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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
The registrant 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.
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934 For the fiscal year ended December 31, 1999
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 333-30785
California Infrastructure and Economic
Development Bank Special Purpose Trust SCE-1
--------------------------------------------
(Issuer of the Certificates)
SCE Funding LLC
---------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-4640661
-------- ----------
(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2244 Walnut Grove Avenue,
Room 180, Rosemead, California 91770
------------------------------ -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (626) 302-1850
--------------
Securities registered pursuant to Section 12(b) of the Act: None
Securities registered pursuant to Section 12(g)of the Act:
California Infrastructure and Economic Development Bank Special Purpose Trust
SCE-1 Rate Reduction Certificates, Series 1997-1: Class A-2 6.14%
Certificates; Class A-3 6.17% Certificates; Class A-4 6.22% Certificates;
Class A-5 6.28% Certificates; Class A-6 6.38% Certificates; Class A-7 6.42%
Certificates, maturing serially from 2000 to 2009, and underlying SCE Funding
LLC Notes of the same respective classes
(Title of Class)
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 at least 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 amendment to this
Form 10-K: [X]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of March 1, 2000 was $0.
DOCUMENTS INCORPORATED BY REFERENCE.
Not applicable.
PART I
Item 1. Business.
General
SCE Funding LLC (Note Issuer) is a special purpose, single member limited
liability company organized under the laws of the State of Delaware. Southern
California Edison Company (SCE), as the sole member of the Note Issuer, owns all
of the equity securities of the Note Issuer. The principal executive office of
the Note Issuer is located at 2244 Walnut Grove Avenue, Room 180, Rosemead,
California 91770. Its telephone number is (626) 302-1850. The Note Issuer was
organized in June 1997 for the limited purposes of owning the Transition
Property (as described below) and issuing notes secured by the Transition
Property and other limited collateral and related activities, and is restricted
by its organizational documents from engaging in other activities. The Note
Issuer's organizational documents require it to operate in a manner such that it
should not be consolidated in the bankruptcy estate of SCE in the event SCE
becomes subject to such a proceeding.
The only material business conducted by the Note Issuer has been the acquisition
of Transition Property (which is reported as a note receivable on the financial
statements); and the issuance on December 11, 1997, of $2,463,000,000 in
principal amount of the SCE Funding LLC Notes, Series 1997-1, Class A-1 through
Class A-7 (Notes), with scheduled maturities ranging from one to ten years and
final maturities ranging from three to twelve years; the receipt of amounts
payable pursuant to the Transition Property; the payment of principal and
interest with respect to the Notes; and related activities. The Notes were
issued pursuant to an indenture between the Note Issuer and Bankers Trust
Company of California, N.A., as trustee (Indenture). The Note Issuer sold the
Notes to the California Infrastructure and Economic Development Bank Special
Purpose Trust SCE-1, a Delaware business trust (Trust), which issued
certificates corresponding to each class of Notes (Certificates) in a public
offering.
The Note Issuer has no employees. It has entered into a servicing agreement
(Servicing Agreement) with SCE pursuant to which SCE is required to service the
Transition Property on behalf of the Note Issuer. In addition, the Note Issuer
has entered into an administrative services agreement with SCE pursuant to which
SCE performs administrative and operational duties for the Note Issuer.
Transition Property
The California Public Utilities Code (PU Code) provides for the creation of
"Transition Property." A financing order dated September 3, 1997 (Financing
Order) issued by the California Public Utilities Commission (CPUC), together
with the related Issuance Advice Letter, establishes, among other things,
separate non-bypassable charges (FTA Charges) payable by residential electric
customers and small commercial electric customers in an aggregate amount
sufficient to repay in full the Certificates, fund the Overcollateralization
Subaccount established under the Indenture and pay all related costs and fees.
Under the PU Code and the Financing Order, the owner of the Transition Property
is entitled to collect FTA Charges until such owner has received amounts
sufficient to retire all outstanding series of Certificates and cover related
fees and expenses and the Overcollateralization Amount described in the
Financing Order. The Transition Property is a property right under California
law that includes, without limitation, ownership of the FTA Charges and any
adjustments thereto as described in the next paragraph.
