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VOL. 33, NO. 34

Deals show tech sector attractive to investors

Key soliciting options for new HQ space

By CHUCK SODER csoder@crain.com

Banking giant seeks efficiency, though others theorize a better lease is its goal

Northeast Ohio’s technology scene is coming of age. In the wake of two acquisitions late last month totaling $470 million, several people who follow technology companies in the region say many local tech firms now are capable of attracting far greater amounts of money than they could have just a few years ago. In some cases, that money will come via acquisitions. In others, it will be in the form of larger venture capital investments. Both the former and the latter already are starting to happen. Although the number of local tech companies being acquired hasn’t risen drastically during the last two years or so, some recent deals have been especially large. On Aug. 24, for example, medical implant maker OrthoHelix Surgical Designs Inc. of Medina announced it will be sold to medical device firm

By STAN BULLARD sbullard@crain.com

KeyCorp is indicating to developers and property owners that it might want to build a new headquarters in Cleveland, though some real estate brokers believe it may be expressing such interest in order to extract a better lease deal at its current home, the 57story Key Tower. A property development source familiar with the situation said KeyCorp has asked more than one downtown developer to provide office alternatives for the company. The source said Key wants less space than the banking company occupies now at 127 Public Square. “They are not looking to downsize (staff), but want a more efficient layout,” the source said. According to a Feb. 27 regulatory filing, KeyCorp leases 26 floors totaling almost 690,000 square feet in Key Tower, the secondtallest skyscraper between Chicago and New York City. The source said the space KeyCorp would need for its headquarters could be trimmed with more efficient layouts. KeyCorp also could benefit from technological improvements in the 20 years since Key Tower’s completion. The source asked not to be identified because he is not authorized to

See TECH Page 8

INSIDE In-depth shale coverage We analyze the trends and the major players in Ohio’s shale boom. PAGE 13

See KEY Page 28

CRAIN’S FILE PHOTO

HOSPITALS AT BOTTOM OF BOTTLE Scarcity of some drugs, ‘suffocation’ of supply chain forces pharmacists to get creative By TIMOTHY MAGAW tmagaw@crain.com

make supplies of medications last.

One hard-to-come-by pain medication typically costs the Cleveland Clinic 10 cents a dose. But, given the difficulty in securing See DRUGS Page 29

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NEWSPAPER

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The medicine cabinets at Northeast Ohio’s hospitals are sparse these days, and while it’s no fault of their own, a nationwide drug shortage has forced pharmacists to come up with creative ways to

Although the federal government has offered a few tools to ease the burden, local hospital pharmacists say the shortages show few signs of easing. More than 200 drugs are in short supply or unavailable entirely; the bulk of these

are generic injectable drugs. Alternatives, if they exist, often are sold at high markups.

World

Trade d C Conference Thursday, Sept. 27

Expert advice to grow your sales See page 9

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With final $25M, art institute will finish expansion

INSIGHT

CIA reaches $66 million goal, allowing it to start second phase of campus integration By TIMOTHY MAGAW tmagaw@crain.com

ANDRE JENNY

SAME GAME. NEW NAME? Cleveland Browns Stadium soon may be rebranded, but what value a deal might bring is tricky to gauge By JOEL HAMMOND jmhammond@crain.com

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hen soon-to-be Cleveland Browns owner Jimmy Haslam introduced himself to Clevelanders at a news conference Aug. 3 at Browns headquarters in Berea, he was open and direct about everything except potential personnel changes; with the sale still not complete, he was hesitant to comment on those matters. His bluntness was a marked FRANK JANSKY/ZUMA PRESS departure from the reclusive Randy New Cleveland Browns owner Jimmy Haslam (left) stands Lerner, followed quickly by another anomaly: Mr. Haslam admitted that with general manager Tom Heckert at the team’s Family he would explore, “probably,” selling Night scrimmage on Aug. 8 at Cleveland Browns Stadium. the naming rights to Cleveland Browns Stadium, a potentially lucrative INSIDE: The most valuable naming rights transaction. deals in the NFL. Page 11 “We live in a marketing world,” Mr. ■ A year in, 92.3 The Fan makes up ground Haslam said simply that day. on WKNR in local sports radio. Page 9 Two things appear to be certain in presenting sponsor. It’s also a lock any potential naming rights deal on the that Westlake-based TravelCenters of North Coast: First, that it won’t be Pilot America, Pilot’s chief competitor in Flying J, the giant Knoxville-based their business, won’t be chosen. operator of truck stops that Mr. Haslam After that, the deal seems to be fair runs; he reiterated in a Plain Dealer game. Browns spokesman Neal Gulkis interview last week a previous asserSee BROWNS Page 11 tion that his company would not be the

Grafton Nunes’ paramount task upon becoming president and CEO of the Cleveland Institute of Art in 2010 was to sniff out the remaining $25 million needed to com- Nunes plete the college’s $66 million fundraising effort — the largest in the institution’s 130-year history. Nearly 2½ years later, the small art school steered by Mr. Nunes has reached that goal and is ready to break ground this fall on the final phase of its expansive building initiative. The project’s goal is to unite the school’s fragmented East Side campus into a single complex on Euclid Avenue in University Circle’s Uptown district.

“The last $20 million is the toughest,” said Mr. Nunes, who led a successful $15 million fundraising effort at Emerson College in Boston prior to his arrival in Cleveland. “Finishing that $66 million was important because the capital campaign and unification project was so important to the growth of the school.” Completed in December 2010, the first phase of the unification project was the complete renovation of the college’s Joseph McCullough Center for the Visual Arts on Euclid Avenue; it’s a former Ford Model T assembly plant built in 1915 and acquired by the college in 1981. The second phase, expected to See CIA Page 28

THE WEEK IN QUOTES “The hospitals basically validated that they felt the (drug) shortage was somewhat severe. Years ago, it was sporadic. Now it’s more of a chronic problem.” — Lisa Anderson, a registered nurse and vice president of member services for the Center for Health Affairs. Page One

“The Utica is an interesting area and an interesting play and people go where opportunities are. … And lots of people see potential in the Utica.” — Gregory Brown, general counsel for Texas-based Beland Energy Utica LLC and Beusa Energy. Page 13

“What we’ve done to survive is we’ve gotten into some other areas. We’ve diversified our business.We’re finding industries and opportunities where we can use our existing capital equipment.” — Matt Reineke, president and CEO, Americarb. Page 12

“We’re not anti-tax and we’re not afraid to pay our share, we just want to know what we’re dealing with.” — Terry Fleming, executive director of the Ohio Petroleum Council in Columbus. Page 18

ERC study finds more — and bigger — raises on tap for 2013 Only a small number of manufacturing companies plan to freeze wages By DAVID PRIZINSKY clbfreelancer@crain.com

A slightly better Northeast Ohio worker pay picture is painted this year by employers participating in the latest compensation survey published by the Employers Resource Council, a human resources service organization in Mayfield Village. Raises are expected to increase

by an average of 3% next year, compared to the 2.8% wage and salary hikes projected in the year-ago survey. Actual increases put in place during the current year averaged 3%, slightly higher than anticipated in the year-ago survey. Marty Mordarski, director of research and membership at ERC, said the latest survey “indicates there is also a trend toward more

companies deciding to increase wages and salaries.” He said the 3% average projected wage hike is slightly higher than recent averages and is the highest since 2009. The largest average pay hike recorded in the last dozen ERC surveys was 4.4%; that occurred in 2001. Half the companies surveyed said they raised pay 3% or more this

INSIDE: Historical wage hike data from ERC. Page 9 year, and 60% said they would do so in 2013. Mr. Mordarski also noted that only a small number of manufacturing companies said they would freeze wages next year, a good sign. The ERC contacted 154 companies and organizations for the survey — 76 manufacturing companies, 46 non-manufacturing companies and 32 nonprofit organizations. Employers

that said they would freeze pay were not included in calculating pay raise averages. The ERC survey covered five job classifications ranging from executives to production, supervisory and clerical. This year, when it came to actual raises, service companies loosened the purse strings a little more than manufacturers. The raises at service firms exceeded those at manufacturing firms by a small margin, and that is expected again next year. See ERC Page 9

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PUBLISHER/EDITORIAL DIRECTOR:

Brian D. Tucker (btucker@crain.com) EDITOR:

Mark Dodosh (mdodosh@crain.com) MANAGING EDITOR:

Scott Suttell (ssuttell@crain.com)

OPINION

Bad breaks

E

lected officials in Columbus have talked a good game about reducing the number of tax breaks that businesses enjoy in Ohio, but haven’t made headway in stripping them from the tax code. Instead, they’ve added to their number, causing us to doubt whether they’re serious about doing away with any of the tax giveaways, which in total cost the state billions of dollars in revenue each year. As Crain’s government reporter Jay Miller wrote in a Page One story last week, a study by public policy nonprofit Policy Matters Ohio showed state legislators and Gov. John Kasich in the last year had approved at least nine new or expanded “tax expenditures” — government-speak for tax credits, deductions and exemptions. These additions came even though lawmakers and the governor have given the impression through public comments that even they believe there are needless tax loopholes that should be eliminated. Take remarks made last April on the floor of the Ohio House by state Rep. Mike Foley, a Cleveland Democrat and a member of a legislative study committee on taxes. Rep. Foley said many of the tax breaks “probably help economic development in the state of Ohio.” “But,” he noted, “there are some out there that are fairly silly and have been on the books for a long time.” Fairly silly? Try ridiculous. It’s absurd that the Ohio Department of Taxation every two years goes through the exhaustive effort of creating its Tax Expenditure Report, which itemizes the cost to the state of each tax break, only to see the document sit on the shelf. As the report itself states, the responsibility for evaluating each tax expenditure’s merit “belongs jointly to the General Assembly and the Governor.” Yet once a tax giveaway is added to the roster, it continues on and on and on, without a thorough examination by either the Legislature or the governor’s office of whether the tax break’s benefit to Ohio’s economy is worth the revenue the state forgoes. The failure of the legislative and executive branches of government to do anything of value with the Tax Expenditure Report isn’t unique to the current occupants of the Statehouse and governor’s mansion. The state’s tax commissioner has been required since 1987 to produce the report as a supplement to the governor’s biennial budget. Twenty-five years and five gubernatorial administrations later, the elimination of a tax break remains about as rare an event in Columbus as a sighting of Halley’s Comet in the heavens. Instead, the tax expenditures keep piling up — so much so that they had reached 128 in the latest tax department report. Until Gov. Kasich and the Legislature actually begin to peel back — rather than add to — the number of tax breaks on the books, it’s hard to consider their talk about closing at least some of these loopholes anything more than gratuitous lip service.

FROM THE PUBLISHER

Look ahead, address the past messes

I

— including Mr. Gregory — found it n a discussion about business and confusing that President Obama has not what needs to be done to jump-start tried to build bridges with the American the American economy, who would business community. Had he done so, you imagine decrying golden parathe Republicans might not have had so chutes as lucrative financial payouts that much to yell about last week in Tampa. “idiot CEO’s get when they get fired?” This was all captured by syndicated Dennis Kucinich, you might guess. columnist William D. Cohan of Nope. Bloomberg News, who quoted Some Occupy Cleveland proMr. Wright as saying — correctly tester? BRIAN — that it does no good to keep Nah. TUCKER looking back and blaming peoAn overblown, talk-show ple for the financial mess, and blabberer? that our ongoing financial crisis Wrong again. demands that we act, and act The man uttering those words quickly. was one of America’s mostReal business and political respected former chief execuleaders, they said, need to sit tives, Lou Gerstner, the man down together and work out a responsible for the dramatic plan that begins right now. A turnaround of IBM. good first step would be to find those He and two others in his same category real leaders. — former General Electric CEO Jack **** Welch and Bob Wright, former head of YOU’RE A BUSINESS OWNER and NBC Universal — gathered on Nantucket realize that in order to grow, you need to Island recently for a discussion with find new markets overseas. The problem David Gregory, host of NBC’s Meet The is, you’re not quite sure where to start. Press. Or, you’re an executive of a local Particularly telling was that the men

company with years of experience selling products to global markets. How do you plan for 2013 when the debt crisis and instability in the eurozone continues to dominate the world’s business news headlines? And what could Northeast Ohio, even with its long history as a center of international trade, do as a region to further help our local companies prosper through exports? Many of our companies have been active in Asia for years, if not decades. What will the Asia slowdown mean to them? On Sept. 27, business owners and executives will be able to get some of those questions answered while making valuable connections at Crain’s NEO World Trade Conference. Two powerful keynote speakers will be sandwiched around four panel discussions probing these questions and other issues, followed by a networking cocktail reception. For more information on the event — to be held at Executive Caterers at Landerhaven — or to register, visit www.crains cleveland.com/NEOWorldtix, or call Christian Hendricks at 216-771-5182. ■

PERSONAL VIEW

Revising Third Frontier plan appropriate By BARBARA R. SNYDER

A

nyone who doubts the difference a decade can make need only look back to 2002. In that year, United Airlines filed for bankruptcy, Palm and BlackBerry dominated the new smart phone market, and Mark Zuckerberg started his first year at Harvard. Today, United has the world’s largest number of airline destinations, iPhones and Androids are all the rage, and Mr. Zuckerberg’s company, Facebook, boasts more than 950 million active users. For Ohio, 2002 stands out as the year the state launched Ohio Third Frontier, a model for economic innovation that has brought the state more than 80,000 new jobs and $6.6 billion in outside invest-

Ms. Snyder is president of Case Western Reserve University and a member of the Ohio Third Frontier Advisory Board. ments. The effort proved so successful that in 2010, more than 60% of voters endorsed a proposal to extend the state’s support for an additional four years. Why tinker with an approach that has attracted such acclaim and new dollars? Because the status quo is never static — especially in the current business climate. Last month, I was among the members of the Ohio Third Frontier advisory board and commission who came together for a retreat to consider the program’s accomplishments and opportunities. Over two days of extensive conversation, several themes emerged: ■ Rapid results: Given the ever-accel-

erating pace of change, Ohio Third Frontier investments should focus more on shorter-term opportunities for returns on investment — that is, those within a window of fewer than five years. ■ Strengths focused: The Ohio Third Frontier should direct resources to those areas where Ohio already has leadership relative to other states. Outside analysis has identified several industrial clusters that meet this criterion, among them Advanced Materials, Software Applications for Business & Healthcare, and Medical Technology. ■ Catalytic campuses: Revolutionary advances from the Internet to Google emerged from universities, where faculty members pursue the next “Big Idea” every day. By supporting the commercialSee VIEW Page 6

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THE BIG ISSUE Do you think political conventions are still relevant, and do they influence how you vote? 700 W. St. Clair Ave., Suite 310, Cleveland, OH 44113-1230 Phone: (216) 522-1383 Fax: (216) 694-4264 www.crainscleveland.com

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I think they’re still relevant, because it kind of puts a face on the party. It just kind of unifies the people in that party. They don’t influence my decision to vote, but that’s because I’m already decided.

To tell you the truth, in this day and age with everyone tweeting and Facebook and all the media — instant news — you get all the information, all the news breaking, on a daily basis. So they’re just repeating the facts, if you ask me.

I don’t think they have a great influence on how people vote. I think they’re still relevant, because it’s a platform for them to at least talk about the issues and their stance on them, which is always going to get in the public eye.

I think they are important, but I think people have their opinions already in place. So, personally, they do not influence how I vote.

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Youngstown firm buys Taylor Chair’s assets 196-year-old Bedford company closed doors in June; Gasser will continue office furniture line By JAY MILLER jmiller@crain.com

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The Taylor chair is on its way back. It will be made in Ohio, but not in Bedford, its home for 196 years. Gasser Chair Co. of Youngstown bought the name, chair designs, customer list and other proprietary property at an Aug. 22 auction of the assets of The Taylor Cos., which folded earlier this year. Taylor was believed to be Cuyahoga County’s oldest continuously operating company; it called itself the oldest furniture manufacturer in the United States. The company specialized in chairs for law offices, government buildings and other institutions. Gasser president Mark Gasser said his company has yet to decide whether Taylor’s highly regarded line of office chairs will be made at Gasser’s Youngstown plant or its Millersburg plant, both of which he described as underused. The company, which has more than 110 employees, paid more than $100,000 for the package of Taylor intellectual property it bought, Mr. Gasser said. Gasser will use its newly acquired furniture line to expand into the market for office chairs. The 65-yearold company specializes in seating for restaurants, hotels and casinos. It provided the slot machine and game table chairs for both the new Horseshoe casinos in Cleveland and Cincinnati.

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“They have a long history and they have a stellar reputation in the (office furniture) industry.” – Mark Gasser, president, Gasser Chair Co. “The attraction to us was the fact that Taylor Chair — they have a long history and they have a stellar reputation in the (office furniture) industry — was in a separate and different market than we currently sell into, which is more of the hospitality and entertainment industries,” Mr. Gasser said. “I don’t think we would have considered getting into the office seating business with anything less than that type of a name.” He added, “It’s a very difficult market to build or pioneer a brand in, and Taylor has already done that over many years.” Mr. Gasser said he hasn’t been able to assess yet how Gasser will market and sell the Taylor chairs. But he said the two companies’ marketing styles were similar, noting that both have used independent sales representatives who sell for multiple manufacturers. Both chair makers also served what he described as a middle market, selling to customers who may buy 50 to 100 chairs at a time. He said he wasn’t planning to compete in the mass market against companies such as Steelcase Inc. or Herman Miller Inc. Gasser Chair’s annual sales are about $10 million, Mr. Gasser said. That’s about the same size as Taylor Chair, which in 2006 — before the recession — had sales of $11 million, according to information supplied by Thompson Auctioneers of Fairborn, which handled the disposal of Taylor assets.

An end and a beginning Jeff Baldassari, Taylor president and CEO, said the company closed its doors June 8. The closing cost about 50 people their jobs at the plant in Bedford and at a second plant — Taylor Desk — in Lynwood, Calif. Taylor bought that California plant in the 1980s. The closing also cost the jobs of Mr. Baldassari and executive vice president Brett Meals, who was a member of the seventh-generation descendents of company founder Benjamin Fitch. Mr. Fitch opened the business in Bedford in 1816. Mr. Baldassari blamed the company’s demise on the recession and the failure to win a tax abatement from the state of Ohio for the 72,000square-foot plant Taylor built in Bedford in 2006. Kent Jones of Thompson Auctioneers said the Aug. 22 auction cleaned out the Bedford factory, selling items ranging from saws and sanders to scrap leather and corrugated boxes. He declined to say how much the sale netted for creditors or to disclose how much is owed to creditors. Meanwhile, the California factory is being reborn. A news release issued Aug. 23 by Alan Paull said A.J. Paull Office LLC opened for business on Aug. 1. Mr. Paull’s grandfather had sold Eastern Cabinet and Furniture Co. to Taylor in 1986. He then ran what became Taylor Desk.

