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, 2005
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
(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 2ndAvenue, Detroit, Michigan
(Address of principal executive offices) | | 48226-1279
(Zip Code) |
313-235-4000
(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.
Yesþ Noo
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
Yeso Noþ
The Detroit Edison Securitization Funding LLC
Quarterly Report on Form 10-Q
Quarter Ended September 30, 2005
Table of Contents
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. 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 to 15 years pursuant to a Michigan statute. 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 qualified costs, called Securitization Property by Michigan statute. The qualified 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 and used the net proceeds to purchase the Securitization Property from Detroit Edison. The Company receives surcharge 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.
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 securitization bonds. This surcharge rate was modified to $0.00388 per kilowatthour (kWh) on March 1, 2005 compared to $0.00374 per kWh which became effective March 1, 2004.
Significant components of operations are as follows:
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30 | | | September 30 | |
| (in Thousands) | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
| Surcharge Revenues | | $ | 57,807 | | | $ | 49,307 | | | $ | 153,361 | | | $ | 137,980 | |
| Interest Income | | | 496 | | | | 183 | | | | 1,159 | | | | 451 | |
| Amortization Expense | | | 35,069 | | | | 24,968 | | | | 83,895 | | | | 64,120 | |
| Interest Expense | | | 22,509 | | | | 23,813 | | | | 68,440 | | | | 72,254 | |
| Amortization of debt costs | | $ | 425 | | | $ | 389 | | | $ | 1,250 | | | $ | 1,146 | |
For additional detail see the Statement of Operations on Page 3 of this report.
1
Increased surcharge rates and electricity sales volumes by Detroit Edison resulted in surcharge revenues rising by $8.5 million in the third quarter and $15.4 million for the nine-month period of 2005. Rising market interest rates resulted in increased interest income of $0.3 million for the third quarter and $0.7 million for the nine-month period of 2005.
Increase amortization expense resulted in operating expense increasing by $10.1 million in the third quarter and $19.8 million in the nine-month period of 2005. Amortization expense consists of amortization of the Securitization Property, overcollateralization fee, and over-recovery of securitization surcharge. Amortization expense is adjusted to ensure that revenues and interest income equal expenses.
Due to declining bond obligations, interest expense decreased $1.3 million in the third quarter and $3.8 million in the nine-month period of 2005. Amortization of debt issuance cost increased $0.1 million for the nine-month period of 2005 reflecting the scheduled reduction in debt.
Servicing and administrative expense are determined by the March 9, 2001 Administration Agreement established between the Company and Detroit Edison which establishes administration fees at $250,000 per year. Servicing fees are set at an amount equal to 0.05 percent of the initial principal amount $1.75 billion of the securitization bonds, resulting in annual fees of $875,000. Fees are recorded on a pro rata basis through the year.
2
THE DETROIT EDISON SECURITIZATION FUNDING LLC
STATEMENT OF OPERATIONS (Unaudited)
| | | | | | | | | | | | | | | | | |
| | | Three Months Ended | | | Nine Months Ended | |
| | | September 30 | | | September 30 | |
| (in Thousands) | | 2005 | | | 2004 | | | 2005 | | | 2004 | |
Operating Revenues | | $ | 57,807 | | | $ | 49,307 | | | $ | 153,361 | | | $ | 137,980 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Operating Expenses | | | | | | | | | | | | | | | | |