In order to enhance the likelihood that actual collections with respect to
the Transition Property are neither more nor less than the amount necessary to
amortize the Notes in accordance with their expected
1
amortization schedules, pay all related fees and expenses, and fund certain
accounts established pursuant to the Indenture as required, the Servicing
Agreement requires SCE, as the servicer of the Transition Property (Servicer),
to seek, and the Financing Order and the PU Code require the CPUC to approve,
periodic adjustments to the FTA Charges. Such adjustments will be based on
actual collections and updated assumptions by the Servicer as to future usage of
electricity by specified customers, future expenses relating to the Transition
Property, the Notes and the Certificates, and the rate of delinquencies and
write-offs. On August 19, 1999, SCE filed with the CPUC an anniversary true-up
mechanism advice letter filing. The filing decreased the FTA Charges for
residential customers by 5%, from 1.306 cents to 1.235 cents per kilowatt hour,
and for small commercial customers by 5%, from 1.381 cents to 1.306 cents per
kilowatt hour, effective October 1, 1999. On December 16, 1999, SCE filed with
the CPUC a routine annual true-up mechanism advice letter filing stating that
because of the changes in FTA Charges effective October 1, 1999, no further FTA
Charge adjustments were necessary.
The Trust
The Trust was organized in November 1997 solely for the purpose of purchasing
the Notes and issuing the Certificates. It will not conduct any other material
business activities.
Item 2. Properties.
The Note Issuer has no materially important physical properties. Its primary
asset is the Transition Property described above in Item 1 (Business).
The Trust has no materially important physical properties. Its primary assets
are the Notes described above in Item 1 (Business).
Information about collections from the Transition Property and payments in
respect of the Notes is included in the Annual Statement and the Quarterly
Servicer's Certificate attached hereto as Exhibits 99.1 and 99.3, respectively.
Item 3. Legal Proceedings.
No legal proceedings affecting either the Note Issuer or the Trust occurred in
1999.
Item 4. Submission of Matters to a Vote of Security Holders.
Omitted with respect to the Note Issuer pursuant to Instruction I of Form 10-K.
No matters were submitted for a vote or consent of holders of the Certificates
in 1999.
2
PART II
Item 5. Market For Registrant's Common Equity and Related Stockholder Matters.
There is no established public trading market for the Note Issuer's equity
securities. All of the Note Issuer's equity is owned by SCE. The Note Issuer's
equity securities, or membership interests, were sold to SCE in June 1997 in
exchange for an initial capital contribution of $5,000. SCE has made capital
contributions to the Note Issuer aggregating $10,320,000 as of December 31,
1999, net of distributions made from time to time from the Note Issuer to SCE.
The sale of the Note Issuer's membership interests to SCE was exempt from
registration under the Securities Act of 1933, as amended, pursuant to Section
4(2) thereof. The Note Issuer has made no other sales of unregistered
securities.
The Indenture prohibits the Note Issuer from making any distributions to the
sole member from the amounts allocated to the Note Issuer unless no default has
occurred and is continuing thereunder and the book value of the remaining equity
of the Note Issuer, after giving effect to such distribution, is equal to at
least 0.5% of the original principal amount of all series of Notes which remains
outstanding. As of December 31, 1999, the original principal amount of all
series of Notes which then remained outstanding was $1,970,400,000. On August 2,
1999, the Note Issuer made a distribution to SCE in the amount of $2,000,000.
The Note Issuer intends to make distributions to SCE, as the sole member, from
time to time in the future as permitted by the Indenture and as approved by the
Note Issuer's Board of Directors.
The registered owner for each class of the Certificates is Cede & Co., as
nominee of The Depository Trust Company (DTC). The Note Issuer and the Trust are
unable to ascertain the number of beneficial holders of Certificates. The
Certificates are not registered on any national securities exchange and do not
trade on any established trading market.
Item 6. Selected Financial Data.
Omitted pursuant to Instruction I of Form 10-K.
Item 7. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following analysis of the Note Issuer's results of operations is in an
abbreviated format pursuant to Instruction I of Form 10-K.