Taking a risk on history Mr. Baldassari, who said he may consult with Gasser Chair, was optimistic that the chair business also can be restarted. He said he expects Gasser will focus on the 20% of the Taylor chair line that accounted for 80% of the business. “The good thing is, there aren’t many American wood (chair) manufacturers left,” he said. “They can get back in because there isn’t a lot of competition in that sector.” Mr. Gasser, too, is optimistic. But he conceded sentiment was a factor in the decision to buy Taylor Chair. “This is an opportunity to keep the name alive,” he said. “I must admit that, honestly, I couldn’t bear to see the name and its history just evaporate. I thought it was worth the risk.” ■

View: Time to evaluate other tech opportunities continued from PAGE 4

ization efforts of our institutions of higher learning, the Ohio Third Frontier can ensure breakthroughs make their way to markets far more quickly. ■ Meaningful metrics: We require much more rigorous collection and evaluation of metrics to determine the actual impact of our initiatives. We have directed staff to explore what measures will provide the most useful information for determining how best to proceed with regard to existing and proposed programs. Change is always challenging, particularly when an offering appears to be going well. Northeast Ohio companies, hospitals and my own university, Case Western Reserve, have benefited tremendously from the foresight of

those leaders who first brought the Ohio Third Frontier to fruition. But then I remember that it hasn’t been that long since we all thought that a cell phone smaller than six inches was pretty special. A decade after the Ohio Third Frontier began, it’s time to assess whether additional opportunities exist for Ohio. Just as in a university laboratory, we need to try additional ideas, assess their outcomes, and adjust based on that new information. No program is perfect, and even the best-sounding proposals may not prevail in practice. But we have an obligation to at least explore new options. Ohioans have entrusted us with the responsibility of ensuring their future. Our task is to do all that we can to make it as promising as it can be. ■

WRITE TO US Send your letters to: Mark Dodosh, editor, Crain’s Cleveland Business, 700 W. St. Clair Ave., Suite 310, Cleveland, OH 44113-1230 e-mail: mdodosh@crain.com

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Tornier N.V. of the Netherlands for $135 million. A few days later, trucking software firm TMW Systems Inc. of Beachwood said it will be sold for $335 million to Trimble Navigation Ltd. of Sunnyvale, Calif., which makes technology to manage mobile workers. On the venture investment side, Northeast Ohio companies developing medical devices, software, new materials and other high-tech products raised a total of $114 million in venture capital during the first half of 2012. That figure didn’t set a record, but it easily exceeded firsthalf totals of $83 million, $50 million and $18 million in 2011, 2010 and 2009, respectively, according to data from JumpStart Inc., a nonprofit that assists and invests in young tech companies. Money is flowing partly because of improvements in both the economy and the credit market. That’s especially true for big acquisitions, which often involve debt financing. But there’s another factor driving deals for tech companies in the region: They are reaching the point where they are ready to scale up or, in some cases, be sold, according to several people interviewed for this story.

More tech deals are on the way, according to attorney Howard Bobrow, who advises private equity funds, venture capital firms and young growth companies for the Cleveland office of law firm Taft, Stettinius & Hollister LLP. He has seen an increase in the number of tech companies ready for exits and is working with a few now. Mr. Bobrow noted that improvements in the broader market for mergers and acquisitions are helping, but he added that the region’s tech sector is in a better position to take advantage of those improvements than it would have been a few years ago. “I absolutely think it means that the industry is showing signs of maturity,” he said.

Big hairy deals The acquisition deals for OrthoHelix and TMW Systems illustrate Mr. Bobrow’s point. The sale of OrthoHelix will mark the first exit for the company, which is owned in part by Mutual Capital Partners LLC, a growth-stage venture capital firm in Cleveland. TMW founder Tom Weisz sold his stake in his business back in 2005, when the company was acquired by Peppertree

Capital Management Inc. of Pepper Pike and Wachovia Capital Partners of Charlotte, N.C., for an undisclosed amount that he previously said was less than $100 million. Other tech companies that have struck deals to be acquired for relatively large amounts so far this year include U.S. Endoscopy, which is to be sold for $270 million to medical equipment maker Steris Corp., its next-door neighbor in Mentor, and Rolls-Royce Fuel Cell Systems (U.S.) Inc. of North Canton, which for $45 million sold a 51% stake in itself to Korean conglomerate LG. Of the eight local tech companies identified by Crain’s as striking deals this year to be acquired, some — OrthoHelix, the Rolls-Royce subsidiary, marketing software firm BrandMuscle Inc., wireless equipment provider Summit Data Communications Inc. and Onosys, which provides online food ordering software for restaurants — are relatively young; all were formed since 1999. The other three — U.S. Endoscopy, TMW and electronic transaction services provider Electronic Merchant Systems — were formed in the 1980s and 1990s. Although the number of acquisitions isn’t particularly high compared

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to previous years, the size of the deals is, according to Mr. Bobrow and others who spoke with Crain’s. Mr. Bobrow noted how some acquisitions from previous years were small or involved companies that were not performing well.

Investments add up Venture capital dollars also appear to be flowing readily into Northeast Ohio, according to JumpStart’s figures. Granted, local companies would need to raise more than $200 million in the second half of 2012 to reach the record of $317 million in venture capital raised in 2007. However, the sheer number of companies receiving any amount of money from venture capital firms or individual investors has skyrocketed, according to JumpStart’s figures. During the first half of 2012, 73 companies received investments, a number that beat annual figures from most previous years. The economy likely is a factor in the overall increase in deals, but the increasing number of quality companies in the region is another, said Lynn-Ann Gries, chief investment officer at JumpStart. Ms. Gries said another reason is the presence of the Ohio Capital Fund, a $150 million “fund of funds” that invests in venture capital firms that commit to financing companies in Ohio. The 25 venture capital firms that have received money from the fund had invested $188 million in 66 Ohio companies as of March 31. However, most of the fund’s money has been committed to venture firms, so if the state Legislature doesn’t pass a bill to renew it, the investments the underlying firms make could slow down, she said. “The work the Ohio Capital Fund did in bringing additional venture funds to the region has been pretty much the shining star in how we’ve been able to get our companies financed,” Ms. Gries said.

Entering ‘exit mode’ Among the venture firms that have received money from the fund is Draper Triangle Ventures of Pittsburgh. Draper years ago made early investments into two local companies that recently went on to raise more venture capital: heart imaging technology developer CardioInsight Technologies Inc. of Cleveland raised $7.5 million earlier this year, and appointment management software firm TOA Technologies Inc. of Beachwood raised $17 million last year. The dollar amounts of local venture deals will “continue to climb” in the future, and acquisitions of local tech companies will become more common, said Mike Stubler, managing director at Draper. “We should start to see more of those (companies) going into exit mode,” he said. Ralph Della Ratta Jr., managing partner at Western Reserve Capital Partners LLC in Cleveland, said he expects acquisitions to rise. The firm lately has been working on more deals that involve technology companies, and Mr. Della Ratta said he knows of three that will be sold or are hunting for buyers. Although the improved credit market likely is helping drive acquisitions in Northeast Ohio, companies looking for venture capital haven’t been helped by national investing trends. Venture investments have recovered somewhat from the recession but have been flat lately, according to the PricewaterhouseCoopers/National Venture Capital Association MoneyTree Report. Thus, any increase in venture capital in Northeast Ohio can be attributed mainly to the achievements of people in this region, said Jonathan Murray, managing partner for Early Stage Partners of Cleveland. “Locally, we’ve gotten our act together,” Mr. Murray said. ■

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WKNR still No. 1 in sports ERC: Local survey mirrors national trend WAGE HIKES MAY GO UP radio, but Fan closes gap continued from PAGE 3

Data show year-old newcomer brings listeners to FM dial; ESPN affiliate’s boss undeterred By JOEL HAMMOND jmhammond@crain.com

To hear the principals involved, there is no sports radio competition in Cleveland. Those significant lineup changes at WKNR-AM, 850, better known as ESPN Cleveland, after CBS Radio’s WKRK-FM, 92.3, “The Fan,” went live in August 2011? Nothing more than gathering and applying feedback from listeners. And the slow but steady ratings climb at WKRK? All part of the process of building an audience. According to data compiled by Baltimore-based Arbitron Inc., which tracks radio listenership nationwide, WKNR remains the top sports dog in Cleveland. However, in Arbitron’s most recent Portable People Meters data, WKRK continued to close the listener gap. Arbitron does not release its research publicly; a Cleveland-area media buyer provided the data to Crain’s. In terms of average quarterly audience, which measures the average number of people listening in any 15-minute span, the average difference in July of 1,500 listeners between the two stations was the smallest since The Fan began broadcasting on Aug. 29, 2011. In its first four months on air, the average monthly difference in quarterly audience was 4,350; since April, that average difference has shrunk to 2,100 listeners per month. Meanwhile, in terms of cumulative audience — which is referred to by Arbitron as “cume” and is a measure of the total number of people a station reaches in a month — WKRK also has narrowed the gap. From October through December last year, WKNR averaged 187,500 in cume per month, with WKRK averaging only 98,300. Since April, WKNR’s cume has fallen 26% to an average of 138,400 total listeners per month, while WKRK’s monthly cume has moved up 18%, to 116,200. “The takeaway is that WKNR still is No. 1 in the market, regardless of the demographic, but (WKRK) is slowly catching up,” said the media buyer who provided the data and has tracked it since The Fan debuted.

Heck with ratings Ratings numbers, though, matter little at WKNR, according to Good Karma Broadcasting president Craig Karmazin, who said the company that owns the station isn’t a radio company, but rather a sports marketing company. “Ratings don’t impact our business model,” Mr. Karmazin said. “Our DNA is in marketing and events, helping execute for our partners and delivering return on investment for them. Radio is an aspect of that, but not all of it.” The company’s list of capabilities includes remote broadcasts, golf outings and invitation-only gatherings with on-air personalities and Cleveland sports alumni, among other functions. On the radio side, Mr. Karmazin acknowledges that The Fan’s presence likely has taken away listeners. But the region’s second sports-talk station has helped, too, in turning

more listeners and potential advertisers on to sports radio. WKRK program director Andy Roth agrees. He said his station’s FM presence has opened sports talk to a group of listeners who either hadn’t thought of sports radio before or, if they had, had never made it to the FM side of the dial. “That has been the most challenging part — grabbing people and letting people know that there is sports radio on the FM dial,” said Mr. Roth, who in a previous life launched Major League Baseball’s Internet radio platform. And as The Fan increases its audience, it, too, is moving into developing a more robust marketing presence. As evidence, Mr. Roth cites the station’s partnership with the Barley House in downtown Cleveland on its new Browns tailgate parties, which he sees as a way to introduce even more people to the station and expand its brand.

The pay picture nationwide appears similar to the local snapshot produced by ERC. Mercer, an international consulting firm, is projecting average pay raises in the United States of 2.9% next year, up from 2.7% this year. Mercer surveyed 1,500 midsize and large employers. One company that is exceeding the average size of raises planned next year is Fastener Industries Inc., a Berea-based manufacturer with operations that include Ohio Nut and Bolt Co. Fastener Industries will raise wages and salaries by 4% next year, a figure that matches the size of increases that were effective this year. “We look at the Consumer Price Index and try to stay ahead of it, if we can afford to,” said Patrick Finnegan, the company’s president and CEO. The CPI has risen 1.4% from July last year to July this year, according to the Bureau of Labor Statistics. Mr. Finnegan said business is on the rise at the 190-employee company. The company is enjoying record sales, partly because most of the business units at Fastener Industries are benefiting as the recession weeded out some of the company’s

Research by Mayfield Village human resources group ERC show raises are expected to increase by an average of 3% in 2013. A look at past ERC raises estimates and actual figures:

Year

Projected

Actual

2012

2.8%

3.0%

2011

2.8

2.8

2010

2.7

2.7

2009

3.3

3.1

2008

3.3

3.4

2007

3.3

3.5

2006

3.3

3.4

2005

3.3

3.4

2004

3.2

3.6

2003

3.0

3.3

competitors. Vitamix Corp., a food processing products maker in Olmsted Township, will raise employee pay from 3% to 4% next year, a range that matches 2012 hikes, according to

Salvatore Indriolo, the company’s director of human resources. Mr. Indriolo said the company, with 425 full-time employees, is enjoying strong demand from all the markets it serves. Vitamix uses the CPI in analyzing compensation budgets, but it also takes into account internal and external benchmarks in setting pay levels, Mr. Indriolo said. One service company, Chapman and Chapman Inc. in Twinsburg, is planning a combined base pay and bonus compensation package to average about 4% next year, similar to this year. CEO Walter Chapman said the benefits consulting firm was unable to increase compensation two years ago. He said business conditions have improved since then and the 27-employee firm also has gained market share. While the ERC compensation guide turned up signs of optimism, the improved outlook isn’t shared universally, according to the National Federation of Independent Business. Chief economist William Dunkelberg said the group’s latest business conditions report indicates small businesses are concerned about higher taxes and are not in a mood to expand. The NFIB said optimism is “disturbingly low.” ■

Head to head Mr. Roth said WKRK is seeing “substantial growth” in listeners on each of its shows, referred to in radio parlance as “day parts.” “At different times of the year, certain shows can be up or down,” Mr. Roth said. “But now, everyone is almost near their high marks, and we’re still going up.” A source said WKRK’s morning drive show, the often-controversial “Kiley and Booms,” often has outpaced the nationally broadcast “Mike and Mike in the Morning” on WKNR and even at times has challenged the popular “Rover’s Morning Glory” on WMMS-FM, 100.7. The Arbitron data for July, though, show Rover well ahead of the pack among males ages 25 to 54, with “Kiley and Booms” and “Mike and Mike” at a near dead heat. WKNR’s midday show, “The Really Big Show,” with market veteran Tony Rizzo and Aaron Goldhammer, outdraws WKRK’s show featuring local TV personalities Andy Baskin and Jeff Phelps. In the afternoon drive-time slot, WKNR’s “The Hooligans,” which features longtime Ohio State beat reporter Bruce Hooley, Cleveland sports radio veteran Greg Brinda and Chris Fedor, and WKRK’s “The Bull and The Fox,” featuring New York radio veteran Adam Gerstenhaber and former Ohio State defensive back Dustin Fox, are comparable. In July, according to the Arbitron data supplied to Crain’s, WKNR’s average quarterly audience beat WKRK in the male 25-54 group, though WKRK’s cume was about 4,000 listeners higher. The WKNR lineup reflects massive changes at WKNR since WKRK went live. They include extending “The Really Big Show” an hour and moving former Cleveland Cavaliers play-by-play man Michael Reghi and his partner, Kenny Roda, to late night from afternoon drive, where “The Hooligans” now reside. Good Karma’s Mr. Karmazin, though, said the changes were a result of listener reaction and requests. “We really love our lineup,” Mr. Karmazin said. ■

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Moderator: Pat Perrin, Global Finance Manager, Office of Business Assistance, Ohio Department of Development

Panelists t Susan Whitney, Office Director, U.S. Commercial Service, Cleveland t Amy Liu, Co-Director and Senior Fellow, Metropolitan Policy Program, Brookings Institution t Patrick Hayes, Regional Manager, SBA Export Solutions Group, U.S. Export Assistance Center t Mark Klein, Export Finance Manager, The Export-Import Bank of the U.S.

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WWW.CRAINSCLEVELAND.COM

SEPTEMBER 3 - 9, 2012

GOING PLACES JOB CHANGES

OHIO: Natan Milgrom to commercial middle market relationship manager.

AUTOMOTIVE GANLEY BMW: Vince Cuffaro to client adviser.

FIRSTMERIT CORP.: Michael G. Robinson to executive vice president, Wealth Management Services.

DISTRIBUTION

FINANCIAL SERVICE

FLACK STEEL: David Feldstein to director of risk management.

CEDAR BROOK FINANCIAL PARTNERS LLC: David Anderson to chief compliance officer.

EDUCATION

RETIREMENT SOLUTIONS: Zachary Keberdle and Srdjan Demonjic to associate financial consultants.

CLEVELAND STATE UNIVERSITY: Paul Wolansky to director of advancement, College of Liberal Arts and Social Sciences. LAKE ERIE COLLEGE: Ruta Greiner to director of public relations and creative services; Kathryn Staats to assistant director, alumni and public relations; Joseph Kosch to digital media developer. PADUA FRANCISCAN HIGH SCHOOL: Kimberly Merryman Sherer to director, marketing and public relations.

ENGINEERING PROFESSIONAL SERVICE INDUSTRIES INC.: Delvecchio Gray to senior roof consultant.

FINANCE FIFTH THIRD BANK, NORTHEASTERN

Milgrom

Wolfort

Creegan

SS&G: Alicia Huffman, Kelli Miller and Nicole Benden to associates.

Samsa

Ginsberg

Pine

SS&G HEALTHCARE SERVICES LLC: Darlene Steines, Stephanie Irwin, Michael Zalenski, Monica Swank and Karen Ann Wiecek to billing specialists; LaDonna Kessler and Tina Heatwall to practice managers.

REAL ESTATE

WESTERN RESERVE PARTNERS LLC: Justin A. Wolfort to vice president; Thomas P. Creegan to associate.

RETAIL

WALTHALL, DRAKE & WALLACE LLP CPAS: Jen Witczak to supervisor; Janice Paul-Canfield to director, quality control; Jean M. Pavlin to director, accounting and audits.

UTILITY

HEALTH CARE

BOARDS

UNIVERSITY HOSPITALS FERTILITY CENTER: Dr. Bryan Hecht to fertility specialist; Dr. Brooke Rossi and Dr. Bill Hurd to medical staff.

GREATER CLEVELAND ASTD: Lori Klepfer to president; Stephanie Steirn to executive director; Shannon Hunt to president elect and vice president, programs; Sheri Mazurek to vice president, finance; Stan Gromek to vice president, membership and administration; Jenny Mayo to vice president, marketing.

INSURANCE HYLANT GROUP: Jeffrey Belgrave and Michael Baumgartner to client executives.

