U.S. PUBLIC FINANCE

CREDIT OPINION25 February 2016

New Issue

Contacts

Heather Correia 214-979-6868Associate Analystheather.correia@moodys.com

Thomas Jacobs 212-553-0131Senior Vice Presidentthomas.jacobs@moodys.com

Gallup-McKinley County School District No.1, NMNew Issue - Moody's Assigns A1 Underlying & Aa1 Enhancedto Gallup-McKinley CSD No. 1, NM's $7.8M in GOULTs, Ser.2016

Summary Rating RationaleMoody's Investors Service has assigned an A1 underlying rating to Gallup-McKinley CountySchool District No. 1, NM’s $7.8 million General Obligation School Building Bonds, Series2016. Concurrently, Moody’s has affirmed the A1 on $34.1 million in outstanding parity debt.The district has an additional $7.5 million not rated by Moody’s. Moody's has also assigned aAa1 enhanced rating to the Series 2016 GO bonds based on the New Mexico School DistrictEnhancement Program (NMSDEP) - Post March 30, 2007.

The A1 rating reflects the district’s large tax base, which is concentrated in coal, oil and gas.Risks associated with exposure to market volatility associated with that concentration aresomewhat offset by the district’s manageable debt burden and healthy financial position,with almost 90% of operating revenues derived from state and federal sources. The ratingfurther incorporates the district’s below average socioeconomic profile and elevated pensionburden.

The Aa1 enhanced rating on the Series 2016 General Obligation Bonds is based on ourassessment of the NMSDEP - Post March 30, 2007 and the amount of state aid availablefor intercept relative to debt service. For additional information on the program, please seeMoody's report on the NMSDEP dated May 4, 2008.

Credit Strengths

» Healthy financial operations and improving reserve levels

» Stabilizing enrollment levels

» Manageable debt profile with above average principal amortization

Credit Challenges

» Economic concentration in coal, oil, and gas

» Below average resident income levels

» Elevated pension burden

MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page onwww.moodys.com for the most updated credit rating action information and rating history.

2 25 February 2016 Gallup-McKinley County School District No. 1, NM: New Issue - Moody's Assigns A1 Underlying & Aa1 Enhanced to Gallup-McKinley CSD No. 1, NM's$7.8M in GOULTs, Ser. 2016

Rating OutlookMoody's generally does not assign outlooks to local government credits with this amount of debt outstanding.

Factors that Could Lead to an Upgrade

» Expansion and diversification of the tax base

» Improvement of the socioeconomic profile

Factors that Could Lead to a Downgrade

» Failure to maintain balanced operations resulting in a material decline in reserves

» Significant contraction of the tax base; loss of student enrollment

Key Indicators

Exhibit 1

Source: Gallup-McKinley County School District No. 1, NM; Moody's Investor Services

Detailed Rating Considerations - EnhancedMoody's has assigned an enhanced rating of Aa1 to the Series 2016 General Obligation School Building Bonds, equivalent to theNMSEP-Post March 30, 2007 programmatic rating. Ratings on individual intercept financings depend on the programmatic rating aswell as the evaluation of additional rating factors. These factors include the sufficiency of interceptable revenues as determined byspecific coverage tests, the timing of the state's fiscal year as it relates to scheduled debt service payment dates, and the transactionstructure.

Based on the district's state equalization guarantee (SEG) funds for fiscal year 2015, interceptable state-aid provides an ampleminimum of 9.72 times coverage of maximum periodic debt service. Further, state revenues provide an adequate minimum 8.91 timesmaximum periodic debt service coverage when coverage is stressed by deducting the state's final monthly state aid payment withina fiscal year. State-aid funding levels for New Mexico school districts have been stable in recent years, but have experienced mid-yearcuts to address fiscal stress at the state level within the last decade. This weakness is somewhat mitigated by a continued level ofample debt service coverage as previously discussed. Principal payments are scheduled for August, early in the State's fiscal year, andis considered an average interval that mitigates the risk of late budgets. The program requires the appointment of a third-party fiscal

MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

3 25 February 2016 Gallup-McKinley County School District No. 1, NM: New Issue - Moody's Assigns A1 Underlying & Aa1 Enhanced to Gallup-McKinley CSD No. 1, NM's$7.8M in GOULTs, Ser. 2016

agent, who is required to notify the state if an intercept of SEG is required. The Bank of Albuquerque is the fiscal agent for the currentsale.

Detailed Rating Considerations - UnderlyingEconomy and Tax Base: Sizeable Tax Base with Concentration in Coal, Oil and GasThe size of the district's tax base will likely fluctuate in the near-term, given concentration in the energy industry. However, giventhat a majority of the district's funding is derived from the state and federal governments, financial operations should remain largelyunaffected by possible future contractions. The district encompasses nearly 5,000 square miles and is adjacent to the Navajo Nationand the Zuni Pueblo in northwestern New Mexico. Interstate 40 is the main transportation corridor and passes through the city ofGallup, which is the only incorporated city within the district and represents about one-third of total district population. Gallup islocated 140 miles west of Albuquerque (Aa1 stable) and 15 miles east of the Arizona (Aa2 stable) border.

