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 Quarterly Period ended September 30, 2003

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

     Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Exchange Act.

Yes o          No þ

TABLE OF CONTENTS

Chief Executive Officer Section 906 Certification

Chief Financial Officer Section 906 Certification

Monthly Servicer Certificate dated August 13, 2003

Monthly Servicer Certificate dated Sept. 12, 2003

Monthly Servicer Certificate dated Oct. 13, 2003

Semi-Annual Servicer Certificate August 26, 2003

THE DETROIT EDISON SECURITIZATION FUNDING LLC

QUARTERLY REPORT ON FORM 10-Q

QUARTER ENDED SEPTEMBER 30, 2003

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		8
Item 2.	Management’s Narrative Analysis of the Results of Operations		2
PART II — OTHER INFORMATION
Item 6.	Exhibits and Reports on Form 8-K		9
Signature			10

1

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 The Detroit Edison Company (Detroit Edison) electric deliveries to customers.

MANAGEMENT’S NARRATIVE ANALYSIS OF THE 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 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, 2003, the Company earned $46,965,000 in surcharge revenues and $179,000 in interest income compared to $58,576,000 in surcharge revenues and $298,000 in interest income for the three-month period ended September 30, 2002. The decrease in surcharge revenues is due to changes in surcharge rates and weather driven lower electricity sales by Detroit Edison. 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 periods ended September 30, 2003 and 2002 was $21,456,000 and $32,085,000, respectively. The decrease in amortization expense reflects the adjustment needed to have revenues and interest income equal expenses. The lower amount was primarily attributable to the decrease in surcharge revenues. During the 2003 three-month period, the Company also incurred interest expense of $25,017,000, amortization of debt issuance costs of $367,000, servicing fees of $218,000, and administrative fees of $62,000 compared to interest expense of $26,142,000, amortization of debt issuance costs of $351,000, servicing fees of $218,000, and administrative fees of $62,000 for the 2002 three-month period.

     For the nine-month period ended September 30, 2003, the Company earned $132,046,000 in surcharge revenues and $622,000 in interest income compared to $157,095,000 in surcharge revenues and $842,000 in interest income for the nine-month period ended September 30, 2002. The decrease in surcharge revenues is due to changes in surcharge rates and weather driven lower electricity sales by Detroit Edison. The amortization expense for the nine-month periods ended September 30, 2003 and 2002 was $54,815,000 and $76,997,000, respectively. The decrease in amortization expense reflects the adjustment needed to have revenues and interest income equal expenses. The lower amount was primarily attributable to the decrease in surcharge revenues. During the 2003 nine-month period, the Company also incurred interest expense of $75,835,000, amortization of debt issuance costs of $1,110,000, servicing fees of $656,000, and administrative fees of $187,000 compared to interest expense of $79,052,000, amortization of debt issuance costs of $984,000, servicing fees of $656,000, and administrative fees of $187,000 for the 2002 nine-month period.

     Detroit Edison, as Servicer, collects a surcharge from its customers for the benefit of the Company and the Securitization Bondholders. The surcharge is adjusted annually to provide sufficient funds for timely payments related to the Bonds. This surcharge rate was modified to $0.00336 on March 1, 2003 compared to $0.00392 that became effective March 1, 2002.

2

THE DETROIT EDISON SECURITIZATION FUNDING LLC

STATEMENT OF OPERATIONS (UNAUDITED)

		Three Months						Nine Months
		Ended						Ended
		September 30						September 30
		2003			2002			2003			2002
		(In thousands)
Operating Revenues		$	46,965		$	58,576		$	132,046		$	157,095
Operating Expenses
	Amortization expense		21,456			32,085			54,815			76,997
	Servicing fees		218			218			656			656
	Administrative fees		62			62			187			187
	Other		24			16			65			61
			21,760			32,381			55,723			77,901
Operating Income			25,205			26,195			76,323			79,194
Interest Expense and Other
	Interest expense		25,017			26,142			75,835			79,052
	Interest income		(179	)		(298	)		(622	)		(842	)
	Amortization of debt issuance costs		367			351			1,110			984
			25,205			26,195			76,323			79,194
Net Income		$	—		$	—		$	—		$	—

See Notes to Financial Statements (Unaudited)

3

THE DETROIT EDISON SECURITIZATION FUNDING LLC

STATEMENT OF FINANCIAL POSITION

		(Unaudited)
		September 30		December 31
		2003		2002
		(In thousands)
ASSETS
Current Assets
	Cash and cash equivalents	$	—	$	—
	Restricted cash		35,631		94,757
	Accounts receivable		26,561		23,564
	Accrued unbilled revenues		7,202		8,309
			69,394		126,630
Securitized Regulatory Assets
	Securitization property, less accumulated amortization of $169,765 and $106,743, respectively		1,549,950		1,612,973
	Unamortized bond issuance cost, less accumulated amortization of $2,990 and $1,880, respectively		27,295		28,405
			1,577,245		1,641,378
		$	1,646,639	$	1,768,008
LIABILITIES AND MEMBER’S EQUITY
Current Liabilities
	Accrued interest	$	8,215	$	34,428
	Accounts payable to member		95		375
	Current portion of securitization bonds payable		88,727		88,266
	Regulatory liability		43,017		50,095
			140,054		173,164
Non-Current Liabilities and Deferred Credits
	Securitization bonds payable		1,496,221		1,584,948
	Other		1,614		1,146
			1,497,835		1,586,094
Member’s Equity			8,750		8,750
		$	1,646,639	$	1,768,008

