5 Steps to Capture the Boom in the Energy Revolution

Energyintensive Industries White Paper

By The Montrose Group, LLC

February 2016

1 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

About the Montrose Group, LLC Multi-Disciplinary Professional Consulting Team with $2 B Worth of Experience The Montrose Group, LLC brings a multi-disciplinary team to business consulting with economic development planning, lobbying, marketing and communications and public finance and incentive services. The veteran team of David J. Robinson, Principal, Nate Green, Director of the Economic Development, Jon Dudley, Director of Tech Commercialization, Michelle Bretscher, Director of Marketing and Joe Stevens, Director of Government Relations of The Montrose Group, LLC negotiated and served clients in over $2 B worth of transactions. The Montrose Group, LLC Are Business Development Experts Economic Development Planning. The Montrose Group, LLC serves public and private sector economic development, state and local governments, universities, hospitals and private sector companies by developing economic development plans focused on high wage job growth in energy, technology, advanced services and manufacturing and global firms providing industry cluster, labor shed and economic market analysis while gaining critical community input and developing concrete action steps tied to potential funding sources. Lobbying. The Montrose Group, LLC serves public and private sector organizations and trade association before the local, state and federal government by advocating on policy, tax and spending issues, government procurement and business development, regulatory relief and project funding priorities on topic such as economic development, education, energy, environmental, gaming, health care, higher education, insurance, local government, manufacturing, pharma, solid waste, technology, telecommunication, and utilities. Marketing and Communications. The Montrose Group, LLC serves public and private sector organizations, trade associations and economic development organizations by creating and implementing media relations, social media, newsletters, blogs, web site development, major daily newspaper editorial board and paid media campaigns all tied to economic development, public policy and business development client needs for promoting retention and attraction of domestic and global industries and achievement of public policy aims. Public Finance and Incentives. The Montrose Group, LLC serves public and private sector organizations by negotiating economic development incentives, project finance capital, capital access including traditional financing, venture capital and EB-5 funding, economic development deals through credit and economic analysis, evaluation of deal viability and financing, Tax Increment Financing (TIF) structuring and analysis and infrastructure financing for water, sewer, power, broadband, and workforce through government programs.

2 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

On a quarterly basis, the Montrose Group hopes to develop White Papers on targeted industry clusters that produce high-wage jobs. We’ll outline what economic development and public policy strategies can be implemented at the regional and state level to retain and attract these companies. This White Paper takes a look at Energy-Intensive industries, and it will answer three, critical questions. Why focus on energy-intensive firms? The first White Paper of 2016 focuses on energyintensive industries. Why? The answer is easy. Record-low energy prices driven by domestic production of renewable and non-renewable sources of energy create substantial opportunities for the retention and recruitment of companies that will tolerate other higher costs of production, like wages, a region may have if they can secure lower energy prices. In essence, for certain firms, energy costs are so high that lower energy prices are the most important factor impacting their decision as to where to locate a corporate facility. Who are these energy-intensive industries? Research indicates energy-intensive firms that produce high-wage jobs are for the most part manufacturing companies. That does not mean other industries do not consume high-rates of energy, but the question becomes: do these industries provide the high-wage jobs that fuel regional economic prosperity? Energy-intensive industries include:  Paper manufacturing, including paper and paperboard mills  Chemical manufacturing including basic chemicals, petrochemicals, alkalis and chlorine  Primary metals including iron, steel, ferroalloy, aluminum production and processing  Cement and lime production and processing  Food processing. What can be done to retain and attract energy-intensive firms? As with all economic development strategy, energy-intensive firms are retained and attracted through a public policy and economic development approach that provides them not only with low-cost energy, but also offers land use tools, site infrastructure funding, tax policy, and workforce policy. All of this is driven to build a high-quality of life for a region and make it attractive to firms interested in connecting with a region’s low-cost industry. Before diving into the details of the world of energy-intensive industries, let’s begin with a general discussion of economic development strategy and how that applies to the energyintensive world. Next, the White Paper will outline how America is living in the Age of Energy and what communities can do to capture the economic benefits of the times. The White Paper next outlines specific public policy steps regions and states are taking to recruit energy-intensive industries. Finally, the White Paper provides an industry cluster analysis for several energy3 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

intensive industries to provide a picture for the economic definition and prospects for targeted energy-intensive industries. General Approach to Economic Development: Focus on the Five Drivers Economic development planning strategies need to focus on high-wage job retention and creation. As the U.S. Department of Labor estimates it only takes 170 workers to manufacture today what it took 1,000 workers in 1950, economic development strategies also need to focus not just on manufacturing or one high-wage industry but develop a diversification strategy as well. The U.S. Department of Commerce, working with Harvard Professor Michael Porter, identified 51 industry clusters that dominate America’s regional economies. North Dakota, Texas and several other states are leading an economic recovery. Whether an analysis is based upon the Porter industry cluster analysis or comparing which regions and states are growing based upon which industries, five drivers exist for regional economies that promote high-wage job retention and expansion and capital investment.  Energy is a growth industry. According to the U.S. Energy Department, Energy Information Agency, electricity demands will grow 28 percent from 2011 to 2040. The exploration, production and distribution of energy to meet this demand provide highwage jobs. Economic development studies indicate, midstream, and downstream energy and energy-related chemical companies plan to invest $346 million in the U.S. from 2012-2025. Energy booming North Dakota grew faster than China and more than double Texas—the state that finished second in economic growth in 2014.  Technology companies are big business. From 1996 to 2007 economic development studies indicate, university licensing agreements based on product sales contributed $47 billion to $187 billion to the U.S. GDP. Research and development in total generates $1.238 trillion for the U.S. economy. The Brookings Institution indicates science, technology, engineering and math (STEM) jobs dominate the tech industry and pay 26 percent higher wages.  Globalism represents access to growing markets. According to the U.S. Department of Commerce, 70 percent of the world’s customers are outside of the United States and workers for firms that export or are owned by global parents pay workers higher than average wages.  Manufacturing is still a high-wage American job center. Again, according to the Brookings Institution, manufacturing workers from 2008-2010 averaged $943.06 a week, 19.9 percent higher than the non-manufacturing average of $786.40. Due in part to enhanced domestic energy production gains and rising costs in China, advanced manufacturing has bright prospects in the United States in the coming years.  Service sector jobs dominates the American economy and regions have an opportunity to gain high-wage, professional service jobs. Regions with a large pool of college and university educated workers are well positioned to recruit high-wage financial services, insurance, health care and professional service firms that dominate the advanced services marketplace. Successful regions and states build economies focused on the booming industry sectors of energy, technology, globalism, advanced manufacturing and advanced services. A wide-range of tactics exist to implement strategies related to the five drivers’ economic development strategies. 4 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

America is Still Enjoying the Age of Energy Energy-intensive industries are and should be the economic focus of regions and states all across the United States and policy makers need to take heed of what it takes to retain and attract these all important companies. The larger focus on this white paper will center first on why the energyintensive sector is worthy of interest, how regions can retain and attract energy-intensive sector companies, how state and local tax policy, venture capital impacts the retention and attraction of energy-intensive companies and, finally, conclude with a deep-dive into several of the energyintensive industries profile. Natural gas posted a new 52-week low this week of $2.47 per million BTUs, and oil remains below $50 dollars a barrel. Low energy costs drive economic growth. Energy is consistently a top 10 factor impacting corporate site location decisions. Regions, states and companies looking to capture the benefit of lower energy costs should take five steps to create an economic boom. The decline in oil prices created questions about the benefits of energy to the American economy. Just as energy could do no wrong when oil prices and domestic production were high so of course runs the public relations cycle the other way. Economies, while impacted by public relations, run on energy. Just as the tech boom did not end with the year 2000 tech stock bust, the current oil price decline does not devalue the role energy plays in the nation and regional economies. 6 reasons confirm America is living in the age of energy. 1. The energy industry creates high-wage STEM jobs. Science, Technology, Engineering and Math (STEM) occupations are all over the energy industry sector and they command higher wages, earning 26 percent more than their non-STEM counterparts. These STEM jobs require a larger investment in higher education as these occupations demand higher skills. 2. The energy industry is one of the five growing industry clusters. Of the 51 economic development clusters, the energy industry, along with high-tech, global, advanced service and advanced manufacturing firms, is one of the five drivers of economic development as these industries are leading the economic recovery. North Dakota and Texas are just two examples of states leading economically—both driven by an energy economy. 3. Low-cost, reliable energy fuels the rest of the economy. Every industry runs on energy and the availability of low-cost, reliable energy is a critical piece of a community’s infrastructure needed to retain and attract high-wage jobs. Low-cost, reliable energy is provided by either monopoly based regulation or market competition as the way we regulate energy delivery services is changing to a competitive marketplace. However, it is important to note that energy needs to be low-cost and reliable. 4. America has an abundance of renewable and non-renewable sources of energy. Whether it is the shale oil and natural gas revolution or wind or solar power, regions all over the U.S. are enjoying a renaissance in domestic energy production that is providing energy independence and renewed economic growth. Too often the renewable vs. non-renewable energy topic becomes a debate driven by ideology. The fact is if a region has an opportunity to use natural resources for domestic energy production purposes they should do it—if your region is windy, build wind mills for energy production. 5. Energy demand growing globally. While American energy demand is expected to remain relatively flat due to efficiency and productivity increases, the global demand for American energy sources is high. Developing economies expansion into the manufacturing sector as 5 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