LEGAL BUCKINGHAM, DOOLITTLE & BURROUGHS LLP: David J. Lindner, Justin S. Greenfelder, Michael J. Matasich and Dustin J. Vrabel to partners.

JONES LANG LASALLE: A.J. Magner to managing director, corporate accounts, industrial; Andrew Coleman to senior vice president, tenant representation.

AMBIANCE: Jeremy Ginsberg to ecommerce manager.

FIRSTENERGY CORP.: Ty Pine to director, state government affairs for Ohio.

HOLDEN ARBORETUM: Paul R. Abbey (Fairport Asset Management) to chairman.

THORMAN HARDIN-LEVINE CO. LPA: Sara Verespej to associate; Laura Greene to client service manager.

PLAYHOUSESQUARE PARTNERS: Dawn McFadden (Jones Day) and Brent Pietrafese (Calfee) to co-chairs; Robert Lewis and Clayton Smith to vice-chairs; Carli Cichocki, Christina Klenotic, Matt Silla, Cristin Snodgrass, Ivana Vucenovic, George Reider, Maurie Donnelly, Sam Miller, Jennifer Jackson, Kevin Ropenus, Emma Bembridge and Amanda Hicken to committee cochairs.

WELTMAN, WEINBERG & REIS CO. LPA: Jason K. Wright to Litigation and Defense Group.

Send information for Going Places to dhillyer@crain.com.

LITTLER MENDELSON: Inna Shelley to associate. MCDONALD HOPKINS LLC: Matthew J. Samsa to associate.

Employees lack benefit info Most don’t feel informed about plan enrollment options By MATT DUNNING Business Insurance

A majority of employees said they aren’t receiving adequate enrollment information about their company’s benefit plans, according to a survey by supplemental insurance provider Aflac Inc. About 52% of the more than 2,500 employees who responded to Aflac’s 2012 Open Enrollment Survey said their employers have not distributed any information regarding coming open enrollment periods. Thirty-nine percent said they were only somewhat prepared for open enrollments, while 26% said they were unprepared or very unprepared. The survey’s findings offer a sharp contrast to employers’ assessments of the effectiveness of their benefits communications strategies, outlined

in a separate Aflac survey released in April. In that study, 49% of the 1,800 employers who responded characterized their benefits communications as very or extremely effective. Forty-eight percent of employees surveyed said they are only “sometimes� aware of changes made each year in their benefit plans, and 13% said they are rarely or never aware of changes made. Exactly half of the employees surveyed somewhat or strongly agreed that they would be better informed about their health insurance choices if they were given the opportunity to meet with an insurance consultant during open enrollment. ■Matt Dunning is an associate editor with Business Insurance, a sister publication of Crain’s Cleveland Business.

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11

Browns: Stadium naming rights deals can carry risks for sponsors continued from PAGE 3

confirmed that until Mr. Haslam officially takes control of the team, he would have no comment on naming rights possibilities. But what Mr. Haslam might encounter when shopping the stadium’s most visible real estate to prospective suitors is that the market for naming rights deals isn’t as robust as it once was. In August 2011, MetLife bought the naming rights to New Meadowlands Stadium, home of the NFL’s Giants and Jets, for a reported $17 million to $20 million per season through 2036. But that price was thought by marketing mavens to be somewhat low for two teams in the largest media market in the world — and for a stadium that will play host to the 2014 Super Bowl. A better gauge of what marketing rights to Browns Stadium could fetch may be found in New Orleans, where the Saints announced a deal last September to rename the Superdome the Mercedes-Benz Superdome, for $5 million per year for 10 years. The Houston Texans, by comparison, receive about $9.4 million a year under a 30-year deal with electric giant Reliant. But Reliant’s name went on the then-new stadium in 2002, when the economy was better.

The Saints since 1999 have been successful on the field, with five playoff appearances and a Super Bowl victory. But Mercedes-Benz has had to endure the team’s bounty scandal, in which coach Sean Payton, general manager Mickey Loomis, former defensive coordinator Gregg Williams and current and former players were suspended for varying amounts of time for perpetuating a practice of offering players money for knocking opponents out of games.

Blank slate On the plus side for the Browns, their stadium isn’t sponsored already nor does it have a catchy nickname. (Save your “Factory of Sadness” jokes.) Thus, a sponsor that buys

naming rights wouldn’t need to compete with the nostalgia of a longtime name, as when auto insurer Progressive Corp. bought the naming rights to the former Jacobs Field in 2008; some fans still call Progressive Field “The Jake,” and a cottage industry of T-shirts — “It’s Still The Jake To Me,” for example — has sprung up. Still, gaining first-time naming rights to a team’s home doesn’t assure a sponsor of success. “The company purchasing the naming rights really needs a strong promise from the team that it will do everything possible to help with the rollout of the name and activation of the partnership,” Mr. Dietz said. ■

NFL NAMING RIGHTS DEALS NEw Cleveland Browns owner Jimmy Haslam said last month he would market naming rights for Cleveland Browns Stadium. Here’s a look at the annual value for the top NFL naming rights deals:

Sponsor

Team

Per-year value

Expiration

MetLife

Jets/Giants

$17 million

2036

Reliant

Texans

9.375 million

2032

Gillette

Patriots

8 million

2031

U. of Phoenix

Cardinals

7.72 million

2026

FedEx

Redskins

7.59 million

2025

Bank of America

Panthers

7 million

2023

Colts

6.07 million

2027

Lucas Oil

“The Browns should be selling the idea that the future looks bright.” – Michael Dietz, founder, Dietz Trott Sports and Entertainment Management “The Saints’ deal isn’t a record, but it’s not rock-bottom low, either,” said Michael Dietz, whose Farmington Hills, Mich., sports marketing firm, Dietz Trott Sports and Entertainment Management, recently opened a Cleveland office headed by former Mid-American Conference commissioner Rick Chryst. Whether a company in Cleveland has plenty of change to spare — or would want to shell out big bucks for a team that, unlike the Saints, hasn’t come close to playing in, much less winning, a Super Bowl — remains to be seen. But Mr. Dietz said a national company looking to expand into Northeast Ohio or the Midwest could be a possibility, as could regional companies — especially banks — that are big in the Midwest.

No guarantees The Browns are 68-141 since returning to the NFL in 1999, with one playoff appearance and 10 seasons with 10 losses or more. That poor level of performance has limited the team’s exposure on national television — they play one game, on Sept. 27 at Baltimore’s M&T Bank Stadium, on national TV this season — which would limit the value of a naming rights deal for the team. Mr. Dietz said a company considering such a deal would enter into an agreement knowing the team’s record won’t be perfect — but also believing Mr. Haslam will set the organization in the right direction. “Sponsors would need to believe in the turnaround plan in place, and the Browns should be selling the idea that the future looks bright,” he said. “In my opinion, this is a good opportunity to buy into a partnership because the perceived value is so low.” Then again, even franchises that are riding high can ensnare sponsors — including those buying naming rights — in team or player scandals.

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SEPTEMBER 3 - 9, 2012

Price wars with Chinese sap energy from local solar industry Innovation will propel U.S. firms, advocates say By GINGER CHRIST gchrist@crain.com

Plagued by a loss of state and federal incentives and a shift in focus, at least within the state, to shale drilling, Northeast Ohio companies tied to solar energy are fighting to make a go of it as the luster has faded from what seemed like a promising industry. Of the 164 solar-related companies in the state, 29% — or 47 companies — are in Cuyahoga and the six con-

tiguous counties, according to the Solar Energy Industries Association, a U.S. trade association for solar energy companies. It has been a rough road to travel for those companies, especially those on the manufacturing side, which has been hammered by Chinese rivals undercutting prices. Chinese competition has pushed the price of solar panels down 60% in the past 18 months, said Alan Frasz, president of Dovetail Solar and Wind, a Cleveland-based solar

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installation company. The price points are below what many U.S. manufacturers consider competitive, which is troublesome because solar panels are treated like commodities, said Neil Sater, CEO of GreenField Solar Corp., an Oberlinbased solar cell fabricator. “There’s little brand recognition,” Mr. Sater said. “That’s tough because companies have to compete on price.” The pricing woes have caused a shake-out among solar manufacturers, including notable examples such as Solyndra, a California-based solar panel company that closed in August 2011 despite receiving a $535 million loan guarantee from the U.S. Energy Department. For Mr. Sater, the fierce competition creates a “chicken-and-egg problem.” Manufacturers need to scale up production to lower their per-unit costs, but also need to be able to lower their prices to increase production, he said. The companies that will survive the solar slump are those that are technologically advanced, said Dave Karpinski, vice president of NorTech, a regional technology-based economic development group. “I think we’re going to get back to what we’ve always known: The U.S. is going

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to compete on innovation. We’re not going to compete on low cost,” Mr. Karpinski said. “It’s all about the game-changing innovation.” The innovation angle is one in which the 25-person GreenField Solar hopes to find its success. The solar cell equipment maker, which still is in the development phase, plans next year to market commercially its StarGen solar concentrators. The concentrators use mirrors to reflect intense sunlight onto small strips of solar cells. Mr. Sater said he hopes not only the technology but also the appearance of the concentrators will distinguish his company from others. StarGen concentrators look like a hybrid of a satellite dish and a solar panel.

Survival strategy The struggles of solar panel manufacturers are creating ripples in the supply chain. Americarb, an Ashland-based producer of components for hightemperature furnaces used to make solar energy equipment, in the last 10 months has lost 95% of its solar business, said Matt Reineke, president and CEO of Americarb. As solar panel manufacturers have closed their doors, the demand for new equipment dried up. And, as those shuttered companies sold their inventory to surviving manufacturers, the replacement parts market also waned, Mr. Reineke said. The company was forced to cut the work force at its main manufacturing plant in Ashland by half, leaving Americarb with 70 workers locally. “What we’ve done to survive is we’ve gotten into some other areas. We’ve diversified our business,” Mr. Reineke said. “We’re finding industries and opportunities where we can use our existing capital equipment.” The company, which used to rely on solar orders for 75% of its business, now only fills solar orders as capacity allows. It instead focuses on producing parts for furnaces used to make LED lights and on parts used in high-temperature mining and aerospace equipment. “It’s too cyclical to count on,” Mr. Reineke said about the solar industry. Americarb’s sales are on track to finish down 30% this year from the $55 million it generated in 2011, but Mr. Reineke expects to see the diversification efforts the company started last year begin to pay off soon.

No ‘gravy train yet’ While declining solar panel prices

are hurting U.S. manufacturers, they have had a positive effect on installers. The lower price helps make solar power more competitive with electric power and lures more customers to purchase the systems, Dovetail Solar’s Mr. Frasz said. Installations do appear to be on the rebound. Photovoltaic system installations in 2011 rose 109% from the previous year, according to a Solar Market Insight Report issued by the Solar Energy Industries Association and GTM Research, a market research company. In fact, solar installations have steadily increased each year since 2007 when the Solar Energy Industries Association first started collecting data. Dovetail Solar this year is on pace to up its sales 50% this year from 2011, when the company broke even, and already has hired seven employees. The 40-person company also on Aug. 1 opened a physical office in Cincinnati, giving it offices in four cities across the state. But, as Mr. Frasz is quick to point out, “It’s not a gravy train yet.”

Credit issues Dorothy Baunach, partner at EnerG Solution, a solar panel installer in Mogadore, agrees. In the absence of government incentives, solar installers rely on solar renewable energy credits — credits awarded for each megawatt hour of solar-generated electricity that can be sold to utility companies — to defray the upfront cost of an installation, installers say. The credits, which can be used to satisfy an electric company’s solar power requirement, used to sell for $300 per credit but now bring in $200 or less each, Ms. Baunach said. The reason for the declining demand for the credits is a number of the electric companies — the leading purchasers of the credits — already have satisfied alternative energy requirements mandated by Ohio law. The state requires that all electric companies must generate 12.5% of their energy from renewable sources by 2025, with at least 0.5% of that total being from solar. “The renewable energy credit market in Ohio is pretty soft,” Ms. Baunach said. “Credits have taken a dive and you have to be able to secure the credits to make the financing work.” In response, Dovetail Solar is turning to creative financing. The company is trying to sell naming rights for the solar roof it’s installing on Cleveland State University’s Wolstein Center to electric companies in Ohio. ■

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F LET THE GAMES CONTINUE As Chesapeake sells a chunk of its holdings, companies new and old jockey for position in Ohio’s rapidly developing Utica play By DAN SHINGLER ■ dshingler@crain.com

or the past few months, there’s been much speculation on what would become of the 337,000 acres that Chesapeake Energy put up for sale as part of an effort to pay off a mountain of debt that the company ran up to — among other things — buy the mineral rights on those lands. But while that’s the single biggest bundle of mineral rights likely to change hands in Ohio’s Utica shale gas play, it’s not the only one. Companies and investors alike still are jockeying for positions to profit from the Utica’s apparently vast deposits of natural gas, crude oil and liquids used in the petrochemical industry — and some observers say we’ve yet to see all of the energy companies that will eventually emerge to drill in Ohio. “We are seeing new names pop up, smaller companies with names we’ve never heard of,” said Mark Dolezal, president of the Eastern Geauga Landowners, a group of about 300 landowners in Geauga County that has put together 17,000 acres for which it hopes to sell mineral rights. See GAME Page 16

FILE PHOTO/ STEPHEN HERRON

Shale isn’t going away, so let us guide you through it

I

f you’re sick of hearing about shale gas, we’ve got some disappointing news for you: Our coverage of the topic is not only increasing, but we’re ramping up to do even more with a new magazine called Shale that will come out in December. Why? Because in the two years that Crain’s Cleveland Business has been writing about shale gas and oil, we’ve become convinced that this could be the biggest economic news to hit our state since the advent of the steel or automotive industries. Yet, people still ask: Can it really become that big? It already has. It’s hard to remember the last time a major corporation invested hundreds of millions of dollars into

its Ohio facilities or On top of what the DAN in-state production, yet energy companies are that’s exactly what already SHINGLER spending to get the gas, has happened because of we’ve also already seen the shale gas industry here. billions more committed One company alone, or planned for industrial Chesapeake Energy, has development that will invested more than $1.2 support this industry. Shell billion to secure the mineral is planning to spend about rights on roughly 1.3 mil$3 billion to build a gas lion acres of Ohio land. processing plant just Other energy companies have across the Ohio River in Pennsylspent billions more — money that vania, largely to process gas that so far has gone toward payments to Shell believes will come from Ohio. Ohio farmers and other land and In Youngstown, Houston-based mineral rights owners willing to V&M Star is spending $650 million sell those rights for energy to build a new steel mill that will development. If you don’t think that’s make tubing for the oil and gas being felt in the state’s economy, industry — while other mills in look at the want ads or talk to a Youngstown, Canton and Lorain pickup truck dealer in a place like plan their own expansions, repreCarrollton. senting more than $300 million in

additional steel plant expansion projects. A billion in new steel plants? Sounds like China. But pinch yourself: It’s Ohio. These are not the forecasts of starry-eyed energy hounds. They represent real dollars already being spent by real corporations that have done their homework. And if a billion dollars’ worth of investment into Ohio steel mills doesn’t get your attention, you’re probably reading the wrong newspaper and should pick up a copy of the Weekly World News. Only Bat Boy or mutant aliens likely are to provide more shocking headlines to anyone who grew up in this Rust Belt state of ours. But, there’s nothing like oil for a little rust, right? So, for those of you sticking with Crain’s and reality,

we’ve still got some work to do. This industry is still an infant in Ohio, and we’ve yet to see the real drilling begin. Barring some unforeseen major development, the months and years ahead will be a flurry of activity as drillers drill, pipeline companies lay new lines, processing facilities get built and, perhaps, an infrastructure emerges to begin using natural gas to fuel cars and trucks the way that gasoline does today. We’d love to tell you all about it, as it happens — we plan to write in this new Shale magazine about the good, as well as any bad and ugly that comes with this industry. — Dan Shingler, editor, Shale

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Industry suppliers may need API logo Few Ohio businesses certified to make parts for oil and gas drilling By DAN SHINGLER dshingler@crain.com

S

uppose there was a machine shop owner in Cleveland looking for a new market into which to sell finely tooled parts that he knows how to make as well as anyone. A scan of most any paper in the state says: Shale gas! Surely, this machine shop has all it takes to make and sell whatever this new gas industry needs in the way of drill bits, valves, brackets, hardware, connectors or anything else made of metal: Lathes? Check. CNC machines with varying numbers of axles? Check. The know-how to work with any tool or alloy? Double check. Rail and highway access? Check. ISO quality standards? Which one? Got ’em all. Check. An API monogram? ... Uh-oh. A lot of Ohio manufacturers don’t yet know what an API monogram is. But many in the oil and gas industry say they should. Manufacturers in Houston know — they have to, because API stands for the American Petroleum Institute, and without those three magic letters on their products, the energy industry is about as interested in buying their parts and pieces as it is in drilling dry holes. That’s one reason there are 637 Texas companies listed on the API website as participants in the institute’s licensing and certification

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programs. Ohio only has 25 on the same list. And it’s why those Texas companies dominate the industry’s supply chain, even in Ohio. The API certifies manufacturers with an audit process similar to what companies go through to get ISO certifications, said Ed Durante, president of Houston-based Texas International Engineering Consultants and an API auditor. It’s a process that can take months to prepare for and up to a year to complete — but is worth it in order to sell products to the oil and gas industry, Mr. Durante tells prospective supply chain participants. Companies that go through the API certification process then can participate in the institute’s monogram program — meaning they can put the API monogram on their products and sell them to the industry with the institute’s stamp of approval. That monogram is becoming as valuable in Ohio as it is in Houston or Oklahoma City, said Christina Polesovsky, associate director of the Ohio Petroleum Council in Columbus. “Many of our members won’t use anything but API-monogrammed products,� Ms. Polesovsky said.

Selective service To be fair, not everything gas drillers buy is subject to an API standard or certification. “Not everyone who is a vendor or service provider needs all of this — it’s the companies active on the well site,� notes Kristy Hawthorne, director of membership services for the Ohio Oil and Gas Association, also in Columbus. For example, she said, road construction or landscape companies that prepare a well-site before drilling begins often can do so without the certification. But the standards come heavily into play for manufacturers who produce pipes, valves, fittings and other stuff that sits on top of or goes down into a gas well. That’s in part because the gas industry is standards-oriented as it seeks to ensure safe operations. Drillers say if it’s a part that can fail and lead to a problem with a well, they’ll demand that it be API certified. For folks such as machine shop owners, an API certification could be a must-have if they are to break into the oil and gas supply chain developing right outside their doors. “When companies like Chesapeake are in the area, they’re only going to buy from approved API licensees. They’re going to ask that the manufacturer stamp that monogram onto the equipment itself,� said Reid Porter, director of global industry services for the American Petroleum Institute in Houston.

