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 March 31, 2002

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

PART I — FINANCIAL INFORMATION
	Item 1. Financial Statements
	Item 2. Management’s Narrative Analysis of the Results of Operations
		Statement of Operations
		Statement of Financial Position
		Statement of Cash Flows
		Statement of Member’s Equity
		Notes to Financial Statements
		Independent Accountants’ Report
PART II — OTHER INFORMATION
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURE
EX-99.17 Monthly Servicer Certificate

THE DETROIT EDISON SECURITIZATION FUNDING LLC

QUARTERLY REPORT ON FORM 10-Q
QUARTER ENDED MARCH 31, 2002

TABLE OF CONTENTS

			PAGE
			NUMBER
PART I – FINANCIAL INFORMATION
	Item 1. Financial Statements
		Statement of Operations		2
		Statement of Financial Position		3
		Statement of Cash Flows		4
		Statement of Member’s Equity		5
		Notes to Financial Statements		6
		Independent Accountants’ Report		7
	Item 2. Management’s Narrative Analysis of the Results of Operations			1
PART II – OTHER INFORMATION
	Item 6. Exhibits and Reports on Form 8-K			8
SIGNATURE				9

FORWARD-LOOKING STATEMENTS

Certain information presented herein includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. Forward-looking statements involve certain risks and uncertainties that may cause actual future results to differ materially from those contemplated, projected, estimated or budgeted in such forward-looking statements. Securitization bondholders may suffer payment delays or losses if the Detroit Edison Securitization Funding LLC’s (Company’s) assets are not sufficient to pay interest or the scheduled principal of the securitization bonds. Funds for payments are dependent upon the securitization property and the right to collect the securitization surcharge 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.

MANAGEMENT’S NARRATIVE ANALYSIS OF RESULTS OF OPERATIONS

The Results of Operations discussion for the Company is presented in accordance with General Instruction H(2) (a) of Form 10-Q.

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 March 31, 2002, the Company has earned $49,751,000 in surcharge revenues and $294,000 in interest income compared to $9,925,000 in surcharge revenues and $44,000 in interest income for the three-month period of 2001. 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 ended March 31, 2002 and 2001 was $22,825,000 and $3,314,000, respectively. During the 2002 three-month period, the Company also incurred interest expense of $26,608,000, amortization of issuance cost of $311,000, servicing fees of $219,000, and administrative fees of $62,000 compared to interest expense of $6,555,000, amortization of issuance cost of $6,000, servicing fees of $73,000, and administrative fees of $21,000 for the 2001 three-month period.

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 kilowatt hour rate. This surcharge rate was modified to $0.0041 on September 1, 2001 and to $0.00392 effective March 1, 2002. 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.

Under a Michigan Public Service Commission financing order, Detroit Edison has implemented an annual adjustment to the SC to provide sufficient funds for timely payments related to the Bonds.

1

THE DETROIT EDISON SECURITIZATION FUNDING LLC
STATEMENT OF OPERATIONS (UNAUDITED)

		Three Months Ended
		March 31
		2002			2001
(in Thousands)
Operating Revenues		$	49,751		$	9,925
Operating Expenses
	Amortization expense		22,825			3,314
	Service fees		219			73
	Administrative fees		62			21
	Other		20			—
			23,126			3,408
Operating Income			26,625			6,517
Interest Expense and Other
	Interest expense		26,608			6,555
	Interest income		(294	)		(44	)
	Other		311			6
			26,625			6,517
Net Income		$	—		$	—

See Notes to Financial Statements (Unaudited)

2

THE DETROIT EDISON SECURITIZATION FUNDING LLC
STATEMENT OF FINANCIAL POSITION

		March 31
		2002		December 31
(in Thousands)		(Unaudited)		2001
ASSETS
Current Assets
	Cash and cash equivalents	$	2,895	$	2,872
	Restricted cash		23,789		67,840
	Accounts receivable		27,546		22,406
	Accrued unbilled revenues		6,478		7,047
			60,708		100,165
Securitized Regulatory Assets
	Securitization property, less accumulated amortization of $45,054 and $27,380, respectively		1,674,661		1,692,335
	Unamortized bond issuance cost		29,491		29,803
			1,704,152		1,722,138
		$	1,764,860	$	1,822,303
LIABILITIES AND MEMBER’S EQUITY
Current Liabilities
	Accounts payable	$	2,805	$	2,809
	Accrued interest		8,767		35,681
	Accounts payable to member		94		375
	Current portion of securitization bonds payable		84,880		72,521
	Regulatory liability		33,427		28,432
			129,973		139,818
Non-Current Liabilities and Deferred Credits
	Securitization bonds payable		1,625,460		1,673,214
	Overcollateralization subaccount		677		521
			1,626,137		1,673,735
Member’s Equity			8,750		8,750
		$	1,764,860	$	1,822,303