well as Europe dependence on Russian natural gas will drive these two large markets to American energy sources due to the economic and political stability of the United States. 6. The energy industry supports urban and rural markets. The energy industry is leading an economic recovering in communities as diverse as Houston and rural North Dakota and Oregon. The discovery and use of domestic energy sources is the key to economic success for these regions. Of course, both urban and rural energy friendly markets need to take steps to diversify their economy, make strategic community investments and build infrastructure based upon the influx of revenue from new energy discoveries. America will enjoy the benefits of domestic energy production for decades to come. It has the potential to produce an economic renaissance on par with the Information Age boom of the 1990s. 5 Steps to Capture the Boom in the Energy Revolution If energy intensive industries are worthy of attention, the next step is to determine who to attract the high-wage jobs in these industries. The first step is to identify regional market strengths and connect them with energy-intensive industries. Economic strengths are understood through industry cluster or market analysis. Regions with access to domestic energy should focus on energy-intensive industries. 30 percent of the U.S.’s energy consumption is tied to the American industrial sector. As the U.S. Energy Information Agency graph below illustrates, energy-intensive industry sectors such as chemical, aluminum, glass, food products, cement and lime, iron, steel, paper and pulp, glass and refining are the prime users of American energy.

As an example, the American chemical industry is a target for an energy-intensive company attraction campaign as a chemical factory’s energy consumption can constitute 80 percent of the company’s costs. Look at the Louisiana Chemical Corridor along the Mississippi River from New Orleans to Baton Rouge. This $50 billion industry cluster is one of 24 regions designated 6 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

for support from the federal government’s $1 billion Investing in Manufacturing Communities Partnership. Second, the energy that is being produced in a region must be captured to serve that region. Efforts to retain and attract energy-intensive companies first must solve the infrastructure puzzle that will connect their community to the oil, natural gas and even electricity flowing from new local sources. Traditional infrastructure tools such tax increment financing, tax exempt bond financing, local, state and federal grants all come into play to fund the “last mile connection” from the massive national natural gas pipeline network shown below. Interstate Natural Gas Pipeline Map

Again, Louisiana is a national model as they not only have turned the Haynesville Shale into a massive opportunity for the local shale play but are the preferred location for chemical processing for much of the rest of the nation’s oil and natural gas flowing from other shale developments. Third, regions looking to attract energy-intensive companies need to develop economic development incentives to retain and attract these companies but a particular focus needs to center on a workforce certified to by ready from day one to work in the industry they are recruiting. Regions should focus on creating a workforce pipeline to develop a pool of workers trained and ready to work in the facilities for the industry in which they are required. Again, 7 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

Louisiana like much of the south benefits from lower labor costs compared to the Industrial Midwest, East or West Coasts of the U.S. but the Louisiana Chemical Corridor is working to provide training to lower-skill and lower-income workers through projects like the Louisiana Workforce Commission’s Incumbent Worker Training Program to better align K-12 and higher education with workforce needs. Fourth, regions need to develop sites to fit the unique needs of the targeted energy-intensive companies. Regions looking to capture energy-intensive sites need to develop large scale sites with power, road, direct rail, and, in many cases, water access. The infrastructure needs to be in place to ensure the site is shovel-ready. Again, traditional infrastructure tools such as tax increment financing, utility partnerships, and local, state and federal funding will be needed to develop these sites. The Louisiana Economic Development Certified Site program creates development-ready industrial sites that have completed a rigorous review process addressing zoning restrictions, title work, environmental studies, soil analysis and surveys by Louisiana Department of Economic Development and an independent, third-party engineering firm. Finally, the region’s energy-intensive industry strength needs to be connected with a marketing campaign. First, a deep dive needs to occur within the targeted energy-intensive industries to create a target list of companies. This industry and the list of companies should be the targeted for a marketing strategy built on regional brand awareness tied to this industry as well as social media, earned media, paid media, trade association and conference participation and, ultimately through direct recruitment. Again, using the chemical industry as an example, there are over 90 industries within this one industry and research needs to determine which of these industries is the best partner based upon the industry market conditions and connections to the supply chain within a region. The Louisiana Chemical Corridor is one of the nation’s most recognized chemical industry clusters which is the result of a successful global marketing campaign. Low energy costs offer a tremendous economic opportunity but capturing that market involves a complex strategy executed to perfection.

ID Regional Strengths Tied to Energy Low Cost, Reliable Power as an Economic Development Driver is the First Step to ID Regional Energy Strength The first step tied to identifying a regional strengths connected to the energy industry is developing low cost and reliable energy sources. Americans use 19 percent of the world’s energy, and this energy usage is driven by the industrial nature of the American economy.viii From an economic development standpoint, not all states have equal levels of consumption and costs for energy. Large, industrialized states of Texas, California, Ohio, New York, Pennsylvania, Illinois, North Carolina, Michigan, and Indiana top the U.S. states in energy consumption. Cold weather northern states use more natural gas to heat their homes and 8 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

businesses, while southern states consume substantial amounts of electricity to cool these same types of facilities in the warm summers. Beyond levels of consumption, the cost of energy is a top factor impacting corporate site location decisions of companies considering whether to locate jobs. Energy availability and costs rank in the top 10 of corporate site location consultant factors. The cost of energy varies among the different states and it varies with sources of energy as well. Idaho, Wyoming, Washington, Utah, and Kentucky offer the best electric rates, and New Hampshire, New York, Alaska, Connecticut and Hawaii offer the highest.ix The cost and reliability of region’s transportation fuel impact on transportation and logistics firms as American consumes 27 percent of its energy on transportation.x Oil constitute 93 percent of America’s transportation costs and small business owners found high fuel costs to be an impediment to economic growth.xi South Carolina, Arkansas, Oklahoma, Wyoming, Alabama, and Tennessee offer the lowest gasoline prices, and much like other sources of energy, the East and West Coast offer the highest gasoline prices.xii Energy-intensive industry sectors are strong candidates for retention and attraction campaigns for regions and states with low energy costs. Companies in the chemical, aluminum, cement, iron, steel, paper and pulp, glass and refining provide high-wage manufacturing jobs but cannot operate in a region with high-energy costs. Chemical factories, as an example, have 80 percent of their costs tied to energy and energy-intensive industries constitute just over two-thirds of all global energy use.xiii Nature or policymakers both impact the energy cost of a region and state. Most regions in America have access to an affordable source of energy based upon available natural resources such as water, geothermal, shale, oil, natural gas, wind, solar, biomass, oil, or natural gas. The Tennessee Valley Authority (TVA) is an example of a multi-state region that capitalized on federal resources to capture the power of water to provide low cost energy. Today, the TVA serves 155 government cooperative power distributors and directly serves 57 large industrial or government installations.xiv The TVA is an economic development giant that plays a major role in retaining and attracting high-energy companies with power costs 16 percent below the national average stimulating $5.9 billion in business investments. Shale oil and renewable sources have a chance to play the same role as the TVA for the regions having access to these power sources. Whether a region has direct access to a large pool of energy from their natural resources or not, state policymakers can decide whether their regions have low or high costs for power. Traditionally, the costs of power are driven by state policymaker decision whether to adopt a regulatory or deregulatory model for electric and natural gas service. Either approach can produce low cost power. Utility regulatory models that treat electric and natural gas companies as a monopoly permit these companies to offer service without competition but at an agreed upon price. Even these states that regulate utilities as a natural monopoly offer special economic development incentives for energy-intensive companies. These companies gain reduced rates for electric and natural gas service in exchange for the promise of job creation and capital investment. The larger the job creation and capital investment-- the larger the energy price reduction for energy-intensive companies. Nearly half the states have deregulated power utility 9 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

services and leave it to the market to set retail rates for electric and natural gas services. A great debate is raging between policymakers about whether the regulated or deregulated approach creates lower energy costs. Either approach can work but policymakers have to make challenging choices when it comes to driving down energy costs.