As discussed under Item 1 (Business), the Note Issuer was organized in June 1997
for limited purposes, and on December 11, 1997, the Note Issuer issued Notes in
order to purchase Transition Property, which is classified as a note receivable
on the financial statements included under Item 8 (Financial Statements and
Supplementary Data). As the Note Issuer is restricted by its organizational
documents from engaging in activities other than those described in Item 1
(Business), income statement effects were limited primarily to income generated
from the Transition Property, interest expense on the Notes and incidental
investment interest income.
In 1999, income generated from the Transition Property was $138 million compared
with $154 million in 1998. The decrease is due to lower authorized FTA charges
per kilowatt hour during 1999 combined with a reduction in the amount of
kilowatt hours billed to both residential and small commercial customers.
Interest expense in 1999 was $136 million compared to $152 million in 1998. The
decrease is due to lower outstanding balances on the rate reduction notes.
Interest expense includes interest on the Notes, amortization of debt issuance
costs and the discount on the Notes.
3
During the twelve months ending December 31, 1999, the non-bypassable FTA
Charges billed to residential and small commercial customers totaled $380
million. Collections of FTA Charges totaled $388 million and were sufficient to
cover 100% of the scheduled quarterly payments on the Notes and provide
additional funding of approximately $13 million for deposit to a previously
established reserve sub-account. Interest earnings on restricted and
unrestricted funds are used to assist with making the scheduled payments on the
rate reduction notes. Management of the Note Issuer expects future collections
of FTA Charges to be sufficient to cover expenses and to make scheduled payments
on the Notes on a timely basis.
Year 2000 Issue
Under the Servicing Agreement, SCE, as Servicer, is responsible for functions,
such as data acquisition, usage and bill calculation, billing, customer service,
collections, payment processing, and remittance, that are dependent on SCE's
computer systems. Failure of those systems due to the Year 2000 or otherwise,
could adversely affect the ability of the Note Issuer to make timely payments of
principal and interest on the Notes.
SCE has advised the Note Issuer as follows regarding its experience with the
Year 2000. SCE implemented a comprehensive program to address potential Year
2000 impacts consisting of five phases: inventory, impact assessment,
remediation, testing, and implementation. Edison International, SCE's parent
holding company, provided overall coordination of this effort, working with SCE
and its business units. On June 29, 1999 SCE announced that it had achieved Year
2000 readiness of 100% of its critical systems. Such systems were defined by SCE
as those of its applications and systems, which if not appropriately remediated,
may have had a significant impact on customers, the health and safety of the
public and/or personnel, the revenue stream, or regulatory compliance. A system,
application or physical asset was deemed to be Year 2000-ready if it was
determined by SCE to be suitable for continued use through 2028 (or through the
last year of the anticipated life of the asset, whichever occurred first), even
if not fully Year 2000-compliant (able to accurately process date/time date,
between the 20th and 21st centuries, 1999 and 2000, and leap-year calculations).
SCE has advised the Note Issuer that none of SCE's critical applications or
assets have encountered significant problems on or since January 1, 2000,
including on and over February 29, 2000 and they continue to operate as
expected.
Based upon the information provided by SCE, the Note Issuer does not expect any
material adverse impact on the Note Issuer or its financial position or results
of operations, or on the payment of principal and interest on the Notes, as a
result of any inability of the computer systems on which it currently relies to
recognize or otherwise function correctly with respect to the Year 2000 and
later years.
Forward-looking Information
In the preceding Management's Discussion and Analysis of Financial Condition and
Results of Operations, and elsewhere in this annual report, the Note Issuer uses
the words could, estimates, expects, anticipates, believes, and other similar
expressions that are intended to identify forward-looking information that
involves risks and uncertainties. Actual results or outcomes could differ
materially as a result of such important factors as the commencement and outcome
of voter initiatives and legal or regulatory proceedings challenging the
collection of FTA Charges or payment of the Notes or Certificates.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable to the Note Issuer or the Trust.
4
Item 8. Financial Statements and Supplementary Data.
