Wellington, Aug 26 NZPA - Contact Energy posted a subdued annual result today, and said that this year's profit may be flat if poor conditions continue.

Despite short-term challenges, Contact planned to raise at least $250 million in debt over the next six months to fund its planned generation projects, expected to cost $3 billion in the next five or six years.

Contact posted a 1 percent fall in net profit for the year ended June to $237.1 million, while underlying profit after tax, excluding one-off items, was up 0.7 percent at $232.8m.

The gas and electricity company had to supply South Island demand by purchasing electricity from the spot market at a "significant" loss during some periods, chief executive David Baldwin said.

Supply had been hit by low hydro storage, and transmission constraints in the lower North Island and across the Cook Strait HVDC link.

While Contact's more than half a million electricity customers are evenly spread across the islands, most of its generation is in the North Island, where spot power prices had been cheaper.

Given a weaker-than-expected start to this year, the company's mid-point expectation was that it was unlikely to beat last year's underlying profit, Mr Baldwin said.

"It does demonstrate that Contact's business model is a strong one, so that even in times of fairly difficult trading conditions like it's had, particularly over the fourth quarter 2008, that it's able to produce fairly solid results," Forsyth Barr equity analyst Andrew Harvey-Green said.

Despite the integration of the various parts of Contact's business, the difference in electricity price between the North Island and South Island was a problem, and would persist if the South Island customer base continued to grow, Mr Harvey-Green said.

Contact, along with other power companies, expected to increase prices to its customers again this year, following an average 3 percent rise last year.

Drought conditions during the second half of the financial year had resulted in an average annual wholesale price for Contact's generation of $107 per megawatt hour, almost double for the previous year.

Wholesale electricity revenue increased by 82 percent to $1.148 billion, but electricity purchase costs were up 110 percent to $954.9m.

Additional costs totalled around $120m, including transmission costs of $34m and gas costs, Mr Baldwin said.

With hydro storage so low in the South Island, Contact was hoping for Electricity Commission approval to use an extra 2m of water at Lake Hawea for hydro generation beyond its normal operational limits.

Reversing a ban on thermal energy would encourage gas exploration, but renewable energy remained the most attractive investment option, particularly as natural gas prices were expected to continue climbing.

"The quickest and most energy efficient way to create baseload energy for New Zealand is geothermal," Mr Baldwin said.

Contact was planning to spend $1.3 billion in geothermal generation over the next five years.

Wind energy was also important, and large-scale hydro projects may become more attractive in future, he said.

Contact is 51.2 percent-owned by Australia's Origin Energy which is the subject of a hostile takeover bid Britain's BG Group.

No one had approached Contact interested in buying the Origin stake, Mr Baldwin said.

Shares in Contact closed up 9c, or 1 percent, at $8.40.

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