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Manufacturers, businesses, consumers hit hard during cold-weather months

Tripling of natural gas prices hikes costs

In less than a year natural gas prices have tripled, catching most people by surprise. The higher costs don’t just affect natural gas users, but industries, businesses and homeowners

throughout the state who will face higher electricity bills because of electrical power generation from natural gas.

“You get hit twice,” said Mark Leggett, senior government affairs director for the Mississippi Manufacturers Association (MMA). “It is also having an impact on electric rates

because natural gas is also the fuel of choice for electricity generation. So if you use natural gas and electricity, you are paying more for both things.”

And in many cases, those costs are considerably more. Entergy Mississippi has requested a $137-million fuel cost adjustment and $12 million in carrying charges for a total of $149

million in unexpected costs. The company proposes passing along the fuel charges over a two-year period starting Jan. 1, 2001 as a 16% rate increase for residential, commercial

and industrial customers.

Mississippi Power Company, which has less reliance on natural gas for electricity production than many other utilities, is projecting a 2% increase for customers over the next year.

Mississippi Valley Gas Company (MVGC) estimates bills could rise as much as 50%, more if the winter turns out to be colder than expected.

“Please understand that Mississippi Valley Gas does not profit in any way from increases in wellhead prices,” Matthew L. Holleman III, president and CEO of MVGC said in a letter

to customers. “We apologize for any hardships higher natural gas prices may cause. Please be patient with us as we all try to work our way through this time of significantly higher

energy prices.”

A serious concern

Leggett said the increasing cost of natural gas is a serious concern.

“The rise in natural gas prices comes at a time when the economy is slowing anyway and companies are feeling stress,” Leggett said. “And now they have this increase in their fuel

costs. We realize there is not a lot we can do about it at the moment. The market is driving it. Increased production is about the only thing that is going to drive the price down.”

Joseph Sims, president of the Mississippi/Alabama division of the U.S. Oil and Gas Association, said while the higher prices are a major incentive for increased production,

exploration and production activity has declined so much in recent years that it will take a while to catch up.

Sims said currently nationwide there are only 1,000 rigs running in the U.S., and another 300 that are idle.

Sims said that over time he believes producers will add significantly to the reserves. But he said it is obvious that the market is very concerned about natural gas supplies in 2001,

and that is a driving force behind the higher prices.

No profit windfall for producers

Sims said he wouldn’t say today’s prices are producing a windfall of profits for producers because the same companies went through very low oil and gas prices back in 1998. He

does believe many producers will reinvest today’s positive cash flows into more oil and gas production.

“The downside is that industries that are dependent on natural gas for making their product are going to see a significant increase,” Sims said. “The price increase has been so

dramatic and has increased far beyond what most people thought. I guess the only thing worse than paying more for natural gas is being in California’s circumstance where you are

concerned about having enough electricity.”

Roland Woodard, a senior engineer for the refinery economics and planning group, Ergon, Inc., said there has been a “snowball effect” that has caused prices to go so high.

Colder winter, declining reserve

“Winter is here, and prices were already escalating before that,” said Woodard, who is also chairman of MMA’s energy committee. “We had a relatively warm winter last year. Now

we are already into winter and are starting out with less storage than anticipated. We have had the Arctic blast, and that has only fueled the uncertainty if we have enough gas to get

through the winter. Plus prices were already escalating in the summer.”

Another factor is that energy deregulation has caused a large number of natural gas-fired generators to be constructed. The impact of this major new source of demand for natural gas

is also increasing speculation about adequate natural gas availability, which in turn causes speculation that natural gas prices will increase.

Woodard said larger industries buffer market variations by locking in long-term contracts for natural gas supplies. But many small and medium-sized companies in the state are

purchasing gas on shorter-term contracts, and are more vulnerable to wide market swings.

Ergon has long-term contracts for natural gas to fuel its refinery in Vicksburg, but Woodard said many smaller companies aren’t as fortunate. He said a typical manufacturer with

limited resources to purchase long-term contracts for natural gas is now faced with having to deal with the escalating prices on a day-to-day or month-to-month basis.

“That’s the person being most affected by this,” Woodard said.

Poultry growers are concerned about increasing prices for heating poultry houses this winter, and small businesses such as wood kiln operations that use a lot of natural gas in their

process are also increasingly crunched by high natural gas prices.

A silver lining?

But the news isn’t all bad. Higher prices for natural gas mean more severance tax collections for county and state governments. And some Mississippi businesses have been able to

take advantage of the situation. For example, Mississippi Chemical Corporation recently announced a $16 million pre-tax gain in its fiscal quarter ended Dec. 31, 2000, due to the

sale of all of its natural gas futures contracts.

“We remain committed to the nitrogen business and our customers, but we also have to take advantage of opportunities to optimize cash flow during these challenging times,” said

Charles O. Dunn, president and CEO of Mississippi Chemical Corp. “It is our belief that the current unprecedented natural gas prices are unlikely to be sustained during the

intermediate term. As a result, we felt it was in the company’s best interest to sell our futures positions to lock in the substantial gain afforded by the recent increase in natural gas

prices.’’

That gain will help with losses earlier in the year including a $12.2-million loss for the three months ending in September. The company has been impacted by high prices for natural

gas used to produce fertilizer, and has seen its stock decline to a 52-week low of $2.43 on Dec. 7 compared to a 52-week high of $10.75.

Contact MBJ staff writer Becky Gillette at mullein@datasync.com or (228) 872-3457.

About Becky Gillette

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