THE PERRYMAN GROUP. June N. Valley Mills Dr., Suite 300. Waco, TX ph , fax

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1 June 2012 A Detailed Forecast of Future Economic Activity in Victoria, Texas and the Surrounding Area: An Analysis with Considerations of the Implications for Future Fiscal Policy THE PERRYMAN GROUP 510 N. Valley Mills Dr., Suite 300 Waco, TX ph , fax info@ www.

2 Table of Contents Introduction... 1 Highlights of Study Findings... 2 The Perryman Group s Perspective... 3 Key Trends Affecting Economic Growth in the Victoria Area... 5 Measuring Economic Impacts... 9 Effect of the Caterpillar Manufacturing Facility Construction Ongoing Operations of Caterpillar and Related Suppliers Effect of Chemical Facility Expansion Construction Ongoing Operations Effect of the Eagle Ford Shale: Spillover Benefits for Victoria Drilling, Extraction, and Related Operations Effect of the Eagle Ford Shale: Spillover Benefits for Victoria Drilling, Extraction, and Related Operations Long-Term Forecast for Victoria and the Golden Crescent Region Economic Forecast Overview Total Output Growth Over Time Output Growth by Sector Output Gains Output Composition Total Employment Over Time Employment Growth Rate by Sector Employment Gains Employment Composition Conclusion APPENDICES APPENDIX A: US Multi-Regional Impact Assessment System Methodology APPENDIX B: The Texas Econometric Model Methodology APPENDIX C: Effect of the Caterpillar Manufacturing Facility Effect of Chemical Facility Expansions Effect of the Eagle Ford Shale: Effect of the Eagle Ford Shale: Forecast Tables i 2012 by The Perryman Group

3 Introduction by The Perryman Group

4 Introduction The economy of Victoria, Texas and the surrounding region have recently seen a surge in business investment and economic growth. Developments span multiple industries and have led to a notable stimulus to the economy and, in fact, a shift in the likely growth prospects for the area for the foreseeable future. The recent expansions and relocations are also likely to spur additional activity in related industries. In such an environment of change, planning can be difficult in that past performance may be a poor indicator of future expansion. In order to aid in planning efforts, The Perryman Group (TPG) was recently asked to provide a detailed forecast of economic growth for the Victoria area including a specific assessment of the likely impact of recent shifts in business activity. This report presents the results of the analysis. Highlights of Study Findings Victoria and the Golden Crescent Region are forecast to experience economic growth at a pace exceeding most parts of the United States. Several industries are contributing to economic expansion through direct stimulus of related construction and ongoing operations and through the associated multiplier effects through the economy by The Perryman Group

5 These notable gains enhance the outlook for the area economy. o The Perryman Group projects that output (real gross product) in the Victoria Metropolitan Statistical Area will expand at a 4.21% annual pace, while employment grows by 2.33%. o For the Golden Crescent Region, the pace of expansion is somewhat higher, with output up 4.68% per annum and employment growth of 2.78% over the period. While past performance in a local area is often a very strong indicator for future potential growth, recent large corporate locations and expansions and the emergence of the Eagle Ford Shale are reshaping the Victoria-area economy, thus enhancing future expectations. The Perryman Group s Perspective Dr. M. Ray Perryman, founder and President of the firm, developed the Texas Econometric Model (including a submodel of the Victoria economy) in the early 1980s and has consistently maintained, expanded, and updated it since that time. The model has been used in hundreds of diverse applications and has an excellent reputation for reliability. This large-scale forecasting system includes submodels of both the Victoria Metropolitan Statistical Area (MSA) and the Golden Crescent Council of Governments (COG) Region and has been used to provide projections of local activity on an ongoing basis since the early 1980s. The Perryman Group also has extensive experience in economic development work and has performed assessments for dozens of communities across the state. These projects have included by The Perryman Group

6 detailed examination of local areas and potential growth patterns as well as issues arising from anticipated development. The firm also has extensive experience in evaluating economic impacts including (1) hundreds of individual corporate locations, (2) a number of large, new real estate developments, and (3) trends or patterns such as regulatory changes or industry emergence. In particular, Dr. Perryman developed the US Multi-Regional Impact Assessment System more than 30 years ago. It has been used in thousands of applications throughout the US and contains specific submodels for both Victoria and the surrounding area. This system can be fully integrated with the econometric model in order to evaluate the effects of major emerging factors on the local economy. The firm has completed numerous studies related to various gas formations (including shale areas), major manufacturing plants, and petrochemical facilities. TPG has extensive experience in the Victoria area. Dr. Perryman developed and maintains the Victoria Econometric Model and has prepared forecasts of the area on an ongoing basis for about 30 years. In addition, TPG has performed projects related directly to the Victoria area, including impact studies regarding Formosa Plastics and the proposed Exelon nuclear power facility and an economic assessment of Citizens Medical Center. In short, TPG brings a wealth of experience, analytical resources, and expertise to this endeavor by The Perryman Group

7 Key Trends Affecting Economic Growth in the Victoria Area by The Perryman Group

8 Key Trends Affecting Economic Growth in the Victoria Area As noted, Victoria has seen several very positive economic developments recently. Caterpillar, Inc. is building the North American Hydraulic Excavator Facility on 320 acres in the Lone Tree Business Center. Original plans called for an investment of about $130 million in a state-of-the-art, 850,000 sq. ft. facility, and Caterpillar later announced (in June 2011) plans for an additional $70 million and 200,000 sq. ft. in the Victoria site. The facility is expected to bring more than 600 jobs to the area. Construction began in the first quarter of 2011 and Phase I is complete with employees in training. o The Caterpillar plant has led other companies to locate in Victoria as well. For example, Keen Transport, a leading logistics provider to the construction-equipment industry in North America and a preferred supplier to Caterpillar, has purchased about 30 acres of land for a facility to provide outbound shipments for Caterpillar. The project is expected to be completed soon with a cost of about $15 million and employment for 15 workers within the first year. o Other suppliers to Caterpillar are also considering nearby locations, and it is likely that some will decide to invest in facilities in the area. The Victoria area is also experiencing growth in several of the petroleum and chemical facilities in the region. o INVISTA has started a $250 million capital investment project at its Victoria county plant expected to last four to five years by The Perryman Group

9 o Formosa Plastics Corporation also announced plans to invest over $1.7 billion to expand its plant at Point Comfort, Texas (34 miles southeast of Victoria). Part of the project includes a new olefins cracker, propane dehydrogenation unit, and low density polyethylene resin plant. The expansion and new construction, expected to be completed by 2016, should provide over 1,800 construction jobs and 225 permanent jobs to the area. Another major economic driver in the Victoria area is the recent development of the Eagle Ford Shale in nearby counties. The region is the site of significant exploration and production, and Victoria benefits from spillover activity. o Petrohawk and Pioneer were two of the earliest and remain among the most active operators in the Eagle Ford around Victoria. o Pioneer and its partners have announced plans to invest $15 billion in developing a project in the Eagle Ford including plans to build a facility in Victoria. Pioneer has hired over 350 workers in Victoria with plans for more in the future. o There are many other exploration and production companies active in the region which also provide a strong economic contribution to the area, in addition to spillover effects from various services, suppliers, and consumer purchases from the associated payrolls. The Port of Victoria is another valuable economic resource. Situated on over 2,000 acres and served by rail and four-lane divided highways, the Port recently formed an Industrial Park with multi-modal access in a Foreign Trade Zone. o The Port is a major center for the chemical, construction, and steel fabrication and agribusiness industries providing access to all transportation modes by The Perryman Group

10 o Convenient to the Eagle Ford Shale formation, companies at the Port of Victoria are currently serving the oil and gas industry by shipping and storing crude oil and frac sand. o A public-private fleeting area near the Port is also in the design stages. Construction costs are expected to be about $4 million. The engineering design work for a $6.5 million bulk cargo dock has recently been completed and permitting is near completion. In addition to these economic developments, Victoria has also recently completed construction of two new high schools, a new middle school, two new elementary schools as well as a fine arts center and aquatic center and other improvements funded by a $159 million bond election. Higher educational options in the area are also expanding. These enhancements not only improve the quality-of-life and opportunities for area residents, but also help ensure the availability of a quality workforce to meet future needs. All of these developments affect future economic performance. As part of this forecasting effort, The Perryman Group measured the total economic impact (including multiplier effects) of the most significant of these notable enhancements to the area s industrial base and potential for growth and incorporated the results into a comprehensive industrial forecast. Specifically, The Perryman Group examined the effects of the Caterpillar manufacturing facility, significant chemical expansions, and activity in the Eagle Ford Shale. Other notable corporate locations and expansions are under consideration and have a reasonable probability of occurrence; these were also factored into The Perryman Group s projections, though to a lesser extent by The Perryman Group