| Amortization expense | | | 35,069 | | | | 24,968 | | | | 83,895 | | | | 64,120 | |
| Servicing and administrative fees | | | 281 | | | | 281 | | | | 844 | | | | 844 | |
| Other | | | 19 | | | | 39 | | | | 91 | | | | 67 | |
| | | | | | | | | | | | | | | |
| | | | 35,369 | | | | 25,288 | | | | 84,830 | | | | 65,031 | |
| | | | | | | | | | | | | | | |
Operating Income | | | 22,438 | | | | 24,019 | | | | 68,531 | | | | 72,949 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Interest Expense and Other | | | | | | | | | | | | | | | | |
| Interest expense | | | 22,509 | | | | 23,813 | | | | 68,440 | | | | 72,254 | |
| Interest income | | | (496 | ) | | | (183 | ) | | | (1,159 | ) | | | (451 | ) |
| Amortization of debt issuance costs | | | 425 | | | | 389 | | | | 1,250 | | | | 1,146 | |
| | | | | | | | | | | | | |
| | | | 22,438 | | | | 24,019 | | | | 68,531 | | | | 72,949 | |
| | | | | | | | | | | | | |
| | | | | | | | | | | | | | | | | |
Net Income | | $ | — | | | $ | — | | | $ | — | | | $ | — | |
| | | | | | | | | | | | | |
See Notes to Financial Statements (Unaudited)
3
THE DETROIT EDISON SECURITIZATION FUNDING LLC
STATEMENT OF FINANCIAL POSITION
| | | | | | | | | |
| | | September 30 | | | | |
| | | 2005 | | | December 31 | |
| (in Thousands) | | (Unaudited) | | | 2004 | |
ASSETS | | | | | | | | |
Current Assets | | | | | | | | |
| Restricted cash | | $ | 26,535 | | | $ | 73,137 | |
| Accounts receivable | | | 37,111 | | | | 23,144 | |
| Accrued unbilled revenues | | | 9,424 | | | | 12,181 | |
| | | | | | | |
| | | | 73,070 | | | | 108,462 | |
| | | | | | | |
Securitized Regulatory Assets | | | | | | | | |
| Securitization property, less accumulated amortization of $352,979 and $282,012, respectively | | | 1,366,736 | | | | 1,437,703 | |
| | | | | | | |
Other Assets | | | | | | | | |
| Unamortized bond issuance cost, less accumulated amortization of $6,216 and $4,966, respectively | | | 24,069 | | | | 25,319 | |
| | | | | | | |
| | | $ | 1,463,875 | | | $ | 1,571,484 | |
| | | | | | | |
LIABILITIES AND MEMBER’S EQUITY | | | | | | | | |
Current Liabilities | | | | | | | | |
| Accrued interest | | $ | 7,351 | | | $ | 31,261 | |
| Accounts payable to member | | | 96 | | | | 375 | |
| Current portion of securitization bonds payable | | | 104,498 | | | | 96,349 | |
| Securitization reserve | | | 44,940 | | | | 32,481 | |
| | | | | | | |
| | | | 156,885 | | | | 160,466 | |
| | | | | | | |
Non-Current Liabilities and Deferred Credits | | | | | | | | |
| Securitization bonds payable | | | 1,295,375 | | | | 1,399,872 | |
| Other | | | 2,865 | | | | 2,396 | |
| | | | | | | | |
| | | | 1,298,240 | | | | 1,402,268 | |
| | | | | | | | |
Member’s Equity | | | 8,750 | | | | 8,750 | |
| | | | | | | |
| | | $ | 1,463,875 | | | $ | 1,571,484 | |
| | | | | | | |
See Notes to Financial Statements (Unaudited)
4
THE DETROIT EDISON SECURITIZATION FUNDING LLC
STATEMENT OF CASH FLOWS (Unaudited)
| | | | | | | | | |
| | | Nine Months Ended | |
| | | September 30 | |
| (in Thousands) | | 2005 | | | 2004 | |
Operating Activities | | | | | | | | |
| Net income | | $ | — | | | $ | - | |
| Adjustments to reconcile net income to net cash from operating activities: | | | | | | | | |
| Amortization | | | 85,145 | | | | 65,265 | |
| Changes in current assets and liabilities: | | | | | | | | |
| Accounts receivable and accrued unbilled revenues | | | (11,210 | ) | | | (6,729 | ) |
| Interest payable | | | (23,910 | ) | | | (25,052 | ) |
| Accounts payable | | | (279 | ) | | | (307 | ) |
| | | | | | | |
| Net cash from operating activities | | | 49,746 | | | | 33,177 | |
| | | | | | | |
| | | | | | | | | |
Investing Activities | | | | | | | | |
| Restricted cash | | | 46,602 | | | | 55,550 | |
| | | | | | | |