The financial statements and related financial information required to be filed
hereunder appear on pages F-1 through F-6 of this report and are incorporated
herein by reference. In addition, attached with respect to the Note Issuer and
the Trust as Exhibits 99.1, 99.2, and 99.3 are an Annual Statement summarizing
certain information with respect to collections from the Transition Property and
payments on the Notes and Certificates, an Annual Certificate of Compliance with
respect to the Servicer's activities, and the Quarterly Servicer's Certificate
for the collection periods September 1999 through November 1999 (dated December
27, 1999).
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Omitted pursuant to Instruction I of Form 10-K.
Item 11. Executive Compensation.
Omitted pursuant to Instruction I of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Omitted pursuant to Instruction I of Form 10-K.
Item 13. Certain Relationships and Related Transactions.
Omitted with respect to the Note Issuer pursuant to Instruction I of Form 10-K.
Not applicable to the Trust.
5
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements.
The following financial statements of the Note Issuer and
report of independent public accountants are included in Item 8 (Financial
Statements and Supplementary Data):
Report of Independent Public Accountants
Balance Sheets
Statements of Operations and Changes in Member's Equity
Statements of Cash Flows
Notes to Financial Statements
2. Financial Statement Schedule.
None.
3. Exhibits.
See the Exhibit Index of this report below.
(b) Reports on 8-K.
None.
6
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, as of March 21, 2000.
SCE FUNDING LLC
as Registrant
By: W. James Scilacci
------------------------------------------
Name: W. James Scilacci
Title: President
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 dates indicated.
Signature Title Date
--------- ----- ----
W. James Scilacci Director and President March 21, 2000
- -------------------------------- (Principal Executive
W. James Scilacci Officer)
Mary C. Simpson Director and Treasurer March 21, 2000
- -------------------------------- (Principal Financial and
Mary C. Simpson Accounting Officer)
Anand Maniktala Director March 22, 2000
- --------------------------------
Anand Maniktala
Exhibit Index
Exhibit
Number
3.1 Certificate of Formation (incorporated by reference to the same titled
exhibit to the Note Issuer's Registration Statement on Form S-3, File
No. 333-30785)
3.2 Limited Liability Company Agreement (incorporated by
reference to the same titled exhibit to the Note
Issuer's Registration Statement on Form S-3, File No.
333-30785)
3.3 Amended and Restated Limited Liability Company Agreement (incorporated
by reference to exhibit number 3.4 to the Note Issuer's Registration
Statement on Form S-3, File No. 333-30785)
4.1 Note Indenture (incorporated by reference to the same titled exhibit
to the Note Issuer's Current Report on Form 8-K filed with the
Commission on December 11, 1997)
4.2 Series Supplement (incorporated by reference to the same titled
exhibit to the Note Issuer's Current Report on Form 8-K filed with the
Commission on December 11, 1997)
4.3 Note (incorporated by reference to the same titled exhibit to the Note
Issuer's Current Report on Form 8-K filed with the Commission on
December 11, 1997)
4.4 Amended and Restated Declaration and Agreement of
Trust (incorporated by reference to the same titled
exhibit to the Note Issuer's Current Report on Form
8-K filed with the Commission on December 11, 1997)
4.5 First Supplemental Agreement of Trust (incorporated
by reference to the same titled exhibit to the Note
Issuer's Current Report on Form 8-K filed with the
Commission on December 11, 1997)
4.6 Rate Reduction Certificate (incorporated by reference to the same
titled exhibit to the Note Issuer's Current Report on Form 8-K filed
with the Commission on December 11, 1997)
10.1 Transition Property Purchase and Sale Agreement
(incorporated by reference to the same titled exhibit
to the Note Issuer's Current Report on Form 8-K filed
with the Commission on December 11, 1997)
10.2 Transition Property Servicing Agreement (incorporated
by reference to the same titled exhibit to the Note
Issuer's Current Report on Form 8-K filed with the
Commission on December 11, 1997)
10.3 Note Purchase Agreement (incorporated by reference to
the same titled exhibit to the Note Issuer's Current
Report on Form 8-K filed with the Commission on
December 11, 1997)
10.4 Fee and Indemnity Agreement (incorporated by
reference to the same titled exhibit to the Note
Issuer's Current Report on Form 8-K filed with the
Commission on December 11, 1997)
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
99.1 Annual Statement
99.2 Annual Certificate of Compliance
99.3 Quarterly Servicer's Certificate
Report of Independent Public Accountants
To the Members of SCE Funding LLC:
We have audited the accompanying balance sheets of SCE Funding LLC (a Delaware
Limited Liability Company) as of December 31, 1999 and 1998 and the related
statements of operations and changes in member's equity and cash flows for each
of the two years in the period ended December 31, 1999, and the period from
inception to December 31, 1997. 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. 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 SCE Funding LLC as of December
31, 1999 and 1998, and the results of its operations and its cash flows for each
of the two years in the period ended December 31, 1999, and the period from
inception to December 31, 1997, in conformity with accounting principles
generally accepted in the United States.
ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
February 2, 2000
Item 8. Financial Statements
SCE FUNDING LLC
BALANCE SHEETS
(in thousands)
As of December 31,
ASSETS 1999 1998
------ ---- ----
Current Assets:
Cash & equivalents $ 1,318 $ 183
Current portion of note receivable 246,300 246,300
Interest receivable 5 2,324
-------------------------------------------------------
Total Current Assets 247,623 248,807
-------------------------------------------------------
Other Assets and Deferred Charges:
Restricted funds 35,946 20,837
Note receivable - net of discount 1,712,114 1,955,693
Unamortized bond issuance costs 14,593 16,417
-------------------------------------------------------
Total Other Assets & Deferred Charges 1,762,653 1,992,947
-------------------------------------------------------
Total Assets $ 2,010,276 $ 2,241,754
=======================================================
LIABILITIES AND MEMBER'S EQUITY
Current Liabilities:
Interest payable $ 2,220 $ 1,938
Current portion of long-term debt 246,300 246,300
Miscellaneous accrued expenses 70 566
-------------------------------------------------------
Total Current Liabilities 248,590 248,804
-------------------------------------------------------
Long term debt - net of discount 1,723,552 1,969,783
-------------------------------------------------------
Member's equity 38,134 23,167
-------------------------------------------------------
Total Liabilities and Member's Equity $ 2,010,276 $ 2,241,754
=======================================================
The accompanying notes are an integral part of these financial statements
F-1
SCE FUNDING LLC
STATEMENTS OF OPERATIONS AND CHANGES IN MEMBER'S EQUITY
(in thousands)
Year Ended December 31,
Year Year Period
1999 1998 1997
---- ---- ----
OPERATING REVENUE:
Interest income $137,670 $154,279 $8,304
----------------------- -------------------- ---------------------
Total Operating Revenue 137,670 154,279 8,304
----------------------- -------------------- ---------------------
OPERATING EXPENSES:
Interest expense 135,565 152,274 8,231
Other expenses 5,430 6,584 332
----------------------- -------------------- ---------------------
Total Operating Expenses 140,995 158,858 8,563
----------------------- -------------------- ---------------------
Net Loss (3,325) (4,579) (259)
----------------------- -------------------- ---------------------
Member's Equity- beginning of period 23,167 12,981 --
Member Contributions - net 18,292 14,765 13,240
----------------------- -------------------- ---------------------
Member's Equity, end of period $38,134 $23,167 12,981
======================= ==================== =====================
The accompanying notes are an integral part of these financial statements
F-2
SCE FUNDING LLC
STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended December 31,
1999 1998 1997
---- ---- ----
Cash flows from Operating Activities:
Net Loss $ (3,325) $ (4,579) $ (259)
Adjustment for non-cash items:
Amortizations 2 (30) (13)
Deferred assets 245,470 244,017 --
Other--net (15,109) (8,583) (12,254)
Changes in working capital:
Receivables 2,319 5,839 (2,451,873)
Interest payable 282 (6,204) 8,142
Accounts payable and other current liabilities (496) (2,816) 3,382
----------------------------------------------------
Net Cash Provided by, (Used in) Operating Activities 229,143 227,644 (2,452,875)
-----------------------------------------------------
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Payable -- -- 2,462,310
Payment of bond issuance costs -- (2,542) (16,059)
Payment of principal on rate reduction notes (246,300) (246,300) --
----------------------------------------------------
Net Cash Provided by, (Used in) Financing Activities (246,300) (248,842) 2,446,251
----------------------------------------------------
Cash Flows from Investing Activities:
Equity contributions from Southern California Edison
Company 18,292 14,765 13,240
----------------------------------------------------
Net Cash Provided by Investing Activities 18,292 14,765 13,240
----------------------------------------------------
Net Increase (decrease) in cash and equivalents 1,135 (6,433) 6,616
Cash and equivalents, beginning of period 183 (6,616) --
----------------------------------------------------
Cash and equivalents, end of period $ 1,318 $ 183 $ 6,616
====================================================
The accompanying notes are an integral part of these financial statements
F-3
SCE FUNDING LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 1999
1. Basis of Presentation.
The financial statements include the accounts of SCE Funding LLC (also
referred to as the Note Issuer), a Delaware special purpose limited liability
company, whose sole member is Southern California Edison Company (SCE), a
provider of electric services. All of the issued and outstanding common stock of
SCE is owned by its parent holding company, Edison International. SCE Funding
LLC was formed on June 27, 1997, in order to effect the purchase from SCE of
Transition Property (as defined below) and to fund such purchase from the
issuance of the SCE Funding LLC Notes, Series 1997-1, Class A-1 through Class
A-7 (Notes) to the California Infrastructure and Economic Development Bank
Special Purpose Trust SCE-1 (Trust) which issued certificates (Certificates)
with terms and conditions similar to the Notes. The proceeds from the sale of
the Transition Property resulted in a reduction in revenue requirements
sufficient to enable SCE to provide a 10% electric rate reduction to SCE's
residential and small commercial customers in connection with electric industry
restructuring mandated by California Assembly Bill 1890, as amended by
California Senate Bill 477 (collectively, the electric restructuring
legislation). This rate reduction became effective January 1, 1998.
SCE Funding LLC was organized for the limited purposes of issuing the
Notes and purchasing Transition Property. Transition Property is the right to be
paid a specified amount from non-bypassable tariffs authorized by the California
Public Utilities Commission (CPUC) pursuant to the 1995 electric restructuring
legislation. For financial reporting purposes, the purchase of the Transition
Property by the Note Issuer from SCE was treated as the issuance of a promissory
note by SCE to SCE Funding LLC, in the amount of approximately $2.5 billion.
Accordingly, the purchase of the Transition Property is classified as a note
receivable on the accompanying financial statements. Notwithstanding such
classification, the Transition Property, for legal purposes, has been sold by
SCE to SCE Funding LLC.
SCE Funding LLC is restricted by its organizational documents from
engaging in any other activities. In addition, its organizational documents
require it to operate in such a manner that it should not be consolidated in the
bankruptcy estate of SCE, in the event SCE becomes subject to such a proceeding.
SCE Funding LLC is legally separate from SCE. The assets and revenues
of the Note Issuer, including, without limitation, the Transition Property, are
not available to creditors of SCE or Edison International, and the note
receivable from SCE to SCE Funding LLC (i.e., the Transition Property) is not
legally an asset of SCE or Edison International.
F-4
2. Summary of Accounting Policies
Cash Equivalents
Cash equivalents include working funds and short-term investments with
maturities of 90 days or less.
Restricted Funds
SCE Funding LLC is required to maintain funds of approximately 0.5% of the
outstanding principal balance. These funds are invested in short term securities
with maturities of 90 days or less. They are to be used to make scheduled
payments on the Notes to the Trust and to pay other expenses of SCE Funding LLC
in the event that collections of the non-bypassable tariffs prove insufficient
to make such payments.
Unamortized Debt Issuance Expenses
The costs associated with the issuance of the Notes to the Trust have been
capitalized and are being amortized over the life of the Notes.
Income Taxes
SCE Funding LLC is a single-member limited liability company. Accordingly, for
federal and state income tax purposes, any income tax effect of SCE Funding
LLC's activities will be reflected in SCE's financial statements.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
and assumptions. These estimates and assumptions may affect the reported amount
of revenue, expenses, assets, and liabilities and disclosure of contingencies.
