Back to GetFilings.com

Table of Contents

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

FORM 10-K

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

For the fiscal year ended December 31, 2002

Commission file number 333-51066

The Detroit Edison Securitization Funding LLC, a Michigan limited liability company, meets the conditions set forth in General Instruction I (1) (a) and (b) of Form 10-K 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)

313-235-8000
(Registrant’s telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act:

None

Securities registered pursuant to Section 12(g) of the Act:

None
     

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 X                      No      

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. [ X ]

The registrant is a single member limited liability company whose equity is solely owned by The Detroit Edison Company.

DOCUMENTS INCORPORATED BY REFERENCE

None

THE DETROIT EDISON SECURITIZATION FUNDING LLC

ANNUAL REPORT ON FORM 10-K
YEAR ENDED DECEMBER 31, 2002

Table of Contents

TABLE OF CONTENTS

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 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.

PART I

Item 1 & 2. Business & Properties

The 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, an operating electric public utility that is a wholly owned subsidiary of DTE Energy Company (DTE Energy). As discussed in Item 7, Management’s Narrative Analysis of Results of Operations, the Company was organized for the sole purpose of purchasing and owning Securitization Property, issuing securitization bonds, and performing activities that are necessary to accomplish these purposes. The Company had no financial operations until February 15, 2001.

On March 9, 2001, the Company issued $1.75 billion of securitization bonds (Note 3) and used the net proceeds to purchase securitization property from Detroit Edison.

Securitization Property is a property right authorized by Michigan state legislation and by a financing order of the Michigan Public Service Commission (MPSC). The Securitization Property is qualified costs that primarily represent Detroit Edison’s unamortized investment in the 1,150 Megawatt Fermi 2 nuclear power plant that was classified as a regulatory asset. The Michigan statute provided, among other things, the irrevocable right of Detroit Edison, or its successor or assignee, to impose, collect and receive a non-bypassable surcharge from customers pursuant to an 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 (Act).

Item 3. Legal Proceedings

None.

Item 4. Submission Of Matters To A Vote Of Security Holders

Omitted per general instruction I (2) (c) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).

1

Table of Contents

PART II

Item 5. Market For Registrant’s Member’s Equity And Related Owner Matters

The Company was formed as a single member limited liability company, solely owned by Detroit Edison for its own benefit. As such, no market exists for the member’s equity.

Item 6. Selected Financial Data

Omitted per general instruction I (2) (a) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).

Item 7. Management’s Narrative Analysis Of Results Of Operations

The Results of Operations discussion for the Company is presented in accordance with General Instruction I (2) (a) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).

As discussed in Note 1, 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 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 year ended December 31, 2002, the Company earned $205,230,000 in surcharge revenues and $1,123,000 in interest income compared to $143,920,000 in surcharge revenues and $824,000 in interest income for the year ended December 31, 2001. The increase in surcharge revenues is due to weather driven higher electricity sales by Detroit Edison and an increase in the surcharge rate, as well as the fact that the Company was not formed until March 2001. Amortization expense consists of amortization of the Securitization Property, overcollateralization fee, and over-recovery of securitization surcharge (SC). The amortization expense for the years ended December 2002 and 2001 was $98,887,000 and $56,333,000, respectively. The increase in amortization expense reflects the adjustment needed to have revenues and interest income equal expenses. The larger adjustment was primarily attributable to the increase in surcharge revenues. During 2002, the Company also incurred interest expense of $104,873,000, amortization of debt issuance costs of $1,397,000, servicing fees of $875,000, and administrative fees of $250,000 compared to interest expense of $86,928,000, amortization of debt issuance costs of $482,000, servicing fees of $729,000, and administrative fees of $208,000 in 2001.

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. 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. This surcharge rate was modified to $0.0041 per kilowatthour on September 1, 2001.

2

Table of Contents

Under a MPSC financing order, Detroit Edison will implement an annual adjustment to the SC to provide sufficient funds for timely payments related to the securitization bonds. On February 6, 2002, the SC was modified to $0.00392 per kilowatthour effective March 1, 2002 and on February 5, 2003, the SC was modified to $0.00336 per kilowatthour effective March 1, 2003.