| Net cash from investing activities | | | 46,602 | | | | 55,550 | |
| | | | | | | |
| | | | | | | | | |
Financing Activities | | | | | | | | |
| Payment of bonds | | | (96,348 | ) | | | (88,727 | ) |
| | | | | | | |
| Net cash used for financing activities | | | (96,348 | ) | | | (88,727 | ) |
| | | | | | | |
| | | | | | | | | |
Net Increase in Cash and Cash Equivalents | | | — | | | | — | |
Cash and Cash Equivalents at Beginning of the Period | | | — | | | | — | |
| | | | | | | |
Cash and Cash Equivalents at End of the Period | | $ | — | | | $ | — | |
| | | | | | | |
| | | | | | | | | |
Supplementary Cash Flow Information | | | | | | | | |
| Interest paid | | $ | 92,350 | | | $ | 97,306 | |
| | | | | | | |
See Notes to Financial Statements (Unaudited)
5
THE DETROIT EDISON SECURITIZATION FUNDING LLC
STATEMENT OF MEMBER’S EQUITY (Unaudited)
| | | | | | | | | |
| | | Nine Months Ended | |
| | | September 30 | |
| (in Thousands) | | 2005 | | | 2004 | |
Balance beginning of period | | $ | 8,750 | | | $ | 8,750 | |
| | | | | | | |
| | | | | | | | | |
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 2004 Annual Report 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 may 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 $49,799,000 of securitization bonds during the first quarter of 2005 and $46,549,000 of securitization bonds during the third quarter of 2005.
7
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
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, 2005, and the related condensed statement of operations for the three-month and nine-month periods ended September 30, 2005 and 2004, and the condensed statements of cash flows and member’s equity for the nine-month periods ended September 30, 2005 and 2004. These interim financial statements are the responsibility of The Detroit Edison Securitization Funding LLC’s management.
We conducted our reviews in accordance with the standards of the Public Company Accounting Oversight Board (United States). 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 the standards of the Public Company Accounting Oversight Board (United States), 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 the standards of the Public Company Accounting Oversight Board (United States), the statement of financial position of The Detroit Edison Securitization Funding LLC as of December 31, 2004, 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 March 15, 2005, 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, 2004 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 8, 2005
8
Other Information
EXHIBITS
| | | |
| Exhibit | | |
| Number | | Description |
| |
| Filed: | | |
| 99-71 | | Monthly Servicer Certificate dated August 12, 2005 |
| | | |
| 99-72 | | Monthly Servicer Certificate dated September 13, 2005 |
| | | |
| 99-73 | | Monthly Servicer Certificate dated October 14, 2005 |
| | | |
| 99-74 | | Semi-Annual Servicer Certificate dated August 30, 2005 |
| | | |
| Furnished: | | |
| 32-19 | | Chief Executive Officer Section 906 Certification |
| | | |
| 32-20 | | Chief Financial Officer Section 906 Certification |
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 |
| | | |
| Date: November 8, 2005 | | /s/ DANIEL G. BRUDZYNSKI |
| | | |
| | | Daniel G. Brudzynski |
| | | Chief Accounting Officer and Controller |
10
EXHIBIT INDEX
| | | |
| Exhibit | | |
| Number | | Description |
| | | |
| 32-19 | | Chief Executive Officer Section 906 Certification |
| | | |
| 32-20 | | Chief Financial Officer Section 906 Certification |
| | | |
| 99-71 | | Monthly Servicer Certificate dated August 12, 2005 |
| | | |
| 99-72 | | Monthly Servicer Certificate dated September 13, 2005 |
| | | |
| 99-73 | | Monthly Servicer Certificate dated October 14, 2005 |
| | | |
| 99-74 | | Semi-Annual Servicer Certificate dated August 30, 2005 |
| | | |
