Fitch Rates Northwest Independent School District, Texas' $100MM GOs 'AAA'.

AUSTIN, Texas -- Fitch Ratings has assigned an 'AAA' rating to Northwest Independent School District, Texas' (the district) $100 million unlimited tax school building bonds, series 2007, based on a guarantee provided by the Texas Permanent School Fund (PSF), whose claims paying financial strength is rated 'AAA' by Fitch. Fitch has also assigned an 'AA-' underlying rating to the series 2007 bonds and affirmed the underlying 'AA-' rating on the district's approximately $313 million in outstanding unlimited tax bonds. The bonds are scheduled to price on May 10 via negotiation to a syndicate led by RBC Capital Markets. The Rating Outlook is Stable.

The bonds are payable from and secured by an unlimited ad valorem tax levied against all taxable property within the district. The series 2007 bonds are further secured by the Texas Permanent School Fund guarantee. Proceeds will be used to construct, equip, and renovate school facilities, as well as to pay costs of issuance.

The 'AA-' underlying rating reflects the district's conservative fiscal management, strong financial performance with solid reserve levels, as well as its rapidly expanding tax base. The district also benefits from a large property tax revenue stream from mineral valuations and business properties, as only one third of the district's tax base is currently residential. Offsetting risks include slow principal amortization with a growing debt burden, ongoing pressures associated with rapid enrollment growth, and a very high tax base concentration in mineral reserves. Steady increases in taxable assessed valuation (TAV) have helped offset rising operating and capital needs generated by a growing student population while maintaining large reserves to help balance swings in mineral valuations.

With a total of about 10,000 students currently enrolled in its 16 schools, the district encompasses 232 square miles northwest of the Dallas-Fort Worth metropolitan statistical area (MSA) serving 16 rural communities in Denton, Tarrant and Wise counties. Residential development has steadily increased the district's student enrollment at an average annual rate of almost 12% over the past five years. The district's population has nearly doubled from about 37,000 in 2000 to nearly 69,000 in 2007. Demographic projections provided quarterly by an outside consultant indicate an average 14% annual growth rate in enrollment over the next five years and projects to reach 30,000 students by fiscal 2016.

From fiscal 1999-2007, the district's TAV grew an average of over 20% annually, primarily due to the availability of affordable land that spurred residential development and in particular, the construction of starter homes. Mineral reserves of the Barnett Shale field which lies in the district boundaries contributed in large part to TAV growth most markedly since fiscal 2005. The Barnett Shale is the largest onshore natural gas field in Texas and among the fastest growing in North America. Recent upswings in oil & gas prices and increased production have raised taxpayer concentration concerns; the top ten property taxpayers comprise more than 30% of fiscal 2007 TAV and contain four oil, gas and minerals companies. Prospects for additional residential and retail development to diversify the district's tax base appear favorable, given the availability of affordable land and its proximity to the Dallas-Fort Worth metropolitan area.

The district's general fund reserve levels remain impressive with large operating surpluses in recent years, despite the pressures associated with growing enrollment and wealth equalization payments. Fiscal 2006 results were better than the previously anticipated break-even or $1 million drawdown due to an adjustment to wealth equalization payments. The district ended fiscal 2006 with a $2.7 million increase to the general fund balance recording a total fund balance of $36.8 million, or 37% of expenditures and transfers out, well above the district's target of 33% or four months of current operating expenditures.

The district adopted a balanced budget for fiscal 2007, but now expects to end the year with another operating surplus estimated at about $9 million due to larger than budgeted property tax revenues. Although still early in the budgeting process, district officials anticipate adopting the fiscal 2008 budget with a moderate increase to fund balance. Moreover, adding to the districts financial flexibility, its five-year financial forecast does not include adoption of the optional $0.04 O&M tax levy until fiscal 2011.

Debt levels are high and principal amortization is slow. This is representative of the district's fast-growth environment and its need to meet facility demands while limiting the impact to existing taxpayers. With the current bonds, direct debt is a sizeable 5.8% of TAV and $6,009 per capita. Including overlapping debt, these levels increase to 6.6% of TAV and $6,862 per capita. This issuance is the third installment of a $224.5 million bond program approved by voters in October 2005. The district anticipates returning to market with the remaining $54.5 million in May 2008. With enrollment growth and facility needs expected to continue, the district has formed a long range planning committee to evaluate future needs and make recommendations for the next bond election, which could take place as early as May 2008.

In an effort to maintain an interest and sinking fund tax rate of no more than $0.335 per $100 of TAV, the bonds are structured with a back-loaded maturity schedule. Principal amortization of 16% in 10 years is slow even for a fast growth school district.

The local economy is tied closely with the Dallas-Fort Worth metropolitan area and its major employment centers since much of the district is within commuting distance. Area unemployment rates remain below average, while wealth levels are above those of the state and nation.

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