Detroit Edison Securitization Funding 10-Q Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarter Ended September 30, 2001

Commission file number 333-51066

The registrant meets the conditions set forth in General Instruction H(1) (a) and (b) of Form 10-Q and is, therefore, filing this Form with the reduced disclosure format.

THE DETROIT EDISON SECURITIZATION FUNDING LLC
(a Michigan limited liability company)
(Exact name of registrant as specified in its charter)

Michigan (State or other jurisdiction of incorporation or organization)	38-0478650 (I.R.S. Employer Identification No.)
2000 2nd Avenue, Detroit, Michigan (Address of principal executive offices)	48226-1279 (Zip Code)

313-235-8000

Registrant’s telephone number, including area code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes No

TABLE OF CONTENTS

Form 10-Q for Quarter Ended September 30, 2001

Monthly Servicer Certificate dated 8/10/2001

Monthly Servicer Certificate dated 9/14/2001

Monthly Servicer Certificate dated 10/12/2001

Semi-Annual Servicer Certificate dated 8/31/2001

THE DETROIT EDISON SECURITIZATION FUNDING LLC

QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED SEPTEMBER 30, 2001

TABLE OF CONTENTS

			PAGE
			NUMBER
PART I — FINANCIAL INFORMATION
	Item 1 - Financial Statements
		Statement of Operations		3
		Statement of Financial Position		4
		Statement of Cash Flows		5
		Statement of Member’s Equity		6
		Notes to Financial Statements		7
		Independent Accountants’ Report		12
	Item 2 - Management’s Narrative Analysis of the Results of Operations			1
PART II — OTHER INFORMATION				13
	Item 6 -Exhibits and Reports on Form 8-K			13
SIGNATURE				14

DETROIT EDISON SECURITIZATION FUNDING LLC

MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

The Results of Operations discussion for Detroit Edison Securitization Funding LLC (“Company”) is presented in accordance with General Instruction H(2) (a) of Form 10-Q.

As discussed in Note 1 of the Notes to Financial Statements included herein, the Company is a special purpose entity established by The Detroit Edison Company (“Detroit Edison”) to recover certain stranded costs, called Securitization Property by Michigan Statute. The stranded costs primarily represent Detroit Edison’s unamortized investment in the 1,150 megawatt Fermi 2 nuclear power plant that was classified as a regulatory asset. On March 9, 2001 the Company issued securitization bonds (“Bonds”) and used the net proceeds to purchase Securitization Property from Detroit Edison. The Company receives revenues that are intended to recover its costs and service its debt. Amortization expense associated with the Securitization Property is adjusted as necessary so that expenses equal revenues and interest income.

For the three- month period ended September 30, 2001, the Company has earned $48,875,000 in surcharge revenues and $304,000 in interest income. Amortization expense consists of amortization of the Securitization Property, overcollateralization fee, and over-recovery of securitization surcharge (“SC”). The amortization expense for the three-month period was $21,973,000. During the three-month period, the Company also incurred interest expense of $26,797,000, amortization of issuance cost of $128,000, servicing fee of $218,000, and administrative fees of $63,000.

For the nine-month period ended September 30, 2001, the Company has earned $97,462,000 in surcharge revenues and $552,000 in interest income. The amortization expense for the nine-month period amounted to $37,014,000. During the nine-month period, the Company also incurred interest expense of $60,168,000, amortization of issuance cost of $176,000, servicing fee of $510,000 and administrative fees of $146,000.

Detroit Edison, as Servicer, collects a surcharge from its customers for the benefit of the Company and the Securitization Bondholders based on an initial $0.0032 per kilowatthour rate. This surcharge rate was modified to $0.0041 on September 1, 2001. Due to the time lag between SC billed to customers and amounts collected from those customers, Detroit Edison began cash remittance to the Trustee for SC collections on May 14, 2001. As of September 30, 2001, Detroit Edison has remitted $62,217,000 of SC collections to the Trustee.

Under the MPSC financing order, Detroit Edison will implement an annual adjustment to the SC until 12 months prior to the last expected final payment date of the final class of the Bonds. Thereafter, a quarterly adjustment to the SC will be implemented to provide sufficient funds for timely payments related to the Bonds.

1

MANAGEMENT’S NARRATIVE ANALYSIS OF THE RESULTS OF OPERATIONS

FORWARD-LOOKING STATEMENTS

Certain information presented herein is based on the expectations of the Company, and, as such, is forward-looking. The Private Securities Litigation Reform Act of 1995 encourages reporting companies to provide analyses and estimates of future prospects and also permits reporting companies to point out that actual results may differ from those anticipated.