11 Measuring Economic Impacts Any investment or spending by a corporation or public entity generates multiplier effects throughout the economy. Construction and development of a new facility, for example, leads to purchases ranging from concrete to engineering services to landscaping. Ongoing operations also stimulate business activity through purchases and the expenditures by employees of payroll dollars for various goods and services. Direct investments result in stimulus in a variety of sectors, as well as generating spillover benefits for an even wider range of businesses. They also support substantial fiscal revenues for governments at all levels. The Perryman Group developed a model approximately 30 years ago (with continual updates, expansions, and refinements since that time) to describe these interactions. This dynamic input-output assessment model uses a variety of data (from surveys, industry information, and other sources) to describe the various goods and services (known as resources or inputs) required to produce another good/service. An associated fiscal model allows for estimation of tax receipts to state and local entities. It has been used in thousands of applications, including numerous studies of higher education and research facilities as well as mixed-use real estate developments. The submodels used in the current analysis reflect the specific industrial composition and characteristics of the Golden Crescent Region and the Victoria Metropolitan Statistical Area. Impacts are expressed in terms of several different indicators of business activity by The Perryman Group

12 o Total expenditures (or total spending) measures the dollars changing hands as a result of the economic stimulus. o Gross product (or output) is production of goods and services that will come about in each area as a result of the activity. This measure is parallel to the gross domestic product numbers commonly reported by various media outlets and is a subset of total expenditures. o Personal income is dollars that end up in the hands of people in the area; the vast majority of this aggregate derives from the earnings of employees, but payments such as interest and rents are also included. o Job gains are expressed as person-years of employment (one person working for one year) for temporary projects (such as construction) or as permanent jobs when evaluating ongoing annual effects. All results are expressed on an annual or a cumulative basis in constant (2012) dollars. Additional information regarding the methods and assumptions used may be found in Appendix A. Results are presented for two geographic areas: o the Victoria MSA (Calhoun, Goliad, and Victoria counties) and o the Golden Crescent Region (including the effects on business activity within the Victoria MSA as well as spillover to other parts of the region which is defined as the Golden Crescent Council of Governments Region comprised of Calhoun, DeWitt, Goliad, Gonzales, Jackson, Lavaca, and Victoria counties). Summary totals and results by major industrial category are provided in the following sections, with additional detail in the Appendices to this report by The Perryman Group

13 Effect of the Caterpillar Manufacturing Facility The location of a manufacturer of the magnitude of the Caterpillar facility can lead to a significant change in the economic complex of an area. The stimulus to the local and regional economies stems from the construction and operation of the plant as well as the likely location of related firms. Construction The Perryman Group estimates that construction and development of the Caterpillar manufacturing facility leads to total economic effects of an estimated $182.6 million in output (gross product) and 2,234 person-years of employment in Victoria, with additional spillover effects into the surrounding region. The Total Impact of Ongoing and Anticipated Construction Associated with the Caterpillar Manufacturing Facility on Business Activity Total Expenditures $ $ Gross Product Personal Income Retail Sales $ $ $ $ $ $ Person-Years of Employment 2,358 - Golden Crescent Region 2,234 - Victoria MSA Golden Crescent Region Victoria MSA $0 $95 $190 $285 $380 $475 Millions of 2012 Dollars Note: Assumes that equipment installed within the facility is manufactured outside the region. Source: The Perryman Group by The Perryman Group

14 These benefits are concentrated not only in the construction sector, but also in retail trade and various services industries as noted in the following tables. The Total Impact of Ongoing and Anticipated Construction Associated with the Caterpillar Manufacturing Facility on Business Activity in the Victoria Metropolitan Statistical Area Sector Total Expenditures Real Gross Product Personal Income Employment (2012 Dollars) (2012 Dollars) (2012 Dollars) (Person Years) Agriculture $3,416,834 $963,973 $641, Mining $5,651,672 $1,381,375 $689,621 4 Construction $137,859,531 $66,644,280 $54,919, Nondurable Manufacturing Durable Manufacturing Transportation and Utilities $22,692,467 $5,685,081 $2,959, $23,956,632 $9,796,738 $5,958, $23,556,365 $9,508,642 $5,579, Information $4,243,773 $2,620,639 $1,134, Wholesale Trade $13,978,108 $9,456,158 $5,452, Retail Trade $54,761,530 $41,446,895 $24,156, Finance, Insurance, and Real Estate $32,779,352 $8,102,727 $3,844, Business Services $11,927,459 $7,411,500 $6,045, Health Services $12,509,438 $8,744,525 $7,393, Other Services $21,103,215 $10,807,390 $8,777, TOTAL $368,436,376 $182,569,923 $127,551,334 2,234 Source: US Multi Regional Impact Assessment System, The Perryman Group Note: Assumes that equipment installed within the facility is manufactured outside the region by The Perryman Group

15 The Total Impact of Ongoing and Anticipated Construction Associated with the Caterpillar Manufacturing Facility on Business Activity in the Golden Crescent Region Sector Total Expenditures Real Gross Product Personal Income Employment (2012 Dollars) (2012 Dollars) (2012 Dollars) (Person Years) Agriculture $6,249,857 $1,792,213 $1,180, Mining $6,167,495 $1,527,194 $841,063 5 Construction $137,889,330 $66,659,551 $54,931, Nondurable Manufacturing Durable Manufacturing Transportation and Utilities $38,881,032 $11,008,875 $5,744, $37,435,165 $14,508,031 $9,141, $23,556,365 $9,508,642 $5,579, Information $4,243,773 $2,620,639 $1,134, Wholesale Trade $13,978,108 $9,456,158 $5,452, Retail Trade $54,993,346 $41,638,985 $24,271, Finance, Insurance, and Real Estate $32,779,352 $8,102,727 $3,844, Business Services $11,927,459 $7,411,500 $6,045, Health Services $12,573,659 $8,790,043 $7,432, Other Services $20,811,088 $10,858,726 $8,819, TOTAL $401,486,029 $193,883,284 $134,418,287 2,358 Source: US Multi Regional Impact Assessment System, The Perryman Group Note: Assumes that equipment installed within the facility is manufactured outside the region by The Perryman Group

16 Ongoing Operations of Caterpillar and Related Suppliers Once fully operational, The Perryman Group estimates that the Caterpillar facility will lead to gains in business activity in Victoria of some $205.4 million in output (gross product) each year as well as 2,156 jobs. Again, results for the Golden Crescent Region (including Victoria) are even higher. The Anticipated Annual Impact (at Maturity) of Operations Associated with the Caterpillar Manufacturing Facility and Related Suppliers on Business Activity Total Expenditures $ $ Gross Product $ $ Golden Crescent Region Personal Income Retail Sales $ $ $ $ Permanent Jobs 2,371 - Golden Crescent Region 2,156 - Victoria MSA Victoria MSA $0 $125 $250 $375 $500 $625 Source: The Perryman Group Millions of 2012 Dollars Among the industries experiencing the largest gains in activity (as noted in the following tables) are durable manufacturing and retail trade by The Perryman Group

17 The Anticipated Annual Impact (at Maturity) of Operations Associated with the Caterpillar Manufacturing Facility and Related Suppliers on Business Activity in the Victoria Metropolitan Statistical Area Sector Total Expenditures Real Gross Product Personal Income Employment (2012 Dollars) (2012 Dollars) (2012 Dollars) (Permanent Jobs) Agriculture $3,733,107 $1,020,334 $682, Mining $5,348,810 $1,272,695 $634,284 4 Construction $8,153,037 $4,366,637 $3,598, Nondurable Manufacturing Durable Manufacturing Transportation and Utilities $23,653,131 $6,085,113 $3,211, $232,133,920 $86,569,041 $61,552, $28,808,824 $11,020,498 $6,351, Information $4,588,097 $2,820,848 $1,220, Wholesale Trade $22,825,696 $15,443,692 $8,904, Retail Trade $55,354,801 $41,377,419 $24,031, Finance, Insurance, and Real Estate $34,919,990 $8,902,424 $4,252, Business Services $9,284,350 $5,557,378 $4,533, Health Services $13,376,806 $9,355,287 $7,909, Other Services $22,501,590 $11,655,663 $9,471, TOTAL $464,682,158 $205,447,028 $136,353,651 2,156 Source: US Multi Regional Impact Assessment System, The Perryman Group by The Perryman Group