See Notes to Financial Statements (Unaudited)

4

THE DETROIT EDISON SECURITIZATION FUNDING LLC

STATEMENT OF CASH FLOWS (UNAUDITED)

			Nine Months
			Ended
			September 30
			2003			2002
			(In thousands)
Operating Activities
	Net income		$	—		$	—
	Adjustments to reconcile net income to net cash from operating activities:
		Amortization		57,523			77,981
	Changes in current assets and liabilities:
		Accounts receivable		(1,890	)		(10,054	)
		Interest payable		(26,213	)		(27,074	)
		Accounts payable		(280	)		(297	)
Net cash from operating activities				29,140			40,556
Investing Activities
	Restricted cash			59,126			32,017
	Capitalization of issuance cost			—			(22	)
Net cash from investing activities				59,126			31,995
Financing Activities
	Payment of bonds			(88,266	)		(72,521	)
Net cash used for financing activities				(88,266	)		(72,521	)
Net Increase in Cash and Cash Equivalents				—			30
Cash and Cash Equivalents at Beginning of the Period				—			2,872
Cash and Cash Equivalents at End of the Period			$	—		$	2,902
Supplementary Cash Flow Information
	Interest paid		$	102,049		$	106,126

See Notes to Financial Statements (Unaudited)

5

THE DETROIT EDISON SECURITIZATION FUNDING LLC

STATEMENT OF MEMBER’S EQUITY (UNAUDITED)

		Nine Months
		Ended
		September 30
		2003		2002
		(In thousands)
Balance beginning of period		$	8,750	$	8,750
Add:
	Member’s contribution		—		—
Balance end of period		$	8,750	$	8,750

See Notes to Financial Statements (Unaudited)

6

THE DETROIT EDISON SECURITIZATION FUNDING LLC

NOTES TO FINANCIAL STATEMENTS (UNAUDITED)

Note 1 — General

     The financial statements included herein should be read in conjunction with the notes to financial statements contained in the 2002 Annual Report to the Securities and Exchange Commission on Form 10-K.

     The accompanying financial statements are prepared using accounting principles generally accepted in the United States of America. These accounting principles require management to use estimates and assumptions that impact reported amounts of assets, liabilities, revenues and expenses, and the 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

     The Company retired $47,754,000 of securitization bonds (Bonds) during the first quarter of 2003 and $40,512,000 of Bonds during the third quarter of 2003.

7

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 September 30, 2003, the related condensed statements of operations for the three-month and nine-month periods ended September 30, 2003 and 2002 and the condensed statements of cash flows and member’s equity for the nine-month periods ended September 30, 2003 and 2002. These interim financial statements are the responsibility of The Detroit Edison Securitization Funding LLC’s management.

     We conducted our reviews 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 and 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 reviews, we are not aware of any material modifications that should be made to such condensed interim 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, 2002, 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 11, 2003, 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, 2002 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

November 7, 2003

8

OTHER INFORMATION

Exhibits and Reports on Form 8-K

     (a) Exhibits

Exhibit
Number		Description
Filed:
	99-41	Monthly Servicer Certificate dated August 13, 2003
	99-42	Monthly Servicer Certificate dated September 12, 2003
	99-43	Monthly Servicer Certificate dated October 13, 2003
	99-44	Semi-Annual Servicer Certificate dated August 26, 2003
Furnished:
	32-3	Chief Executive Officer Section 906 Certification of Periodic Report
	32-4	Chief Financial Officer Section 906 Certification of Periodic Report

     (b) Reports on Form 8-K

     During the quarterly period ended September 30, 2003, the Company did not file any Current Reports on Form 8-K.

9

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

/s/ DANIEL G. BRUDZYNSKI
_______________________________________
Daniel G. Brudzynski

Chief Accounting Officer and Controller

Date: November 7, 2003

10

EXHIBIT INDEX

Exhibit
Number		Description
Filed:
	99-41	Monthly Servicer Certificate dated August 13, 2003
	99-42	Monthly Servicer Certificate dated September 12, 2003
	99-43	Monthly Servicer Certificate dated October 13, 2003
	99-44	Semi-Annual Servicer Certificate dated August 26, 2003
Furnished:
	32-3	Chief Executive Officer Section 906 Certification of Periodic Report
	32-4	Chief Financial Officer Section 906 Certification of Periodic Report