3

Table of Contents

Item 7A. Quantitative And Qualitative Disclosures About Market Risk

The Company estimates that if interest rates were 10% higher or lower, the fair value of long-term debt at December 31, 2002 would decrease $54 million and increase $52 million, respectively.

4

Table of Contents

Item 8. Financial Statements And Supplementary Data

5

Table of Contents

INDEPENDENT AUDITORS’ REPORT

To the Managers of
The Detroit Edison Securitization Funding LLC:

We have audited the statement of financial position of The Detroit Edison Securitization Funding LLC, (“the Company”) as of December 31, 2002 and 2001, and the related statements of operations, cash flows and member’s equity for the years then ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of The Detroit Edison Securitization Funding LLC as of December 31, 2002 and 2001, and the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted in the United States of America.

/s/ DELOITTE & TOUCHE LLP

Detroit, Michigan
February 11, 2003

6

Table of Contents

THE DETROIT EDISON SECURITIZATION FUNDING LLC
STATEMENT OF OPERATIONS

See Notes to Financial Statements

7

Table of Contents

THE DETROIT EDISON SECURITIZATION FUNDING LLC
STATEMENT OF FINANCIAL POSITION

See Notes to Financial Statements

8

Table of Contents

THE DETROIT EDISON SECURITIZATION FUNDING LLC
STATEMENT OF CASH FLOWS

See Notes to Financial Statements

9

Table of Contents

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

See Notes to Financial Statements

10

Table of Contents

THE DETROIT EDISON SECURITIZATION FUNDING LLC
NOTES TO FINANCIAL STATEMENTS

NOTE 1 — NATURE OF OPERATIONS

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

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 by Detroit Edison. Securitization Property is a property right authorized by Michigan state legislation and by a financing order of the Michigan Public Service Commission (MPSC). The Michigan statute provided, among other things, the irrevocable right of Detroit Edison, or its successor or assignee, to impose, collect and receive a non-bypassable securitization surcharge (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 (Act). The Financing Order also includes the right to obtain periodic adjustments of SC. The Financing Order authorizes the SC to be sufficient to recover up to $1.774 billion aggregate principal amount of securitization bonds (Bonds), plus an amount sufficient to fund any reserves and to pay interest, servicing fees and other administrative expenses relating to the Bonds.

On March 9, 2001, the Company issued $1.75 billion of Bonds and used the net proceeds to purchase the Securitization Property from Detroit Edison.

The principal amount of the Bonds, interest, fees, and required overcollateralization for the Bonds will be recovered through the SC payable by 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 various subaccounts 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 Company has no employees. Under a Servicing Agreement, Detroit Edison is required to manage and administer the Securitization Property. Detroit Edison collects 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 with the MPSC for annual adjustments to the SC. 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.

11

Table of Contents

NOTE 2 — SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

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, expenses, and the disclosure of contingent assets and liabilities. Actual results may differ from those estimates.

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 ratemaking process, which results in differences in the application of generally accepted accounting principles between regulated and non-regulated businesses. Continued applicability of SFAS No. 71 requires that rates be designed to recover specific costs of providing regulated services and be charged to and collected from customers. The Company believes that currently available facts support the continued application of SFAS No. 71 to its business.

Cash and Cash Equivalents

For purposes of the Statement of Cash Flows, the Company considers investments purchased with a maturity of three months or less to be cash equivalents.

Restricted Cash

Restricted cash includes $80.6 million in the General Subaccount, $4.5 million in the Reserve Subaccount, $0.9 million in the Overcollateralization Subaccount and $8.8 million in the Capital Subaccount. The Trustee has established the following subaccounts for the Bonds:

General Subaccount is comprised of daily 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 Subaccount consists of funds remaining after required allocations on the scheduled semi-annual payment dates. The Trustee may draw funds from this subaccount if the general subaccount is insufficient to make scheduled payments.

Overcollateralization Subaccount accumulates a 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 Subaccount was initially funded by a contribution to the Company by Detroit Edison on the date of issuance of the Bonds in an amount equal to 0.5% of the initial principal amount of the Bonds. This subaccount will be released at Bond retirement. The Trustee can draw funds from this subaccount if the general subaccount, reserve subaccount and overcollateralization subaccount are insufficient to service bond payments. If the Capital Subaccount is used, it will be replenished from SC remittances.