See Notes to Financial Statements (Unaudited)

3

THE DETROIT EDISON SECURITIZATION FUNDING LLC
STATEMENT OF CASH FLOWS (UNAUDITED)

				Three Months Ended
				March 31
(in Thousands)				2002			2001
Operating Activities
	Net income			$	—		$	—
	Adjustments to reconcile net income to net cash from operating activities:
		Amortization			23,157			3,320
	Changes in current assets and liabilities:
			Accounts receivable		(4,595	)		(9,925	)
			Interest payable		(26,914	)		6,555
			Accounts payable to member		(281	)		94
Net cash from (used for) operating activities					(8,633	)		44
Investing Activities
	Restricted cash				44,051			(14,857	)
	Purchase of securitized property				—			(1,743,937	)
Net cash from (used for) investing activities					44,051			(1,758,794	)
Financing Activities
	Issuance of bonds				—			1,750,000
	Member’s investment				—			8,750
	Payment of bonds				(35,395	)		—
Net cash from (used for) financing activities					(35,395	)		1,758,750
Net Increase in Cash and Cash Equivalents					23			—
Cash and Cash Equivalents at Beginning of the Period					2,872			—
Cash and Cash Equivalents at End of the Period				$	2,895		$	—
Supplementary Cash Flow Information
	Interest paid			$	53,522		$	—

See Notes to Financial Statements (Unaudited)

4

THE DETROIT EDISON SECURITIZATION FUNDING LLC
STATEMENT OF MEMBER’S EQUITY (UNAUDITED)

		Three Months Ended
		March 31
		2002		2001
(in Thousands)
Balance beginning of period		$	8,750	$	—
Add:
	Member’s contribution		—		8,750
Balance end of period		$	8,750	$	8,750

See Notes to Financial Statements (Unaudited)

5

The Detroit Edison Securitization Funding LLC
Notes to Financial Statements (Unaudited)

NOTE 1 — GENERAL

These financial statements (unaudited) should be read in conjunction with the notes to financial statements contained in the 2001 Annual Report to the Securities and Exchange Commission on Form 10-K.

The accompanying financial statements were prepared in conformity with accounting principles generally accepted in the United States of America. In connection with their preparation, management makes estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and disclosure of contingent assets and liabilities. Actual results could differ from those estimates.

The financial statements are unaudited, but in the opinion of the Company, include all adjustments necessary for a fair statement of the results for the interim periods. Financial results for this interim period are not necessarily indicative of results that may be expected for any other interim period or for the fiscal year.

NOTE 2 — LONG-TERM DEBT

During the first quarter of 2002, the Company retired $35,395,000 of the Bonds.

6

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 as of March 31, 2002, and the related condensed statements of operations, cash flows and member’s equity for the three-month periods ended March 31, 2002 and 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.

We have previously audited, in accordance with auditing standards generally accepted in the United States of America, the statement of financial position of The Detroit Edison Securitization Funding LLC as of December 31, 2001, and the related statements of operations, cash flows and member’s equity for the year then ended (not presented herein); and in our report dated February 26, 2002, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed statement of financial position as of December 31, 2001 is fairly stated, in all material respects, in relation to the statement of financial position from which it has been derived.

/s/ DELOITTE & TOUCHE LLP

Detroit, Michigan
April 23, 2002

7

Other Information

Exhibits and Reports on Form 8-K.

(a)	Exhibits
(i)	Exhibits filed herewith.

Exhibit
Number	Description
99.17	Monthly Servicer Certificate dated April 12, 2002
(b) Reports on Form 8-K
None.

8

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: May 14, 2002		By:	/s/ DANIEL G. BRUDZYNSKI
			Daniel G. Brudzynski
			Chief Accounting Officer and Controller

9

Exhibit Index

Exhibit
Number	Description
99.17	Monthly Servicer Certificate dated April 12, 2002