Energy as Critical Infrastructure Enabling Economic Development The provision of reliable, low cost power to a site primed for economic development is a critical piece of the job creation puzzle. Ensuring the provision of this power service requires different approaches depending upon if the region or state operates in a regulated or deregulated electric and natural gas marketplace. The states are about evenly split between regulated and deregulated utility services. Traditionally, utility companies were charged by government with the responsibility to generate, transmit and distribute power and were provided a guarantee rate of return through a method of monopoly regulation established during the New Deal Era. In regulated, monopoly utility markets, economic development is the job of the utility who serves the job site in question and regulators and utilities created programs to incentivize economic growth in these markets. Duke Energy’s Indiana program illustrates such as model. Duke is Indiana’s largest electric utility and the state operates under a traditional monopoly regulatory model and they also promote sites for development as well as offer lower rates for high energy consumption, job producing projects. The Duke Energy Indiana Site Readiness Program helps communities identify, assess, improve, and increase awareness of industrial sites by assisting local economic development groups to screen and assess specific sites that could be prime for industrial development. The goal is to develop 3-5 “shovel ready” sites annually by providing a site assessment that permits the site to be marketed to industrial companies looking for corporate site locations. Duke Energy focuses on industrial sites larger than 60 acres for a single or multi-tenant use as well as for significant urban redevelopment sites.xv Under a deregulated power market, utility companies are forced to divide up their companies into separate entities operating power generation, transmission and distribution with generation companies operating as traditional utilities or merchant operations.xvi Retail service of electricity or natural gas is then provided by the traditional utility as well as outside competitors that battle for customers. It is the battle of the marketplace that creates the competitive advantage in deregulated states and it is hoped these companies will work on corporate site location projects to develop high wage jobs. Ohio, Pennsylvania, New Jersey, Illinois, Michigan, New York, Connecticut, Rhode Island, Maine, New Hampshire, California, Arizona, Nevada, Oregon, Maryland, Delaware, and Texas are considered “deregulated” for electric power purposes while Virginia and Montana recently enacted laws to “reregulate" after policy makers grew concerned about the price impact of deregulation.xvii The challenge for the deregulated utility marketplace related to economic development infrastructure is that without the guarantee of a customer that 10 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

monopoly regulation provides utilities will not simply build out the infrastructure required to prepare a site for job creation. Local communities are forced to utilize a range of economic development programs such as Tax Increment Financing and other programs needed to build out the energy infrastructure to sites looking for development. Some states offer the benefits of both electric deregulation and monopoly regulation. Ohio is a deregulated utility market but still offers customers a chance to participate in a traditional electric rate rider program known as a “reasonable arrangements.”xviii Electric utilities and businesses customers may gain a reduced electric rate for non-retail projects that create 25 full-time jobs over three years with an annual average wage that is 150 percent of the federal minimum wage.xix Companies must also be awarded local, state, or federal tax incentives.xx An economic arrangement may also be granted to retain utility customers likely to cease or reduce operations or relocate them out of state but the customer have an average billing load of at least 250 kilowatts and that the cost of electricity be identified as a major factor in the decision to cease, reduce, or relocate operations.xxi Energy-intensive Project Financing Options Energy-intensive industries are constantly in search of financing to address their energy needs and most states, including Ohio, offer a range of government supported financing options for these project. Each year states receive an allocation from the federal government of what is known as volume cap. Volume Cap is the amount of tax-exempt financing available for certain types of private companies or developers in a calendar year. Federal law determines project eligibility. A project must obtain an award of Volume Cap from a state before it can have tax-exempt bonds issued. The true value of volume cap is that it allows eligible “private activities” such as manufacturing projects to receive tax exempt rates, which carry a lower interest rate than taxable rates. Entities that can issue tax-exempt private activity bonds include counties, cities, port authorities, housing authorities, quasi state agencies, and community improvement corporations. The state of Ohio, through the Development Services Agency (DSA) allocates $100 million annually to qualified small issues. These qualified small issues are commonly known as industrial development bonds. Projects must meet strict regulations to be a qualified small issue as defined in Internal Revenue Code Section 144. Proceeds of the bonds must be used to acquire, construct, or improve land or depreciable property, or to redeem bonds previously issued for such purposes for a manufacturing facility. A manufacturing facility is defined as any facility used in the manufacturing or production of tangible personal property. Processing must result in the change of tangible personal property or in ancillary facilities used in the manufacturing process. Tests for what is and is not manufacturing generally follows these guidelines: something built, installed, or established to facilitate manufacturing; or the implements of fabrication; or a combination of both. Additionally, these characteristics apply: Facilities must be of a character subject to allowance for depreciation; the property produced must be tangible personal property; there must be a “change” or “transformation” of the original materials and such “transformation” 11 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

should be substantial; manual or machine labor must be expended in the process; and as a result of the process, a new and different article must be created that has a distinctive name, character, or use. The limit for the capital expenditures that can be financed using a tax-exempt qualified small issue is $10 million. Additionally, a beneficiary of the issue (the company) cannot have more than $40 million in outstanding issues including the current issue. The program in Ohio has not been incredibly active in the past five years, but examples of Qualified Small Issues including the issuer are:  Great Lakes Brewing, Cuyahoga County;  General Data Inc., Treasurer, State of Ohio;  Seepex, Inc, Treasurer, State of Ohio;  FWT, LLC, Regional Port Authority of Northwest Ohio;  Techmetals, Inc, Montgomery County;  WSMC Properties, LLC, Butler County; and  2875 Needmore Rd., LLC, Montgomery County. The Ohio Development Services Agency also offers funding for energy-intensive companies through the Ohio Energy Loan Fund. The Fund provides financing for energy efficiency and advanced energy projects to Ohio businesses, manufacturers, non-profits, schools, colleges and universities, and public entities for energy improvements that reduce energy usage and associated costs, reduce fossil fuel emissions, and/or create or retain jobs. Eligible activities include energy retrofits, energy distribution technologies and renewable energy technologies. The Energy Loan Fund guidelines and application process in the past have required the following:  All applicants must submit a Letter of Intent.  Projects must have a minimum 15 percent energy reduction, but with the new competitive nature of the program, higher energy savings will be most desirable.  Rates and terms: typically 3 percent for 15 years.  Loan amounts range between a minimum of $250,000 to a maximum of $1,250,000.  All applicants must attend the Bidder’s Conference.  A second round of funding is likely to occur later this year.  Eligible borrowers can be corporations, limited liability companies, limited partnerships, nonprofits, school districts, colleges and universities, local units of government or any combination thereof. All applicants must be registered with the Ohio Secretary of State either as an Ohio entity or as a foreign (non-Ohio) entity qualified to do business in the state of Ohio.  Each applicant must provide a documented cost share for a proposed project. Cost share for for-profit entities must be a minimum of 20 percent of total project costs. Cost share for nonprofit and local units of government must be a minimum of 10 percent of total project costs.

12 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

A list of past recipients includes: Recipient

Location

Loan Amount

1544 Central Parkway LLC

Brown County

$269,545

Greenon Local Schools

Clark County

$526,182

Waverly City Schools

Pike County

$1,574,803

Marconi Energy Partners

Franklin County

$930,400

North Central State College

Richland County

$1,000,000

Heidelberg College

Seneca County

$493,962

Drury Cleveland

Cuyahoga County

$3,000,000

Kraton Polymers

Washington County

$7,781,699

All applicants must submit a Letter of Intent to the Ohio Development Services Agency by the due date of the RFP. Once an applicant has submitted a Letter of Intent, applicants will receive communication from ODSA to submit a formal application.

Incentives for Energy Intensive Companies Energy Company Tax Policy Impacts Attraction of Energy-intensive Industries The most important economic development incentive impacting energy intensive companies is state tax policy not the tax credits that catch the most attention. States and regions looking to attract energy-intensive industries need a multi-pronged approach to tax policy. This tax policy needs to accomplish three complex tasks: 1. promote energy industry investments in drilling, distribution and processing facilities needed to produce low-cost energy resources 2. provide for needed infrastructure investments in primarily rural markets that typically are the site of most energy developments 3. retention and recruitment of heavy manufacturers dependent on the cost of energy more so than other industries Most debate among policy makers related to energy tax policy centers on how to tax the energy companies themselves. This focus on how energy companies are taxed impacts the attraction of high-wage energy-intensive company jobs because without the initial drilling, transmission and processing investment by the oil industry—there is no oil or natural gas or wind or solar power to use.