Here’s the catch As it is, drillers say they still buy most of their critical components from places such as Texas, where companies already have the API monogram in place and are well versed in API standards. It’s still early as far as drilling goes in Ohio, and the supply chain here is only beginning to ramp up. Both drillers and local economic developers say they’d like to see a better local supply develop, so that Ohio can take full advantage of its new shale gas industry. The hitch is that it can take a year to get API certification,

Messrs. Durante and Porter said. It takes several months for even the most organized company to prepare for an audit, Mr. Porter said. Then, nearly all companies have things they must correct after the initial audit. Plus, there’s still a waiting period once corrections are made before a manufacturer can put the API monogram on its products. “We have a prerequisite that someone cannot be a licensee unless they have the quality system up for three months,� Mr. Porter said. “You can’t just turn on the light and be done.� There also is a wait for an auditor — because there are no API auditors in Ohio. Across the world, API has about 140 auditors who will conduct about 3,300 audits in 2012, Mr. Porter said. But 80% of those auditors are overseas, along with the bulk of the world’s oil and gas equipment makers and service providers. “In the past, we have not had a lot of activity in Ohio,� Mr. Porter said. “The closest auditors we have for the northern area right now are really coming from Toronto.� That situation means manufacturers can’t just call up and ask for an audit and expect an auditor to come out right away — they need to schedule their audit months in advance of their readiness date if they want to get certified quickly, Mr. Porter said.

Get a move on So far, however, there’s no program to help manufacturers understand either the need for API certification or the process of acquiring it. The Ohio Manufacturers’ Association does not have a program addressing API certification, though it may consider one in the future, said Ryan Augsburger, managing director of public policy services for the association. Likewise, API has not held any workshops on the topic for local manufacturers or service providers, though it has sent Mr. Durante and others to at least begin to make potential industry suppliers aware of the need for API certification at industry conferences in the area. What will it take to get such programs in place — or, perhaps more importantly, to get auditors in Ohio? Just ask, says Mr. Porter. But so far, he says, no one has. “If I knew we were going to have interest growing in Cleveland, it doesn’t take a lot of effort on our part to do auditor qualifications,â€? Mr. Porter said. “We will definitely recruit if we need to put a hard charge on getting additional auditors.â€? Convincing API to mobilize an auditor recruitment effort might require more action from economic developers, policy makers and the Ohio Manufacturers’ Association — and drillers say they hope that action takes place. They’ll get by, whether it happens or not, but it would be better for Ohio and the energy industry if steps were taken to bolster the local supply chain by getting more API certifications in place, industry insiders say. “If there’s a message in your story that Ohio needs to understand, it’s that ultimately the best thing for the supply chain to do ‌ is force the OMA to engageâ€? with the Ohio Oil and Gas Association, one drilling company executive said privately. â–

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Game: Major drillers enter the fray, for fear of losing out continued from PAGE 13

Indeed, new players not only are entering the Ohio Utica, but are being formed to do so. Texas-based Beland Energy Utica LLC, for one, was created in May by Beusa Energy principals, who have had success drilling for shale gas in the Haynesville shale play, which includes parts of Arkansas, Louisiana and East Texas, said Gregory Brown, the general counsel for both Beland and Beusa. They hope to repeat their success in the Utica, he said. “The Utica is an interesting area and an interesting play and people go where opportunities are,” Mr. Brown said. “And lots of people see potential in the Utica.” Mr. Brown declined to say how much capital Beusa, a privately held company, has to spend on Utica leases or for drilling here, but said the company would like to initially acquire the mineral rights to 15,000 to 20,000 acres here. If those acres prove profitable, it likely will try to buy more, he said. That’s not going to be a cheap ticket in at this point. Mineral rights in the Utica have skyrocketed in price in the last two years, and currently fetch between $2,000 and $5,000 per acre. Even at the low end of that price range, the mineral rights alone on 15,000 acres would cost $30 million — which does not include the roughly $6 million to $10 million that Utica drillers say they currently are spending to drill each new well. A 15,000-acre parcel could support about 23 well pads, at 640 acres per pad, with each pad containing as many as six wells, drillers say.

Crowded field Aside from new ventures by

existing independent oil companies such as Beusa, the Utica also is attracting interest from other parties, ranging from private equity groups in Houston that hope to buy up rights and contract with other companies to develop wells, to Big Oil — companies such as BP, Exxon and Chevron that dwarf even the Utica’s giant, Chesapeake Energy, in size and resources. By far the largest leaseholder in the Utica with 1 million acres under lease — even after it sells 337,000 acres — Oklahoma Citybased Chesapeake has a market capitalization of about $13 billion. Small potatoes compared to, say, BP, which has a market cap of about $134 billion — and a pimple compared to Exxon Mobil’s mountainous market cap of more than $400 billion. At least some of “the Bigs” are showing increased interest in the Utica as well, said Tom Stewart, executive vice president of the Ohio Oil and Gas Association in Columbus. Most notably, BP has begun to expand its interest, Mr. Stewart said. “BP has moved out from around the Youngstown area and Trumbull County areas,” Mr Stewart said. “I hear they’re now (buying leases) in 10 counties.” BP’s Ohio spokesman Curtis Thomas largely confirmed that, though he declined to say how much acreage BP has now acquired in Ohio, citing the Utica’s “extremely competitive environment” of late. “BP has recently expanded our acquisition efforts in Trumbull and eight other counties including Carroll, Columbiana, Guernsey, Harrison, Mahoning, Stark and Tuscarawas,” Mr. Thomas told

OHIO COUNTIES AFFECTED BY CHESAPEAKE’S SALE OF UTICA LEASES These 19 counties are affected by Chesapeake’s moves; the shaded area indicates the scope of the Utica shale, while the orange area indicates areas that contains wet gas.

type of investment in the Utica,” Mr. Stengell said. Major oil companies probably don’t need the Utica to keep their production levels up, and what they produce here would only be a small part of their global volume. But at the same time none of them want to be seen as missing out on a play as highly publicized as the Utica is in the U.S., he said. “They don’t want to sit on the sidelines and then find out three years from now that the results are better than expected and the valuation is better than expected,” Mr. Stengell said. Mr. Stengell, who is marketing leases on about 175,000 acres in Ohio, said he’s aware of at least one big producer that is hoping to buy the mineral rights on 100,000 acres in the Utica, though he declined to name the company. But that’s not a big deal in the world of Big Oil, no matter how many headlines it grabs in Ohio. “That’s a $200 million to $300 million investment. But for a BP, that’s not something to even write a press release about,” Mr. Stengell said.

Just the beginning Crain’s in an email. But Mr. Stewart thinks the major oil companies might be more interested in the Utica if Ohio’s tax situation was more predictable. He’s a staunch opponent of Ohio Gov. John Kasich’s current effort to increase severance taxes on oil and gas production from the Utica shale. “I don’t think some of the big companies are going to do a whole lot until they have regulatory and tax certainty,” he said. “It’s going to be

interesting to see whether (Big Oil is) here two years from now. These are companies that have choices worldwide.”

They want to stay in the game Big companies such as BP, Exxon or Shell have more options, because of their size and international presence, Mr. Stewart explained. While even the Utica’s biggest current exploration companies are largely confined to domestic production, Big Oil has the world to choose from when it decides where to invest and drill, Mr. Stewart said. One need only look at recent headlines to confirm his logic. Shell, for example, announced in August that it plans to invest $1 billion a year in shale gas exploration in China, where it’s also building a $12.6 billion refinery and petrochemical processing plant. Here, meanwhile, folks are waiting to see how Shell proceeds with its plans to build a $3 billion processing plant on the Ohio-Pennsylvania border. Big Oil also tends to like big acreage, Mr. Stewart said, and major producers are not as likely as small, independent drillers to go house to house cobbling together acreage one small farm at a time. But there still are some large blocks of mineral rights available in Ohio. Aside from groups such as the Geauga Landowners, of which there are at least several, there also are professional marketers such as Steve Stengell working with groups of landowners that include not only farmers, but old-line energy companies that have spent decades acquiring mineral rights in Ohio. They often paid a pittance for those rights — as little as $5 an acre, say some producers — and now they own rights to shale gas that requires high-tech and expensive drilling techniques. So they sell those deep rights to other, larger drillers, explained Mr. Stengell, president of Kentucky-based Encore Energy and a longtime participant in Ohio’s conventional gas-drilling industry. “My belief is that Big Oil is going to continue to come into the play, because they want to make some

There are other ways that mineral rights in Ohio might still change hands, Mr. Stengell predicts: via joint ventures between companies or outright acquisitions of small companies by larger ones that are buying them primarily for their Utica rights. Some companies, including Chesapeake, already have done this. In January, Chesapeake sold a 25% stake in more than 600,000 Utica acres to the French-based Energy company Total, for $2.3 billion — recouping all it had spent to acquire rights on 1.3 million Utica acres in that one transaction. Mr. Stengell predicts that other super-independents — the term now being used to describe the Utica’s large drillers — will engage in similar transactions that allow them to access new capital with which to develop wells, while still controlling their holdings. Some companies will probably get offers from larger rivals that they just can’t refuse, Mr. Stengell predicts. “A company comes out and acquires 1,000 acres, or 10,000 acres. Then, they drill 10 wells or 15 or 20 and production looks really good ... then a big company like Anadarko (Petroleum) or even a major says, ‘Let’s get in there,’ and buys them up,” Mr. Stengell said. “That’s where the getting really gets good.” Some companies already have gained their Utica acreage via such deals, and more will do so in the future, Mr. Stengell predicts. But whether that happens, one thing seems certain — we’ve not seen the last of large lease transactions among energy companies in the Utica, nor have we likely yet seen the arrival of all of the drillers that eventually will try their luck in Ohio. Mr. Stewart said he only has to look to Shell’s decision to invest $3 billion in a processing plant to prove to himself that the Utica is a bona fide major oil and gas play and a major blip on the industry’s radar screen nationally. “You’re not going to invest that kind of money without some certainty that the feedstock (the Utica’s wet gas) is going to be there,” Mr. Stewart said. ■

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UTICA SHALE’S MAJOR PLAYERS OHIO/PENNSYLVANIA UTICA SHALE NET ACREAGE

Some names to know in terms of energy companies staking a claim to the Utica Shale:

Here’s a look at various companies’ acreage positions in the Utica shale. The information represents known acreage positions, as there are a number of other companies for which complete information is not available.

Company

■ Chesapeake Energy: Based in Oklahoma City, Chesapeake is the nation’s second-largest producer of natural gas and is the 800-pound gorilla in the Utica. The company moved in early to begin buying up leases and as of the beginning of this year had acquired the mineral rights on 1.3 million acres in the play. The company also ran up a mountain of debt via this and other costly activities, causing it to attempt to divest its assets, including the mineral rights to 337,000 acres of Ohio land. Its CEO, Aubrey McClendon, has described the Utica play as “the biggest thing to happen to the state economically since the plow.” It still will have a million acres of the Utica under its control after it completes the sale of 337,000 acres to raise cash and pay down its debt. ■ EnerVest/EV Energy Partners: EnerVest is a Houston-based exploration company, and EV Energy Partners is a unit formed by EnerVest in 2006 for long-term acquisition and development of gas and oil resources. The group reportedly holds leases on about 760,000 acres in the Utica and has just begun drilling here, with one well completed in Stark County and another in Carroll County. So far, the company has said the wells have exceeded their expectations for oil and gas production.

■ Hess Corp.: Another “superindependent” energy company, New York-based Hess has a market cap of about $17 billion and entered the Utica with a splash in fall 2011, when it spent $593 million to acquire the mineral rights to acquire a 50% stake in 200,000 acres then controlled by Consul Energy. Since then, Hess has reportedly upped its stake in the Utica and today has mineral rights to about 185,000 acres. — Dan Shingler

Number of acres

Chesapeake Energy

Company

Number of acres

1,000,000*

Devon

157,000

EnerVest**

760,000

Total

154,750

Chevron

600,000

Consol Energy

100,000

Anadarko Petroleum

240,000

BP

84,000

Hess Corp.

200,000

ExxonMobil (XTO)

75,000

Range Resources

190,000

Rex Energy

72,200

SOURCE: PUBLISHED REPORTS; OHIO DEPARTMENT OF NATURAL RESOURCES; COMPANY WEBSITES * — DOES NOT INCLUDE 337,000 ACRES FOR SALE; ** — ESTIMATE

TAPPING INTO OPPORTUNITY MY BENESCH MY TEAM Benesch Shale Oil & Gas Industry Team: Singular resources for a multifaceted opportunity Helping our clients navigate the complexities and exploit the potential of shale oil and gas exploration and drilling, including:

■ Chevron: A “major” in the world of Big Oil, Chevron controls the mineral rights on about 600,000 Utica acres. However, the energy giant, with a market cap of more than $200 billion, has so far been more of a buyer than a driller in Ohio. It plans its first well sometime in September, in Harrison County. ■ Anadarko Petroleum: One of the so-called “super-independents,” Anadarko is big for an independent energy company, bigger than Chesapeake even, with a market cap of more than $34 billion. It reported on July 31 that it has three wells in production, three near completion and one that was just being drilled. While optimistic, the company has said it will wait until 2013 to further discuss its land position in Ohio. It owns or has a stake in mineral rights for about 300,000 acres in the play, including about 240,000 acres that it directly controls.

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hio Gov. John Kasich appears to be going directly to big oil and gas producers to negotiate some sort of change in how the state taxes oil and gas, as relations between the Kasich administration and the Ohio Oil and Gas Association seem to have become sour, if not downright acrimonious. Or, as one statehouse observer who asked to remain anonymous said: “It’s gotten ugly, and it appears to be getting personal.” Talking to either the governor’s office or OOGA only bolstered that claim. Asked whether the governor was negotiating with the industry or showing any flexibility on the topic of raising severance taxes on oil and gas produced in Ohio, OOGA executive vice president Tom Stewart scoffed at the suggestion that Gov. Kasich was in a bargaining mood. “He’s not negotiating anything with anyone,” said Mr. Stewart, when asked of reports last month that the governor was reaching out to the oil and gas industry to try to find a compromise on the issue of severance taxes. The governor wants to increase severance taxes on oil and gas to fund a decrease in the state’s income tax, while Mr. Stewart is opposed to new taxes that he says

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would single out his industry and stifle a sector that is buoying Ohio’s economy. Mr. Stewart said he did not question Gov. Kasich’s motives. He said he thinks the governor wants to take action that will help the state as a whole but does not understand the ramifications of his proposed tax increase. “They intend to raise $500 million from that (tax increase), and it will have no impact on drilling? Anyone who believes that is someone who has never made a risk investment in their life,” Mr. Stewart said.

Up for negotiation Those are tough terms when directed at a former finance industry executive such as Gov. Kasich, and the governor’s office had a response that was just as harsh. Kasich spokesman Rob Nichols said that Mr. Stewart was mistaken with regards to the governor not negotiating with anyone — he’s just not negotiating with OOGA. “There’s actually been quite a bit of conversation between the administration and some of the oil and gas companies,” said Kasich spokesman Rob Nichols. “It sounds as if Mr. Stewart is not as plugged in as he was perhaps before.” So who then, is the governor talking to as he seeks advice and industry input on his plans for the severance tax? BP, at least for one, said Terry Fleming, executive director of the Ohio Petroleum Council in Columbus. “I’m pretty sure the governor’s spokesperson is referring to BP,” said Mr. Fleming, noting that the governor’s office met with BP Group CEO Robert Dudley when Mr. Dudley was visiting Ohio in July.

ON THE WEB For an opinion piece on the proposed severance tax by Thomas E. Stewart, executive vice president of the Ohio Oil and Gas Association, go to www.CrainsCleveland.com/ againsttax.

Later this month, BP officials will make a presentation to the governor’s office, outlining what the company thinks would be some best practices in terms of oil and gas taxation at the state level, along with some practices that the industry thinks are too complicated. BP’s senior director of government and public affairs for Ohio, Bruce Johnson, will spearhead the company’s communications efforts on the issue, Mr. Fleming said. Reached late last week, Mr. Johnson said BP regional president Tim Harrington met with Gov. Kasich on two occasions and that the governor has asked BP for input, given its experience operating in multiple states. Messrs. Johnson and Fleming both said that BP is not out to avoid a tax increase altogether, but wants any changes to result in a simple tax code that won’t be a burden to comply with or be so expensive that it makes it unprofitable to drill in Ohio. It and other drillers also are opposed to a tax structure, such as the one currently put forth by Gov. Kasich, that would tax different resources at different rates. “We considered it not unworkable, but very difficult. That’s the message that went back to the administration. It’s too much like Arkansas — and in Arkansas, it’s

FROM CRAIN’S BLOGS A recent blog entry on Crains Cleveland.com and Crain’s weekly Energy newsletter: A Houston company, Hilcorp Energy Co., since June has stepped up significantly its pursuit of oil and gas leases in eastern and southern Mahoning County, according to a story from The (Youngstown) Vindicator. Of the 444 leases signed by Hilcorp in Mahoning County, 433 of them — that is, all but 11 — have been filed in 2012, and most of those have come this summer, the newspaper reports. The expansion of the oil and gas business into both Mahoning and Trumbull counties “is just a natural expansion of the industry to the north

of its current base in Ohio,” said Joseph A. Stanislaw, founder of the advisory firm The JAStanislaw Group LLC, an independent senior adviser to Deloitte’s energy and sustainability practice and a member of several energy-related boards. “Companies are moving north to grab land that doesn’t already have holds,” Mr. Stanislaw told The Vindicator. Greg Lalicker, president of Hilcorp, told the newspaper, “When you are in the early stages of a play, companies are really trying to get a sense of what all is going on. … Whether this potential turns out to be more liquids or more gas will only be known once we have the results from drilling and production. That is why we are here — to figure that out.”

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administration. It’s too much like Arkansas — and in Arkansas, it’s difficult to determine who owes what,” Mr. Johnson said. Instead of a tax scheme that has one rate for gas, another for oil and a third for other hydrocarbons, BP will urge the governor to instead push for a simple BTU tax, Mr. Johnson said. Such a tax would be imposed on the energy value of the resources taken from the ground in Ohio, as expressed in BTUs — or British Thermal Units, a measure of thermal energy — whether the resource is dry gas, wet gas, oil or something else, Mr. Fleming said.