Unamortized Bond Issuance Costs

The costs related to the issuance of the Bonds are amortized over the life of the Bonds utilizing the effective interest method.

12

Table of Contents

Revenue

On March 26, 2001, Detroit Edison, as Servicer, implemented a nonbypassable SC of $0.0032 per kilowatthour (kWh), which was modified to $0.0041 per kWh on September 1, 2001 and $0.00392 per kWh on March 1, 2002. The Company also accrues SC revenue for electric services provided by Detroit Edison but unbilled at the end of each month.

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. Amortization expense consists of amortization of the Securitization Property, overcollateralization fee, and over-recovery of SC.

In accordance with SFAS No. 71, amortization is adjusted for over/under recovery of SC resulting from differences between estimated and actual electricity delivery and is shown as a regulatory liability on the statement of financial position.

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 annual 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.

The Company retired $72,521,000 of Bonds during 2002.

13

Table of Contents

Details of the Bonds at December 31, 2002 are:

In the years 2003 — 2007, long-term debt maturities are $88,265,610, $88,726,715, $96,348,877, $104,497,870, and $110,793,727, respectively.

NOTE 4 — FAIR VALUE OF FINANCIAL INSTRUMENTS

The fair value of financial instruments is determined by reference to various market data and other valuation techniques. The estimated fair value of long-term debt at December 31, 2002 and 2001 was $1,861,849,000 and $1,784,673,000 compared to the carrying amount of $1,673,214,000 and $1,745,735,000, respectively.

NOTE 5 — 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.

At December 31, 2002, the Statement of Financial Position includes a receivable from Detroit Edison of $23,303,518 for SC collections and also includes a payable to Detroit Edison of $375,000 for servicing fees and administrative expenses.

14

Table of Contents

NOTE 6 — SUPPLEMENTARY QUARTERLY FINANCIAL INFORMATION (Unaudited)

15

Table of Contents

Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure

None.

16

Table of Contents

PART III

Item 10. Directors and Executive Officers of the Registrant

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management

Item 13. Certain Relationships and Related Transactions

All omitted per general instruction I (2) (c) of Form 10-K for wholly owned subsidiaries (reduced disclosure format).

17

Table of Contents

PART IV

Item 14. Controls and Procedures

(a) Evaluation of disclosure controls and procedures

The Company’s Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of the Company’s disclosure controls and procedures (as defined in Exchange Act Rules 13a-14(c) and 15d-14(d)) as of a date within 90 days before the filing of this annual report, and have concluded that, as of the evaluation date, such controls and procedures were effective at ensuring that required information will be disclosed on a timely basis in reports filed under the Exchange Act.

(b) Changes in internal controls

	There have been no significant changes (including corrective actions with regard to significant deficiencies or material weaknesses) in the Company’s internal controls or in other factors that could significantly affect these controls subsequent to the evaluation date referenced in paragraph (a) above.

Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K

(a)  The following documents are filed as part of this Annual Report on Form 10-K.

	(1) Financial statements. See “Item 8 — Financial Statements and Supplementary Data.”
	(2) Schedules are omitted as not applicable or not required, or the required information is shown in the financial statements or notes thereto.
	(3) Exhibits.

18

Table of Contents

(b)  Reports on Form 8-K.

None.

19

Table of Contents

SIGNATURES

     Pursuant to the requirements of Section 13 or 15(d) 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.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the date indicated.

20

Table of Contents

FORM 10-K CERTIFICATION

I, David E. Meador, Manager and Chief Executive Officer of The Detroit Edison Securitization Funding LLC, certify that:

	1.		I have reviewed this annual report on Form 10-K of The Detroit Edison Securitization Funding LLC;
	2.		Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
	3.		Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
	4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

			a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
			b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
			c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

			a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
			b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.

The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

21

Table of Contents

FORM 10-K CERTIFICATION

I, Daniel G. Brudzynski, Controller and Chief Financial Officer of The Detroit Edison Securitization Funding LLC, certify that:

	1.		I have reviewed this annual report on Form 10-K of The Detroit Edison Securitization Funding LLC;
	2.		Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report;
	3.		Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report;
	4.		The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

			a)	designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared;
			b)	evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the “Evaluation Date”); and
			c)	presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5.

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

			a)	all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and
			b)	any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6.

The registrant’s other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

22

Table of Contents

EXHIBIT INDEX