Securitization Bondholders may suffer payment delays or losses if the Company’s assets are not sufficient to pay interest or the scheduled principal of the Bonds. Funds for payments are dependent upon the Securitization Property and the right to collect the SC over a period limited by Michigan Statute to 15 years. In addition, collections are dependent on the level of Detroit Edison electric deliveries to customers.

2

THE DETROIT EDISON SECURITIZATION FUNDING LLC

STATEMENT OF OPERATIONS (UNAUDITED)

		Three Months			Nine Months
		Ended			Ended
		September 30, 2001			September 30, 2001
(in Thousands)
Operating Revenues		$	48,875		$	97,462
Operating Expenses
	Amortization expense		21,973			37,014
	Service fee		218			510
	Administrative fee		63			146
			22,254			37,670
Operating Income			26,621			59,792
Interest Expense and Other
	Interest expense		26,797			60,168
	Interest income		(304	)		(552	)
	Other		128			176
			26,621			59,792
Net Income		$	—		$	—

See Notes to Financial Statements (Unaudited)

3

THE DETROIT EDISON SECURITIZATION FUNDING LLC

STATEMENT OF FINANCIAL POSITION (UNAUDITED)

		September 30, 2001
(in Thousands)
ASSETS
Current Assets
	Cash and cash equivalents	$	3,821
	Restricted cash		15,380
	Accounts receivable		27,003
	Accrued unbilled revenues		8,260
			54,464
Regulatory Assets
	Unamortized securitization property		1,709,726
	Unamortized bond issuance cost		30,109
			1,739,835
		$	1,794,299
LIABILITIES AND MEMBER’S EQUITY
Current Liabilities
	Accounts payable	$	3,775
	Accrued interest		8,920
	Accounts payable to member		94
	Current portion of securitization bonds payable		72,521
	Regulatory liability		26,661
			111,971
Non-Current Liabilities and Deferred Credits
	Securitization bonds payable		1,673,214
	Overcollateralization subaccount		364
			1,673,578
Member’s Equity			8,750
		$	1,794,299

See Notes to Financial Statements (Unaudited)

4

THE DETROIT EDISON SECURITIZATION FUNDING LLC

STATEMENT OF CASH FLOWS (UNAUDITED)

				Nine Months
				Ended
				September 30, 2001
(in Thousands)
Operating Activities
	Net income			$	-
	Adjustments to reconcile net income to net cash from operating activities:
		Amortization			37,190
	Changes in current assets and liabilities:
			Accounts receivable		(35,263	)
			Interest payable		8,920
			Accounts payable to member		94
Net cash from operating activities					10,941
Investing Activities
	Restricted Cash				(15,380	)
	Purchase of securitized assets				(1,719,715	)
	Capitalization of issuance cost				(26,510	)
Net cash used for investing activities					(1,761,605	)
Financing Activities
	Issuance of bonds				1,750,000
	Member’s investment				8,750
	Payment of bonds				(4,265	)
Net cash from financing activities					1,754,485
Net Increase in Cash and Cash Equivalents					3,821
Cash and Cash Equivalents at Beginning of the Period					-
Cash and Cash Equivalents at End of the Period				$	3,821

See Notes to Financial Statements (Unaudited)

5

THE DETROIT EDISON SECURITIZATION FUNDING LLC

STATEMENT OF MEMBER’S EQUITY (UNAUDITED)

		Nine Months
		Ended
		September 30, 2001
(in Thousands)
Balance beginning of period		$	-
Add:
	Member’s contribution		8,750
Balance at end of period		$	8,750

See Notes to Financial Statements (Unaudited)

6

THE DETROIT EDISON SECURITIZATION FUNDING LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

NOTE 1 — NATURE OF OPERATIONS

The Detroit Edison Securitization Funding LLC (“Company”), a single member limited liability company established by Detroit Edison under the laws of the State of Michigan, was formed on November 20, 2000. The Company is a wholly owned subsidiary of Detroit Edison. Detroit Edison is an operating electric public utility and is a wholly owned subsidiary of DTE Energy Company (“DTE”). The Company was organized for the sole purpose of purchasing and owning Securitization Property, issuing securitization bonds (“Bonds”), and performing activities that are necessary to accomplish these purposes. The Company had no financial operations until February 15, 2001.

Securitization Property is a property right authorized by Michigan state legislation and by a financing order of the Michigan Public Service Commission (“MPSC”). Securitization Property represents, among other things, the irrevocable right of Detroit Edison, or its successor or assignee, to impose, collect and receive a non-bypassable SC from customers pursuant to an order (“Financing Order”), issued on November 2, 2000, and clarified on January 4, 2001, by the MPSC in accordance with the June 2000 Customer Choice and Electricity Reliability Act (“the Act”). Securitization Property also includes the right to obtain periodic adjustments of SC. The MPSC Financing Order authorizes the SC to be sufficient to recover up to $1.774 billion aggregate principal amount of bonds, plus an amount sufficient to provide for any credit enhancement, to fund any reserves and to pay interest, redemption premiums, if any, servicing fees and other administrative expenses relating to the Bonds.

