Fitch Rates Yoakum ISD, TX ULT Bonds 'AAA' TX PSF; 'A+' Underlying; Outlook Stable

Fitch Ratings assigns its 'AAA' rating to the following Yoakum Independent School District (ISD) bonds:

--$50 million unlimited tax (ULT) school building bonds, series 2014;

The 'AAA' is based on the Texas Permanent School Fund (PSF) guaranty which is rated 'AAA' by Fitch. Fitch also assigns an 'A+' underlying rating to the series 2014 bonds.

To the following outstanding bonds, Fitch also assigns an 'AAA' Texas PSF guaranty and an 'A+' underlying rating:

--ULT school building bonds, series 2008;
--ULT refunding bonds, series 2012;

The 2014 bonds are expected to price during the week of Jan. 27. Proceeds will be used to construct and equip new school facilities and pay issuance costs.

The Rating Outlook is Stable.

SECURITY
The bonds are secured by an unlimited annual property tax levy. The bonds are additionally secured by a Texas Permanent School Fund guaranty.

RATING DRIVERS

RAPID TAXBASE TRANSFORMATION: Significant energy sector investments have more than doubled the district's taxable assessed valuation (TAV). The district is among the areas of the expansive Eagle Ford shale with the highest levels of oil drilling and exploration.

HIGH TAX BASE CONCENTRATION: The largest contributor to recent TAV gains, a natural gas liquids (NGL) processing plant, brings significant concentration but provides some diversity within the energy sector as its assessed as industrial property and equipment versus mineral values which are more volatile to commodity price swings.

EXPANDING FINANCIAL RESERVES: Surging property tax revenues are poised to expand the district's modest general fund reserves. General fund revenue composition is shifting heavily to local property taxes, and the district is projected to incur manageable expenditures for equalization payments to the state.

MIXED DEBT LEVELS; LIMITED CAPITAL NEEDS: Mixed debt ratios and elevated carrying costs are balanced against moderate principal amortization and a lack of future debt plans. A high percentage of voters supported the large recently-approved bond program.

RATING SENSITIVITIES

PRUDENT MANAGEMENT AMIDST TRANSFORMATION: Fitch expects the district's tenured management to prudently manage its newfound resources and attendant changes in its operating parameters.

CREDIT PROFILE
Yoakum ISD is located about 100 miles east of San Antonio, TX and lies within the counties of Dewitt, Lavaca, and Gonzales. The city of Yoakum (population 5,832) comprises the bulk of the district's estimated 2014 population of 10,000.

ENERGY SECTOR TRANSFORMING ECONOMY
The historically agricultural economy is undergoing a rapid transformation fueled by oil exploration and production and natural gas liquids (NGL) processing. Two of the district's three counties have the third and seventh highest rig counts within the Eagle Ford shale which encompasses 30 counties. However, the vast majority of surging taxable value growth is attributed to the construction of a $560 million NGL processing plant. As a result, the district's TAV increased by over 150% from fiscal 2012-2014, increasing TAV per capita to a high $180,000.

The NGL plant is owned by Enterprise Hydrocarbons LP and accounts for a very high 46% of the district's TAV. EOG Resources (Enron) is the 2nd largest taxpayer with 10% of total TAV. The combined top 10 taxpayers account for an exceptionally high 64% of TAV. The NGL plant is one element of Enterprise Products Partners LP's (Fitch IDR 'BBB'/Stable) significant Eagle Ford shale investments which include extensive pipelines to carry NGLs and crude oil to Houston area facilities.

MIXED DEBT PROFILE
The current offering is comprised of the entire $50 million ULT bond authorization approved by a high 69% of voters in Nov. 2013. The proceeds will address the district's substantial deferred capital needs. No further facility needs are projected for the medium to long term, depending on enrollment trends. Debt per capita is elevated at $7,110 but moderate as a percentage of market value at 4.5%.

Based on the district's current TAV, the debt service tax rate is projected to rise significantly to $0.42 per $100 TAV from the current $0.11 per $100 TAV. Including the current offering, debt service is level and amortization is moderate with 45% of principal retired in 10 years. Fitch considers the district's projection in its plan of finance of another large 50% surge in TAV in fiscal 2015 to be aggressive. This growth would lower the debt service tax rate to $0.29 per $100 TAV.

Including the district's limited pension and OPEB obligations, total projected carrying costs (based on maximum annual debt service of the 2014 bonds) are elevated at 27% of total spending (based on adjusted fiscal 2013 spending). This also incorporates the loss of debt service offsets from the state equal to 20% of debt service due to its substantial tax base expansion.

POTENTIAL FOR EXPANDING FINANCIAL MARGINS
Due to annual pay-as-you-go capital outlays (ranging from 3%-9% of spending), the district posted annual deficits through fiscal 2012, reducing its unrestricted fund balance to a modest $1.7 million, equal to 13.7% of spending. Surging TAV growth enabled the district to expand its unrestricted fund balance to 18.5% in fiscal 2013 via an operating surplus equal to 6.1% of spending. However, these results still fell below the district's informal 20% fund balance target. Fueled by additional TAV gains, a 79% increase in local property tax revenues in the fiscal 2014 budget is projected to nearly double its financial reserves despite $1.6 million (10% of spending) in additional pay-go capital outlays.

TAX ABATEMENT EFFECTIVE FISCAL 2015
Per a tax abatement agreement, the TAV of the NGL plant will decline from $560 million in fiscal 2014 to only $10 million for an eight-year period beginning in fiscal 2015. As a result, for the O&M levy only, concentration among the top 10 taxpayers will decline to 19%.Starting in fiscal 2023, the NGL plant will be assessed at full market value. The NGL's tax abatement applies only to the operations and maintenance levy.

Although the district will become property-rich in fiscal 2015 due to overall tax base growth, the tax abatement of the NGL plant will help reduce the magnitude of the district's equalization payments to the state. In return, the NGL plant has agreed to provide modest compensation for lost O&M revenues that approximate the net impact of its reduced state aid resulting from its property-rich classification. For fiscal 2015, the district projects equalization payments of $900,000 or about 6% of spending which Fitch considers sustainable.

TEXAS SCHOOL DISTRICT LITIGATION
In February 2013 a district judge ruled that the state's school finance system is unconstitutional. The ruling, which was in response to a consolidation of six lawsuits representing 75% of Texas school children, found the system 'inefficient, inequitable, and unsuitable and arbitrarily funds districts at different levels...' The judge also cited inadequate funding and districts' inability to exercise 'meaningful discretion' in setting tax rates as constitutional flaws in the current system.

The judge agreed to reopen testimony after the Texas legislature restored $4.5 billion in school funding in its 2013 session. The increased funding levels apply to school district budgets in fiscal years 2014 and 2015. The judge will determine if the additional funding affected arguments made during the trial. The testimony, which began Jan. 21, 2014, is expected to last roughly three weeks. It is anticipated that the original ruling, if upheld, will ultimately be appealed to the state supreme court.

Additional information is available at www.fitchratings.com.

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, and National Association of Realtors.

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

Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=816978
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Fitch Ratings
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