The local economy is supported primarily by coal mining, electricity generation, oil and natural gas extraction, refining and pipelines.The tax base has grown an average of 2.8% annually over the last five years, with only one moderate annual decline in fiscal 2011.Fiscal 2016 assessed value (AV) is $833.4 million, derived from a moderately-sized equalized value of $2.5 billion. Approximately45.7% of AV is centrally assessed, representing coal mines and pipelines. Residential properties account for 31.9% and oil and gasreserves are a modest 0.32%. Additionally, the district has high taxpayer concentration, with top ten taxpayers representing 41.9% offiscal 2016 AV. The top three, El Segundo Coal Company, Tri-State Generation and Western Refinery, account for 29.1% of the total.

El Segundo Coal Mine is owned by Peabody Energy Corp. (Caa3 negative); however, in November 2015, the company agreed to sellthe asset to Bowie Resource Partners LLC (B2 ratings under review - downward pressure). The sale has not been finalized. El Segundoopened in 2008, and has long-term coal agreements with Arizona Public Service Company (A2 stable) and Tucson Electric Power, acredit positive. Tri-State G&T Association Inc. (Baa1 stable) owns Plains Escalante Generating Station, a coal-fired power plant, openingin 1984. Coal is supplied by El Segundo mine. The plant employs 120 people. Western Refining, Inc. (B1 stable) is the only crude oilrefinery within the Four Corners region, and employs 389 people. Officials report that production at these companies has not slowed,and there are no concerns regarding job loss, either from the decline in oil and gas prices or potential future cost of environmentalcompliance.

District enrollment stabilized in fiscal 2016 increasing .4% to 11,173, and will likely improve over the next several years. Since fiscal2012, enrollment has declined by 584 students in aggregate. The district attributes annual losses to out-migration and competitionfrom charters and federally-managed schools. The district is focused on maintaining, if not increasing, current enrollment levels, andis modernizing schools, developing cyber academies and leveraging partnerships with universities and local businesses to attract andretain students. For fiscal 2017, officials anticipate enrollment growth of 0.4% to 1%.

Resident income levels remain weak relative to national medians with median family income that is equal to 57% of the US medianaccording to the 2013 American Community Survey. McKinley County's 9.3% unemployment rate in November 2015 is high relative tothe state's 6.5% and nation's 4.8% during the same timeframe.

Financial Operations and Reserves: Strong Financial Performance; Majority of Revenues from State and Federal SourcesThe district's strong financial position will likely remain stable over the mid-term given management's conservative budgeting practicesand substantial financial reserves. The district has reported sizeable surpluses four of the past five years, increasing General Fundbalance to $23.8 million or 23.2% of revenues as of fiscal 2015 year-end. Approximately $5.6 million of the $8.7 million surplusrealized in 2015 is attributed to delayed receipt of federal impact aid; the district had not received payments from fiscal 2011, fiscal2012 and fiscal 2013. The district has earmarked $3 million of that one-time payout for debt service on revenue bonds issued forteacher housing.

In fiscal 2015, a majority of General Fund revenues were derived from state (63.8%) and federal (29.4%) sources. Given that thedistrict does not rely on property taxes for operations, if the base were to contract due to pressure in the energy sector, the districtwould remain largely unaffected from a revenue standpoint. However, if the contraction were to result in job loss and subsequentenrollment declines, state and federal funding could be adversely impacted. Future reviews will focus on the district's ability to balancerecurring expenditures and revenues.

MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

4 25 February 2016 Gallup-McKinley County School District No. 1, NM: New Issue - Moody's Assigns A1 Underlying & Aa1 Enhanced to Gallup-McKinley CSD No. 1, NM's$7.8M in GOULTs, Ser. 2016

The fiscal 2016 budget projects use of $6.6 million in cash reserves, which is a typical budgeting practice of New Mexico schooldistricts. The district has benefitted from increased state aid and federal apportionments, and conservatively expects to balance thebudget with a nominal use of fund balance.

The district is in early stages of fiscal 2017 budget preparation.

LIQUIDITY

The district's fiscal 2015 General Fund cash position is favorable, with $19.6 million, or 19.2% of revenues, held in reserve. This is amarked increase from prior year's $9.5 million, or 10.2% of revenues. Operating net cash, including both the General Fund and DebtService Fund, is $33.4 million, or 30.5% of operating revenues. Moody's notes that a majority of monies in the Debt Service Fund areexpended in August of the following fiscal year for debt payments.