18 The Anticipated Annual Impact (at Maturity) of Operations Associated with the Caterpillar Manufacturing Facility and Related Suppliers on Business Activity in the Golden Crescent Region Sector Total Expenditures Real Gross Product Personal Income Employment (2012 Dollars) (2012 Dollars) (2012 Dollars) (Permanent Jobs) Agriculture $6,918,522 $1,917,782 $1,270, Mining $6,232,820 $1,526,497 $890,391 5 Construction $8,308,453 $4,446,283 $3,664, Nondurable Manufacturing Durable Manufacturing Transportation and Utilities $44,556,825 $12,879,725 $6,775, $257,879,069 $96,142,847 $68,537, $28,982,595 $11,059,367 $6,368, Information $4,588,097 $2,820,848 $1,220, Wholesale Trade $22,825,696 $15,443,692 $8,904, Retail Trade $56,540,588 $42,360,010 $24,619, Finance, Insurance, and Real Estate $34,919,990 $8,902,424 $4,252, Business Services $9,284,350 $5,557,378 $4,533, Health Services $13,714,047 $9,594,311 $8,112, Other Services $23,030,764 $11,931,132 $9,695, TOTAL $517,781,814 $224,582,297 $148,843,196 2,371 Source: US Multi Regional Impact Assessment System, The Perryman Group by The Perryman Group

19 Effect of Chemical Facility Expansion Construction As noted, significant expansion is slated for area chemical facilities. The Perryman Group estimates that the gains in business activity generated by this construction include $577.3 million in output (gross product) and 7,038 person-years of employment in the Victoria MSA, with larger results for the region as a whole. The Total Impact of Ongoing and Anticipated Construction Associated with Significant New Chemical Facility Expansions on Business Activity Total Expenditures $1, $1, Gross Product $ $ Golden Crescent Region Personal Income Retail Sales $ $ $ $ Person-Years of Employment 7,450 - Golden Crescent Region 7,038 - Victoria MSA Victoria MSA $0 $200 $400 $600 $800 $1,000 $1,200 $1,400 $1,600 Millions of 2012 Dollars Note: Assumes that equipment installed within the faciliies is manufactured outside the region. Source: The Perryman Group Nondurable manufacturing and consumer-oriented industries would receive the largest gains, with benefits through all industrial segments as illustrated in the following tables by The Perryman Group

20 The Total Impact of Ongoing and Anticipated Construction Associated with Significant New Chemical Facility Expansions on Business Activity in the Victoria Metropolitan Statistical Area Sector Total Expenditures Real Gross Product Personal Income Employment (2012 Dollars) (2012 Dollars) (2012 Dollars) (Person Years) Agriculture $11,129,023 $3,082,026 $2,054, Mining $17,609,207 $4,340,919 $2,175, Construction $426,181,709 $193,676,195 $159,601,250 2,250 Nondurable Manufacturing Durable Manufacturing Transportation and Utilities $71,911,652 $17,652,392 $9,269, $61,960,710 $24,921,783 $15,553, $79,808,414 $31,144,939 $18,090, Information $13,965,343 $8,602,700 $3,724, Wholesale Trade $43,851,739 $29,650,918 $17,096, Retail Trade $166,390,875 $124,701,401 $72,484,778 2,220 Finance, Insurance, and Real Estate $106,993,128 $27,829,358 $13,379, Business Services $73,398,865 $47,102,675 $38,423, Health Services $40,255,471 $28,105,843 $23,763, Other Services $71,909,981 $36,474,904 $29,656, TOTAL $1,185,366,118 $577,286,055 $405,272,735 7,038 Source: US Multi Regional Impact Assessment System, The Perryman Group Note: Assumes that equipment installed within the facilities is manufactured outside the region by The Perryman Group

21 The Total Impact of Ongoing and Anticipated Construction Associated with Significant New Chemical Facility Expansions on Business Activity in the Golden Crescent Region Sector Total Expenditures Real Gross Product Personal Income Employment (2012 Dollars) (2012 Dollars) (2012 Dollars) (Person Years) Agriculture $20,260,769 $5,702,031 $3,762, Mining $19,353,725 $4,840,475 $2,701, Construction $426,188,417 $193,679,633 $159,604,075 2,251 Nondurable Manufacturing Durable Manufacturing Transportation and Utilities $129,089,591 $36,107,352 $18,877, $109,356,269 $41,676,196 $26,923, $79,808,414 $31,144,939 $18,090, Information $13,965,343 $8,602,700 $3,724, Wholesale Trade $43,851,739 $29,650,918 $17,096, Retail Trade $166,442,071 $124,743,827 $72,510,145 2,220 Finance, Insurance, and Real Estate $106,993,128 $27,829,358 $13,379, Business Services $73,398,865 $47,102,675 $38,423, Health Services $40,270,034 $28,116,167 $23,772, Other Services $71,932,812 $36,486,790 $29,666, TOTAL $1,300,911,177 $615,683,061 $428,532,330 7,450 Source: US Multi Regional Impact Assessment System, The Perryman Group Note: Assumes that equipment installed within the facilities is manufactured outside the region by The Perryman Group

22 Ongoing Operations At maturity, the operations of these chemical facility expansions could be expected to lead to gains in business activity of some $255.4 million in output (gross product) each year as well as 2,104 jobs in the Victoria MSA, with higher results for the region. The Anticipated Annual Impact (at Maturity) of Operations Associated with Significant New Chemical Facility Expansions on Business Activity Total Expenditures $ $ Gross Product Personal Income Retail Sales $ $ $ $ $ $ Permanent Jobs 2,212 - Golden Crescent Region 2,104 - Victoria MSA Golden Crescent Region Victoria MSA Source: The Perryman Group $0 $100 $200 $300 $400 $500 $600 $700 $800 Millions of 2012 Dollars Gains by sector stemming from these expanded chemical facilities are noted in the following tables by The Perryman Group

23 The Anticipated Annual Impact (at Maturity) of Operations Associated with Significant New Chemical Facility Expansions on Business Activity in the Victoria Metropolitan Statistical Area Sector Total Expenditures Real Gross Product Personal Income Employment (2012 Dollars) (2012 Dollars) (2012 Dollars) (Permanent Jobs) Agriculture $4,598,955 $1,364,394 $914, Mining $25,176,691 $6,194,392 $3,139, Construction $12,042,146 $6,610,994 $5,447, Nondurable Manufacturing Durable Manufacturing Transportation and Utilities $364,890,289 $116,162,818 $54,949, $7,618,726 $3,103,217 $1,976, $57,719,904 $19,939,077 $11,261, Information $5,158,841 $3,174,609 $1,373, Wholesale Trade $20,670,783 $13,992,904 $8,068, Retail Trade $59,554,173 $44,295,244 $25,687, Finance, Insurance, and Real Estate $38,736,715 $10,445,343 $4,888, Business Services $13,356,139 $7,903,051 $6,446, Health Services $13,761,879 $9,620,629 $8,134, Other Services $24,431,047 $12,581,191 $10,218, TOTAL $647,716,289 $255,387,863 $142,506,475 2,104 Source: US Multi Regional Impact Assessment System, The Perryman Group by The Perryman Group

