EDP, Portugal’s largest electric utility, is tapping the securitization market to help recover the costs of supporting renewable electricity, according to Moody’s Investor Service.

As the nation’s “last recourse supplier,” Energias De Portugal is responsible for purchasing electricity produced by “special regime operators” such as wind or solar generated electricity. Yet it no longer has a monopoly on supplying power and so cannot recoup all of its costs from end-user tariffs, which are set by its regulator.

In order to recoup these costs, EDP has been authorized by the federal government to charge a special tariff called a “global use of system tariff” on all users of electricity, regardless of the supplier that they choose. These collection rights are being bundled into collateral for bonds to be issued by an entity called Volta VI. EDP has previously completed five such transactions; the one currently being marketed consists of collection rights related to costs already partially incurred and still to be incurred in 2018, including the adjustments from the two previous years (2016 and 2017).

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The global use-of-system tariffs are collected by the operator of the national grid, EDP Distribuição, and channeled directly to Volta VI, and the transaction is serviced by Banco Comercial Português.

The latest offering, which has yet to be sized, consists of two tranches of notes. Moody’s expects to assign an A1 to the senior tranche of notes, consistent with prior deals from the Volta platform. There will also be an unrated tranche of liquidity notes. All of the notes have an expected maturity of February 2023.

Storm Harbour Securities is the sole arranger; Banco Santander Totta is a joint lead manager.
Among the strengths of the deal, according to Moody’s, is the fact that the monthly amounts to be collected are fixed, and not subject to the volume of electricity used. While the tariff is based on an expected volume of usage, any deviation from target monthly payment amounts are borne by the distribution grid operator. (There is a kind of true-up mechanism, similar to that of U.S. utility fee deals, in that EDP’s regulator can take into amounts actually received in setting the tariff in future years.)

Moody’s also noted that prior Volta deals have yet to experience a default or loss. The two prior transactions in 2017 and 2016 raised €600 million each.

As with U.S. utility fee deals, the primary risk to the transaction legal, since the decree laws authorizing the collection rights backing the deal could overturned by the Portuguese State. However, Moody’s considers this risk to be low, which it said is “consistent with the general country-level risks captured within Portugal’s LCC of A1.” And EDP would have a valid claim against the Portuguese State under certain circumstances, though it might not have sufficient funds to pursue a legal remedy.

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