13 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

For the oil and natural gas industry, the rate of the severance tax is the “hot” political topic. Ohio is among many states considering an expansion of their oil and gas severance taxes. Gov. John Kasich is pushing for a severance tax expansion. An Ohio General Assembly working group suggested a market-based “trigger” or slow phase-in of a tax increase depending on economic trends with an eye toward maintaining growth in the industry and also recommends uses of any potential revenue gains, such as assisting local governments with infrastructure needs and lowering income taxes. However, the Ohio General Assembly working group failed to recommend a specific severance tax rate increase and Gov. Kasich is not satisfied with the result. Focusing on only the severance tax is a common mistake for states looking for energy company investments. Energy companies are also impacted by the overall state business tax system. As an example, while Texas has a relatively high severance tax that is the state’s second largest revenue source, Texas also has no income tax at the local or state level and the Lone Star State does not apply the severance tax until the well is a money maker. Eight State Comparison of Severance Tax Rates, Bases and Incentives State

Severance Tax Rates & Bases

Incentives

Arkansas

5% of the market value of the oil at the point of severance and the owner of a well that produces fewer than ten barrels of oil per day pays a reduced 4% rate on oil from that well with separate levies totaling 2.05¢ per barrel of oil are levied for the benefit of the Arkansas Museum of Natural Resources

Deduct costs incurred dehydrating, treating, compressing, and delivering natural gas, an oil or gas well that disposes of salt brine produced in the production of the oil or gas by means of an approved underground saltwater disposal system is allowed a severance tax credit equal to the operator’s costs in maintaining the underground disposal system, up to $370,000

Colorado

Basis of gross income attributable to the sale of oil and gas depending upon the producer’s annual gross income and ranges from 2% (annual gross income under $25,000) to 5% (annual gross income of $300,000 and over) plus an additional charge on the market value of oil and gas produced at the wellhead to fund enforcement actions not to exceed 1.7 mills

Authorizes a credit against the severance tax equal to 87.5% of ad valorem tax, i.e., property tax, assessed or paid by leasehold and royalty interests

Louisiana

Levies a severance tax on oil and condensate equals 12.5% of “gross value” which is the greater of (1) the gross receipts received from the first purchaser, less charges for trucking, barging, and pipeline fees, and (2) the posted field price and a tax on natural gas solids and liquids are levied at a rate of 15.8¢ per Mcf of gas, which results from applying a gas price index adjustment to a base minimum rate of 7¢.56

Production of oil or natural gas from a horizontal well is exempt from the tax for the earlier of the first two years of the well’s production or the date that “payout” of the well is achieved, i.e., the date a sufficient quantity of oil or natural gas, based on market prices, is obtained to recover the producer’s costs of drilling the well and is reduced and eventually eliminated if the price of oil or natural gas increases to certain thresholds

14 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

State

Severance Tax Rates & Bases

Incentives

North Dakota

Levies a gross production tax on oil which equals 5% of the gross value of the oil at the wellhead and an oil extraction tax which is currently 6.5% of the gross value of oil at the wellhead. Beginning in 2016, the oil extraction tax rate becomes 5% of the gross value of oil, unless the price of oil exceeds $90 per barrel plus an inflation factor, in which case the rate will increase to 6%

If the price of oil dips below a trigger price, currently $52.59 per barrel, a 4% reduced rate applies, and, until July 1, 2015, if the oil price exceeded the trigger price, the first 75,000 barrels or first $4.5 million of gross value of oil from a horizontal well was subject to a reduced 2% rate

Oklahoma

Levies a gross production tax on oil and gas for wells producing on or after July 1, 2015 of 2% on the gross value of severed oil and gas for the first three years of a well’s production, with a 7% rate applying thereafter, and, if the sale price of the oil or gas does not reflect the prevailing price for similar gas or oil, the Oklahoma Tax Commission may require the producer to pay the tax on the basis of the prevailing price of oil or gas from the same field and if the sale is between related entities and not done at arm’s length, then gross value equals the prevailing price of oil and gas produced in the county, as calculated by the Commission. A petroleum excise tax equal to 0.095% of the gross value of severed natural gas and oil is charged with rate decrease of 0.085% scheduled for July 1, 2016

Oklahoma allows gas producers to deduct their marketing costs associated with moving the gas from a well to market from the gross production tax base, and, for wells producing on or after July 1, 2015, Oklahoma imposes a 2% rate on the gross value of severed oil and gas for the first three years of a well’s production

Texas

Levies a severance tax on oil and condensate (“oil production tax”) equal to the greater of 4.6% of the market value of oil or condensate or 4.6¢ for each barrel of oil or condensate produced, imposes a regulatory oilfield clean-up fee of 0.675¢ per barrel of oil produced, a severance tax on gas and all liquid hydrocarbons that are not condensate (“gas production tax”) equals 7.5% of the market value of gas or liquids produced, and an oilfield clean-up fee of 1/15 of 1¢ per Mcf of gas produced

The market value of gas is reduced by costs incurred by the producer to compress, dehydrate, sweeten, or deliver the gas, for the gas production tax, Texas offers a temporary rate reduction for wells extracting gas designated by the Texas Railroad Commission or the Federal Energy Regulatory Commission as a high-cost gas, which currently includes gas produced from shale formations, the reduction is calculated by subtracting from the 7.5% rate the product of that rate times the ratio of drilling and completion costs incurred for the well to twice the median drilling and completion costs for high-cost wells completed during the preceding fiscal year, but the rate may not be reduced below zero, the reduced rate applies for the lesser of ten years beginning on the first day of production, or until the cumulative value of the tax reduction equals 50% of the drilling and completion costs incurred for the well.

15 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

State

Severance Tax Rates & Bases

Incentives

Ohio

A general severance tax is imposed at 10¢ per barrel of oil and 2.5¢ per 1,000 cubic feet (Mcf) of natural gas, and the cost recovery assessment is imposed at 10¢ per barrel of oil and 0.5¢ per Mcf of natural gas

West Virginia

Levies a severance tax on oil and natural gas at a rate of 5% of the gross value of the natural gas or oil with the gross value of natural gas and oil equals the product’s local market value, with deduction for processing costs necessary to obtain commercially marketable or usable oil or gas and an additional tax on natural gas in the amount of 47¢ per Mcf for the purpose of reducing the state’s Workers’ Compensation debt.

Provides an annual credit of $500 for each severance taxpayer and exempts natural gas and oil extracted from low-producing wells.

Again, these taxes in energy rich states are not the only tax energy companies pay but they illustrate approaches multiple states have taken in this area. State Tax Policy Impacts Energy-intensive Company Recruitment As America operates with the highest corporate tax rate in the industrialized world, how much and what state and local governments’ tax impacts the retention and attraction of energyintensive companies. Taxing consumption over income promotes greater economic investment among heavy manufacturing companies that dominate the energy-intensive industry list. Also, comparing the tax policy of all 50 states again is not productive as the focus needs to be on states gaining substantial local energy resources. Most of this multi-state comparison will center on Arkansas, Colorado, Louisiana, North Dakota, Oklahoma, Ohio, Pennsylvania, Texas and West Virginia. First, let’s acknowledge that all states charge taxes. Ernst & Young produces an annual business tax cost report for the Council of State Taxation and the data proves this point. The Council of State Taxation data is relevant for how a state taxes all industry but efforts to retain and attract energy-intensive companies will involve a deeper dive into state and local personal income taxes, business taxes, sales tax and property tax to meet their spending needs that impact energy-intensive companies. Seven states, Alaska, Florida, Nevada, South Dakota, Texas, Washington and Wyoming, recruit companies by not having an income tax. According to an Oklahoma Council of Public Affairs study, states without an income tax experience higher state domestic product growth as compared to states with a state income tax. Of the nine comparison states, Texas is the only one to not have a state or local income tax. However, Texas makes up for the lack of an income tax through a sales tax and a severance tax—the severance tax is actually the second largest source of revenue for the state of Texas.

16 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

Council of State Taxation Business Tax Burden (2013 Data) for Energy Rich States State

Population

Business Tax Burden

Business Share of State & Local Taxes

Arkansas

2,994,079

$4,400,000,000

40.9%

Colorado

5,355,866

$12,000,000,000

48.0%

Louisiana

4,649,676

$8,500,000,000

49.2%

North Dakota

739,482

$4,700,000,000

70.5%

Oklahoma

3,878,051

$7,000,000,000

49.8%

Ohio

11,594,163

$20,400,000,000

40.0%

Pennsylvania

12,787,209

$26,000,000,000

42.1%

Texas

26,956,958

$68,000,000,000

63.5%

West Virginia

1,850,326

$3,600,000,000

50.4%

All the energy rich states impose some form of general business taxes. Arkansas, Colorado, Louisiana, North Dakota, Oklahoma, Pennsylvania, and West Virginia impose business income taxes similar to the federal corporate income tax. Texas imposes a “margins tax” based either on revenue or gross receipts after certain deductions and Ohio imposes a Commercial Activity Tax similar to a gross receipts tax according to the report produced for the Ohio 2020 Tax Policy Study Commission. Gross receipts taxes are friendly in general to manufacturers and less friendly to retailers and other companies with high revenues but low margins. Ohio and all of the eight comparison states levy a tax on the sale of TPP and certain services (sales tax) and an accompanying tax at the same rate on the use of TPP and services purchased outside the state by a resident of the state/use tax according to the report produced for the Ohio 2020 Tax Policy Study Commission. Each of the states also allows local sales and use taxes in addition to the state rate. These taxes, absent specific exemption, would apply to the TPP and service purchases of oil and gas producers. According to the report produced for the Ohio 2020 Tax Policy Study Commission, Arkansas, Colorado, Texas, and West Virginia authorize local governments to levy property taxes against tangible personal property (TPP) or real property, including oil and gas reserves. However, three states, North Dakota, Oklahoma, and Pennsylvania, do not authorize the levy of property tax against either oil and gas reserves or TPP. The Buckeye state authorizes the levy of property tax against oil and gas reserves, but not general business TPP. Louisiana allows local property taxes to be levied against oil and gas TPP, but not against mineral rights. The table below summarizes the taxes energy-intensive companies face in the nine energy rich states.