24 The Anticipated Annual Impact (at Maturity) of Operations Associated with Significant New Chemical Facility Expansions on Business Activity in the Golden Crescent Region Sector Total Expenditures Real Gross Product Personal Income Employment (2012 Dollars) (2012 Dollars) (2012 Dollars) (Permanent Jobs) Agriculture $8,343,701 $2,499,525 $1,663, Mining $26,818,967 $6,663,010 $3,633, Construction $12,042,146 $6,610,994 $5,447, Nondurable Manufacturing Durable Manufacturing Transportation and Utilities $387,022,712 $123,298,168 $58,697, $13,296,857 $4,711,248 $3,103, $57,719,904 $19,939,077 $11,261, Information $5,158,841 $3,174,609 $1,373, Wholesale Trade $20,670,783 $13,992,904 $8,068, Retail Trade $59,554,173 $44,295,244 $25,687, Finance, Insurance, and Real Estate $38,736,715 $10,445,343 $4,888, Business Services $13,356,139 $7,903,051 $6,446, Health Services $13,761,879 $9,620,629 $8,134, Other Services $24,431,047 $12,581,191 $10,218, TOTAL $680,913,864 $265,734,992 $148,623,384 2,212 Source: US Multi Regional Impact Assessment System, The Perryman Group by The Perryman Group

25 Effect of the Eagle Ford Shale: 2012 The Eagle Ford Shale has recently experienced a major upswing in drilling and other exploration activity. As a regional financial and business center, Victoria receives notable spillover benefits from this activity such as locations of regional offices for drilling and service companies and incremental activity for a variety of businesses ranging from law firms to banks to restaurants and retail stores. The Golden Crescent Region also includes a portion of the shale play, with drilling and production ongoing. The Eagle Ford Shale is a relatively new field, and activity (and, thus, the associated economic impact) is expected to grow over time. The Perryman Group quantified these benefits as of 2012, as well as projections for by The Perryman Group

26 Spillover Benefits for Victoria Current spillover benefits for Victoria stemming from activity within the Eagle Ford Shale were estimated to include $241.2 million in output (gross product) and 2,863 permanent jobs. The Current (as of 2012) Annual Impact of the "Spillover" Benefits Associated with the Development of the Eagle Ford Shale on Business Activity in the Victoria Metropolitan Statistical Area Total Expenditures $ Gross Product $ Personal Income $ Permanent Jobs 2,863 Retail Sales $ $0 $125 $250 $375 $500 $625 $750 $875 Millions of 2012 Dollars Note: Based on typical value capture of supplier, service, and retail activity from the surrounding trade area. Source: The Perryman Group As a financial center for much of the region, the Victoria finance, insurance, and real estate segment is a major beneficiary. Retail trade is also likely to see notable gains. Other industry-level benefits are described in the table below by The Perryman Group

27 The Current (as of 2012) Annual Impact of the "Spillover" Benefits Associated with the Development of the Eagle Ford Shale on Business Activity in the Victoria Metropolitan Statistical Area Sector Total Expenditures Real Gross Product Personal Income Employment (2012 Dollars) (2012 Dollars) (2012 Dollars) (Permanent Jobs) Agriculture $12,506,931 $4,443,335 $2,964, Mining $19,798,327 $4,646,247 $2,472, Construction $49,743,490 $24,734,174 $20,382, Nondurable Manufacturing Durable Manufacturing Transportation and Utilities $76,487,515 $20,729,586 $10,623, $35,674,230 $13,182,212 $8,700, $53,354,373 $18,760,400 $10,521, Information $7,412,356 $4,566,116 $1,971, Wholesale Trade $18,433,843 $12,469,505 $7,190, Retail Trade $90,825,752 $68,279,926 $39,716,197 1,212 Finance, Insurance, and Real Estate $300,683,793 $25,560,387 $10,365, Business Services $16,372,587 $9,609,486 $7,838, Health Services $21,501,177 $15,019,964 $12,699, Other Services $38,260,715 $19,238,900 $15,709, TOTAL $741,055,088 $241,240,239 $151,157,767 2,863 Source: US Multi Regional Impact Assessment System, The Perryman Group Note: Based on typical value capture of supplier, service, and retail activity from the surrounding trade area by The Perryman Group

28 Drilling, Extraction, and Related Operations The regional economy experiences larger economic benefits of the Eagle Ford Shale, capturing a significant amount of exploration and production. The Perryman Group estimates that current gains in business activity for the region associated with the development of the Eagle Ford Shale include $1.7 billion in output (gross product) and 17,371 jobs. The Current (as of 2012) Annual Impact of Drilling, Extraction, and Related Operations Associated with the Development of the Eagle Ford Shale on Business Activity in the Golden Crescent Region Total Expenditures $5, Gross Product $1, Personal Income $1, Permanent Jobs 17,371 Retail Sales $ $0 $1,600 $3,200 $4,800 $6,400 Millions of 2012 Dollars Note: Includes exploration and drilling, extraction, lease and royalty payments and associated construction. Source: The Perryman Group In addition to the mining sector, construction and various consumer-oriented segments (as well as the finance, insurance, and real estate sector) see particularly large effects (as illustrated in the following table) by The Perryman Group

29 The Current (as of 2012) Annual Impact of Drilling, Extraction, and Related Operations Associated with the Development of the Eagle Ford Shale on Business Activity in the Golden Crescent Region Sector Total Expenditures Real Gross Product Personal Income Employment (2012 Dollars) (2012 Dollars) (2012 Dollars) (Permanent Jobs) Agriculture $61,640,319 $21,898,943 $14,611, Mining $1,408,612,396 $310,183,216 $144,681, Construction $800,942,322 $346,693,588 $285,697,108 4,029 Nondurable Manufacturing Durable Manufacturing Transportation and Utilities $376,968,172 $102,165,616 $52,360, $175,820,187 $64,968,438 $42,879, $262,956,647 $92,460,499 $51,857, Information $36,531,743 $22,504,070 $9,718, Wholesale Trade $90,851,062 $61,455,866 $35,436, Retail Trade $447,634,068 $336,517,127 $195,740,995 5,972 Finance, Insurance, and Real Estate $1,481,917,924 $125,974,186 $51,085, Business Services $80,692,176 $47,360,281 $38,633, Health Services $105,968,396 $74,025,787 $62,589,490 1,034 Other Services $188,567,662 $94,818,783 $77,424,771 1,870 TOTAL $5,519,103,074 $1,701,026,401 $1,062,717,213 17,371 Source: US Multi Regional Impact Assessment System, The Perryman Group Note: Includes exploration and drilling, extraction, lease and royalty payments, and associated construction by The Perryman Group

30 Effect of the Eagle Ford Shale: 2020 As noted, the Eagle Ford Shale is a relatively new field, and the pace of development is growing. The economic impact of related drilling and production will likely continue to grow through the forecast horizon. The projections examined in the present analysis assume a baseline pattern in future petroleum and natural gas prices developed by the Energy Information Administration. Spillover Benefits for Victoria By 2020, The Perryman Group estimates that gains in business activity in Victoria associated with the Eagle Ford Shale would include $344.1 million in output (gross product) and 4,083 jobs. The Projected (as of 2020) Annual Impact of the "Spillover" Benefits Associated with the Development of the Eagle Ford Shale on Business Activity in the Victoria Metropolitan Statistical Area Total Expenditures $1, Gross Product $ Personal Income $ Permanent Jobs 4,083 Retail Sales $ $0 $175 $350 $525 $700 $875 $1,050 $1,225 Millions of 2012 Dollars Note: Based on typical value capture of supplier, service, and retail activity from the surrounding trade area. Source: The Perryman Group by The Perryman Group

31 The 2020 benefits by sector are indicated in the following table. The Projected (as of 2020) Annual Impact of the "Spillover" Benefits Associated with the Development of the Eagle Ford Shale on Business Activity in the Victoria Metropolitan Statistical Area Sector Total Expenditures Real Gross Product Personal Income Employment (2012 Dollars) (2012 Dollars) (2012 Dollars) (Permanent Jobs) Agriculture $17,838,873 $6,337,613 $4,228, Mining $28,238,729 $6,627,030 $3,526, Construction $70,950,084 $35,278,822 $29,071, Nondurable Manufacturing Durable Manufacturing Transportation and Utilities $109,095,595 $29,567,002 $15,153, $50,882,831 $18,802,039 $12,409, $76,100,355 $26,758,315 $15,007, Information $10,572,384 $6,512,738 $2,812, Wholesale Trade $26,292,540 $17,785,492 $10,255, Retail Trade $129,546,494 $97,388,954 $56,647,966 1,728 Finance, Insurance, and Real Estate $428,871,001 $36,457,266 $14,784, Business Services $23,352,531 $13,706,192 $11,180, Health Services $30,667,537 $21,423,260 $18,113, Other Services $54,571,984 $27,440,809 $22,406, TOTAL $1,056,980,939 $344,085,532 $215,599,192 4,083 Source: US Multi Regional Impact Assessment System, The Perryman Group Note: Based on typical value capture of supplier, service, and retail activity from the surrounding trade area by The Perryman Group