On March 9, 2001, the Company issued $1.75 billion of Bonds, Series 2001-1 and used the proceeds to pay expenses of issuance and to purchase the Securitization Property from Detroit Edison.

The Company is required to operate in a manner that does not subject its assets to the creditors of either DTE or Detroit Edison. Detroit Edison sold the Securitization Property to the Company. The Bonds are debt obligations of the Company.

The principal amount of the Bonds, interest, fees, and required overcollateralization for the Bonds will be recovered through the SC payable by Detroit Edison’s electric customers taking delivery of electricity from Detroit Edison on its MPSC approved rate schedules and special contracts.

Detroit Edison, as Servicer, collects the SC from its customers and deposits daily collections into the General Subaccount held by The Bank of New York, as trustee (“Trustee”). The Trustee is required to use these funds to make principal and interest payments on the Bonds and to pay fees and expenses specified in the Indenture for the Bonds. The Reserve Subaccount maintained by the Trustee consists of funds remaining after required allocations on the scheduled semi-annual payment dates. The Overcollateralization Subaccount held by the Trustee is being funded from collections of the SC over the term of the Bonds. The Capital Subaccount held by the Trustee was initially funded by a contribution to the Company by Detroit Edison on the date of issuance

7

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

of the Bonds in an amount equal to 0.5% of the initial principal amount of the Bonds. The Capital Subaccount is the last account the Trustee will draw upon if amounts in the General Subaccount, Reserve Subaccount, and Overcollateralization Subaccount are insufficient to make payments specified in the Indenture. If the Capital Subaccount is used, it will be replenished to its original level from SC remittances.

The Company has no employees. Under a Servicing Agreement, Detroit Edison is required to manage and administer the Securitization Property of the Company and to collect the SC on behalf of the Company. Detroit Edison receives an annual servicing fee of 0.05% of the initial principal amount of the Bonds. The Servicing Agreement also requires Detroit Edison to file requests for annual adjustments to the SC, and the Act and the Financing Order require the MPSC to act upon these requests within specified time periods. These adjustments are based on actual SC collections and updated assumptions by Detroit Edison of estimated delivery of electricity, expected delinquencies and write-offs, and future expenses relating to the Securitization Property and the Bonds.

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

a.     Management’s Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

b.     Regulation and Regulatory Assets and Liabilities

The Company’s business meets the criteria of Statement of Financial Accounting Standards (“SFAS”) No. 71, “Accounting for the Effects of Certain Types of Regulation.” This accounting standard recognizes the cost-based rate-making process which results in differences in the application of generally accepted accounting principles between regulated and non-regulated businesses. The Company’s purpose is to collect the SC, and pay interest and principal on the Bonds and other administrative costs. The SC, as periodically established by the MPSC, is designed to provide the necessary revenues to satisfy such activities. Continued applicability of SFAS No. 71 requires that rates be designed to recover specific costs of providing regulated services and products, and that it be reasonable to assume that the rates are set at levels that will recover an entity’s costs and can be charged to and collected from customers. The Company believes it satisfies such requirements and continues to apply the provisions of SFAS No. 71 to its business.

8

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

c.     Cash and Cash Equivalents

For purposes of the Balance Sheet and Statement of Cash Flows, the Company considers investments purchased with a maturity of three months or less to be the equivalent of cash. The balance of $3.82 million of Cash and Cash Equivalents has been retained to pay the remaining Bond issuance costs.

d.     Restricted Cash

Restricted cash includes $8.75 million in the Capital Subaccount and $6.63 million in the General Subaccount. The Trustee has established the following subaccounts for the Bonds:

General Subaccountis comprised of SC collections and interest earned from short term investments. These amounts accumulate until the Trustee pays principal, interest, service and administration fees, and other expenses.

Reserve Subaccountincludes any net SC over collections. The Trustee may draw funds from this subaccount if the general subaccount is insufficient to make scheduled payments.

Overcollateralization Subaccountaccumulates the mandatory reserve amount. This account is funded over the life of the Bonds. The Trustee may draw from this subaccount if the general subaccount and reserve subaccount are insufficient to service required payments.

