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Natural gas price spikes put squeeze on paper producer

New Hampshire Union Leader

December 25. 2013 9:59PM

GORHAM — When Mike Cummings took over as CEO of Gorham Paper and Tissue in May, the company had recently completed a $5 million investment, extending a natural gas line to the paper mill that had been converted to produce bathroom tissue and fast-food packaging materials.

The natural gas connection, completed in the fall of 2011, was designed to save money.

At the time, no one thought it would result in temporary shutdowns at the mill due to constraints on natural gas flowing into New England.

But that's exactly what happened last week, as unseasonably cold weather sent gas prices soaring. The mill had to shut down for three days from Dec. 14-16, as approximately 100 employees lost much-needed wages on the eve of the holiday.

It was the second gas-related shutdown at the mill this year. In February, one paper machine had to be shut down, temporarily affecting workers at that time as well, according to Cummings.

And it could happen again at GPT and other manufacturers that rely on natural gas, as the coldest months lie ahead.

The Portland (Maine) Press Herald reported last week that some Maine paper companies, also supplied by the Portland Natural Gas Transmission System, had to limit production or shut down parts of their operations during the cold snap.

The volatile price of natural gas, due to a lack of pipeline capacity into New England, is putting a crimp on one of New Hampshire's most acclaimed manufacturing success stories.

GPT was shut down for eight months in 2010 after Fraser Papers declared bankruptcy in 2009. It was eventually purchased by high-profile New York investor Lynn Tilton of Patriarch Partners, who invested in new equipment and a new energy supply as part of her avowed mission to "rebuild America one company at a time."

The conversion and ensuing success were widely reported, including a mention on a CBS Evening News broadcast in April on the revival of manufacturing in the U.S., in which the reporter noted, "The once-closed mill is humming with a new tissue machine and a sharpened focus on the technical specialty markets."

Unfortunately, the machines weren't humming for three days last week, as natural gas on the spot market became so expensive that GPT could not afford to operate.

Space at a premium

There are only two major pipelines into New England, and on the coldest day of the year, most of the space on those pipelines is occupied by local distribution companies like Liberty Utilities that must supply gas to heat homes. The remaining space is sold at a premium.

During the cold snap earlier in the month, prices on the spot market for delivery into New England more than tripled, reaching an average of $33 per dekatherm compared to $6.50 per dekatherm last December.

With more customers acquiring natural gas service, the demand continues to outpace supply, with no new pipelines expected to come on line for at least another two years.As a result, future cold snaps could result in even wilder price swings. "That does not bode well for this winter," said Cummings.

GPT could purchase guaranteed contracts, called "firm gas," but they come at a premium that would make the overall pricing of GPT products less competitive in the marketplace, according to Cummings.

He said it would not make sense for the company to pay higher prices for nine months to guarantee supply during a handful of extremely cold days in the winter. Prices had already stabilized by the middle of last week as warmer air moved into the region.

"We have the same gas prices as anyone else in the country for nine months, but in the winter, because of the pipeline layout in New England, we are at a disadvantage with our competitors," he said.

Workers affected during the limited shutdowns should be eligible for unemployment benefits, according to state Sen. Jeff Woodburn, D-Dalton, who said he's communicated with the Department of Employment Security on the matter.

"This is not the first time this situation has happened," he said. "There is a process for those people who were sent home because of the lack of fuel."

The fuel-related shutdowns, which could become more frequent, have a short-term effect on employee income, but could have a long-term effect on the company's customer relations, said Cummings."It's important to understand how this issue affects a manufacturer that competes with companies outside of New England," he said. "It's not a 12-month issue, but it can be a catastrophic issue when you can't run, and your customers can't get their product. We've built up fantastic relationships with customers that we damaged last weekend because we couldn't make their product."

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