32 Drilling, Extraction, and Related Operations For the Golden Crescent Region, the anticipated positive economic effects of the Eagle Ford Shale rise to $7.9 billion in output (gross product) each year and 24,776 jobs by The Projected (as of 2020) Annual Impact of Drilling, Extraction, and Related Operations Associated with the Development of the Eagle Ford Shale on Business Activity in the Golden Crescent Region Total Expenditures $7, Gross Product $2, Personal Income $1, Permanent Jobs 24,776 Retail Sales $ $0 $1,000 $2,000 $3,000 $4,000 $5,000 $6,000 $7,000 $8,000 $9,000 Millions of 2012 Dollars Note: Includes exploration and drilling, extraction, lease and royalty payments and associated construction. Source: The Perryman Group The sectoral breakout of the 2020 economic benefits of the Eagle Ford Shale for the region is indicated in the following table by The Perryman Group

33 The Projected (as of 2020) Annual Impact of Drilling, Extraction, and Related Operations Associated with the Development of the Eagle Ford Shale on Business Activity in the Golden Crescent Region Sector Total Expenditures Real Gross Product Personal Income Employment (2012 Dollars) (2012 Dollars) (2012 Dollars) (Permanent Jobs) Agriculture $87,918,757 $31,234,879 $20,841, Mining $2,009,130,598 $442,420,208 $206,362,058 1,028 Construction $1,142,399,237 $494,495,646 $407,495,208 5,747 Nondurable Manufacturing Durable Manufacturing Transportation and Utilities $537,676,859 $145,720,758 $74,682,435 1,198 $250,775,670 $92,665,716 $61,159, $375,060,057 $131,878,165 $73,965, Information $52,105,918 $32,097,982 $13,861, Wholesale Trade $129,582,594 $87,655,669 $50,543, Retail Trade $638,468,968 $479,980,765 $279,189,097 8,518 Finance, Insurance, and Real Estate $2,113,687,663 $179,679,373 $72,864, Business Services $115,092,783 $67,550,868 $55,104, Health Services $151,144,735 $105,584,386 $89,272,577 1,474 Other Services $268,957,635 $135,241,830 $110,432,420 2,668 TOTAL $7,872,001,474 $2,426,206,244 $1,515,773,733 24,776 Source: US Multi Regional Impact Assessment System, The Perryman Group Note: Includes exploration and drilling, extraction, lease and royalty payments and associated construction by The Perryman Group

34 Long-Term Forecast for Victoria and the Golden Crescent Region by The Perryman Group

35 Long-Term Forecast for Victoria and the Golden Crescent Region The Perryman Group s analysis of major changes in the economy of Victoria and the surrounding region (described in the prior section) was used in preparing a detailed long-term forecast through Given the recent major industrial announcements and emerging Eagle Ford Shale, the economy of the area is expected to see notable shifts and more rapid growth through the forecast horizon. Economic Forecast Overview As noted, The Perryman Group forecasts economic growth through 2020 for the Victoria Metropolitan Statistical Area (Calhoun, Goliad, and Victoria counties). From 2012 to 2020, The Perryman Group s forecast calls for growth in output (gross product) at a 4.21% compound annual rate, resulting in an increase from an estimated $6.17 billion in 2012 to $8.58 billion in The population is projected to expand by some 16,040 residents to reach 135,160 in Job gains over the time horizon are forecast to total 11,420. The outlook for these and other key indicators of economic activity is described in the following table by The Perryman Group

36 Outlook for the Victoria Metropolitan Statistical Area: (Calhoun, Goliad, and Victoria Counties) Key Indicator 2012 Level 2020 Level Growth Rate* Increase Real Gross Product (2012$) $6.17 billion $8.58 billion 4.21% $2.41 billion Population 119, , % 16,040 Wage & Salary Employment 56,480 67, % 11,420 Real Personal Income (by place of residence in 2012$) $5.20 billion $7.40 billion 4.52% $2.20 billion Real Retail Sales (2012$) $1.96 billion $2.75 billion 4.38% $0.79 billion *Compound Annual Growth Rate, meaning that it reflects changes in the base from which growth is calculated. See Appendix B for further information. For the Golden Crescent Region (including the Victoria MSA), The Perryman Group s projections through 2020 call for healthy growth in all economic indicators. Job growth in the region is forecast to total 20,690 over the period, while the population expands by 34,030. Growth rates and increases for key economic indicators are summarized in the following table by The Perryman Group

37 Outlook for the Golden Crescent Region: (Calhoun, DeWitt, Goliad, Gonzales, Jackson, Lavaca, and Victoria Counties) Key Indicator 2012 Level 2020 Level Growth Rate* Increase Real Gross Product (2012$) $8.41 billion $12.2 billion 4.68% $3.79 billion Population 192, , % 34,030 Wage & Salary Employment 84, , % 20,690 Real Personal Income (by place of residence in 2012$) $7.96 billion $11.59 billion 4.80% $3.63 billion Real Retail Sales (2012$) $2.99 billion $4.29 billion 4.64% $1.30 billion *Compound Annual Growth Rate, meaning that it reflects changes in the base from which growth is calculated. See Appendix B for further information. Total Output Growth Over Time To place this growth in context, output (real gross product) in Victoria and the surrounding region is expected to reach prerecession levels this year, with healthy expansion extending through the forecast horizon. The following graphs illustrate real gross product for Victoria and the Golden Crescent Region from 2001 through the forecast horizon (2020) by The Perryman Group

38 Real Gross Product for the Victoria Metropolitan Statistical Area $10,000 $9,000 $8,000 Millions of 2012 Dollars $7,000 $6,000 $5,000 $4,000 $3,000 $2,000 $1,000 $ Source: The Perryman Group Real Gross Product for the Golden Crescent Region $14,000 $12,000 $10,000 Millions of 2012 Dollars $8,000 $6,000 $4,000 $2,000 $ Source: The Perryman Group by The Perryman Group

39 Output Growth by Sector On a sectoral basis, growth in the Victoria MSA is expected to be particularly strong in durable manufacturing (with a 6.32% compound annual growth rate between 2012 and 2020), information (5.45% expansion), and services (5.14% growth). These sectors also lead the pace of growth in the region by The Perryman Group

40 Output Gains In terms of the absolute level of output (real gross product) the largest gains are projected to occur within the large services and nondurable manufacturing segments. For the Victoria MSA, the services sector is forecast to expand by $534.3 million by 2020, while nondurable grows by $525.9 million by The Perryman Group

41 by The Perryman Group

42 Output Composition Currently, the largest contributors to output (gross product) in the Victoria MSA are nondurable manufacturing, services, and mining. Sectoral Composition of RGP (Output) for the Victoria Metropolitan Statistical Area 2012 Government, 9.88% Agriculture, 0.30% Mining, 17.15% Services, 17.55% Construction, 6.84% FIRE, 7.26% Durable Mfg, 4.45% Information, 1.09% TWU, 4.17% Nondurable Mfg, 18.92% Trade, 12.38% Note: FIRE is Finance, Insurance, & Real Estate TWU is Transportation, Warehousing, & Utilities Source: The Perryman Group The region as a whole follows a similar pattern, as illustrated in the chart below by The Perryman Group

43 Sectoral Composition of RGP (Output) for the Golden Crescent Region 2012 Government, 11.57% Agriculture, 0.50% Mining, 15.67% Services, 16.57% Construction, 6.35% Durable Mfg, 4.68% FIRE, 7.51% Information, 1.10% TWU, 4.32% Nondurable Mfg, 19.41% Trade, 12.32% Note: FIRE is Finance, Insurance, & Real Estate TWU is Transportation, Warehousing, & Utilities Source: The Perryman Group These sectors will become even more important in the years to come. Nondurable manufacturing (which includes chemical manufacturing facilities) is forecast to rise to a 19.73% share of economic output in Victoria by by The Perryman Group

