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Natural gas prices hit record highs in northern N. E.

January 15, 2014
GORHAM — The effects of the temporary restructuring at Gorham Paper and Tissue announced on Friday, Jan. 3, have begun to kick in. The state's Rapid Response team held a meeting on Friday with some 20 laid-off GPT workers at White Mountains Community College in Berlin, giving a chance for Employment Security, other state agencies and college officials to give them information.

The plight and distress of these individual workers and their families is, however, only a part of the story.

The skyrocketing price of natural gas on which the GPT's papermaking process depends is a key element of the unfolding story and one that has the potential to jeopardize the mill's long-term sustainability.

When GPT CEO Mike Cummings announced that only one or two paper machines would run this winter and not three or four, he explained that record-setting natural gas prices were the culprit. "The sudden, extreme increases in New England's natural gas prices makes business-as-usual impossible," he said. "We can't run paper machines when production costs exceed prices for our products."

Switching from oil to natural gas was designed to avoid this problem. Very high energy costs had plagued the mill in the past, and Patriarch Partners had moved swiftly to solve this problem after buying the paper mill in May 2011. The company moved swiftly and aggressively to connect the mill to the Portland Natural Gas Transmission System (PNGTS), which runs through Berlin. Once the natural gas was flowing, then-mill manager Willis Blevins said that the switch was saving $1 million a month.

The mill retained its capability of burning oil, although it currently does not have a fuel supply on hand.

All the natural gas that GPT uses is bought on the "spot" or open market. To keep down costs, GPT did not sign a contract for a firm price, opting instead to remain on the spot market, which is an integral part of the free market system.

The hedged prices offered were 50 per higher than the last three years' average prices, according to industry experts. And GPT did not hedge its bets by signing up to pay a firm price for, say, a quarter or half of the natural gas it uses.

The mill purchases over 3,000 dekatherms (DTHs) of natural gas per day during winter months.

Cummings points out that natural gas prices have never, ever previously been this high. He said they did not — and could not — foresee this turn of events. Cummings points out that natural gas supplies in underground storage are robust and that prices outside the Northeast are low. Prices did spike in the upper Midwest, but not as much.

"There were trades on Jan. 6 as high at $95 per DTH, and the liquidity point on which our price is based — Tennessee Zone 6 — closed at $45," the CEO pointed out.

These are the highest prices in New England since power generators began using natural gas as the fuel for so much electricity generation.

In contrast, during the previous three Decembers (2010 to 2012), the average daily price for natural gas was much lower, Cummings points out.

Ordinarily the market rate would be based on a monthly, not daily, market price per MMBtu for natural gas delivered at a market point – for example, Tennessee Gas Pipeline, Zone 6, plus a contractually established set of "add-ons" for local distribution to get the gas from the market point to the customer, explained Jim Choukas-Bradley, a Washington-DC-based attorney and natural gas expert who in his younger days was a reporter for the "Berlin Reporter." Local distribution charges are different for different classes of customers; for example, a commercial customer typically pays a little less than a residential customer, he said.

"The Tennessee Gas Pipeline Zone 6 Index price for Jan. 2014 is $21.35 per MMBtu which is very high — historically high," Choukas-Bradley said. "So even if the GPT had a firm service contract, its pricing would be based on first-of-the-month market prices, rather than a long-term fixed price. Its price would have been far in excess of the benchmark for operations that GPT CEO Cummings was quoted as saying the mill has to have to operate profitably." Pricing is a complex subject, Choukas-Bradley pointed out, noting the distinction between purchasing firm gas at a market price, which he is referring to, and hedging that market price with a fixed price for a portion of the supply. "That," he explained, "is what a firm customer would typically do to protect itself against a run up in the monthly market price, as has occurred."

He also pointed out that the huge pricing differential between the price of natural gas at Henry Hub in Louisiana — the pricing point for NYMEX futures contracts — and the New England market area delivered prices for spot gas reflects major pipeline capacity constraints in New England.

Both prisons on Berlin's East Side use natural gas.

FCI-Berlin, the federal prison, uses natural gas for heating. "The fuel is purchased via delivery order against General Services Administration (GSA) Area Wide Contract," a prison spokesman reported. "The GSA contract period is 10 years, ending in 2022. The rate is not fixed; it is based on the rate that a similar commercial facility would pay (market rate)."

Natural gas is also used at the Northern NH Correctional Facility, according to spokesman Jeff Lyons. "It is part of the State of NH contract with Liberty Utilities that all state agencies use. The contract runs Dec. 1, 2012, through May 31, 2015." In FY13, the cost of natural gas delivered to the main prison building, but not to the far smaller garage, had an average unit cost of gas of about $9 per dekatherm for the fiscal year 2013.

The three-year price agreement includes 25 percent swing flexibility, designed to protect the state from the kind of fast-spiking prices that are now adversely affecting GPT.

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