Debt and Pensions: Manageable Debt Burden with Rapid Principal Payout; Elevated Pension BurdenWe expect the district's debt burden to remain manageable over the long-term given rapid principal amortization. At 2.7% of fiscal2016 full value, the district's debt burden is above average compared to state and national A1 medians of 1.5% and 1.6%, respectively.Included in the burden is $19.6 million of revenue bonds issued through the New Mexico Finance Authority (NMFA) for teacherhousing. Post-sale, the district will not have any authorized unissued debt remaining. Given ongoing capital needs, officials anticipateapproaching voters in February 2017 for a $25 million authorization. If approved, the district will issue in installments over the followingthree to four years.

Voters approved extension of the district's two mill capital levy in February 2016 for another six years. The levy generatesapproximately $1.4 million per year for various capital improvements.

DEBT STRUCTURE

Inclusive of the new issuance, the district has $49.3 million in GOULT bonds outstanding. All debt is retired by 2028. The NMFArevenue bonds retire by 2026. Ten year principal amortization is rapid at 90.2%.

DEBT-RELATED DERIVATIVES

The district is not party to any interest rate swaps and does not have any variable rate debt.

PENSIONS AND OPEB

The district has an above-average employee pension burden, based on unfunded liabilities for its share of the Educational RetirementBoard (ERB), a cost sharing plan administered by the state. Moody's fiscal 2015 adjusted net pension liability (ANPL) for the district,under our methodology for adjusting reported pension data, is $334.9 million, or an elevated 3.06 times operating revenues. Thethree-year average of the district's ANPL to operating revenues is 3.10 times, while the three-year average of ANPL to equalizedvalue is very elevated at 13.69%. Moody's ANPL reflects certain adjustments we make to improve comparability of reported pensionliabilities. The adjustments are not intended to replace the district’s reported liability information, but to improve comparability withother rated entities.

The New Mexico pension plan funding structure experienced several changes with the signing of SB 115 in 2013, including thereduction of a cost-of-living adjustment (COLA) and increases in employee contributions. The legislation will maintain the fundingchanges until the plan has reached 100% funding, which is estimated to be achieved in 2043. We believe the funding changes adoptedin SB 115 will limit budgetary pressure on the district related to future pension costs.

For more information on Moody's insights on employee pensions and the related credit impact on companies, government, and otherentities across the globe, please visit Moody's at www.moodys.com/pensions.

Management and GovernanceNew Mexico school districts have an institutional framework score of “A,” or moderate. Districts have a low ability to raise revenuesbecause state aid provides over 95% of funding, and property taxes are subject to a small 0.5 mill cap. State aid is moderatelypredictable given a recent trend of increased funding and a history of funding cuts over the past decade. Expenditures, which areprimarily comprised of personnel and facility costs, are moderately predicable given flat student enrollment levels. Districts have amoderate ability to reduce expenditures given above average fixed costs.

MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

5 25 February 2016 Gallup-McKinley County School District No. 1, NM: New Issue - Moody's Assigns A1 Underlying & Aa1 Enhanced to Gallup-McKinley CSD No. 1, NM's$7.8M in GOULTs, Ser. 2016

The district does not have a formal fund balance policy.

Legal SecurityThe bonds are secured by ad valorem taxes that are levied against all taxable property within the district without limitation as to therate or amount.

Use of ProceedsProceeds will be used for various capital projects, specifically completion of Lincoln and Thoreau elementary schools.

Obligor ProfileThe district is located in McKinley County in western New Mexico (Aaa stable), and encompasses 4,957 square miles, the largest schoolboundary in the state. Current enrollment is approximately 11,000 students.

MethodologyThe principal methodology used in the underlying rating was US Local Government General Obligation Debt published in January2014. The principal methodology used in the enhanced rating was State Aid Intercept Programs and Financings: Pre and Post Defaultpublished in July 2013. Please see the Ratings Methodologies page on www.moodys.com for a copy of these methodologies.

Ratings

Exhibit 2

GALLUP-MCKINLEY COUNTY SCHOOL DISTRICT 1, NMIssue RatingGeneral Obligation School Building Bonds, Series2016

A1

Rating Type Underlying LTSale Amount $7,750,000Expected Sale Date 03/07/2016Rating Description General Obligation

General Obligation School Building Bonds, Series2016

Aa1

Rating Type Enhanced LTSale Amount $7,750,000Expected Sale Date 03/07/2016Rating Description General Obligation

Source: Moody's Investors Service

MOODY'S INVESTORS SERVICE U.S. PUBLIC FINANCE

6 25 February 2016 Gallup-McKinley County School District No. 1, NM: New Issue - Moody's Assigns A1 Underlying & Aa1 Enhanced to Gallup-McKinley CSD No. 1, NM's$7.8M in GOULTs, Ser. 2016

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