Fitch Rates Northwest ISD Texas' ULTs 'AAA' PSF/'AA' Underlying; Outlook Stable

AUSTIN, Texas--()--Fitch Ratings has assigned an 'AAA' rating to the following Northwest Independent School District, Texas' (the district) bonds:

--$44.5 million unlimited tax (ULT) refunding bonds, series 2013-A;

--$54.5 million unlimited tax (ULT) refunding bonds, taxable series 2013-B.

The 'AAA' long-term rating reflects the guaranty provided by the Texas Permanent School Fund (PSF), whose bond guarantee program is rated 'AAA' by Fitch.

In addition, Fitch assigns an 'AA' underlying rating to both series of 2013 bonds and affirms the 'AA' rating on the district's $630 million (on a non-accreted basis, pre-refunding) in outstanding ULT bonds.

The series 2013 bonds are scheduled to sell as early as March 5 via negotiation. Proceeds will be used to refund certain outstanding obligations for savings and to pay related costs of issuance.

The Rating Outlook is Stable.

SECURITY

The bonds are secured by an unlimited ad valorem tax pledge levied against all taxable property within the district and are further secured by the PSF Guaranty.

KEY RATING DRIVERS

STRONG FINANCIAL PROFILE MAINTAINED: General fund reserves and liquidity remain solid, maximizing the district's financial flexibility. Management's sound and proactive fiscal practices have historically enabled annual operating surpluses despite a trend of ongoing, rapid enrollment growth.

TAV DECLINES: Decreases in mineral values have led the cumulative, moderately declining taxable assessed value (TAV) trend that was only partially offset by modest, positive gains in residential and retail/commercial construction. The district has historically realized very strong TAV gains due to the district's proximity to the Dallas Fort-Worth (DFW) metro area, availability of affordable land, and rising natural gas values.

TAX BASE CONCENTRATION: Taxpayer concentration remains above average and highly concentrated in mineral reserves due to the district's location over portions of the Barnett Shale formation, one of the largest natural gas fields in the U.S.

WEAK DEBT PROFILE: Capital needs from an ongoing pace of rapid enrollment expansion will continue to drive already high debt levels. Amortization is slow. Carrying costs are expected to remain manageable despite an ascending debt service schedule. The fixed cost burden is tempered in part by the district's overall financial flexibility and some remaining tax rate cushion below the statutory $0.50 tax rate ceiling for new debt.

RATING SENSITIVITIES

DETERIORATION OF FINANCIAL CUSHION, TAX BASE: Material deterioration of solid reserve levels that provide a high level of financial flexibility and/or prolonged, significant weakening of the tax base could signal a fundamental shift in the district's credit profile, leading to negative rating action. The Stable Outlook reflects Fitch's expectation that such shifts are highly unlikely.

CREDIT PROFILE

The district is located in the northwest part of the Dallas-Fort Worth (DFW) metropolitan area and encompasses a large 232 square miles that includes 16 rural communities in Denton, Tarrant, and Wise counties.

RAPID ENROLLMENT EXPANSION CONTINUES IN DFW METRO DISTRICT

Population and enrollment growth has been rapid since 2000 given the availability of affordable land and subsequently, expanded residential and attendant retail/commercial development. Enrollment growth has moderated slightly since the recession that weakened the housing market but remains rapid. The district typically adds between 1,000-1,500 new students per year. Annual enrollment gains have remained in line with demographic studies that project steady increases in student enrollment of about 7% through fiscal 2018; district enrollment totaled not quite 18,000 students in fiscal 2013.

UNEMPLOYMENT IMPROVES ALTHOUGH TAV TRENDS REMAIN WEAK

The local economy is linked closely to that of the larger DFW metropolitan area and its major employment centers, since much of the district is within commuting distance. Area unemployment has consistently tracked better than the state (6%) and nation (7.6%) and the year-over-year decline in unemployment from 7% in December 2011 to 5.9% in December 2012 remained in line with that trend. Income/wealth and educational attainment metrics are generally above state and national averages.

Sizeable growth was previously realized in the district's tax base due to its location over workable portions of the Barnett Shale field, one of the largest natural gas formations in the U.S. Rising mineral values coupled with rapid residential development led to about 15% annual TAV growth from fiscal 2005 - 2010. However, weakness in both sectors, particularly declines in mineral values, has led to a moderate, cumulative 6.5% TAV decline over fiscal years 2011-2013.

Fitch believes it is reasonable that slower-paced, but continued residential and attendant retail/commercial development reported by management and supported by current enrollment trends should add modest TAV growth over the near-term. However, Fitch believes it is likely that the district's tax base will remain subject to some additional variability going forward given its above-average exposure to the energy sector and the potential for fluctuating mineral values through build-out. A declining TAV environment could pose some additional risk to the district's debt profile and capital plans but relatively minimal operational risk given the current school funding formula that offsets declines in property taxes with additional state aid.

Taxpayer concentration is down slightly but remains high at 25% (specifically in the oil and gas sector) and remains a credit concern. The list of the district's top taxpayers is led by Devon Energy Corp at a sizeable 11% (Fitch Long-term Issuer Default Rating 'BBB+' with a Stable Outlook).