‘We’re not afraid to pay our share’ For its part, the Ohio Petroleum Council is not universally against any tax increase on oil and gas produced within the state, but believes it is too early to be able to calculate what the rate of any new tax would be. The industry needs to better understand both what other future tax rates will be, in addition to the severance tax, and also have a better handle on the profitability of its Ohio wells. With the taxes that all businesses pay a subject of debate, and only 12 shale wells producing in Ohio so far, it’s simply too early for the industry to evaluate its position, Mr. Fleming said. “We’re not anti-tax and we’re not afraid to pay our share, we just want to know what we’re dealing with,” he said. As for OOGA, the relationship between it and the Ohio Petroleum Council is a good one, Mr. Fleming said, but the two groups represent different constituencies within the industry. The Petroleum Council, part of the American Petroleum Institute, represents mostly big, multinational energy companies, while OOGA tends to represent smaller producers with a long history in Ohio. The governor’s proposed severance tax increase would affect wells being developed almost exclusively by larger companies, but the OOGA members have a definite stake in those same wells, Mr. Fleming said, because many of Ohio’s small producers sold mineral rights to big producers. That allows companies such as BP to drill for shale gas and oil, while making royalty payments to the smaller producers who sold them mineral rights — and puts them both in the same boat in terms of severance taxes. “A lot of Tom’s members have sold their rights to my members,”

Get Crain’s shale coverage in your inbox Each Tuesday, Crain’s Cleveland Business distributes its “Ohio Energy Report” e-newsletter, and you can receive it for free. We include news from Crain’s and our sister publications, links from across the state and blog items from guests — including Cleveland-area scholars — and managing editor Scott Suttell. To sign up to receive the newsletter, visit www.CrainsCleveland.com /register.

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Register for Crain’s shale panel discussion Sept. 20

C

rain’s Cleveland Business, in partnership with the Canton Regional Chamber of Commerce, is hosting a panel discussion Sept. 20 analyzing the tax issue as it relates to shale gas. The event, “Shale Drilling and Taxes: What’s Fair?,” will be from 7:30 a.m. to 10:30 a.m. at the McKinley Grand Hotel in Canton. In addition to the panel discussion, it will include a breakfast and networking portion and a keynote speaker. The keynote speaker will be Rep. Brian Ellis of the Pennsylvania House of Representatives, who was elected in 2004. He currently

serves on the appropriations, consumer affairs, ethics, judiciary, liquor control and rules committees. Rep. Ellis is the sponsor of Pennsylvania’s shale well impact fee legislation, and he will talk about that state’s shale development experience and how the legislation was developed and discuss its current impact. The panel discussion aims to provide an array of perspectives in finding the proper balance between a tax structure that benefits Ohio while ensuring a reasonable cost structure for shale oil businesses. The panel will be moderated by David Kaminski, director of energy and public affairs for the Canton

Ellis

Kaminski

Regional Chamber of Commerce. Representing the pro tax side on the panel will be a representative from Gov. John Kasich’s office; on the con side will be Jerry James, president of Artex Oil Co. and president of the Ohio Oil and Gas Association. Serving as the neutral panelist will be Keith Bennett, Stark

James

Bennett

County engineer. For more information, go to www.crainscleveland.com/shale tax or contact Jessica D. Snyder, assistant events manager, at 216771-5388 or jdsnyder@crain.com Tickets must be purchased in advance of the event; walk-ins will not be accepted.

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Drillers in Ohio face tight regulations, relaxed taxes Report: Some states with higher rates still lure producers; industry opposes increase By DAN SHINGLER dshingler@crain.com

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hio has some fairly strict regulations, but very low taxes, when it comes to how it’s handling the growing shale gas industry in comparison to other states, a recent report finds. But all states are not the same in terms of their geology, the need to protect local populations and the way they approach and justify their tax environments, say the report’s author and a representative of the Ohio Oil and Gas Association. “Conditions are different in different states,” said Nathan Richardson, a lawyer and resident scholar at the Washington, D.C.-based nonprofit Resources for the Future, and one of the authors of the July report. “Let’s say you are looking at how deep a well casing has to go to protect groundwater — what you might be looking at could just reflect how deep the groundwater is in different states.” Mr. Richardson and his colleagues set out to compare taxes and regulations across the states, with an emphasis on those that are participating in the nation’s so-called shale gas boom. They released their initial findings in July, updating them at the end of that month to include the provisions of Ohio’s latest legislation on oil and gas drilling, Senate Bill 315, which took effect Aug. 1. Geological variations aside, the report shows that Ohio has caught up with many other major gas-pro-

ducing states, at least in terms of its regulations. For example, Ohio joined many other producing states by requiring that groundwater be tested for methane and other contaminants, the report finds. In some areas, Ohio appears to have adopted even more stringent regulations than some other states. For instance, while nearly all states require that drillers encase their well bores in steel and cement near the surface and down through freshwater aquifers, Ohio also requires that drillers use casings on their well bores for 1,000 feet at the bottom of the well. That’s twice as much as the 500 feet of casing required in Pennsylvania, Louisiana or California, the report finds. Also, in the area of disclosure, Ohio is one of only five states that require drillers to disclose both the volume and the concentrations of chemicals they use in their fracking fluid — the mixture of water, sand and chemicals that drillers pump at high pressure into a well to fracture the shale and release its natural gas, oil and other valuable resources. “If you think disclosure is a good idea, then Ohio is ahead of most other states,” Mr. Richardson said. Ohio also has among the lowest number of wells per state inspector. Each Ohio inspector is responsible for overseeing between 31 and 140 wells. In some other producing states, such as Texas and Oklahoma, one inspector monitor more than 1,000 wells, the report stated. That’s not just because Ohio has

EVERYTHING’S BIGGER IN TEXAS, INCLUDING GAS TAX The oil and gas industry says raising taxes on drillers could slow the pace of exploration in Ohio. However, a recent report from Resources for the Future, a nonprofit in Washington, D.C., shows that some states with high gas taxes are big oil and gas producers. ■ Texas charges 18.45 cents per thousand cubic feet (mcf) of natural gas produced. At $2.46 per mcf, that

equals a 7.5% tax. Texas produces more shale gas than any other state. ■ Oklahoma charges 17.2 cents, or 7%. The state has 44,000 gas wells and is the third-largest producer of shale gas. ■ West Virginia charges 12.3 cents per mcf, about 5%. The state has 52,000 conventional gas wells. ■ Ohio charges 2.5 cents, about 1% of the gas’ market value.

yet to really begin drilling its new shale gas wells in earnest, either, Mr. Richardson said. The study counts all of Ohio’s wells, even conventional wells that have been drilled in Ohio for about the last 100 years. Including those in the mix, Ohio already has nearly 35,000 wells to monitor, the report found.

However, the report shows that some states with the highest severance taxes also have the highest number of wells drilled. Texas has among the highest overall tax rates on oil and gas production but leads the nation with more than 95,000 total gas wells and twice the shale gas production of any other state. But Texas is a very large state in terms of its land area. But even relatively small West Virginia, with a tax rate of 12.3 cents per mcf, or about 5% of the total proceeds from the sale of its gas, has more than 52,000 gas wells, all of them old-style conventional wells, data in the report show. Oklahoma, similar in size to Ohio and with taxes about seven times higher, still has 44,000 gas wells and is the third-largest producing state in terms of shale gas, the report finds. Data like that might be helpful to state legislators as they try to decide whether to back their governor’s tax request. But both Mr. Richardson and Tom Stewart, executive vice president of the Ohio Oil and Gas Association, warned that comparing how states tax gas drilling isn’t always as simple as just comparing rates. “There may be a lower tax on initial production in some states (such as Texas),” Mr. Richardson said. “The problem with that is, on shale gas wells, that’s a substantial part of your tax revenues.” He said that’s because shale gas wells tend to produce more gas per day initially, right after they are drilled and production has begun, than they do months or even days and weeks afterward.

Taxing issues In the area of taxes, however, the report seems to indicate that drillers are getting a very good deal in Ohio, which currently taxes the production of gas at 2.5 cents per thousand cubic feet (mcf) of gas produced, or about 1% of the gas’ market value. That’s much less than the 18.45 cents per mcf, or 7.5%, that Texas charges with its severance tax, or the 17.2 cents per mcf (7%) that Oklahoma charges, the report found. The study used a price point of $2.46 per mcf in order to convert absolute taxes to percentages. Drillers, who are fighting Ohio Gov. John Kasich’s ongoing efforts to increase severance taxes in Ohio, have argued that a tax increase would have a chilling effect on drilling in the state, pushing companies to move their rigs to other states.

Scratching the surface Mr. Stewart said he’s looked at several other states that, on the sur-

face, have higher taxes than Ohio — and found that there are mitigating circumstances in many of those states that result in taxes that are effectively lower, especially for horizontal drilling of shale gas wells that produce gas only after they are fracked, like the wells in Ohio. Texas, for example, charges its base tax rate on drillers accessing conventional deposits of oil and gas, but discounts the rate significantly for high-cost shale gas, he said. Other states have similar mitigating circumstances, Mr. Stewart said. For example, Michigan has a tax rate of 5%, which is about five times higher than Ohio. “But, what we don’t often read is that a producer paying that 5% in Michigan gets to offset that against his normal state business taxes. … So it’s a fair deal,” Mr. Stewart said. Other states should not be used as examples, because their tax strategies aren’t working, he said. “Arkansas put in a severance tax in 2008, gave a small abatement period of a couple of years — and ever since then, the drilling rate has dropped by as much as 50%,” Mr. Stewart said. “And West Virginia? I’m not sure why anyone in Ohio public policy would want to mimic the state of West Virginia,” he said, noting that drillers are ignoring parts of West Virginia, while drilling in nearby Pennsylvania is going strong. Pennsylvania charges drillers an impact fee to compensate local governments for wear and tear on their infrastructure but has no severance tax, he said. “That really hasn’t worked out for the great state of West Virginia,” Mr. Stewart said. Mr. Stewart said he’s fine with Ohio’s regulations. Indeed, he contends, they are the result of about a century of drilling in Ohio and represent challenges that were met along the way with new laws that often were supported by the oil and gas industry. But higher taxes are something the industry remains dead set against, he said. A tax of just a few percentage points on a drillers’ gross receipts could end up being a tax on as much as half of their profits, because margins are tight, Mr. Stewart said. “And anyone who believes that taking half of the net profits won’t have an impact on the drilling rate is nuts,” he said. ■

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Obama, Romney laud potential, but EPA action uncertain By TERRY UHL clbfreelancer@crain.com

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ecause Ohio is a swing state in the 2012 presidential election, both Republican nominee Mitt Romney and President Barack Obama will continue to visit the state regularly between now and Election Day. And while they may speak of the national energy security benefits that responsible development of the Utica shale field can bring, it may not be until after the election that Ohioans find out if the U.S. Environmental Protection Agency will begin to regulate more directly the hydraulic fracturing process vital to shale field development. During his 2012 State of the Union address, President Obama backed natural gas drilling as a clean energy source. Shortly after, he signed an executive order that led to a mid-April announcement from the EPA on rules to be implemented in two years to control emissions from wells as the fracking process ends. To date, there has been no announcement on EPA regulation of fracking chemicals. Both presidential candidates speak glowingly of the prospect of Utica shale oil and gas entering the U.S. energy picture. Mr. Romney’s recently released energy white paper, titled “For a Strong Middle Class: Energy Independence,” lists a number of quotations from recent news articles

about the positive opportunities from shale development and its impact on manufacturing, although the plan has no specifics on the Marcellus or Utica shale fields. It does proclaim, “America’s natural resources can be a longterm competitive advantage for American manufacturing and their development is the key to a reindustrialization of the U.S. economy.” The Romney position paper does propose a “State Energy Development Council, where states can work together … to share expertise and best management practices.” President Obama early in 2012 released a jobs report with a section that credited the growth in natural gas production resulting from shale field development with the rebound in U.S. manufacturing. The section noted that with appropriate regulation, shale field development could be of significant benefit to the U.S. economy. The report remains among the few specific comments from the administration on shale gas development. One of the more controversial aspects of the Romney energy plan is his desire to give states more regulatory authority on energy production on federally owned land. The Obama administration has reduced the number of acres of federal land available for energy exploration by more than 15%, including at one point more than 3,000 acres of southern Ohio’s Wayne National Forest that were withdrawn

from auction in December. However, the U.S. Forest Service announced last week it is lifting the fracking ban in the Wayne National Forest. Thirteen sites in the forest will be auctioned later this year for drilling by 2016. Ohio shale experts note the forest is not a “hot” area for shale development right now. The Obama administration also has made plans to open more offshore tracts for drilling, albeit not until 2017. Drilling in Lake Erie continues to be banned on the American side by federal and state laws. No candidates have discussed reversing those bans. Natural gas wells have been drilled on the Canadian side of Lake Erie since the late 1950s and produce approximately 30 million cubic feet (MMcf) per day. (During a normal January, the average Ohio home uses about 18 MMcf of natural gas.) But the rumor of federal EPA regulation of fracking — the process of piping water, sand and chemicals at extremely high pressure into wells to fracture the shale rock thereby releasing the oil and gas — continues to go unanswered by the Obama administration. Mr. Romney’s plan doesn’t specifically address EPA fracking chemicals regulation issue either, but says a Romney administration would “strengthen environmental protection without destroying jobs, paralyzing industry, or barring the use of resources like coal.” ■

More at stake in Brown, Mandel race By TERRY UHL clbfreelancer@crain.com

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evelopment of the Utica shale field and related regulatory issues are of more intense debate in the U.S. Senate race between incumbent Sherrod Brown, a Democrat from Avon, and his Republican challenger, Ohio Treasurer Josh Mandel. Both candidates acknowledge the huge economic and energy advantages of Ohio’s geology. “Everywhere I travel in the state, residents are telling me how our leaders need to make sure we take advantage of the shale opportunity while protecting our air, water and land. I know, and they know, responsible development can improve our tax base, lower our energy costs and improve our national security,” Mr. Mandel said in an interview. Sen. Brown’s focus has been to find ways to use the shale opportunity to create more Ohio jobs. In a visit this summer to the Eastern Gateway Community College in Jefferson County, he talked with officials and students about their government-funded ShaleNet jobs training program and discussed his legislation to aid Ohio’s unemployed workers to get retrained for jobs in the shale industry. What is not clear is whether a

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second Obama administration would lead to U.S. Environmental Protection Agency regulation of hydraulic fracturing, which would take the responsibility away from the states. Challenger Mandel of Lyndhurst is very specific: “I will do everything I can in Washington to keep bureaucrats out of the way. I trust the state of Ohio more than I do the federal government.” Sen. Brown’s office did not respond to a question about his position on EPA regulation of fracking. If the shale development pans out, Mr. Mandel said, “Twenty years from now, Ohio will be one of the leading states in the country for energy exploration and production. And it will have revitalized our manufacturing industry, as we are already beginning to see in the steel category with V&M and U.S. Steel.” In Sen. Brown’s view, “As shale development moves forward, we must protect our water supplies, ensure that local communities are consulted, and take every precaution to safely dispose of waste. We need to be sure that local and county governments aren’t stuck with the tab for roads or cleanup. But make no mistake, these jobs could be a real boost to Ohio’s economy,” he said in a written statement. ■

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SHALE’S RIPPLE EFFECTS You would be hard-pressed to find an industry or sector that has not felt the effects of the region’s shale boom in some way. From real estate and manufacturing to marketing and technology, opportunities in shale

FINANCE Theirs is the industry that handles the most anticipated by-product of the Utica shale play: cash. Bankers, financial advisers and wealth managers are hosting free workshops and, in some cases, going door to door to attract deposits and market themselves as the experts landowners and companies need to manage new wealth. Even as bank and credit union executives work to rake in deposits, some institutions, particularly smaller ones, are challenged when that actually happens because deposits are liabilities, and a deluge of them can create capital ratio issues that raise red flags for regulators.

abound for those doing business in Northeast Ohio. Here’s a look at just a handful of the ways that shale is having a ripple effect throughout the region’s economy.