44 Projected Sectoral Composition of RGP (Output) for the Victoria Metropolitan Statistical Area 2020 Government, 8.44% Agriculture, 0.30% Mining, 16.29% Services, 18.84% Construction, 5.56% Durable Mfg, 5.22% FIRE, 7.01% Information, 1.20% TWU, 4.45% Nondurable Mfg, 19.73% Trade, 12.95% Note: FIRE is Finance, Insurance, & Real Estate TWU is Transportation, Warehousing, & Utilities Source: The Perryman Group Projected Sectoral Composition of RGP (Output) for the Golden Crescent Region 2020 Government, 9.49% Agriculture, 0.50% Mining, 15.36% Services, 17.77% Construction, 6.10% Durable Mfg, 5.25% FIRE, 7.27% Information, 1.21% TWU, 4.58% Nondurable Mfg, 19.33% Trade, 13.12% Note: FIRE is Finance, Insurance, & Real Estate TWU is Transportation, Warehousing, & Utilities Source: The Perryman Group by The Perryman Group

45 Total Employment Over Time Like most areas of the United States, Victoria and the Golden Crescent Region experienced a decrease in employment during the recent recession. However, previous peaks have now been surpassed, and employment is projected to continue to expand through the forecast horizon (2020). 80 Wage & Salary Employment for the Victoria Metropolitan Statistical Area Thousands of Persons Source: The Perryman Group by The Perryman Group

46 Wage & Salary Employment for the Golden Crescent Region Thousands of Persons Source: The Perryman Group Employment Growth by Sector In terms of the rate of growth in employment from 2012 through 2020, durable manufacturing, services industries, and wholesale and retail trade are expected to lead the way. As illustrated in the following graphs, all segments are projected to see expansion over the period by The Perryman Group

47 Projected Wage and Salary Employment Growth Rates by Sector for the Victoria Metropolitan Statistical Area Government 0.88% Services 3.41% FIRE 1.79% Information 2.16% TWU Trade 2.72% 2.93% Nondurable Mfg 1.90% Durable Mfg 3.49% Construction 0.53% Mining Agriculture 0.99% 0.97% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% Note: FIRE is Finance, Insurance, & Real Estate TWU is Transportation, Warehousing, & Utilities Source: The Perryman Group Compound Annual Growth Rate Projected Wage and Salary Employment Growth Rates by Sector for the Golden Crescent Region Government 0.81% Services 3.91% FIRE Information 2.22% 2.50% TWU 3.18% Trade 3.69% Nondurable Mfg 1.68% Durable Mfg 3.34% Construction 2.94% Mining 1.80% Agriculture 0.92% 0.0% 0.5% 1.0% 1.5% 2.0% 2.5% 3.0% 3.5% 4.0% 4.5% Note: FIRE is Finance, Insurance, & Real Estate TWU is Transportation, Warehousing, & Utilities Source: The Perryman Group Compound Annual Growth Rate by The Perryman Group

48 Employment Gains The greatest absolute numbers of net new jobs are projected to be in the area s large services sector, which will likely gain 5,677 jobs in the Victoria MSA over the period (8,873 for the region as a whole) by The Perryman Group

49 Employment Composition Currently, an estimated 32.62% of Victoria jobs fall within the services sector; this segment is forecast to expand as a component of area employment over time, reaching 35.49% of the total by by The Perryman Group

50 Sectoral Composition of Wage and Salary Employment for the Victoria Metropolitan Statistical Area 2012 Agriculture, 0.93% Mining, 5.52% Government, 16.03% Construction, 10.01% Durable Mfg, 3.92% Nondurable Mfg, 7.08% Services, 32.62% Trade, 16.21% FIRE, 3.99% Note: FIRE is Finance, Insurance, & Real Estate TWU is Transportation, Warehousing, & Utilities Source: The Perryman Group TWU, 2.74% Information, 0.95% Sectoral Composition of Wage and Salary Employment for the Golden Crescent Region 2012 Agriculture, 2.58% Mining, 4.66% Government, 17.88% Construction, 8.72% Durable Mfg, 4.20% Nondurable Mfg, 9.11% Services, 29.36% Trade, 16.07% FIRE, 3.96% TWU, 2.55% Note: FIRE is Finance, Insurance, & Real Estate TWU is Transportation, Warehousing, & Utilities Source: The Perryman Group Information, 0.90% by The Perryman Group

51 Projected Sectoral Composition of Wage and Salary Employment for the Victoria Metropolitan Statistical Area 2020 Government, 14.30% Agriculture, 0.84% Mining, 4.97% Construction, 8.68% Durable Mfg, 4.29% Nondurable Mfg, 6.84% Services, 35.49% Trade, 16.99% Note: FIRE is Finance, Insurance, & Real Estate TWU is Transportation, Warehousing, & Utilities Source: The Perryman Group FIRE, 3.82% TWU, 2.83% Information, 0.94% Projected Sectoral Composition of Wage and Salary Employment for the Golden Crescent Region 2020 Government, 15.31% Agriculture, 2.23% Mining, 4.32% Construction, 8.83% Durable Mfg, 4.38% Nondurable Mfg, 8.35% Services, 32.03% Trade, 17.25% FIRE, 3.79% TWU, 2.63% Note: FIRE is Finance, Insurance, & Real Estate TWU is Transportation, Warehousing, & Utilities Source: The Perryman Group Information, 0.88% by The Perryman Group

52 Conclusion by The Perryman Group

53 Conclusion Victoria and the Golden Crescent Region are forecast to experience economic growth at a pace exceeding most parts of the United States. Several industries are contributing to the expansion both through direct stimulus of their operations and through multiplier effects through the economy. o Construction associated with Caterpillar and significant chemical facility expansions will generate a large (though transitory) stimulus to the economy. o When fully operational, The Perryman Group found that the Caterpillar facility will likely lead to gains in business activity in Victoria of some $205.4 million in output (gross product) each year as well as 2,156 jobs. o At maturity, the operations of chemical facility expansions could be expected to lead to gains in business activity of $255.4 million in output (gross product) each year as well as 2,104 jobs in the Victoria MSA. o Current spillover benefits for Victoria stemming from activity within the Eagle Ford Shale were estimated to include $241.2 million in output (gross product) and 2,863 permanent jobs. By 2020, these gains will likely expand to $344.1 million in output (gross product) and 4,083 jobs. For the Golden Crescent Region, the Eagle Ford Shale is an even larger source of stimulus. The Perryman Group estimates that current gains in business activity for the region (including those occurring within the Victoria MSA) include $1.7 billion in output (gross product) and 17,371 jobs. The positive economic effects of the Eagle Ford Shale on the region rise to $7.9 billion in output (gross product) each year and 24,776 jobs by by The Perryman Group

54 These notable gains enhance the outlook for the area economy, and The Perryman Group projects that output (real gross product) in the Victoria Metropolitan Statistical Area will expand at a 4.21% annual pace, while employment grows by 2.33%. For the region as a whole, the pace of expansion is somewhat higher, with output up 4.68% per annum and employment growth of 2.78% over the period. While past performance in a local area is often a very strong indicator for future potential growth, such is not the case in Victoria. Recent large corporate locations and expansions and the emergence of the Eagle Ford Shale are reshaping the area economy, thus enhancing future expectations by The Perryman Group