17 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

Critical Energy-intensive Company Tax Comparisons with Energy Rich States State

Sales Tax in Largest City

Personal Income Tax

Business Tax

Property Tax

Arkansas

12.00%

.9-6.9%

Income- 1.0-6.5%

Local TPP

Colorado

10.00%

4.63%

Income- 4.63%

Local TPP

Louisiana

11.00%

2.0-6.0%

Income- 4.0-8.0%

Limited Local TPP

North Dakota

8.00%

1.223.22%

Income- 1.48-4.53%

No Local TPP

Oklahoma

11.00%

.5-5.25%

Income- 6.0%

No Local TPP

Ohio

8.00%

.4954.997%

Gross Receipts- .26%

Limited TPP

Pennsylvania

8.00%

3.07%

Income- 9.99%

No Local TPP

Texas

8.25%

Zero

Gross Receipts- .5% Retail/1.0% Other

Local TPP

West Virginia

7.00%

3.0-6.5%

Income- 6.5%

Local TPP

While tax policy is only one factor related to the recruitment of energy-intensive companies, it is clear the Lone Star State is a leader in pro-energy tax policy. Texas has nearly the lowest effective sales tax rate, no personal income tax rate, uses a gross receipts tax but does permit a local tangible personal property tax. However, the pro-energy Texas tax code apparently creates a burden on other industries as Texas has a high business tax burden compared to many other energy rich states. Maybe Texas figured something out—the way to become an energy giant is to create a tax policy that favors the energy industry. Building an Energy Workforce is a Key to Economic Success Another major economic development incentive trend used in retain and attracting energy intensive companies is supporting the development of a workforce for this vital industry. Developing an energy-intensive industry workforce is essential for companies and regions focused on economic growth. Workers in the Science, Technology, Engineering and Math (STEM) fields are the core for any effort to build an energy friendly workforce. STEM workers constitute about 5 percent of the U.S. workforce, but accounts for more than 50 percent of the nation’s sustained economic growth according to the Department of Labor. Again, according to the Department of Labor, if current trends continue, more than 90 percent of all scientists and engineers in the world will live in Asia. The growth in STEM related jobs is expected to exceed the demand for non-STEM related occupations. However, while the U.S. leads all industrial nations in the raw number of STEM graduates, the U.S. is losing ground when it comes to 18 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

developing younger STEM workers to meet workforce demands created by retiring Baby Boomers. Companies and regions needing STEM workers to succeed can adopt a number of workforce development strategies to meet this challenge. Companies and regions need to identify industry and educational institution partners to create a focus on increasing the number of STEM graduates. Focusing solely on higher education partners will not meet the demand for STEM workers. Many STEM workers do not need a four-year college degree, but may require only a certificate or targeted training program. More importantly, universities and colleges cannot turn students into STEM workers with a magic wand. STEM workforce strategies focus on K-12 institutions in partnership with university and college partners to begin promoting the benefits of a STEM education at an early age to ensure students who reach high school are preparing for STEM majors in colleges. In addition, successful STEM initiatives need to address potential shortage of K-12 teachers in math and sciences who will be needed to teach the additional STEM related course. Many states are working to gain STEM workers. Colorado’s STEM strategy is a national model. STEM-EC is a Colorado based coalition of business and education leaders connecting industry and the K-16 academic community to graduate more STEM students. Industry partners include Qwest, Lockheed Martin Space Systems, BB2e.com, Sun Microsystems, Hewlett Packard and CH2M HILL. Colorado’s STEM effort illustrates that it starts with the leadership of the business and education community. The link to industry is an essential element, as the academic community needs assistance in identifying specific STEM fields in which jobs are available and what specific training and curriculum structure prepare students for STEM jobs. Washington STEM offers another statewide model for developing a stronger science, technology, engineering and math-based workforce. Washington STEM not only links industry and the academic community but also has created a statewide network and provides a series of grants to local STEM programs. An example of a Washington STEM grant is a $10,000 award made to Ellensburg School District for the Robotics Meets Biotech program. It was used to ignite AP Biology student’s interest in STEM by exploring how robotics can enhance biotechnology research. Dayton and its Western Ohio partners offer a regional STEM workforce model worthy of review. Built upon the base provided by the 10,000 employees of the Wright Patterson Air Force Base and the Air Force Research Lab, Dayton, Ohio has the largest concentration of STEM workers— not just in Ohio but also as one of the top 10 in the United States. To capitalize on this base of STEM workers, the Regional STEM Collaborative (RSC) was created to develop a K-20 STEM workforce strategy. The RSC’s sole focus is to increase the number of students entering into STEM Career Pathways and ultimately becoming a part of our region’s strong STEM Workforce. The RSC approach centers on:  Identifying projected STEM workforce needs in Ohio’s key industry growth areas  Seeking out and supporting STEM initiatives and creating synergistic partnering opportunities around the region  Promoting national, state, and regional programs to develop and retain a strong STEM workforce 19 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

 

Working to enhance STEM teaching methodology and resources inside our classrooms Strengthening the collaborative network

RSC also focuses on supporting the STEM network of teachers, promoting the STEM professions with students and benchmarking the effort on national STEM initiatives. 2015 Venture Capital Investments on Track for Highly Productive Year with Energy Investments Booming Providing access to capital is another economic development incentive states and regions focus on when working to retain and attract energy intensive companies. Venture capital firms in the U.S. have invested more than $47.2 billion in the first three quarters of 2015. These investments total more than seventeen of the past twenty years’ year-end totals, according to data recently provided by the National Venture Capital Association and PricewaterhouseCoopers. The information is available in The MoneyTree™ Report by PricewaterhouseCoopers and the National Venture Capital Association and is based on data collected by Thomson Reuters. 2015’s investment activity has a very strong likelihood of reaching the highest annual level since 2000. Through third quarter 2015:  Regions – The Midwest is sixth out of 18 regions, preceded by Silicon Valley in first, New England second, NY Metro third, LA/Orange County fourth, and the Southeast in fifth. The Midwest in 2015 has so far invested $1.31 billion across 265 deals.  States – Thus far, the top five states are California, Massachusetts, New York, Texas and North Carolina. Missouri comes in at number 15 with 14 deals at $100.96 million while Ohio sits at number 17 with 11 deals at $79.78 million.  Industries – Software and Biotechnology remain the top two investment sectors followed by Media and Entertainment, IT Services, Financial Services, Consumer Products and Services, Medical Devices and Equipment, Industrial/Energy, Healthcare Services, and Computers and Peripherals. Additional industry sector investments include Semiconductors, Retailing/Distribution, Business Products and Services, Telecommunications, Electronics/Instrumentation, and Networking and Equipment. Ten of the seventeen investment industries experienced increases in capital invested in quarter three versus quarter two.  Development Stages - Expansion Stage investments total more than $6 billion, Early Stage investments total more than $5 billion, Later Stage investments total more than $4 billion, and Seed Stage investments total approximately $200 million. Compared against quarter 2 in 2015, Seed and Later Stages investments were up, while Early and Expansion Stages were down.  First-Time Financings – Dollars in first-time financings to companies increased 7 percent in quarter 3 to $2.5 billion while the number of deals declined 3 percent to 372. These first-time investments accounted for 15 percent of all dollars invested and 35 percent of all deals in the third quarter. The average first-time deal was $6.7 million, an increase of $600,000 versus second quarter. Companies in the Seed and Early Stages received the largest percentage of first-time investments, with 66 percent of dollars invested and 79 percent of the deals. 20 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

