - (7) Gain on restructure of gas storage operations - (7) 7 Asset impairments - 2 (2) (100%) 100% Tax on items excluded from underlying earnings (17) 1 (18) (1800%) Reinstatement of tax depreciation on powerhouses (16) - (16) (100%) Underlying earnings after tax 161 227 (66) (29%) Results for the year ended 30 June 2015 Explanation of reconciliation from reported profit to underlying earnings • 36 The adjustments from reported profit to underlying earnings are as follows: » The change in fair value of financial instruments that do not qualify for hedge accounting » Transition costs are those costs incurred on the Retail Transformation project which are comprised primarily of temporary staffing, infrastructure and technology costs. » Gain on sale of priority processing rights through the Waihapa production station as a result of the restructure of gas storage operations » Phased programme of land sales in relation to a Clutha River hydro generation development. This development will not proceed in the foreseeable future » Asset impairments related to land held for sale Results for the year ended 30 June 2015 OCAT, OCAT ratio and free cash flow Free cash flow • Free cash flow measures the cash generating performance of the business and represents cash available to fund distributions to shareholders and growth capital expenditure. Free cash flow is equal to cash flows from operating activities less stay in business capital expenditure, interest costs and transition costs included within other significant items. OCAT (Operating cashflow after tax ) • Contact uses OCAT and OCAT ratio as internal measures of the cash-generating performance of the business. The key difference between OCAT and statutory cash flows from operating activities is OCAT includes stay-in-business capex OCAT ratio • Measures cash returns generated from productive funds employed within operations OCAT ratio = (OCAT – interest tax shield) / average funds employed (excl CAPWIP) • Interest tax shield adjustment accounts for the reduction in tax due to interest paid Average funds employed • • 37 Measures funds employed by Contact in the operating assets of the business, excluding capital work in progress that is not yet operational Calculated on a 12-month weighted average basis to match the operating asset base to operational cash flows Net assets Less: Cash Derivative financial instruments - assets Capital work in progress Add: Debt (NZD equivalent of notional borrowings - after foreign exchange hedging and before deferred financing fees Derivative financial instruments - liabilities Fund employed (12 month weighted average) Results for the year ended 30 June 2015