“It’s not going to be easy to get those (dollars) turned around in loans to the community,� said Patrick Harris, an Ohio Credit Union League spokesman. He cited as an example one $20 million-asset institution whose top executive expects as much as $3 million to come through the door in the next few months. Bankers anticipate that commercial loan growth will catch up with deposits as businesses seek the means to build infrastructure and buy equipment to get oil and gas to the market, said James Thurston, spokesman for the Ohio Bankers League. But until things even out, capital planning is a bigger job, said Jeff Quayle, senior vice president and general counsel for the bankers league. “Certainly it’s a good problem to have, that you’re growing to the point that you have to think about bank capital and what’s the most

efficient way to deploy that capital into your market,� he said. The Ohio Credit Union League is planning a seminar this fall to assist credit unions in developing ways to deploy these large deposits, Mr. Harris said. Another in the finance sector whose oil and gas-related business is building is Cleveland investment banking firm Western Reserve Partners LLC, which is advising more companies that make and service equipment necessary to find, pump, transport and process the gas, said Mark A. Filippell, managing director. “People sell businesses for two reasons: greed and fear,� Mr. Filippell said. “Greed is when things look very good, and right now for many of these companies, things look very good.� Western Reserve is advising several energy-related companies now, but those deals remain confidential. — Michelle Park

restrict oil and gas drilling through zoning, noise or other measures. That year, however, the state Legislature took away local control over the permitting process, and, because of a 1965 law, that opened up urban and suburban areas for drilling. Depending on the depth of a proposed well, drillers need mineral rights to a footprint of as much as 40 acres around a well before they can start pumping. When PEP Drilling realized it was going to go deeper than planned on its Stow well, it sought to expand its footprint with the 0.3-acre parcel owned by city of Stow. Though Stow has turned PEP Drilling down, the company has the 1965 law — known as the mandatory pooling law — on which to fall back. Under the law, if a driller contracts with the owners of at least half the required acreage, a single property owner, or even several property owners, can’t stop the drilling by refusing to join the pool. Instead, if a landowner balks, the producer can ask an Ohio Department of Natural Resources advisory panel to force the pooling, giving the driller the mineral rights and paying royalties to the balking property owner. The law was enacted to control a proliferation of drilling into the same underground pool. With Stow city council’s refusal to sell its mineral rights, PEP Drilling now must decide whether to seek mandatory pooling. — Jay Miller

GOVERNMENT The Ohio oil and gas rush has had an unwanted impact on many local communities, places that are used to regulating who gets to build what, and where, within their boundaries. Take Stow, where drilling for oil and gas — vertically — has been an uncontroversial fact of life around the Summit County community for decades. But now, the city has decided it rather would forgo a $20,000 signing bonus and future royalties on land it owns than allow another well to start pumping. After several heated city council meetings, the city has decided not to give PEP Drilling of Mount Vernon, Ill., land it needs to start pumping gas from a horizontal well it drilled on the land of a Stow church near the city’s land, said Councilman Michael Rasor. “I really don’t have a problem with (drilling),� Mr. Rasor said in a telephone interview. “But one thing I wanted to get was indemnity on the environmental liabilities, and the driller didn’t offer it to us.� Others in the community worried about noise and increased truck traffic. So, on Aug. 6, the city said no to PEP Drilling. However, Stow’s mayor and city council may not have the last word. Until 2004, communities could

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HIGHER EDUCATION The complicated business of exploring and drilling for natural gas in the region’s shale formations has ignited a wave of interest among Northeast Ohio’s institutions of higher learning. While those in the higher education sector admit it often takes years for colleges to respond to what’s happening with the economy, the job prospects and research opportunities offered by the shale boom have a number of local institutions scrambling. Case Western Reserve University in Cleveland, for one, is banding together several researchers under an umbrella known as the Center for Shale Energy Research and Education to study multiple facets of the region’s shale rush, ranging from its impact on the economy to its effects on public health and the environment. The center involves more than 30 faculty members from the private university’s engineering, medical, business, law and science programs. Also, the university is in talks with several companies entrenched in the shale industry about working with the center, but those involved with the project said it was too early to disclose any by name. The center’s leadership also is grappling with how it best can interact with businesses in the industry, especially if the center is to maintain its independence. “As an independent university, we feel that we have a major role to play because we are not funded by one side or another,� said Xiangwu

“We feel that we have a major role to play because we are not funded by one side or another.� – Xiangwu “David� Zeng chairman, department of civil engineering, Case Western Reserve University “David� Zeng, chairman of CWRU’s department of civil engineering and one of the faculty members involved with the initiative. Youngstown State University last fall unveiled its own research institute — the Natural Gas and Water Resources Institute — focusing on the study of the water used in the shale gas extraction process. This spring, the institute also will offer a minor under the same name. Jeffrey Dick, the institute’s director, said the minor largely is geared toward those in the STEM fields — science, technology, engineering and mathematics. While other colleges and universities haven’t made as bold a commitment as CWRU or Youngstown State, faculty at several local institutions have incorporated aspects of the shale industry into their coursework. Also, researchers at Cleveland State University’s Maxine Goodman Levin College of Urban Affairs have studied the economic impact of the shale rush. Still, higher education administrators hint that other programs and research clusters could well be on their way. Staffers at the University of Akron’s Wayne College in Orrville, for example, are holding meetings to determine whether the college could offer any continuing education programs to meet the industry’s needs. — Timothy Magaw

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LEGAL AFFAIRS Ironically, lawyers expect to be kept busy for years by both sides of the shale play debate — those with the desire to drill, baby, drill, and those already suing over the environmental and health impacts. A number of regional law firms have formed in recent months shale-centered practice groups focused on serving clients ranging from single landowners who need land leases to large corporations that want to strike up joint operating agreements with other companies. Cleveland-based Thompson Hine LLP started its Team Shale in fall 2011. Asked about the group’s activity, Michael L. Hardy, who leads the team, noted that a year ago, the firm had no shale-related work. Today, it is evaluating easement documents and rights of way for a midstream exploration company and negotiating leases on behalf of “significant corporate clients,” he said. “It takes a while to develop our penetration into the various sectors in the market,” Mr. Hardy said. “That’s no different than the level of involvement it takes to get involved in other practice areas.” Attorneys who handle leases and title searches have been “extremely busy,” and while that high level of leasing activity is subsiding, work will continue at a different pace, said Glenn Morrical, co-chair of the

oil and gas practice group formalized earlier this year at Tucker Ellis LLP in Cleveland. Other legal work will arise over existing lease rights and the rights of way and real estate negotiations necessary as people seek to lay pipeline for transporting gas and gas liquids, Mr. Morrical said. Responding to the interest, the Cleveland Metropolitan Bar Association in mid-September will host a conference titled “Utica Shale: Issues in Law, Practice and Policy,” which will provide an overview of the legal issues presented as people work to extract oil and gas. “It will clearly taper off at some point,” Mr. Morrical predicted of attorneys’ shale-related workload. “How far off, that is difficult to say. I think there’s going to be a lot of work for quite a while.” Richard H. Nemeth of Nemeth & Barrett LLC started taking on oil and gas clients about a year and a half ago to supplement his firm’s bankruptcy work since consumer bankruptcies are down. But he’s no newbie: He has geology and law degrees, and in 1984 he was hired by an oil and gas company to handle leasing and right-of-way issues before the industry waned in the late 1980s. Now, Mr. Nemeth’s firm is putting together a website about its oil and gas work, which he hopes to launch in the next month or so, and he’s spreading the word through renewed memberships in oil and gas law organizations. “This was a nice skill to be able to fall back on,” he said. — Michelle Park

facturing,” Mr. Colm said. “We’re still on the uphill side of the growth curve.” Already, out-ofstate companies are developing processing plants, distribution infrastructure and are buying up oil and gas leases, injecting hundred of millions of dollars into the state economy. And local companies are keeping pace. Take Canton-based Timken Co., which makes bars and tubes used in the horizontal drilling equipment needed to extract shale. In the past two years, the producer of bearings and steel has announced capital expenditure projects totaling more than $310 million in Northeast Ohio. Because Timken equipment is

used for shale drilling across the country, all of its investments are not directly tied to the local Utica shale boom. Rather, the company is benefiting from the overall strength of the oil and shale business. Shawn Seanor, vice president of oil and gas engineered steel solutions for Timken, said that while a number of companies are moving distribution centers, warehouses and support services to Ohio, they largely aren’t moving manufacturing facilities to the region. But he sees that as a likely possibility. Timken’s customers are starting to see the advantages of moving manufacturing operations to Ohio, which is near both the source of steel and the end location where the components will be used, Mr. Seanor said. — Ginger Christ

“The shale story in Northeast Ohio is counterintuitive. It’s hard for reporters to believe it’s hard to find rooms in Youngstown. That is an eye-opener.” The shale conversation serves as a natural entry point in discussing the region’s strong manufacturing base and its efforts in wind and renewable fuel cell energies, said Mr. Batyko, who regularly travels to New York City to promote Northeast Ohio to national media outlets like The New York Times. Gregg LaBar, senior vice president at Dix & Eaton, a Cleveland-based integrated communications consultancy, notices a growing prominence of the region in the national consciousness thanks to the shale boom. “Ohio and Northeast Ohio have

much more credibility in terms of energy,” he said. “When we go out and pitch what we do, we have much more to talk about in Cleveland.” The problem, however, is in translating the region’s shale boom into direct jobs for the local marketing community, Mr. LaBar said. The bigger drilling companies moving to Ohio typically bring their own marketing resources and, for the most part, aren’t hiring local representatives, he said. Yet. However, Mr. LaBar sees opportunity for those in the local marketing industry to find a way into the shale industry through networking. New companies likely will look to find local representation after they’ve established themselves and grown in the region. — Ginger Christ

MANUFACTURING The shale drilling boom is reinvigorating Northeast Ohio’s manufacturing industry, bringing hundreds of millions of dollars of investment and direct and indirect jobs to the region, according to John Colm, president and executive director of Wire-Net, a Clevelandbased manufacturing advocacy group. At all levels, from upstream to midstream to downstream, the Utica shale activity is having a “significant positive impact on manu-

MARKETING The shale boom is putting Northeast Ohio on the map, particularly in the eyes of the national media, officials say. Groups such as the Cleveland Plus Marketing Alliance are using the attention given to the region because of shale drilling to raise the local profile. “It opens the door for us to talk about the region’s other assets,” said Rick Batyko, executive director of Cleveland Plus Marketing Alliance.

23

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REAL ESTATE In the decades since the end of World War II, a half-century of business departures and two generations of population declines narrowed Northeast Ohio real estate to a zero-sum game. When a business or person moved within the region, it was at the expense of another location. Shale’s rising significance in the region already promises to reverse that trend. A raft of new businesses, such as Halliburton of Houston, which recently committed to establishing an oil field supply unit in Zanesville, and other suppliers of services to drillers already are giving new purpose to long-empty existing buildings and spawning new ones in neglected industrial parks. A North Dakota or Pennsylvanialike population spike may be yet to come, but the influx of businesses already is palpable to commercial real estate owners and commissioncalculating brokers. Not counted among that group are farmers and other land owners reaping big bucks from selling mineral rights. Consider two recent examples of brokerages that reaped rewards from tenants entering the region to supply its nascent shale industry. At NAI Cummins, an Akron-based commercial brokerage, the fatherson team of Bob and Scott Raskow represented Baker Hughes Oilfield Operations Inc. of Houston in the $3.3 million purchase of 108 acres in Massillon. Baker Hughes plans to build a hub to serve oil companies and drillers that will exploit the region’s Utica shale formation. Likewise, George Pofok, a senior vice president at the Cresco brokerage in Independence, in May represented

a Boston-based industrial property owner in the $3.4 million sale of a Youngstown building to Artificial Lift Systems Inc., yet another oil and gas vendor. Another deal reeks of the transforming influence oil money will have on the region, and is close to home. Beck Energy, a natural gas exploration and drilling company long rooted in Ravenna, acquired an office building in Independence for $6 million as an investment in June. Terry Coyne, an executive managing director at the Cleveland office of the Newmark Grubb Knight Frank real estate brokerage, puts the resurgence of activity in this region in historic terms. “John D. Rockefeller helped make Northeast Ohio what it is by consolidating Cleveland-area refineries serving the Oil City, Pa., oil boom,” Mr. Coyne said. “The same geography and geology will make us rich again.” Beyond the emerging supplier business, area companies that make pipe used in wells also are thriving — and expanding. Moreover, Mr. Coyne said he believes the push for mineral rights to exploit shale will push farther north in Northeast Ohio than expected. His reason? “I’m fielding calls from people looking for large parcels of land for farming. They don’t care if there are buildings on it. You can’t farm where there are buildings. It’s something else,” Mr. Coyne said. The “something else,” he surmises, is mineral rights. One property that’s netting calls — for which the mineral rights are not for sale — speaks volumes about the ability of shale to reinvigorate a region weakened by industrial decline: It is the 167-acre former site of the Chrysler plant in Twinsburg, which Mr. Coyne represents as a new industrial park. — Stan Bullard

glass-like material designed to clean contaminated water, which is produced in large quantities when oil and gas wells are drilled. Other young companies aim to break into the industry, too. For instance, MesoCoat Inc. of Euclid plans to market its PcomP metal coating system to companies drilling in the Marcellus and Utica shale areas. The company is working with partners in Houston to try to find its way into the supply chain, said CEO Andy Sherman, adding that he expects companies to use more local suppliers as the amount of drilling in the Midwest grows. Bigger companies also are developing new products for the shale gas market, said Mr. Karpinski, of NorTech. For example, specialty materials supplier Fairmount Minerals of Chardon is about to open a new $5 million research and development center in Sugar Land, Texas, to capitalize on growing demand for specialty sands, resins and other materials used in the fracking process. There are lots of opportunities for companies to develop products locally, too, Mr. Karpinski said. The oil and gas industry always needs better equipment and more durable materials — stuff that Northeast Ohio companies know how to make, he added. “There’s room for small and big companies up and down the (supply) chain,” he said. — Chuck Soder

TECHNOLOGY Not even Texas is big enough to develop all of the technologies that oil and gas companies need to efficiently extract, process and transport the natural gas buried beneath shale rock formations. Some Northeast Ohio companies already are making pieces and parts that go into machinery used in the fracking process and at other points in the supply chain, according to Dave Karpinski, vice president of technology innovation at NorTech. Others are working on new products right now. “It’s definitely not all in Houston, Texas or Louisiana,” he said. NorTech aims to help out those local companies. The nonprofit, which works to promote technologybased economic development in Northeast Ohio, earlier this year decided to start helping workers and suppliers capitalize on the rise in shale gas drilling. It eventually plans to do more to assist local companies developing advanced materials, industrial control systems and water technology for the shale industry. ABSMaterials Inc. of Wooster already has staked out a spot in the oil and gas industry: Founded in 2008, the company has developed a

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Fracking advocates, opponents push their messages Sides seek edge in tense public relations battle By CHRISSY KADLECK clbfreelancer@crain.com

O

hio appears to be a perennial battleground state. This time, though, it’s what’s underground that is the source of an energy-rich, fueldriven debate — one that has created a deep chasm of political and public discourse. High-volume, horizontal hydraulic fracturing — commonly called fracking — is a controversial and relatively new drilling technology that is being used to extract oil and gas from Utica shale deposits in the Buckeye State. This practice has dredged a well of opposition from environmentalists and citizens groups worried about the lack of regulation and groundwater contamination. Proponents in the petroleum industry and big business organizations, however, gush about its powerful economic impact and job creation in some of the most impoverished areas of the state. This tug-of-war of facts, projections and environmental impacts surrounding the issue of fracking has resulted in dueling public relations campaigns. And while neither side will put a dollar figure to their campaigns, it’s easy to say that millions of dollars are going toward swaying public opinion and political will. “Both sides have issues to wrestle with,” said Edward “Ned” Hill, dean of the Maxine Goodman Levin College of Urban Affairs at Cleveland State University, who was part of the research team that completed an economic impact study for the Ohio Shale Coalition in February. “The environmentalists, who are highly skeptical of developing shale, and the industry, whose vested interest is pretty well known,” he said. “Unfortunately for the oil and gas industry, everyone has watched bad John Wayne movies, which have gushing oil derricks in the background, so there is a lot of skepticism. Nobody is going to believe anybody.”

Dueling messages Fracking is a hot-button issue that is easy to sensationalize, Mr. Hill said. “But if both sides don’t try to get their message out, they are just going to get drowned.” For the opposition, you have groups like Don’t Frack Ohio and Network for Oil & Gas Accountability & Protection (NEOGAP). Vanessa Pesec, president of NEOGAP, said her organization represents as many as 20 to 30 groups around the state that want fracking banned “until such time that the industry can prove, through peer-reviewed scientific studies, that this relatively new, highly industrial and invasive extraction method is safe,” she said. To get their messages across, these grassroots groups often post yard signs with messages like: “Keep Our Community Healthy and Safe … Stop Fracking.” They make copies on their home computers or at the local store, and every once in a while take an advertisement out in the paper. In a beefed-up effort to get the message

out, billboards that are 10 feet by 20 feet have appeared in six communities. “Our budget is basically zero and the industry for a year or more has spent millions and millions of dollars trying to persuade Ohioans and Americans that this is safe,” Ms. Pesec said. “And I think that the reason that they need to spend so much money is because they are trying to prove something that is not true, and Americans know it.” Meanwhile, prosperity and investment, especially in areas of the state that have had little attention since the mid-1950s and early ’60s, is one of the key messages from the pro-fracking front, which includes industry leaders like the U.S. Chamber of Commerce. It also includes the Ohio Shale Coalition, a broad-base group organized to assist businesses in capitalizing on opportunities created by the shale industry, which by some accounts is expected to bring more than 65,000 jobs to the state by 2014.

Weapons of choice The U.S. Chamber of Commerce in July launched “Shale Works for US,” a multistate, multimilliondollar campaign that includes radio and newspaper ads focused on advocacy and education. The effort’s goal is to weave a national narrative about the widespread positive economic effects of shale development. Christopher Guith, vice president for policy at the U.S. Chamber’s Institute for 21st Century Energy, said the petroleum industry has done a “phenomenal” job of educating the public in the past year and of trying to “demystify some of the hyperbole that has come out of the anti-fracking crowd.” “This is an issue that is transforming the country, and it’s so hard to stand in the way of it,” Mr. Guith said, adding that the U.S. Chamber wanted to join the movement to help tell the positive story surrounding fracking. “Our biggest asset is our credibility to the average American. We have such broad-base support and we represent every aspect of business, not just oil and gas,” Mr. Guith said. “Obviously, we support hydraulic fracturing, but that is not necessarily what we are trying to debate here,” he said. “There is a much broader economic perspective and we want Americans, and we want Ohioans and we want businesses throughout the country to understand this other side of the story that hasn’t gotten near the amount of coverage that the controversy surrounding the operations has.” Don’t Frack Ohio harnesses a different kind of currency in their PR campaign against what its supporters believe is a drilling practice of earth-shaking proportions. “One thing in Ohio that really woke people up was the earthquake in Youngstown on New Year’s Eve (2011),” said Daniel Kessler, spokesman with Don’t Frack Ohio, a coalition effort of more than a dozen other organizations, spearheaded by 350.org, a movement focused on climate change. “When you start shaking the earth and

“I just think you’d be foolish not to develop the resource in a responsible way. ... I would love it if extremists on both sides would just shut up.” – Ned Hill dean, Maxine Goodman Levin College of Urban Affairs, Cleveland State University

having a 4.0 earthquake that has a tendency to shake up people’s perspective.” In June, Don’t Frack Ohio mobilized 1,200 anti-fracking supporters to descend on the Ohio General Assembly in Columbus to sign a people’s bill banning fracking in the state. “What you are seeing is a wellorganized, well-funded machine put on by the fossil fuel industry versus essentially a different currency, which is people power,” Mr. Kessler said. “What we can do is organize and try to demonstrate power by numbers … to create such a strong anti-fracking force that the legislature would have no choice but to unwind some of the work that they did (last year).”

Two battlegrounds In many ways, there are multiple

PR campaigns taking place in the state, Cleveland State’s Mr. Hill said: one tailored to those immediately affected by fracking, and one for a larger statewide and national audience. “If you go into shale country itself, it’s an area which is anxious for jobs and anxious for royalty incomes so it’s a very easy PR campaign,” said Mr. Hill, who adds that he is neither pro nor anti-shale. “I just think you’d be foolish not to develop the resource in a responsible way. … I would love it if extremists on both sides would just shut up.” Trent Dougherty, director of legal affairs for the Ohio Environmental Council, said while his organization believes the country needs to break its addiction to fossil-fuel powered energy, it realizes that the shale gas play is a reality in Ohio.