As of the close of the third quarter, $47.17 billion has been invested in 3,329 deals. 2015 is on track to have the highest amount of investments since 2000, when $104.99 billion was invested in more than 8,000 deals. Investments in energy sector technology companies have been growing over time. Historically, investments in energy sector early stage tech companies have been growing. While venture capital investments in energy industry early stage tech companies vary by year, it has illustrated growth over time. 2015 proved to be a banner year for energy industry early stage tech companies—with total investments reaching 2,557,065,900 in the first three quarters alone in 2015. Building an Energy Research & Development Park Capitalizing on the economic benefits of both the booming energy and high-tech industries is an economic no brainer. The majority of regions and states succeeding during the last decade have done so on the backs of new, domestic energy production. The high-tech company boom has continued since the 1990s with no signs of slowing down. Both industries produce the high-wage jobs that all regions and states want. The question is how to capitalize on both industries. Retention and recruitment of energy companies is a complex task. States such as Arkansas, Colorado, Louisiana, North Dakota, Ohio, Oklahoma, Pennsylvania, Texas and West Virginia have a unique opportunity to rebuild economies around the explosion of domestic energy created by shale gas and oil. However, competition is stiff for investments by not just energy companies but energy intense industries such as aluminum, chemical, steel, paper, petroleum refining and other industries. Many routes to retention and expansion for these high-wage jobs exist but a traditional route used for decades to recruit targeted manufacturing industries is the creation of research and development initiatives tied to these industries. R&D jobs pay well but they also support the growth of jobs in the industries they are providing cutting edge research to. There is a reason the Center for Automotive Research is in Michigan—to support the expansion of the state’s largest industry. Energy rich regions should be looking at developing an energy focused research park to not only spur tech transfer on university campus’ but to serve as a corporate site location for major companies and research centers wishing to be connected to the growing energy center. The first step to building a successful research park is to identify a university partner with a strength in energy research and available land needed for the development of a research and development park. The second step in developing a successful energy research park is to understand the critical elements of building the initiative. Many “research parks” are mere real estate projects named as a research park. Successful research parks have a larger array of services connected to the parks not just a parcel of land with infrastructure in place. Battelle’s Technology Practice Group years ago identified common characteristics for successful university research parks and they are listed below.

21 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

Common Characteristics of a University Research Park

Of course, the national model of an energy research park is in Texas. The University of Houston Energy Research Park (ERP) capitalizes on the global base of energy companies in Houston. The UH ERP focuses on educational programming, research, industry partnerships, and economic development. The University of Houston launched an undergraduate program in petroleum engineering that will combine the fundamentals of petroleum engineering and geosciences with economics, energy law and business. The program, along with the pre-existing master’s degree, aims to fill gaps in the aging workforce and arm graduates with the skills needed to respond to the evolving industry. The UH Energy initiative takes an integrated, interdisciplinary, translational approach to combine many research areas, ranging from the exploration of new sources (previously inextricable oil and fossil fuels), testing and enhanced production processes of discovered sources (fossil fuels and biofuels), efficient storage and packaging of known sources (wind and solar), and cost-efficient transportation and delivery of acquired sources (electric power), with the ultimate goal of meeting the energy needs of tomorrow. Speeding new technologies to industry is a key strategy of UH research programs which is developed through partnerships with energy industries. The UH Texas Diesel Testing & Research Center provides fuels and emissions testing with a wide range of commercial firms and government agencies. Technical training in energy generation processes is a collaborative program between UH and Power Technology Institute. UH technology in superconductive electrical power transmission will be commercialized in UHERP by Superpower, Inc. Finally, The UH manufacturing incubator will offer mixed use space for light manufacturing and assembly. Small and start-up businesses depend on a community of similar firms and a pool of 22 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

educated but entrepreneurial labor. UH is planning to make ERP buildings available as incubator space. The UH ERP is 74 acres with 692,000 SF of office and industrial park space focused on office/warehouse, industrial & light manufacturing with professional property management, state-of-the-art IT infrastructure and close proximity to UH main campus via free UH shuttle service. The UH ERP recently gained a $25 million fund from private investors interested in energy tech commercialization. Other models exist but those considering a research and development approach to energy company retention and attraction should look to Texas for models.

Marketing to Energy Intensive Companies Attracting Energy-intensive Industries: Chemical Manufacturing The final step to retaining and attracting energy intensive companies is launching a marketing campaign toward these industries. To first step in marketing to these industries is to understand the industries worthy of targeting. According to the U.S. Energy Information Administration, there are eight industries in the manufacturing sector that are defined as energy-intensive: Industry Food Products Paper and Allied Products Bulk Chemicals Glass and Glass Products Cement and Lime Iron and Steel Aluminum Petroleum

NAICS Code 311 322 Parts of 325 3272 32731 and 32741 331111 3313 32411

Source: U.S. Energy Information Administration, Model Documentation Report, Industrial Demand Module of the National Energy Modeling System, September 2013 Taking a look at each industry by size and scope helps to identify the opportunities for growth in each sector and assists economic development professionals in positioning its attraction efforts. Taking a look at each industry by size and scope helps to identify the opportunities for growth in each sector and assists economic development professionals in positioning its attraction efforts. 23 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

Chemical manufacturing is a major industry that lives on cheap and reliable energy. The North American Industry Classification Sector (NAICS) defines this sector in the following way: the Chemical Manufacturing subsector is based on the transformation of organic and inorganic raw materials by a chemical process and the formulation of products. This subsector distinguishes the production of basic chemicals that comprise the first industry group from the production of intermediate and end products produced by further processing of basic chemicals that make up the remaining industry groups. The chemical manufacturing subsector consists of these industry groups:  Basic Chemical Manufacturing: NAICS 3251  Resin, Synthetic Rubber, and Artificial Synthetic Fibers and Filaments Manufacturing: NAICS 3252  Pesticide, Fertilizer, and Other Agricultural Chemical Manufacturing: NAICS 3253  Pharmaceutical and Medicine Manufacturing: NAICS 3254  Paint, Coating, and Adhesive Manufacturing: NAICS 3255  Soap, Cleaning Compound, and Toilet Preparation Manufacturing: NAICS 3256  Other Chemical Product and Preparation Manufacturing: NAICS 3259 Source: http://www.bls.gov/iag/tgs/iag325.htm In 2013, the chemical manufacturing sector used 4,995 trillion BTU of energy with 131,932 million kwh coming from electricity and 2,192 billion cu. ft. coming from natural gas. Source: US EIA,http://www.eia.gov/consumption/manufacturing/data/2010/pdf/Table1_1.pdf According to the U,S. Bureau of Economic Analysis, the Gross Domestic Output of the Chemical Manufacturing industry is $810.1 trillion as of November 5, 2015. The Chemical Manufacturing industry has seen 10 percent growth in gross domestic output from 2008-2014 as the chart below indicates:

Further evidence of the strength of the Chemical Manufacturing industry is the foreign direct investment into the United States made by companies in this industry from 2008 to 2014. 24 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

According to the U.S. Bureau of Economic Analysis foreign owned firms in the Food Products industry invested $10.5 billion USD in the United States in 2008 and made an investment of $12.20 billion USD by 2013, as the chart below shows.

Employment in the Chemical Manufacturing industry, hitting a peak in 2005 and a low in 2011, has seen steady growth the last four years and continues to add jobs. In October 2015 the Chemical Manufacturing industry had employment of 811.6 thousand, an increase of .11 percent year over year. In the last five years, employment in the Chemical Manufacturing industry has grown 3.39 percent. The chart below shows the changes in employment in the Chemical Manufacturing industry in the past 10 years.

EMPLOYMENT IN THOUSANDS

Chemical Manufacturing Employment 880.0 870.0 860.0 850.0 840.0 830.0 820.0 810.0 800.0 790.0 780.0 770.0 2004

872.3

866.1

861.1 846.9

804.1

803.6 786.3

2006

2008

2010

811.6

792.8 783.4

783.5

2012

2014

2016

YEAR

The Chemical Manufacturing industry has 17,029 US establishments with 735,553 employees and $23.10 billion in capital expenditures in 2012 according to the American Economic Census. 25 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

The top companies in the industry: Company

Sales (Millions, $)

Employees

Location

China Petroleum and Chemical Corp.

$459,211.03

358,571

Beijing, China

Exxon Mobil Corp.

$411,939.00

75,300

Irving, TX

BP PLC

$357,783.00

84,500

London, England

Chevron Corp.