FINANCIAL PROFILE A CREDIT POSITIVE

Financial performance has been strong historically, characterized by operating surpluses, solid reserves, liquidity, and sound management -- the latter of which has helped to navigate the operating pressures associated with rapid enrollment growth, large wealth equalization payments, and recent cuts to state funding. Conservative spending and budgeting practices enable year-end results that typically improve upon budgeted expectations.

Audited fiscal 2012 results were comparable to prior years with the district generating a very healthy $8.2 million operating surplus (roughly 6% of the year's spending) due in part to offsetting some general fund spending with the one-time use of $2 million in federal EduJobs funding and spending cuts implemented. Unrestricted general fund reserves at fiscal 2012 year-end rose to a solid $56 million or nearly 39% of spending, which exceeded the district's informal target of maintaining approximately 33% of spending in reserves.

Liquidity strengthened in fiscal 2012 as well with general fund cash and investments totaling $78.4 million or about 6.5 months of general operational spending at year-end. Further financial flexibility and added liquidity come from the maintenance of reserves outside the general fund: $34 million in transferred fund balance (about 25% of operational spending) is within the capital projects fund and available for reallocation to the general fund as needed.

For fiscal 2013, the district's $151 million budget was adopted with a modest $2.7 million draw on reserves to provide salary increases. Year-to-date financial performance remains on track according to management; the year's reportedly tighter budgeting anticipates a reduced drawdown to break-even results.

The district's updated five-year financial forecast now anticipates modest annual operating gaps (no more than 5% of budgeted spending) under reduced TAV growth assumptions. Nonetheless, Fitch recognizes the modest nature of the imbalance and 'worst case' projections while taking comfort from management's conservative fiscal practices that have maintained reserves well above its informal target level.

DEBT LEVELS TO REMAIN ELEVATED

Overall debt levels (on an accreted basis) approximate a very high $8,650 per capita and 6.5% of market value. Principal amortization is very slow with about 30% retired in 10 years. Inclusive of this refunding, annual debt service is projected to rise steadily from $39.7 million in fiscal 2013 to reach maximum annual debt service (MADS) at $58.3 million in 2028. The district's debt profile is primarily comprised of fixed-rate debt with some use of capital appreciation bonds and a low amount (2% of outstanding principal) of variable rate bonds. While the high debt burden is a credit concern, Fitch notes that the fixed cost burden is mitigated in part by the district's overall financial flexibility as reflected in ample reserves and some remaining tax rate cushion below the statutory $0.50 tax rate ceiling for new debt.

At just under 56%, a thinner margin of voters approved a $255 million bond authorization in November 2012 for new school facilities given the roughly $0.07 increase to the debt service tax rate promised voters. (The district's last bond authorization in 2008 was approved by a strong 72% margin; a negligible tax rate impact was promised given strong TAV growth trends). Issuance of the full 2012 authorization while maintaining a debt service tax rate at no more than $0.4125 per $100 TAV is supported by the use of some existing debt service fund balance (up to $17 million) over fiscal years 2013 - 2018 under assumptions of a return to moderately increasing tax base growth over the next five fiscal years. The 2012 authorization is expected to meet the district's capital needs over the next five years, a large portion of which is for construction of the district's third high school that is expected to open in fiscal 2016.

OTHER LONG-TERM LIABILITIES MANAGEABLE

The district's pension and other post-employment benefit (OPEB) liabilities are limited because of its participation in the state pension plan administered by the Teachers Retirement System of Texas (TRS). TRS is a cost-sharing, multiple-employer plan in which the state rather than the district provides the bulk of the employer's annual pension contribution. The district's annual contribution to TRS is determined by state law as is the contribution for the state-run post-employment benefit healthcare plan; the district consistently funds its annual required contributions. Carrying costs for the district (debt service, pension, OPEB costs, net of state support) totaled nearly 20% of governmental fund spending in fiscal 2012, reflective largely of the district's annual debt load.

Additional information is available at 'www.fitchratings.com'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.

In addition to the sources of information identified in Fitch's Tax-Supported Rating Criteria, this action was additionally informed by information from Creditscope, University Financial Associates, S&P/Case-Shiller Home Price Index, IHS Global Insight, Zillow.com, National Association of Realtors, and Texas Municipal Advisory Council.

Applicable Criteria and Related Research:

--'Tax-Supported Rating Criteria' (Aug. 14, 2012);

--'U.S. Local Government Tax-Supported Rating Criteria' (Aug. 14, 2012).

Applicable Criteria and Related Research

Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=686015

U.S. Local Government Tax-Supported Rating Criteria

http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685314

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Contacts

Fitch Ratings
Primary Analyst
Rebecca C. Moses
Director
+1-512-215-3739
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Blake Roberts
Associate Director
+1-512-215-3741
or
Committee Chairperson
Mike Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com

Sharing

Contacts

Fitch Ratings
Primary Analyst
Rebecca C. Moses
Director
+1-512-215-3739
Fitch Ratings, Inc.
111 Congress Avenue
Austin, TX 78701
or
Secondary Analyst
Blake Roberts
Associate Director
+1-512-215-3741
or
Committee Chairperson
Mike Rinaldi
Senior Director
+1-212-908-0833
or
Media Relations:
Elizabeth Fogerty, +1-212-908-0526 (New York)
elizabeth.fogerty@fitchratings.com