Capital Subaccountretains the required 0.5% of the initial principal amount of the Bonds. It will be released at Bond retirement. The Trustee can draw funds from this subaccount if the general subaccount, overcollateralization subaccount and reserve subaccount are insufficient to service bond payments. If the Capital Subaccount is used, it will be replenished from SC remittances.

e.     Bond Issuance Costs

The costs associated with the issuance of the Bonds are capitalized and are being amortized over the life of the Bonds utilizing the effective interest method.

f.     Revenue

On March 26, 2001, Detroit Edison, as Servicer, implemented a nonbypassable SC of $0.0032 per kilowatthour on behalf of the Company, which was modified to $0.0041 on September 1, 2001. The Company also records unbilled SC revenue associated with electricity delivered by Detroit Edison after cycle billings through month-end.

g.     Amortization

The Securitization Property was recorded at acquired cost and is being amortized over the life of the Bonds, based on estimated SC revenues, interest accruals and other expenses. The Act limits the Bond life to no greater than 15 years.

9

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

In accordance with SFAS No. 71, amortization is adjusted for over/under recovery of SC resulting from differences between estimated and actual electricity delivery.

h.     Income Taxes

The Company has elected to be treated as a division of Detroit Edison, and is not a separate taxable entity. As a result, Detroit Edison is responsible for the tax impacts of the Company.

NOTE 3 — LONG-TERM DEBT

In March 2001, the Company issued $1.75 billion of Bonds at an average interest rate of 6.3%. The Company used the proceeds from the Bonds to purchase Securitization Property from Detroit Edison. The Securitization Property of the Company has been assigned to the Trustee to collateralize the Bonds.

Scheduled maturities and interest rates for the Bonds at September 30, 2001 are:

				Initial Class
				Principal Balance			Expected Final
Class	Bond Rate			($ Thousands)			Payment Date		Final Maturity Date
A-1		5.18	%		120,275			3/1/03		3/1/05
A-2		5.51	%		179,038			3/1/05		3/1/07
A-3		5.88	%		322,792			3/1/08		3/1/10
A-4		6.19	%		406,722			3/1/11		3/1/13
A-5		6.42	%		326,237			3/1/13		3/1/15
A-6		6.62	%		390,671			3/1/15		3/1/16
Total				$	1,745,735
Current Maturities					(72,521	)
Long Term Debt				$	1,673,214

The Current Maturities stated above are based on the expected final payment dates rather than the final maturity dates.

NOTE 4 — SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS

Under the Servicing Agreement, Detroit Edison as Servicer is required to manage and administer the Securitization Property of the Company and to collect the SC on behalf of the Company. The Company pays an annual service fee of $875,000 and an annual administrative fee of $250,000 to Detroit Edison. The Company recorded servicing fees of $218,000 and administrative fees of $63,000 for the three-month period ended September 30, 2001. For the nine-month period, the Company recorded servicing fees of $510,000 and administrative fees of $146,000.

10

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

At September 30, 2001, the Balance Sheet includes a receivable from Detroit Edison of $27.0 million for SC collections. The Balance Sheet also includes a payable to Detroit Edison of $94,000 for servicing fees and administrative expenses.

11

INDEPENDENT ACCOUNTANTS’ REPORT

To the Managers of
The Detroit Edison Securitization Funding LLC

We have reviewed the accompanying condensed statement of financial position of The Detroit Edison Securitization Funding LLC, (the “Company”) as of September 30, 2001, and the related condensed statements of operations for the three-month and nine-month periods ended September 30, 2001, and the condensed statements of cash flows and member’s equity for the nine-month period ended September 30, 2001. These financial statements are the responsibility of The Detroit Edison Securitization Funding LLC’s management.

We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with auditing standards generally accepted in the United States of America, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

Based on our review, we are not aware of any material modifications that should be made to such condensed financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.

DELOITTE & TOUCHE LLP

Detroit, Michigan
November 13, 2001

12

OTHER INFORMATION

     EXHIBITS AND REPORTS ON FORM 8-K.

(a)  Exhibits

(i)  Exhibits filed herewith.

Exhibit
Number	Description
99.11	Monthly Servicer Certificate dated August 10, 2001
99.12	Monthly Servicer Certificate dated September 14, 2001
99.13	Monthly Servicer Certificate dated October 12, 2001
99.14	Semi-Annual Servicer Certificate dated August 31, 2001

(b)  Reports on Form 8-K

None.

13

SIGNATURE

     Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

THE DETROIT EDISON SECURITIZATION FUNDING LLC

Date: November 13, 2001 By: /s/ DANIEL G. BRUDZYNSKI
Daniel G. Brudzynski
Chief Accounting Officer and Controller

14

Exhibit Index

The Detroit Edison Securitization Funding, LLC File No. 333-51066
Quarterly Report on Form 10-Q for Quarter Ended
September 30, 2001

Exhibits
Number	Description
99-11	Monthly Servicer Certificate dated August 10, 2001
99-12	Monthly Servicer Certificate dated September 14, 2001
99-13	Monthly Servicer Certificate dated October 12, 2001
99-14	Semi-Annual Services Certificate dated August 31, 2001