$211,970.00

64,700

San Ramon, CA

Phillips 66

$164,093.00

14,000

Houston, TX

Source: Hoovers.com

Chemical Manufacturing Business Challenges: Sensitivity to Energy Prices— Because of the high energy requirements in chemical production, higher energy prices can greatly affect costs. Many manufacturers use natural gas as a source of heat, or natural gas or crude oil as feedstocks. Feedstocks and energy can account for more than half of a chemical company’s production costs. (Source: Hoovers.com) Chemical Manufacturing Industry Indicators:  U.S. nondurable goods manufacturers’ shipments of chemical products, an indicator of chemicals production, fell 2.7 percent year-to-date in September 2015 compared to the same period in 2014.  The spot price of crude oil, a key ingredient in most chemical manufacturing, fell 41.2 percent in the week ending November 6, 2015, compared to the same week in 2014. Source: Hoovers.com For communities, regions and states that have strong access to reliable and low-cost energy, a strategy of trying to attract companies in the Chemical Manufacturing industry is logical and warranted. Energy is certainly not the only reason that companies chose a location, but 91.6 percent of the respondents in the 2014 Area Development Magazine Site Consultant’s Survey listed energy availability and costs as very important to their clients. The Chemical Manufacturing Industry has seen 10 percent growth in the past five years, employment growth of 3.39 percent and with crude oil prices hovering around $41/barrel is poised for solid economic activity in 2015 and into 2016. Communities with a location quotient high and growing in Chemical Manufacturing should positions themselves and market themselves to attract more companies in this sector. Energy-intensive Industries Attraction Strategy: Food Products As the United States has become more energy independent with the shale energy boom of the last decade it has created opportunities for locations that have assets strategically available to attract companies that are dependent upon energy for the output of its products. The food products sector is an industry worthy of review. 26 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

The North American Industry Classification Sector (NAICS) defines this sector in the following way: Industries in the Food Manufacturing subsector transform livestock and agricultural products into products for intermediate or final consumption. The industry groups are distinguished by the raw materials (generally of animal or vegetable origin) processed into food products. The food products manufactured in these establishments are typically sold to wholesalers or retailers for distribution to consumers, but establishments primarily engaged in retailing bakery and candy products made on the premises not for immediate consumption are included. Source: http://www.bls.gov/iag/tgs/iag311.htm In 2013 the food products industry used 1,162 trillion BTU of energy with 75,407 million kwh coming from electricity and 567 billion cu. ft. coming from natural gas. Source: US EIA, http://www.eia.gov/consumption/manufacturing/data/2010/pdf/Table1_1.pdf According to the US Bureau of Economic Analysis the Gross Domestic Output of the food products industry is $970.3 billion as of November 5, 2015. The food products industry has seen 25 percent growth in gross domestic product from 2008-2014 as the chart below indicates:

Food Products Industry GDP 2014

$970.30

2013 $927.40 2012 $906.10 2011 $866.80

2010

$804.30

2009

$774.90

2008 $-

$775.50 $200.00

$400.00

$600.00

$800.00 $1,000.00

Billions $

Further evidence of the strength of the Food Products industry is the foreign direct investment into the United States made by companies in this industry from 2008 to 2014. According to the U.S. Bureau of Economic Analysis foreign owned firms in the Food Products industry invested $25.7 million USD in the United States in 2008 and more than tripled that investment to $83.67 million USD by 2014, as the chart below shows. 27 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

Food Products Industry FDI $83,685.00

$90,000.00 $74,608.00

$80,000.00 $70,000.00 $57,678.00

Millions $

$60,000.00 $50,000.00 $34,448.00

$40,000.00 $30,000.00

$31,133.00 $25,713.00

$27,132.00

$20,000.00 $10,000.00 $2008

2009

2010

2011

2012

2013

2014

Employment in this industry, while dipping in 2009-2011 due to the recession, is steady and is on the rise. In October 2015 the Food Products industry had employment of 1.48 million, an increase of 1.03 percent year over year. In the last 5 years, employment in the Food Products sector has grown 3.07 percent. The chart below shows the changes in employment in the Food Products sector in the past 10 years.

Food Products Industry Employment 1492.3

EMPLOYMENT, IN THOUSANDS

1495.0 1490.0

1483.7

1485.0 1480.0

1477.6

1479.4

1481.2

1480.3 1473.4

1475.0

1468.8

1470.0 1465.0

1458.6

1456.8

1460.0

1450.9

1455.0 1450.0 1445.0 2004

2006

2008

2010

2012

2014

2016

Source: http://data.bls.gov/timeseries/CES3231100001?data_tool=XGtable

The Food Products industry has 25,614 US establishments with $15.39 billion in capital expenditures in 2012 according to the American Fact Finder. The top companies in the industry: 28 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

Company Cargill Nestle SA

Sales (Millions, $) $120,400.00 $92,829.58

Employees 155,000 339,000

Archers-DanielsMidland Mitsubishi

$81,201.00

33,900

$74,099.31

71,994

Pepisco

$66,683.00

271,000

Location Wayzata, MN Vevey, Vaud Switzerland Chicago, IL Chiyoda-Ku, Tokyo, Japan Purchase, NY

Source: Hoovers.com

Food Products Business Challenges: Volatile Ingredient Prices — The price of critical commodity inputs such as corn, soybeans, wheat, dairy, coffee beans, beef, poultry, vegetables, and sugars and oils can increase significantly due to poor farm yields, unpredictable weather patterns, and market reactions to government farm subsidies. Commodity price increases raise raw material and operating costs, which can be difficult to pass on to consumers in the form of higher product prices. Many companies hedge against commodity price increases to limit volatility. (Source: Hoovers.com) Food Products Industry Indicators:  The consumer price index for food, an indicator of food product values, rose 1.6 percent in September 2015 compared to the same month in 2014.  U.S. nondurable goods manufacturers’ shipments of food products, an indicator of demand for food manufacturing, fell 1.2 percent year-to-date in August 2015 compared to the same period in 2014.  U.S. retail sales for food and beverage stores, a potential measure of food demand, increased 3 percent in the first nine months of 2015 compared to the same period in 2014.  Total U.S. wholesale sales of nondurable goods, a potential measure of food demand, fell 7.5 percent in August 2015 compared to the same month in 2014. (Source: Hoovers.com) For communities, regions and states that have strong access to reliable and low-cost energy, a strategy of trying to attract companies in the Food Products industry is logical and warranted. Energy is certainly not the only reason that companies chose a location, but 91.6 percent of the respondents in the 2014 Area Development Magazine Site Consultant’s Survey listed energy availability and costs as very important to their clients. The Food Products industry has seen steady and solid growth over the last five years and with low energy costs and steady commodity prices the industry will continue this growth pattern and solid employment trend for the next five years.

29 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

Energy-intensive Industries Attraction Strategy: Primary Metal Manufacturing As the United States has become more energy-independent with the shale energy boom of the last decade, it has created economic development opportunities. Primary metals manufacturing is an industry worthy of review. The North American Industry Classification Sector (NAICS) defines this sector in the following way: Industries in the Primary Metal Manufacturing subsector smelt and/or refine ferrous and nonferrous metals from ore, pig or scrap, using electrometallurgical and other process metallurgical techniques. Establishments in this subsector also manufacture metal alloys and super-alloys by introducing other chemical elements to pure metals. The output of smelting and refining, usually in ingot form, is used in rolling, drawing, and extruding operations to make sheet, strip, bar, rod, or wire, and in molten form to make castings and other basic metal products. The primary metal manufacturing subsector consists of these industry groups:  Iron and Steel Mills and Ferroalloy Manufacturing: NAICS 3311  Steel Product Manufacturing from Purchased Steel: NAICS 3312  Alumina and Aluminum Production and Processing: NAICS 3313  Nonferrous Metal (except Aluminum) Production and Processing: NAICS 3314  Foundries: NAICS 3315 Source: http://www.bls.gov/iag/tgs/iag331.htm According to the U.S. Energy Information Administration, the U.S. steel industry (including iron production) relies significantly on natural gas and coal coke and breeze for fuel, and is one of the largest energy consumers in the manufacturing sector. The industry accounts for roughly six percent of the total energy consumed in manufacturing. Including fuel and feedstock use, this industry is responsible for approximately 60 percent of the total energy consumed in the primary metals sub-sector. Source: http://www.eia.gov/consumption/manufacturing/briefs/steel/index.cfm According to the U.S. Bureau of Economic Analysis the Gross Domestic Output of the Primary Metals Manufacturing industry is $281.90 billion as of November 5, 2015. The Primary Metals Manufacturing industry saw a massive dip in production in the recession of 2009, but has returned to pre-recession levels, as the chart below indicates:

30 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

Primary Metals Gross Domestic Output 2014

$281.90

2013

$263.40

Years

2012

$267.60

2011

$279.90 $234.10

2010 $166.00

2009

$279.60

2008 $-

$50.00

$100.00

$150.00

$200.00

$250.00

$300.00

Output in Billions

Source: http://www.bea.gov/iTable/index_industry_gdpindy.cfm

Further evidence of the strength of the Primary Metals Manufacturing industry is the consistency of foreign direct investment (FDI) into the United States by companies in this industry from 2008 to 2014. This sector is highly capital intensive requiring continual annual investment. According to the U.S. Bureau of Economic Analysis foreign owned firms in the Primary Metals Manufacturing industry invested $44.5 billion in the United States in 2008 and made an investment of $52.20 billion by 2014, as the chart below shows.