“If it continues to move forward it needs to be done in the most responsible manner. We need to have regulations put in place to protect the environmental and human health and safety,” Mr. Dougherty said. He said it’s disappointing the issue has become so contentious. “Both sides have had to unfortunately take their corners like rabid dogs and really fight a battle that I don’t think is healthy,” Mr. Dougherty said. “It has been portrayed as anyone who is not 100% for drilling, the ‘Drill baby, drill!’ as much as we can, then you must want to completely ban it and never have any homegrown energy sources period.” Some might say that industry is winning the PR battle. But Linda Woggon, executive director of Ohio Shale Coalition, said public support and understanding of fracking is critical to make the most of the jobs this industry will create. “We don’t have a really good pool of talent, skilled people ready for the jobs that this is going to result in so it’s important that people understand it so they can make decisions about training they can get in order to be prepared for these jobs,” she said. ■

Shale. An ever-changing landscape requires expert creative solutions.

Ulmer & Berne LLP is committed to staying abreast of new regulations within the oil and gas industry and partnering with our clients to maximize their opportunities. Our expertise spans the entire energy spectrum, including leasing, title, regulatory, permitting, supply chain, tax, and litigation. Midwest Real Estate News ranked Ulmer & Berne #1 in Ohio and #10 on its list of the Top Real Estate Law Firms.

ulmer.com

BOB KARL bkarl@ulmer.com

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A DAY ON THE DRILLING SITE So what’s it like on a shale gas drilling site? We’ve spent a few days in the rich

areas to the south and east of Cleveland, and here’s a little of what we’ve found.

STEPHEN HERRON PHOTOS

A segment of drilling pipe is about to be changed so drillers can add another section to go deeper at Chesapeake’s first well in Stark County, near Canton. The shale that holds the gas and oil that drillers seek is more than a mile below.

A top motor is seen from the rig floor of a drilling operation near Canton. The motor, suspended by cables, turns the pipe that holds the drill bit. The weight of the motor and pipe help to drive the bit through thousands of feet of sandstone and other material on its way to the Utica shale below.

ABOVE: Behind the well bore on a well pad developed by Chesapeake Energy in Stark County, giant winches handle steel cable used to support the drilling rig. They are surrounded by equipment and tanks that drillers use to store and manage some of the water, sand and chemicals involved in fracking. BELOW: Fracking operations under way at a rig site near Mineral City, Tuscarawas County, Ohio.

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WWW.CRAINSCLEVELAND.COM

27

LARGEST GRANTMAKING FOUNDATIONS RANKED BY AMOUNT OF 2011 GRANTS

Name Address Rank Phone/Website

2010 2011 grants grants (millions) (millions)

2011 assets (millions)

2011 largest grant ($)

1

Cleveland Foundation 1422 Euclid Ave., Suite 1300, Cleveland 44115 (216) 861-3810/www.clevelandfoundation.org

$78.7

$94.1

$1,816.9

3,100,000

2

The George Gund Foundation 45 Prospect Ave. West, Suite 1845, Cleveland 44115 (216) 241-3114/www.gundfoundation.org

$16.6

$23.6

$422.3

3

Lerner Foundation(1) 26500 Curtiss Wright Parkway, Highland Heights 44143 (440) 891-5000

$16.3

$18.6

4

The Timken Foundation of Canton(2) 200 Market Ave. N., Suite 210, Canton 44702 (330) 452-1144

$13.3

5

KeyBank Foundation 800 Superior Ave., Cleveland 44114 (216) 828-7349/www.key.com/foundation

6

2011 smallest grant ($)

Year founded Total Top executive staff Title

Largest grants

44

Suite 1300 Services Inc., Case Western Reserve University, Cleveland State University, Neighborhood Leadership Institute, BioEnterprise Corp.

1914 69

Ronald B. Richard president, CEO

2,000,000

500

The Foundation Fighting Blindness, Cleveland Institute of Art, County of Cuyahoga-Invest in Children, The Cleveland Foundation-Portfolio of Excellent Schools

1952 12

David T. Abbott executive director

$10.5

10,001,000

50

Cleveland Clinic Foundation, Hospital for Special Surgery (New York), Cleveland Orchestra, Jewish Community Federation

1993 NA

Norma Lerner president, treasurer

$7.4

$221.6

476,000

6,450

Stark State College Foundation, Town of Sosnowiec (Poland), University of Akron Foundation, Habitat for Humanity (Bucharest, Romania)

1934 NA

Ward J. Timken president, trustee

$12.6

$12.7

$35.9

1,500,000

10,000

Cleveland Orchestra, United Way of Greater Cleveland, Case Western Reserve University, Cleveland Clinic Foundation, Susan G. Komen Breast Cancer Foundation

1969 3

Margot James Copeland chairman, CEO

Saint Luke's Foundation of Cleveland 4208 Prospect Ave., Cleveland 44103 (216) 431-8010/www.saintlukesfoundation.org

$9.6

$7.6

$170.6

1,000,000

500

MetroHealth Foundation, Neighborhood Progress Inc., Friends of Breakthrough Schools, CWRU School of Dental Medicine

1997 8

Denise San Antonio Zeman president, CEO

7

Stark Community Foundation 400 Market Ave. N., Suite 200, Canton 44702 (330) 454-3426/www.starkcf.org

$8.1

$5.5

$156.1

NA

NA

Stark Education Partnership, United Way of Greater Stark County, Aultman Hospital Compassion Care Center, The Wilderness Center, Canton Museum of Art

1963 10

Mark J. Samolczyk president

8

Eaton Charitable Fund 1111 Superior Ave., Cleveland 44114 (216) 523-5000/www.eaton.com

$8.1

$7.3

$2.3

520,034

50

United Way of Greater Cleveland, University Hospitals of Cleveland, National Merit Scholarship Foundation, United Way of Asheville & Buncombe Count

1953 0

William B. Doggett senior vice president, Public & Community Affairs

9

Kelvin & Eleanor Smith Foundation 30195 Chagrin Blvd., Suite 275, Cleveland 44124 (216) 591-9111/www.kesmithfoundation.org

$7.5

$6.5

$140.0

1,000,000

2,500

NA

1955 3

Ellen Stirn Mavec president, chairman

10

Mt. Sinai Health Care Foundation Allen Med. Library Bldg., 11000 Euclid Ave., Cleveland 44106-1714 (216) 421-5500/www.mtsinaifoundation.org

$6.7

$6.5

$121.0

2,000,000

NA

Jewish Federation, Case Western Reserve University School of Medicine, Cuyahoga County Invest in Children, Fund for Our Economic Future/BioEnterprise

1994 4

Mitchell Balk president

11

Akron Community Foundation 345 W. Cedar St., Akron 44307 (330) 376-8522/www.akroncommunityfdn.org

$6.3

$6.0

$140.7

497,500

25

Akron Art Museum, City of Akron Neighborhood Partnership, Akron Metropolitan Housing Early Learning Project

1955 15

John T. Petures Jr. president, CEO

12

Community West Foundation 20545 Center Ridge Road, Suite 448, Rocky River 44116 (216) 476-7060/www.communitywestfoundation.org

$5.5

$3.4

$80.6

830,000

250

Case Western Reserve University, Cleveland Food Bank, Fairview Hospital, Lutheran Hospital, Malachi House, University School

1997 8

David T. Dombrowiak president, CEO

13

Weatherhead Foundation 25825 Science Park Drive, Beachwood 44122 (216) 292-7100

$5.0

$5.0

NA

NA

NA

Tulane University, Harvard University, Columbia University, University of Texas

1953 NA

Celia J. Weatherhead president

14

GAR Foundation 277 E. Mill St., Akron 44308-1735 (330) 576-2926/www.garfoundation.org

$4.7

$5.7

$138.3

450,000

1,000

United Way of Summit County, Summit Education Initiative, Center for Nonprofit Excellence, Greenleaf Family Center

1967 4

Christine Amer Mayer president

15

Nord Family Foundation 747 Milan Ave., Amherst 44001 (440) 984-3939/www.nordff.org

$4.6

$4.0

$92.8

450,000

25

Amherst Historical Society, Community Foundation of Lorain County, Cleveland Scholarship Programs Inc., Nurturing Center

1988 5

John Mullaney executive director

16

Parker Hannifin Foundation(3) 6035 Parkland Blvd., Cleveland 44124 (216) 896-3000

$4.3

$4.0

$6.2

650,000

100

Cleveland State Univ., United Way, Great Lakes Theatre Festival, Helen Moss Cancer Research Foundation Professorship, Ohio Foundation of Independent Colleges

1953 NA

Don Washkewicz president, trustee

17

The Youngstown Foundation P.O. Box 1162, Youngstown 44501 (330) 744-0320/www.youngstownfoundation.org

$4.1

$4.0

$80.0

454,000

1,000

Easter Seal Society, United Way of Youngstown/ Mahoning County, Compass Family & Community Services, Visiting Nurses Association

1918 2

Janice E. Strasfeld executive director

18

Community Foundation of Lorain County 9080 Leavitt Road, Elyria 44035 (440) 984-7390/www.peoplewhocare.org

$4.0

$3.9

$80.0

362,443

250

Community Health Partners Foundation, Lorain Palace Civic Center, Common Ground

1980 10

Brian R. Frederick president, CEO

19

H. C. S. Foundation(4) 1801 E. Ninth St., Suite 1105, Cleveland 44114 (216) 781-3502

$3.8

$4.7

$95.5

200,000

1,000

Catholic Relief Services (Baltimore, Md.) Lakewood Hospital Association, Ohio Dominican University, Cincinnati Museum Center

1959 NA

Board of trustees

20

The Lubrizol Foundation 29400 Lakeland Blvd., Wickliffe 44092 (440) 347-1797/www.lubrizol.com

$3.7

$2.5

$17.5

1,000,000

1,000

Friends of Breakthrough Schools Citizens Academy II; United Way of Greater Cleveland, United Way of Lake County, The University of Akron

1952 2

David J. Enzerra president

21

Nordson Corp. Foundation 28601 Clemens Road, Westlake 44145 (440) 892-1580/www.nordson.com

$3.7

$2.6

$15.7

250,000

1,250

The Power of Three, CWRU-SHAEP program, Boys & Girls Club of Lorain County, CollegeNow, El Centro de Servicios Sociales, Lorain City Schools

1988 4

Cecilia H. Render executive director

22

Fairmount Minerals Foundation 11833 Ravenna Road, Chardon 44024 (440) 285-3132/www.fairmountminerals.com

$3.6

$1.4

$8.7

150,000

10

University Hospitals, Cleveland Central Catholic High School, America SCORES Cleveland, Aqua Clara Foundation, Cleveland Botanical Garden

2008 0

Jenniffer D. Deckard president

23

Elisabeth Severance Prentiss Foundation(4) PNC Bank, Box 94651, Cleveland 44114 (216) 222-2760/www.esprentissfoundation.org

$3.6

$4.2

$74.1

1

5,000

University Hospitals of Cleveland, Cleveland Clinic Taussig Cancer Center, Free Clinic of Cleveland, MetroHealth, Providence House

1939 NA

Richard W. Mack secretary

24

Martha Holden Jennings Foundation 1228 Euclid Ave., Suite 710, Cleveland 44115 (216) 589-5700/www.mhjf.org

$3.3

$3.8

$60.1

160,000

330

Cleveland Municipal School District, Literacy Cooperative, Cleveland Clinic Foundation, Miami University, Ohio Department of Education

1959 4

William T. Hiller executive director

25

The Raymond John Wean Foundation 147 W. Market St., Warren 44481 (330) 394-5600/www.rjweanfdn.org

$3.2

$4.6

$75.1

500,000

500

Mahoning Valley Organizing Collaborative, Youngstown Neighborhood Development Corp., Trumbull Neighborhood Partnership, Community Solutions Assoc.

1949 4

Jeffrey M. Glebocki president

26

William J. and Dorothy K. O'Neill Foundation 30195 Chagrin Blvd., Suite 106, Cleveland 44124 (216) 831-4134/www.oneillfdn.org

$3.1

$3.0

$72.8

100,000

100

Fund for our Economic Future, Notre Dame College, Dutchess Land Conservancy, Holy Cross Mission Center

1987 3

Leah S. Gary president, CEO

27

The Burton D. Morgan Foundation 22 Aurora St., Hudson 44236 (330) 655-1660/www.bdmorganfdn.org

$3.1

$5.2

$119.5

542,234

250

BioEnterprise Corp., Blackstone LaunchPad Initiative, Entrepreneurship Education Consortium, Invent Now, Junior Achievement of North Central Ohio

1967 7

Deborah D. Hoover president, CEO

28

Forest City Enterprises Charitable Foundation Inc.(5) 50 Public Square, Suite 1100, Cleveland 44113 (216) 621-6060

$3.0

$2.9

$0.2

500,000

150

Jewish Community Federation, United Way Services, Cleveland Metropolitan School District-STEM Program, Case Western Reserve University

1977 NA

Charles A. Ratner president

29

Reinberger Foundation 30000 Chagrin Blvd., Suite 300, Cleveland 44124 (216) 292-2790/www.reinbergerfoundation.org

$2.9

$2.5

$61.4

500,000

2,000

Great Lakes Science Center, Power of Three, Fund For Our Economic Future, Kent State University, Lutheran Metropolitan Ministry, Flying Horse Farm

1968 1

Karen R. Hooser president

Source: Information is supplied by the companies unless footnoted. Crain's Cleveland Business does not independently verify the information and there is no guarantee these listings are complete or accurate. We welcome all responses to our lists and will include omitted information or clarifications in coming issues. Individual lists and The Book of Lists are available to purchase at www.crainscleveland.com. (1) Information is from the 2011 990-PF. (2) Information is from the 2010 990-PF for tax year ending Sept. 30, 2011. (3) Information is from the 2010 990-PF for tax year ending June 30, 2011. (4) Information is from the 2010 990-PF. (5) Information is from the 2010 990-PF for tax year ending Jan 31, 2011.

RESEARCHED BY Deborah W. Hillyer

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CIA: Expansion allows school to increase its enrollment “Once the buildings are complete, we’ll have the facilities to match the quality of our faculty.”

continued from PAGE 3

break ground this fall, is a 91,000square-foot building that will be connected to the former Ford plant. That structure is slated for completion by early 2014.

– Robert Borden, executive director of enrollment and financial aid, CIA

The art of development The new building will replace the college’s aging main building, which is located on East Boulevard less than a mile from the new Euclid Avenue site. The college plans to sell the building, though Mr. Nunes declined to disclose any interested buyers. Chris Ronayne, president of University Circle Inc., which oversees development plans and management of the area, characterized the mystery of who ultimately would buy the soon-to-be vacated art school building as the “$64,000 question” involved with the area’s development. The move opens up a roughly four-acre site across from the Cleveland Museum of Art and Case Western Reserve University. “You’ve got a signature site that is arguably on one of the greatest sites between Chicago and New York because of its proximity to these arts institutions,” Mr. Ronayne said. “It’s high on everybody’s radar.”

RENDERING PROVIDED

The second phase of the Cleveland Institute of Art spans 91,000 square feet. The Cleveland Institute of Art’s initial investment in 2010 at its Euclid Avenue site was the first of several development projects to take shape in the University Circle neighborhood. Work started early last year on the nearly $27 million Museum of Contemporary Art Cleveland, for example, and Case Western Reserve University is building a $50 million student center. The art school’s investment also spurred well-known philanthropist Peter B. Lewis, chairman and former CEO of Progressive Corp., to donate $5 million toward the unifi-

cation project — his largest gift to an area institution in nearly a decade. “You can argue (the Cleveland Institute of Art expansion) was a catalyst and kick-starter overall in a very difficult economic climate,” Mr. Ronayne said. “To accomplish this really just speaks to the confidence people have in this institution.”

Rightsizing the school While the immediate goal of the expansion project was to unify the Cleveland Institute of Art campus, Mr. Nunes said it also created the opportunity for the school to increase

its enrollment to a number that would allow the institution “to achieve financial sustainability over the long term.” At present, the college’s student base hovers at about 520, but Mr. Nunes said an enrollment of 625 to 650 students would be the appropriate size for the college if it’s to bring in enough revenue to sustain its operations comfortably. Tuition at the Cleveland Institute of Art is about $33,000 a year. To accommodate that growth, the college tweaked its plans for the new building on Euclid by increasing the scope of the project by 36,000 square feet. That’s 65% larger than the original plans, which called for a complex that could accommodate 583 students. Over the last three years, the Cleveland Institute of Art stomached three of its largest freshman classes in the school’s history. Part of the reason for that growth has been the school’s ability to transcend its reputation as a “regional school with a

national reputation” by broadening its recruitment efforts, according to Robert Borden, executive director of enrollment and financial aid. “As population in Northeast Ohio and the Northeast generally has started to go down, that started to have an effect on our (enrollment) strategy,” Mr. Borden said. “It became apparent as an institution we couldn’t rely on what was coming to us fairly easily from Northeast Ohio.” Mr. Borden said the college has targeted its recruitment efforts within a 500-mile radius of its campus, though it also has found particular success in recruiting from pockets of Texas, California and Florida. The $66 million investment in the college’s physical facilities enhances its pitch. “Once the buildings are complete, we’ll have the facilities to match the quality of our faculty,” Mr. Borden said. “When that starts to sync together, that will be in everyone’s best interest.” ■

Key: One local broker calls move ‘part of the dance’ continued from PAGE 1

discuss the subject publicly. A second development source, who asked not to be identified for the same reason, said he knows KeyCorp’s headquarters proposal is circulating among a small circle of prospects that he would not identify. KeyCorp downplayed the significance of its contacts with developers. In a written statement, David Reavis, senior vice president and external communications director at KeyCorp, said, “Key continually reviews its corporate real estate assets to ensure our investments are aligned with our needs and market conditions. “This includes looking for opportunities to eliminate excess real estate space as our needs and market conditions change,” Mr. Reavis stated. Mr. Reavis declined to comment on follow-up questions, citing KeyCorp’s policy to refrain from discussing talks with any vendor.