Actual results could differ from these estimates.
3. Fair Value of Financial Instruments
Due to their short maturities, amounts reported for cash equivalents and
restricted funds approximate fair value. In addition to these amounts, at
December 31, 1999, SCE Funding LLC had a financial asset (representing its note
receivable from SCE), and financial liabilities (representing its Notes to the
Trust) each with a cost basis of approximately $2.0 billion. The note receivable
is carried at cost which approximates fair value. Fair value is estimated based
on brokers' quotes of notes with similar characteristics. Financial liabilities
are recorded at cost, which approximates fair value, and their fair value is
based on brokers' quotes.
F-5
4. Long-Term Debt
In December 1997, SCE Funding LLC issued approximately $2.5 billion of Notes to
the Trust. There were originally seven classes of Notes the first of which
("Class A-1") matured in December 1998. The remaining Notes consist of six
classes and have maturities ranging from one to nine years, and bear interest at
rates ranging from 6.14% to 6.42%. The Notes are secured solely by the
Transition Property (see Note 1) and certain other assets of SCE Funding LLC,
and the holders of the Notes do not have any recourse to any assets or revenue
of SCE or Edison International. For financial reporting purposes the Transition
Property is shown as a note receivable, with the same scheduled maturities and
interest rates as the Notes to the Trust (see table below). Notwithstanding such
classification of the Transition Property, the Transition Property has been sold
by SCE to SCE Funding LLC.
Principal and interest payments on the Notes are due quarterly and are paid from
funds deposited monthly with the Trustee by SCE as servicer of the Transition
Property. The debt service requirements include an overcollateralization amount,
which will be retained for the benefit of the holders of the Notes. Any amounts
not required for debt service will be returned to SCE Funding LLC. Scheduled
maturities and interest rates for the Notes payable to the Trust at December 31,
1999, are as follows:
Scheduled Interest Amount
Class Maturity Date -Rate (in thousands)
----- -------------- ------ -------------
A-2 March 25, 2000 6.14% $ 60,952
A-3 March 25, 2001 6.17% 247,841
A-4 March 25, 2002 6.22% 246,030
A-5 September 25, 2003 6.28% 360,645
A-6 September 25, 2006 6.38% 739,988
A-7 December 26, 2007 6.42% 314,944
----------
$1,970,400
Less: Current Maturities (246,300)
Less: Unamortized Discount (548)
----------
Long-Term Debt $1,723,552
==========
5. Significant Agreements and Related Party Transactions
Under the Transition Property Servicing Agreement, SCE, the servicer, is
required to manage and administer the Transition Property of SCE Funding LLC and
to collect the non-bypassable tariffs from the electricity ratepayers on behalf
of SCE Funding LLC. SCE Funding LLC shall pay an annual servicing fee equal to
0.25% of the outstanding principal balance of the Notes for so long as the
non-bypassable tariff is included as a line item on the bills otherwise sent to
electricity ratepayers or 1.5% of the outstanding principal balance of the Notes
if the non-bypassable tariff is not included as a line item on bills otherwise
sent to electricity ratepayers but, instead, is billed separately to electricity
ratepayers. SCE Funding LLC incurred a total of $5.4 million in servicing fees
in 1999. SCE is also entitled to receive as compensation any interest earnings
on the non-bypassable tariff collections, and any late payment charges collected
from SCE's customers prior to remittance to the Trust.
The Trust was created solely for the purpose of purchasing the Notes from SCE
Funding LLC, issuing the Certificates, and applying the payments received in
respect of the Notes to the payment of interest and principal in respect of the
Certificates. Under the Trust Agreement, Bankers Trust Company, the Certificate
Trustee, is responsible for purchasing the Notes and authenticating and
delivering the Certificates to the investors. Bankers Trust Company Delaware,
the Delaware Trustee, is responsible for the maintenance of all records that are
necessary to form and maintain the existence of the Trust. All fees and expenses
of the Certificate Trustee and the Delaware Trustee will be paid by SCE Funding
LLC.
F-6