55 APPENDICES by The Perryman Group

56 APPENDIX A: US Multi-Regional Impact Assessment System Methodology by The Perryman Group

57 US Multi-Regional Impact Assessment System The basic modeling technique employed in this study is known as dynamic inputoutput analysis. This methodology essentially uses extensive survey data, industry information, and a variety of corroborative source materials to create a matrix describing the various goods and services (known as resources or inputs) required to produce one unit (a dollar s worth) of output for a given sector. Once the base information is compiled, it can be mathematically simulated to generate evaluations of the magnitude of successive rounds of activity involved in the overall production process. There are two essential steps in conducting an input-output analysis once the system is operational. The first major endeavor is to accurately define the levels of direct activity to be evaluated. In the case of a prospective evaluation, it is necessary to first calculate reasonable estimates of the direct activity. In this instance, data regarding the Caterpillar manufacturing facility and recent and proposed chemical facility expansions was compiled from public announcements related to the projects. Current and likely future drilling, exploration, and production in the Eagle Ford Shale were based on public data, primarily from the Texas Railroad Commission, and estimates of future development assuming a baseline projection regarding future prices from the Energy Information Administration. The second major phase of the analysis is the simulation of the input-output system to measure overall economic effects. The present study was conducted within the context of the US Multi-Regional Impact Assessment System (USMRIAS) which was developed and is maintained by The Perryman Group. This model has been used in hundreds of diverse applications across the country and has an excellent reputation for accuracy and credibility. The systems used in the current simulations reflect the unique industrial structures of the Victoria Metropolitan Statistical Area and Golden Crescent Regions of Texas. These results were then integrated with the forecast results to account for recent developments in the future economic outlook. The USMRIAS is somewhat similar in format to the Input-Output Model of the United States and the Regional Input-Output Modeling System, both of which are maintained by the US Department of Commerce. The model developed by TPG, however, incorporates several important enhancements and refinements. Specifically, the expanded system includes (1) comprehensive 500-sector coverage for any county, multi-county, or urban region; (2) calculation of both total expenditures and value-added by industry and region; (3) direct estimation of expenditures for multiple basic input choices (expenditures, output, income, or employment); (4) extensive parameter localization; (5) price adjustments for real and nominal assessments by sectors and areas; (6) measurement of the induced impacts associated with payrolls and consumer spending; (7) embedded modules to estimate multi-sectoral direct spending effects; (8) estimation of retail spending activity by consumers; and (9) comprehensive linkage and integration capabilities with a wide variety of econometric, real estate, occupational, and fiscal impact models. The models used for the present investigation have been thoroughly tested for reasonableness and historical reliability by The Perryman Group

58 The impact assessment (input-output) process essentially estimates the amounts of all types of goods and services required to produce one unit (a dollar s worth) of a specific type of output. For purposes of illustrating the nature of the system, it is useful to think of inputs and outputs in dollar (rather than physical) terms. As an example, the construction of a new building will require specific dollar amounts of lumber, glass, concrete, hand tools, architectural services, interior design services, paint, plumbing, and numerous other elements. Each of these suppliers must, in turn, purchase additional dollar amounts of inputs. This process continues through multiple rounds of production, thus generating subsequent increments to business activity. The initial process of building the facility is known as the direct effect. The ensuing transactions in the output chain constitute the indirect effect. Another pattern that arises in response to any direct economic activity comes from the payroll dollars received by employees at each stage of the production cycle. As workers are compensated, they use some of their income for taxes, savings, and purchases from external markets. A substantial portion, however, is spent locally on food, clothing, healthcare services, utilities, housing, recreation, and other items. Typical purchasing patterns in the relevant areas are obtained from the ACCRA Cost of Living Index, a privately compiled inter-regional measure which has been widely used for several decades, and the Consumer Expenditure Survey of the US Department of Labor. These initial outlays by area residents generate further secondary activity as local providers acquire inputs to meet this consumer demand. These consumer spending impacts are known as the induced effect. The USMRIAS is designed to provide realistic, yet conservative, estimates of these phenomena. Sources for information used in this process include the Bureau of the Census, the Bureau of Labor Statistics, the Regional Economic Information System of the US Department of Commerce, and other public and private sources. The pricing data are compiled from the US Department of Labor and the US Department of Commerce. The verification and testing procedures make use of extensive public and private sources. Note that all monetary values are given in constant (2012) dollars to eliminate the effects of inflation. The USMRIAS generates estimates of the effect on several measures of business activity. The most comprehensive measure of economic activity used in this study is Total Expenditures. This measure incorporates every dollar that changes hands in any transaction. For example, suppose a farmer sells wheat to a miller for $0.50; the miller then sells flour to a baker for $0.75; the baker, in turn, sells bread to a customer for $1.25. The Total Expenditures recorded in this instance would be $2.50, that is, $ $ $1.25. This measure is quite broad, but is useful in that (1) it reflects the overall interplay of all industries in the economy, and (2) some key fiscal variables such as sales taxes are linked to aggregate spending. A second measure of business activity frequently employed in this analysis is that of Gross Product. This indicator represents the regional equivalent of Gross Domestic Product, the most commonly reported statistic regarding national economic performance. In other words, the Gross Product of Arkansas is the amount of US output that is produced in that state; it is defined as the value of all final goods produced in a given region for a specific period of time. Stated differently, it captures the amount of value-added (gross area product) over by The Perryman Group

59 intermediate goods and services at each stage of the production process, that is, it eliminates the double counting in the Total Expenditures concept. Using the example above, the Gross Product is $1.25 (the value of the bread) rather than $2.50. Alternatively, it may be viewed as the sum of the value-added by the farmer, $0.50; the miller, $0.25 ($ $0.50); and the baker, $0.50 ($ $0.75). The total value-added is, therefore, $1.25, which is equivalent to the final value of the bread. In many industries, the primary component of value-added is the wage and salary payments to employees. The third gauge of economic activity used in this evaluation is Personal Income. As the name implies, Personal Income is simply the income received by individuals, whether in the form of wages, salaries, interest, dividends, proprietors profits, or other sources. It may thus be viewed as the segment of overall impacts which flows directly to the citizenry. The fourth measure, Retail Sales, represents the component of Total Expenditures which occurs in retail outlets (general merchandise stores, automobile dealers and service stations, building materials stores, food stores, drugstores, restaurants, and so forth). Retail Sales is a commonly used measure of consumer activity. The final aggregates used are Permanent Jobs and Person-Years of Employment. The Person-Years of Employment measure reveals the full-time equivalent jobs generated by an activity. It should be noted that, unlike the dollar values described above, Permanent Jobs is a stock rather than a flow. In other words, if an area produces $1 million in output in 2010 and $1 million in 2011, it is appropriate to say that $2 million was achieved in the period. If the same area has 100 people working in 2010 and 100 in 2011, it only has 100 Permanent Jobs. When a flow of jobs is measured, such as in a construction project or a cumulative assessment over multiple years, it is appropriate to measure employment in Person-Years (a person working for a year). This concept is distinct from Permanent Jobs, which anticipates that the relevant positions will be maintained on a continuing basis by The Perryman Group

60 APPENDIX B: The Texas Econometric Model Methodology by The Perryman Group

61 The Texas Econometric Model Overview The Texas Econometric Model. The system was developed by Dr. M. Ray Perryman, President and CEO of The Perryman Group (TPG) approximately 30 years ago has been consistently maintained and updated since that time. It is formulated in an internally consistent manner and is designed to permit the integration of relevant global, national, state, and local factors into the projection process. It is the result of more than three decades of continuing research in econometrics, economic theory, statistical methods, and key policy issues and behavioral patterns, as well as intensive, ongoing study of local, regional, and national economies. It is extensively used by scores of federal and State governmental entities on an ongoing basis, as well as hundreds of major corporations. In this instance, the Texas Econometric Model was used to describe current and projected economic activity in the Victoria Metropolitan Statistical Area and Golden Crescent Region. This section describes the forecasting process in a comprehensive manner, focusing on both the modeling and the supplemental analysis. The overall methodology, while certainly not ensuring perfect foresight, permits an enormous body of relevant information to impact the economic outlook in a systematic manner. Model Logic and Structure The Texas Econometric Model revolves around a core system which projects output (real and nominal), income (real and nominal), and employment by industry in a simultaneous manner. For purposes of illustration, it is useful to initially consider the employment functions. Essentially, employment within the system is a derived demand relationship obtained from a neo-classical production function. The expressions are augmented to include dynamic temporal adjustments to changes in relative factor input costs, output and (implicitly) productivity, and technological progress over time. Thus, the typical equation includes output, the relative real cost of labor and capital, dynamic lag structures, and a technological adjustment parameter. The functional form is logarithmic, thus preserving the theoretical consistency with the neo-classical formulation. The income segment of the model is divided into wage and non-wage components. The wage equations, like their employment counterparts, are individually estimated at the 3-digit North American Industry Classification System (NAICS) level of aggregation. Hence, income by place of work is measured for approximately 90 production categories. The wage equations measure real compensation, with the form of the variable structure differing between basic and non-basic. The basic industries, comprised primarily of the various components of Mining, Agriculture, and Manufacturing, are export-oriented, i.e., they bring external dollars into the area and form the core of the economy. The production of these sectors by The Perryman Group