Start of the dance? While the potential of a skylinealtering building is intriguing, brokerage insiders doubt KeyCorp will exit Key Tower, which one describes as “the best space in town.” Instead, they see KeyCorp using the specter of a new building as leverage in lease negotiations. Real estate data provider CoStar says KeyCorp’s lease at the tower expires in 2017. Although CoStar does not report a rent figure for KeyCorp, it says the average rent in the building is $27.46 a square foot, at the top of the Cleveland market. Among those brokers who see KeyCorp’s potential move as a negotiating ploy is Robert Nosal, executive managing director in the Cleveland office of Newmark Grubb Knight Frank. “It’s the right time to do this,” Mr. Nosal said. “To beat up on the

landlord, you would go out (seeking proposals) on a building years in advance. They can threaten to leave to get a lower rate and less space in return for a long-term renewal if they need less space.” He issued a prediction: “At the end of the day, they will stay. It’s a great building, a great position. It’s cheaper to stay there than to move. But you’ve got to go through the dance.” Nonetheless, a search of the market by an anchor tenant at times can produce unexpected and far-reaching results.

Eaton’s specter A similar market review by Eaton Corp. three years ago of its space needs and the office market set in motion the diversified manufacturer’s pending exit from downtown Cleveland to its new office campus that’s nearing completion in suburban Beachwood. That search was led by the Cleveland office of Jones Lang LaSalle — the same company that’s handling the headquarters inquiry process for KeyCorp. A Jones Lang spokeswoman declined comment on the KeyCorp situation. Key Tower was built by Westlakebased Jacobs Group but was sold in a two-step process completed in 2010 to an investment fund operated by Wells Real Estate Funds Inc. of Norcross, Ga. Jacobs Real Estate Services still manages and leases the building on Wells’ behalf. None of three Jacobs executives contacted by Crain’s returned messages by Friday afternoon. KeyCorp has 11,000 employees throughout its multistate footprint and $86.5 billion in total assets as of June 30, according to a Securities and Exchange Commission filing. ■ Reporter Michelle Park contributed to this story.

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Drugs: In some places, shortages force docs to tweak treatment continued from PAGE 1

the drug, the health system instead purchases an alternative that costs upwards of $10 a dose, according to Scott Knoer, the system’s chief pharmacy officer. “Every hospital is working on this, and most of the public never even knows how much work goes into handling the problem,” said Mr. Knoer, who has a full-time staff member devoted to managing the issue. The reasons for the drug shortages are wide-ranging. Several drug manufacturers have closed or consolidated operations in the face of shrinking profit margins, a trend health care observers say has suffocated the supply chain. In addition, the U.S. Food and Drug Administration contends more than half of the shortages are a result of quality issues that forced regulators to shutter, either permanently or temporarily, drug manufacturing plants. That was the case at Ben Venue Laboratories Inc., which last year halted production operations at its headquarters in Bedford after multiple inspections turned up dozens of quality control issues. Ben Venue’s shutdown led to a critical shortage of injectable methotrexate, a drug used to treat leukemia in children and rheumatoid arthritis in adults. “It’s going to take a long time to figure this out,” said Dr. Michael Anderson, chief medical officer at University Hospitals Case Medical Center, in talking about how to address the shortage. “It’ll take a long time to find the right balance between the needs of companies and the needs of patients.”

RUGGERO FATICA PHOTOS

LEFT: Sudhir Shah (left) a Cleveland Clinic pharmacist, and Jay Patel, a pharmacy technician, work in the hospital’s clean lab. RIGHT: Pharmacy technician Michael Melville compounds sterile products. On the plus side, the FDA now requires drug manufacturers to provide six months’ advance notice of decisions to discontinue certain drugs, so that hospitals and the market can react accordingly. Such disclosures in the past were voluntary. “This has been a problem that’s been brewing for a while,” UH’s Dr. Anderson said. “It’s reassuring to me as a leader to see the FDA and Congress taking it seriously.” Locally, the Center for Health Affairs, an advocacy group for Northeast Ohio hospitals, has decided to step up its lobbying efforts at the state level after surveying its member hospitals to gauge the breadth of the problem. “The hospitals basically validated that they felt the shortage was somewhat severe,” said Lisa Anderson, a registered nurse and the Center for Health Affairs’ vice president of member services. “Years ago, it was sporadic. Now it’s more of a chronic problem.” The group is looking to ease restrictions on drug compounding — the method by which drugs are concocted from raw materials at hospitals’ in-house pharmacies. At present, the Ohio State Board of Pharmacy permits hospitals to compound drugs on a patient-by-patient basis, rather than stockpile compounded drugs in anticipation of need. State regulations also limit the transfer of compounded drugs between a health system’s member hospitals. The Center for Health Affairs also plans to lobby state lawmakers in support of legislation that would forbid pharmacies from selling drugs in short supply to wholesalers, who in turn resell them to hospitals at high markup.

A lobbying effort It wasn’t until this summer — thanks to a lobbying effort in Congress led by the Cleveland Clinic — that larger health systems by law could repackage certain drugs into smaller doses and share them among hospitals within their system. Previously, the Clinic only could repackage drugs and share them on its main campus; it was barred, for example, from sharing them with Hillcrest Hospital, just 10 miles east in Mayfield Heights. Still, the Clinic’s Mr. Knoer estimates the repackaging legislation will help extend the life of only about 10% of the drugs on short supply. The new provision doesn’t apply to controlled substances. It’s also unclear how the provision might affect hospitals loosely affiliated with one another, instead of those that are wholly owned.

GET DAILY NEWS ALERTS FROM CRAIN’S ! Register for free e-mail alerts and receive: ■ The Morning Roundup ■ Breaking news alerts

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The new normal? Hospital officials say it’s still too early to tell whether measures to curb the problem will have a lasting impact. Wiggle room, maybe, but a cure-all appears nowhere in sight. “It’s bad,” said Stacey Zorska, director of pharmacy at Southwest General Health Center in Middle-

burg Heights. “It’s a daily struggle, and we really can’t anticipate what the next crisis is going to be. I think our team has gotten very good at what to do no matter what the shortage is, but it’s a struggle.” Kevin Zupancic, director of pharmacy at Parma Community General Hospital, said he’s reminded of the shortage daily. He has had to buy a

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Join today and receive free access to all current ERC survey data. Volume 33, Number 34 Crain’s Cleveland Business (ISSN 0197-2375) is published weekly, except for combined issues on the third week of May and fourth week of May, the fourth week of June and first week of July, the third week of December and fourth week of December at 700 West St. Clair Ave., Suite 310, Cleveland, OH 44113-1230. Copyright © 2012 by Crain Communications Inc. Periodicals postage paid at Cleveland, Ohio, and at additional mailing offices. Price per copy: $2.00. POSTMASTER: Send address changes to Crain’s Cleveland Business, Circulation Department, 1155 Gratiot Avenue, Detroit, Michigan 48207-2912. 1-877824-9373. REPRINT INFORMATION: 800-290-5460 Ext. 136

second dry-erase board to keep track in his pharmacy of the mounting list of drugs on short supply. Local hospital officials acknowledge the drug shortages often force them to tweak patients’ treatment plans. They said patients haven’t been hurt, but the prospect of opting for backup drugs so regularly is a concern. ■

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REAL ESTATE CLASSIFIED Phone: (216) 522-1383 Fax: (216) 694-4264 Contact: Toni Coleman E-mail: tcoleman@crain.com OFFICE SPACE

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Copy Deadline: Wednesdays @ 2:00 p.m. All Ads Pre-Paid: Check or Credit Card PUBLIC NOTICE SUBJECT: REQUEST FOR PROPOSAL (RFP) re: Cell Tower Revenue: The City of Seven Hills, Ohio invites Proposals from Qualified persons or entities for the selection of a: Broker for the Buyout/Enhancement of Revenue Streams of Up to Three City Cell Tower leases Parties interested in obtaining a complete copy of this RFP may do so by accessing the City of Seven Hills Web Page at www.sevenhillsohio.org. City Information > Forms > Cell Towers beginning August 27, 2012, or by faxing their request to (216) 525-6276, attention Stewart Lovece PE, PS, CBO, Director of Public Service and Properties. Please include the following information in your request: name and address of firm; name, telephone and facsimile number of contact person; specify RFP Cell Tower Leases. Copies of the RFP may also be obtained by calling 216-525-6224 Trish, or in person at City Hall, 7325 Summitview Drive Seven Hills, Ohio 44131 at the Building Dept.

BUSINESS OPPORTUNITY Seeking to Acquire Businesses Local business group seeks businesses for sale in Northeast Ohio area with revenues between $100,000 and $5,000,000. Ready to pay between $500,000 and $2,000,000 cash. Present management invited to stay if they desire. All discussions will remain strictly confidential. Brokers welcome. Please contact us at 440-356-5997.

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THEINSIDER

THEWEEK AUGUST 27 - SEPTEMBER 2 The big story: TMW Systems Inc., a Beachwood-based provider of software for managing transportation fleets, agreed to be acquired by a California company in a $335 million transaction. Trimble Navigation Ltd. of Sunnyvale, Calif., which itself is a producer of wireless technology to manage field and mobile workers more efficiently, entered into a definitive agreement to buy privately held TMW. Trimble said the all-cash purchase will be financed through its existing credit facility. The transaction is expected to close in the fourth quarter. (See related story, Page One.)

Their chip has come in: Shearer’s Foods, the big snack food manufacturer based in Brewster in Stark County, agreed to be acquired by a private equity firm in Chicago. Wind Point Partners did not say what it will pay for Shearer’s, which claims to be the largest producer of private-label salty snacks in North America and the largest producer of kettle-cooked potato chips in the world. The transaction is expected to close in October. Shearer’s makes both branded and private-label snacks. It started with four employees in 1974; it has 1,850 now. Grab some Z’s:

Shiloh Industries Inc. of Valley City, a maker of steel blanks, complex stampings and modular assemblies for the automotive and heavy truck markets, named as its CEO an executive from Federal-Mogul Corp. Its board of directors appointed Ramzi Y. Hermiz as president and CEO, effective Sept. 4. Mr. Hermiz will succeed Theodore K. Zampetis, who previously announced his plan to retire on Dec. 31. Mr. Hermiz has served since 2009 as senior vice president of vehicle safety and protection at Southfield, Mich.-based Federal-Mogul.

PVF gets a lift: PVF Capital Corp., the parent of Park View Federal Savings Bank, said a regulatory order issued against the bank in October 2009 was lifted. PVF met the targets established by the order of its regulator. Those targets involve tier one capital, risk-based capital and classified and criticized asset ratios, as well as achieving profitability, PVF said. The regulatory order was issued Oct. 19, 2009, and required the bank to raise its core capital level and its total risk-based capital level. PVF exceeded the required capital levels by raising $30 million in March 2010. That’s how they Rolec: Diversified manufacturer Eaton Corp. agreed to buy Rolec Comercial e Industrial S.A. of Santiago, Chile. Eaton did not say what it will pay for Rolec, a maker of integrated power assemblies and lowvoltage and medium-voltage switchgear, and a provider of engineering services, particularly to the mining market in Chile and Peru. Dam right: Advanced Hydro Solutions LLC of Beachwood sold its six-megawatt Mahoning Creek hydroelectric project in western Pennsylvania to Enduring Hydro LLC of Chevy Chase, Md., which plans to add a $16 million hydroelectric generation system to the existing dam. Advanced Hydro said Mahoning Creek received its Federal Energy Regulatory Commission license in March 2011 and is completing final permitting before construction. See you next year: The Ohio Optometric Association’s annual EastWest Eye Conference will move to the under-construction Cleveland Convention Center in 2013, 2014 and 2015. The optometrists’ meeting will attract 1,500 attendees and 100 exhibitors, who are expected to book 1,125 room nights in downtown hotels, according to MMPI Inc., the developer and manager of the new trade show complex.

REPORTERS’ NOTEBOOK BEHIND THE NEWS WITH CRAIN’S WRITERS

NCAA decides to hold its festivities elsewhere

Free art, but with a few strings attached

■ The Greater Cleveland Sports Commis■ Local nonprofits looking to spruce up their sion has lost out on the 2013 Division II Winter office space could land a piece of modern National Championships Festival, which art at no charge from the collection of the was scheduled for Spire Institute in Geneva late Nancy and Frank Porter, the longtime next March. proprietors of Central Cadillac Jeff Orloff, Spire’s chief operin downtown Cleveland. ating officer, said last week that The Cleveland Foundation the NCAA opted to move the obtained the Porters’ large event — which features champimodern art collection as part of onships in men’s and women’s a bequest of their estate in 2003 swimming, men’s and women’s that totaled between $60 million indoor track, and wrestling — to and $70 million, according to Birmingham, Ala., because of Kathy Hallissey, the foundation’s challenges with the hotel block. director of community-responDivision II is the only NCAA sive grantmaking. group that holds more than one The foundation until Sept. 28 event at the same site at the same is fielding applications from FILE PHOTO/MARC GOLUB time; the goal of the festivals is nonprofits interested in obtaining to house all athletes in one area, The indoor track facility a piece of art for display in their preferably a city center, to cre- at Spire Institute offices or for educational use. To ate a unique atmosphere. When challenges arose in downtown Cleveland, where the NCAA wanted all athletes to stay, the governing body opted to change the venue, Mr. Orloff said. The NCAA, which originally awarded the 2013 winter event to Cleveland in April, has held its two previous festivals — last fall and this past spring — in Louisville, Ky. Mr. Orloff said Spire and the sports commission continue to discuss bringing future events to the sprawling athletic facility, though he refused to discuss those possible events because deals are not finalized. — Joel Hammond

be eligible, the nonprofits must support residents of Cuyahoga, Lake or Geauga counties. Some of the art available includes pieces by Leon Polk, Evelyn Svec Ward, William Pettet and Enrique Gran. Qualifying nonprofits must acknowledge they’ll be able to pay for transportation, storage and insurance for the pieces of art they’re awarded. In addition, applicants are asked to describe how they’d use each piece of art and whether they had any sort of relationship with the Porter family. For a list of the available pieces and information about applying, visit http://cleveland

WHAT’S NEW

BEST OF THE BLOGS Excerpts from recent blog entries on CrainsCleveland.com.

Private equity firms pick up the buying pace

THE COMPANY: Buyers Products, Cleveland THE PRODUCT: SnowDogg municipal plows with a trip edge You might not be ready to think about snow, but Buyers Products is — and so, it hopes, are the company’s customers. Buyers Products, which makes products for the mobile equipment market, has introduced SnowDogg municipal plows with a trip edge to keep snow in front of the plow. The trip edge plow “is a new addition to the existing line of full-trip reversible plows, available in standard rolled carbon steel or optional stainless moldboard for easier snow removal as well as extended plow life,” the company says. Continuous welds “provide for a stronger plow while laser-cut components provide a smooth finish and precise fit,” according to Buyers Products. Trip-edge plows are available in three standard sizes: 42 inches by 10, 11 and 12 feet. All SnowDogg municipal plows are available with a variety of hitch configurations and a choice of 3- or 4-inch cylinder. For information, visit www.BuyersProducts .com. Send information about new products to managing editor Scott Suttell at ssuttell@ crain.com.

■ Private equity buyouts are back, The Wall Street Journal reported, but they’re “smaller and less flashy” than in past booms. “Emboldened by a flurry of activity, private-equity executives say the buyout market is crawling back from the doldrums of the financial crisis, when the debt that fueled such deals disappeared and potential sellers were put off by low valuations,” The Journal said. The paper said private equity firms “have snapped up $64.7 billion worth of U.S. companies since January, the highest amount year-to-date since 2007,” according to data provider Dealogic. Among the executives quoted in the piece is Stewart Kohl, co-chief executive of Cleveland- and New York-based Riverside Co. He told The Journal that he has found lenders eager to invest in his firm’s 18 buyouts this year, all of which targeted companies with annual sales between $10 million and $250 million. “Some of the investment bankers that Riverside works with have been so busy this summer that one institution asked Mr. Kohl to delay the sale of one of its companies because its staff was overloaded,” the newspaper reported.

Kids won’t leave? You’re not alone ■ Parents of a certain age should relate to a recent story from HousingWire, which is based on research from the Federal Reserve Bank of Cleveland. “The rate at which Americans formed households fell sharply during the Great

foundation.org/Grantmaking/PorterArt Gallery.html. — Timothy Magaw

Marketing a new marketing group ■ Even though industrial marketing doesn’t have a television show such as “Mad Men” to glamorize it, Craig Coffey thinks creating a Northeast Ohio chapter of the Business Marketing Association will help make business-to-business marketing more attractive to young people either in or considering marketing careers. “I want (the BMA chapter) to be like the cool guy or the cool chick that everyone wants to know,” said Mr. Coffey, marketing communications coordinator for Parker Hannifin Corp. and part of the local BMA steering committee. “I want it to be cutting edge. I want it to be reflective of the people we want to attract.” While the region has other marketing associations, Mr. Coffey said, it lacks an association for those dealing primarily with the B-to-B market rather than the more visible consumer products market . “Companies can use the BMA to help up their game in B2B marketing,” said Eduardo Conrado, chief marketing officer at Motorola Solutions and national chairman of BMA, who promotes its “tribal learning” approach. The local BMA chapter will hold quarterly meetings, which will serve as fundraisers and new member attraction events, as well as periodic committee meetings, Mr. Coffey said. Its first event will feature business author Paul Gillin on Sept. 13. — Ginger Christ ,

Recession, with the greatest shortfall among young adults squeezed financially by the weak economy,” HousingWire reported, citing the work of Tim Dunne at the Cleveland Fed. Tighter lending standards “are further complicating the housing sector’s ability to recover by reducing access to mortgage credit,” according to Mr. Dunne’s research. “This may have increased the incentive of individuals to delay household formation in order to save for a down payment, build credit histories, or repair tarnished credit scores,” Mr. Dunne wrote. The analysis shows the biggest dropoff in household formation occurred among adults aged 18 to 34. “An additional 2 million younger adults now live in a household headed by their parents than did before the recession,” HousingWire reported. “Although these younger adults make up a relatively small portion of household heads, they account for almost three-quarters of the overall shortfall in household formation.”

By one measure, small firms are doing better ■ Small business bankruptcies continued their decline in the second quarter of 2012, shrinking by nearly 17% from the previous quarter, according to the new Small Business Bankruptcy Report from Equifax. It’s the fourth straight quarterly decline in the number of total U.S. small business bankruptcies and the lowest for the second quarter since 2007. The number of business bankruptcies peaked in the second quarter of 2009, Equifax reports. “Small business owners are still steadfastly deleveraging, bringing their debts, assets and cash flows into better alignment; couple that with promising signals in small business lending, and business owners are better positioned to stay afloat,” Equifax said.

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