Primary Metals Manufacturing US FDI $55,095.00 $48,181.00

$51,739.00

2011

2012

$52,203.00

$46,131.00

FDI in Millions

$44,530.00

$50,668.00

2008

2009

2010

2013

2014

Years Source: http://www.bea.gov/iTable/index_MNC.cfm

31 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

Employment in the Primary Metals Manufacturing industry, hitting a peak in 2005 and a low in 2009, saw steady growth through 2012 with a leveling off through mid-2015. In November 2015 the Primary Metals Manufacturing industry had employment of 400,000. In the last five years employment in the sector industry has grown 10.4 percent. The chart below shows the changes in employment in the sector in the past 10 years. Employment is this sector is unlikely to get back to 2005 levels based on sector factors including investment in China, the commoditization of the industry, and continued productivity gains.

Primary Metals Manufacturing Employment 480.0

Employment in Thousands

460.0 440.0 420.0 400.0 380.0 360.0 340.0 320.0 2004

2006

2008

2010

2012

2014

2016

Years Source: http://data.bls.gov/timeseries/CES3231100001?data_tool=XGtable

The Primary Metals Manufacturing industry has 423 U.S. establishments with 400,000 employees in 2012, according to the American Economic Census. The highest concentrations of those establishments are in the Industrial Midwest states of Ohio, Illinois, Indiana, and Pennsylvania. The top companies in the industry: Company Arcelor Mittal Toyota Tsusho Marubeni Posco Saudi Basic Industries

Sales (Millions, $) $79,282.00 $72,409.20 $65,479.04 $59,226.57 $50,395.80

Employees 222,327 53,241 47,925 17,877 N/A

Location Luxembourg Nagoya, Japan Tokyo, Japan Pohang, South Korea Riyadh, Saudi Arabia

Source: Hoovers.com

Primary Metals Manufacturing Industry Challenge: Chinese Overcapacity Creates Global Steel Glut China’s economic slowdown, reduced steel consumption, and increased exports are helping to create a worldwide surplus, which has sent global steel prices lower, according to Bloomberg. US iron and steel mill producer prices fell nearly 18 percent in October 2015 32 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

compared to the same month a year earlier. As China has moved to export more of its excess steel, major steel manufacturers in the U.S., Europe, and Japan have announced reductions in profit forecasts and have idled capacity. China has been reluctant to slow steel production amid fears of lost jobs as the country’s economy has slowed. In recent months, several countries including the U.S., India, Malaysia, and Thailand have taken various regulatory steps to mitigate the effects of Chinese imports on their domestic steel industries. The effects of global steel overcapacity, particularly in China, are expected to last several more years, according to Standard & Poor’s Ratings Services estimates. (Source: Hoovers.com) Primary Metals Manufacturing Industry Indicators:  U.S. durable goods manufacturers’ shipments of primary metals, an indicator of primary metal production, fell 8.1 percent year-to-date in September 2015 compared to the same period in 2014.  U.S. steel mill product prices, which impacts profitability for primary metal manufacturers, fell 16.1 percent in October 2015 compared to the same month in 2014. Source: Hoovers.com The Primary Metals Manufacturing, as seen in the numbers, is not large by sales or employment. However, communities that have an abundance of natural gas supply would do well to try to attract businesses in this sector. The companies that make up this sector make larger capital outlays, typically more than $1 billion USD, when they chose to construct a new facility. The jobs in this sector pay well, at a mean annual wage of $45,960 nationally (US Bureau of Economic Analysis). Going after these “whales” should not be the only strategy communities and regions pursue for industry attraction, but it should be part of an overall attraction strategy for those communities and regions that have an abundance of natural gas, a manufacturing labor force, and quality transportation assets. Launching an Energy Intensive Company BR&E Campaign Following the development of low-cost, reliable power, development of critical infrastructure, creation of tax incentives through energy friendly tax, workforce development and capital access policy, and gaining a clear understanding of which energy intensive industry is likely to grow in a region, traditional economic development marketing efforts come into play. To recruit targeted energy intensive industries, regions and states launch an energy intensive company Business Retention and Expansion (BR&E) Campaign. A job retention campaign is referred to as a business retention and expansion program (BR&E). These programs are broken down into multiple phases and are geared toward keeping and developing new jobs from a region’s existing base of companies. Phase 1 of a BR&E Program is organizing the effort internally within an economic development organization to ensure proper funding and staffing is available. Phase 2 consists of researching the companies that exist in a region, identifying the ones growing and developing a common survey instrument. Phase 3 is meeting with local company executives to gather information using the survey instrument about what issues their company is facing and how local economic 33 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215

development officials can assist their company. Phase 4 is solving any challenges the company identified. Problem-solving helps the company gain access to capital, address a regulatory issue with state government, gain better transportation access or other business and policy issues. Business attraction campaigns promote a region through marketing to companies likely to have an interest or link to the region. A state or regional economic development marketing plan creates a community message, identifies prospect companies and connects with these prospective companies through a range of methods. The economic development marketing message communicates the strengths of the region and state that appeal to prospective companies. These strengths range from the existence of like industry clusters, to a large workforce pool, to special tax advantages and links to markets. Once a message is developed, a list of company prospects is created. This is done through an industry cluster analysis that identifies local company strengths and connections to like or similar industries. Local companies are a source for prospective development as they provide introductions to key suppliers and others with an interest to be more closely connected with their business. Finally, a business attraction campaign launches a marketing campaign geared toward the targeted companies on a regional or state prospect list. An economic development marketing campaign includes:         

Peer to Peer Campaigns: introduction to national company prospects by local company leaders. Internet/website and social media: advertisements and direct contact campaign through social media sites such as LinkedIn, Google and industry trade association sites to drive traffic to the local economic development website. Award Campaign: launch a campaign to gain high rankings in key awards given by groups of interest to the industries targeted. Hosting special events: participation in targeted industry trade association events, such as the Industrial Asset Management Council, Site Selection Guild and CoreNet, which are populated by national corporate site location consultants. Media relations/publicity: a media story placement strategy that promotes a region to the targeted industries of interest in key industry trade publications and corporate site selection magazines; Advertising industry trade publications: an advertisement strategy targeting select industry trade publications. Direct mail: a direct mail campaign communicating the region’s benefits to the targeted companies. Telemarketing: telemarketing campaign to coordinate conversations with the companies targeted and local and state economic development leaders. Business attraction campaigns globally market in the hopes of landing a major FDI project.

34 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215



Finally, business attraction campaigns market and react to corporate site location consultants, who represent big and small companies alike, in their efforts to determine the best location for company expansion projects.

Promoting entrepreneurship is the final tool that economic development organizations use. The explosion of the Information Age caused local and state economic development groups to devote resources to fostering the growth of early stage companies. Local and state economic development efforts spend nearly half their total economic development spending on promoting entrepreneurship. Successful regional and state entrepreneurship strategies encourage people with ideas to take the risk of starting their own business. Regional and state entrepreneurship programs develop a culture that nurtures and supports these small-business owners. They build capital access, business services and business opportunities for emerging small businesses. Entrepreneurship programs develop venture capital and other access to capital tools essential for the growth of emerging, early stage technology companies. In addition, regional and state entrepreneurship programs create capital access programs for small and minority owned firms that may struggle to gain capital from traditional sources. Business incubators and accelerators create homes for early stage company startups. These facilities provide a low cost real estate option along with business services that many emerging small business need but cannot afford to hire. Entrepreneurship programs educate local businesses on export and government procurement business opportunities and create “buy local” campaigns to grow local small businesses. These entrepreneurship programs support existing and successful small to mid-sized companies that are growing and moving a region up the economic ladder. viii

U.S. Department of Energy, Energy Information Agency Report, 2014, retrieved from http://www.eia.gov/tools/faqs/faq.cfm?id=87&t=1. ix Annual Average Electricity Price Comparison by State, State of Nebraska, 2011. x U.S. Energy Information Agency, 2011 Annual Energy Review. xi Raymond J. Keating, “Energy Cost Index 2012: Ranking the States,” Small Business and Entrepreneurship Council, June, 2012. xii Keating. xiii International Energy Agency, World Energy Outlook 2013 Factsheet. xiv Ibid. xv Ibid. xvi Robert McClanahan, “Electric Deregulation,” IEEE Industry Applications Magazine, March-April, 2002. xvii Ibid. xviii See generally, Chapter 4901:1-38. xix Ibid. xx Ibid. xxi Ibid.

35 The Montrose Group, LLC 230 East Town Street, Columbus, Ohio 43215