62 typically flows into national and international markets; hence, the labor markets are influenced by conditions in areas beyond the borders of the particular region. Thus, real (inflation-adjusted) wages in the basic industry are expressed as a function of the corresponding national rates, as well as measures of local labor market conditions (the reciprocal of the unemployment rate), dynamic adjustment parameters, and ongoing trends. The non-basic sectors are somewhat different in nature, as the strength of their labor markets is linked to the health of the local export sectors. Consequently, wages in these industries are related to those in the basic segment of the economy. The relationship also includes the local labor market measures contained in the basic wage equations. Note that compensation rates in the export or basic sectors provide a key element of the interaction of the regional economies with national and international market phenomena, while the non-basic or local industries are strongly impacted by area production levels. Given the wage and employment equations, multiplicative identities in each industry provide expressions for total compensation; these totals may then be aggregated to determine aggregate wage and salary income. Simple linkage equations are then estimated for the calculation of personal income by place of work. The non-labor aspects of personal income are modeled at the regional level using straightforward empirical expressions relating to national performance, dynamic responses, and evolving temporal patterns. In some instances (such as dividends, rents, and others) national variables (for example, interest rates) directly enter the forecasting system. These factors have numerous other implicit linkages into the system resulting from their simultaneous interaction with other phenomena in national and international markets which are explicitly included in various expressions. The output or gross area product expressions are also developed at the 3-digit NAICS level. Regional output for basic industries is linked to national performance in the relevant industries, local and national production in key related sectors, relative area and national labor costs in the industry, dynamic adjustment parameters, and ongoing changes in industrial interrelationships (driven by technological changes in production processes). Output in the non-basic sectors is modeled as a function of basic production levels, output in related local support industries (if applicable), dynamic temporal adjustments, and ongoing patterns. The inter-industry linkages are obtained from the input-output (impact assessment) system which is part of the overall integrated modeling structure maintained by The Perryman Group. Note that the dominant component of the econometric system involves the simultaneous estimation and projection of output (real and nominal), income (real and nominal), and employment at a disaggregated industrial level. This process, of necessity, also produces projections of regional price deflators by industry. These values are affected by both national pricing patterns and local cost variations and permit changes in prices to impact other aspects of economic behavior. Income is converted from real to nominal terms using Texas Consumer Price Index, which fluctuates in response to national pricing patterns and unique local phenomena by The Perryman Group

63 Several other components of the model are critical to the forecasting process. The demographic module includes (1) a linkage equation between wage and salary (establishment) employment and household employment, (2) a labor force participation rate function, and (3) a complete population system with endogenous migration. Given household employment, labor force participation (which is a function of economic conditions and evolving patterns of worker preferences), and the working age population, the unemployment rate and level become identities. The population system uses Census information, fertility rates, and life tables to determine the natural changes in population by age group. Migration, the most difficult segment of population dynamics to track, is estimated in relation to relative regional and extra-regional economic conditions over time. Because evolving economic conditions determine migration in the system, population changes are allowed to interact simultaneously with overall economic conditions. Through this process, migration is treated as endogenous to the system, thus allowing population to vary in accordance with relative business performance (particularly employment). Real retail sales is related to income, interest rates, dynamic adjustments, and patterns in consumer behavior on a store group basis. It is expressed on an inflation-adjusted basis. Inflation at the state level relates to national patterns, indicators of relative economic conditions, and ongoing trends. A final significant segment of the forecasting system relates to real estate absorption and activity. The short-term demand for various types of property is determined by underlying economic and demographic factors, with short-term adjustments to reflect the current status of the pertinent building cycle. In some instances, this portion of the forecast requires integration with the Multi-Regional Industry-Occupation System which is maintained by The Perryman Group. The overall Texas Econometric Model contains numerous additional specifications, and individual expressions are modified to reflect alternative lag structures, empirical properties of the estimates, simulation requirements, and similar phenomena. Moreover, it is updated on an ongoing basis as new data releases become available. Nonetheless, the above synopsis offers a basic understanding of the overall structure and underlying logic of the system. Model Simulation and Multi-Regional Structure The initial phase of the simulation process is the execution of a standard non-linear algorithm for the state system and that of each of the individual sub-areas. The external assumptions are derived from scenarios developed through national and international models and extensive analysis by The Perryman Group. The US model, which follows the basic structure outlined above, was used to some extent in the current analysis to define the demand for domestically produced goods on a per capita basis. Once the initial simulations are completed, they are merged into a single system with additive constraints and interregional flows. Using information on minimum regional requirements, import needs, export potential, and locations, it becomes possible to balance the various forecasts into a mathematically consistent set of results. This by The Perryman Group

64 process is, in effect, a disciplining exercise with regard to the individual regional (including metropolitan and rural) systems. By compelling equilibrium across all regions and sectors, the algorithm ensures that the patterns in state activity are reasonable in light of smaller area dynamics and, conversely, that the regional outlooks are within plausible performance levels for the state as a whole. The iterative simulation process has the additional property of imposing a global convergence criterion across the entire multi-regional system, with balance being achieved simultaneously on both a sectoral and a geographic basis. This approach is particularly critical on non-linear dynamic systems, as independent simulations of individual systems often yield unstable, non-convergent outcomes. It should be noted that the underlying data for the modeling and simulation process are frequently updated and revised by the various public and private entities compiling them. Whenever those modifications to the database occur, they bring corresponding changes to the structural parameter estimates of the various systems and the solutions to the simulation and forecasting system. The multi-regional version of the Texas Econometric Model is re-estimated and simulated with each such data release, thus providing a constantly evolving and current assessment of state and local business activity. The Final Forecast The process described above is followed to produce an initial set of projections. Through the comprehensive multi-regional modeling and simulation process, a systematic analysis is generated which accounts for both historical patterns in economic performance and inter-relationships and best available information on the future course of pertinent external factors. While the best available techniques and data are employed in this effort, they are not capable of directly capturing street sense, i.e., the contemporaneous and often non-quantifiable information that can materially affect economic outcomes. In order to provide a comprehensive approach to the prediction of business conditions, it is necessary to compile and assimilate extensive material regarding current events and factors both across the state of Texas and elsewhere. This critical aspect of the forecasting methodology includes activities such as (1) daily review of hundreds of financial and business publications and electronic information sites; (2) review of all major newspapers in the state on a daily basis; (3) dozens of hours of direct telephone interviews with key business and political leaders in all parts of the state; (4) face-to-face discussions with representatives of major industry groups; and (5) frequent site visits to the various regions of the state. The insights arising from this fact finding are analyzed and evaluated for their effects on the likely course of the future activity. Another vital information resource stems from the firm s ongoing interaction with key players in the international, domestic, and state economic scenes. Such activities include visiting with corporate groups on a regular basis and being regularly involved in the policy process at all levels. The firm is also an active participant in many by The Perryman Group

65 major corporate relocations, economic development initiatives, and regulatory proceedings. Once organized, this information is carefully assessed and, when appropriate, independently verified. The impact on specific communities and sectors that is distinct from what is captured by the econometric system is then factored into the forecast analysis. For example, the opening or closing of a major facility, particularly in a relatively small area, can cause a sudden change in business performance that will not be accounted for by either a modeling system based on historical relationships or expected (primarily national and international) factors. The final step in the forecasting process is the integration of this material into the results in a logical and mathematically consistent manner. In some instances, this task is accomplished through constant adjustment factors which augment relevant equations. In other cases, anticipated changes in industrial structure or regulatory parameters are initially simulated within the context of the Multi-Regional Impact Assessment System to estimate their ultimate effects by sector. Those findings are then factored into the simulation as constant adjustments on a distributed temporal basis. Once this scenario is formulated, the extended system is again balanced across regions and sectors through an iterative simulation algorithm analogous to that described in the preceding section. In the present instance, this process was employed with regard to Caterpillar, the major chemical facility expansions, and the effects of the Eagle Ford Shale by The Perryman Group

66 APPENDIX C: Detailed Sectoral Tables by The Perryman Group

67 Effect of the Caterpillar Manufacturing Facility by The Perryman Group

68 by The Perryman Group

69 by The Perryman Group

70 by The Perryman Group

71 by The Perryman Group

72 Effect of Chemical Facility Expansions by The Perryman Group

73 by The Perryman Group

74 by The Perryman Group

75 by The Perryman Group

76 by The Perryman Group

77 Effect of the Eagle Ford Shale: by The Perryman Group

78 by The Perryman Group

79 by The Perryman Group