====================================================================================================================== 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, 2001. 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 212T, 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-5 6.28% Certificates; Class A-6 6.38% Certificates; Class A-7 6.42% Certificates, maturing serially from 2003 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, 2002 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 212T, 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 December 18, 2001, SCE filed with the CPUC a routine annual true-up mechanism advice letter filing. The filing increased the FTA Charges for residential customers by 12%, from 1.089 cents to 1.222 cents per kilowatt hour, and for small commercial customers by 12%, from 1.152 to 1.292 cents per kilowatt hour, effective January 1, 2002. Under the Servicing Agreement, during any period in which the Servicer does not maintain a short-term rating of A-1 or better by Standard & Poor's or P-1 or better by Moody's Investors Service, the Servicer must remit to the collection account maintained with the trustee for the Notes the total payments of FTA Charges estimated to have been received by the Servicer on a given business day within two business days after receipt thereof by the Servicer. Because of downgrades in its short-term ratings, SCE began making such daily remittances on January 8, 2001. SCE's current short-term ratings are C by Standard & Poor's and Not Prime by Moody's. 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 2001. 2 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 2001. 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 $8,320,000 as of December 31, 2001, 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 there under 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, 2001, the original principal amount of all series of Notes which then remained outstanding was $1,661,607,334. 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. 3 In 2001, income generated from the Transition Property was $109 million compared with $124 million in 2000. The decrease is due to reduced sales and lower authorized FTA Charges per kilowatt hour during 2001. Interest expense in 2001 was $106 million compared to $121 million in 2000. The decrease is due to lower outstanding balances on the Notes. Interest expense includes interest on the Notes, amortization of debt issuance costs and the discount on the Notes. Conservation efforts in response to the energy crisis in 2001 resulted in a decrease in demand for electricity. As a result, cash collections during 2001 were not sufficient to cover scheduled distributions. During 2001, $28.7 million was paid from various reserve accounts to cover scheduled distributions. During the twelve months ending December 31, 2001, the non-bypassable FTA Charges billed to residential and small commercial customers totaled $316 million. Collections of FTA Charges totaled $317 million. Scheduled distributions in 2001 were $355 million. Collections were sufficient to cover approximately 89% of the scheduled payments on the Notes. Prior period overcollections were used to cover scheduled distributions in 2001. Interest earnings on restricted and unrestricted funds and previous period overcollections deposited to various restricted accounts are used to assist with making the scheduled payments on the rate reduction notes. An increase in the FTA Charges went into effect on January 1, 2002. The outstanding balance of the Notes payable to Note holders at December 31, 2001, is $1.67 billion. The required capital reserve in the Capital Subaccount under the Indenture is $8.3 million (0.5% of the outstanding balance of the Notes). The balance in the Capital Subaccount as shown in Exhibit 99.1 is $11.3 million. 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. The increase in miscellaneous accrued expenses in 2001 is due to accelerated cash remittances by SCE. Effective January 1, 2001, because of lower credit ratings, SCE was required to begin making daily rather than monthly remittances to the collection account maintained with the trustee for the Notes. The result is an acceleration of cash collections. These accelerated payments represent future commitments to be paid upon the liquidation of the Notes. 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 Notes or Certificates. Item 7A. Quantitative and Qualitative Disclosures About Market Risk. Not applicable to the Note Issuer or the Trust. 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-7 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 (unaudited) summarizing certain information with respect to collections from the Transition Property and payments on 4 the Notes and Certificate, an Annual Certificate of Compliance (unaudited) with respect to the Servicer's activities, and the Quarterly Servicer's Certificate (unaudited) for the collection periods September 2001 through November 2000 (dated December 12, 2001). 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 28, 2002. 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 28, 2002 - --------------------------------------------------------------- (Principal Executive W. James Scilacci Officer) Mary C. Simpson Director and Treasurer March 28, 2002 - --------------------------------------------------------------- (Principal Financial and Mary C. Simpson Accounting Officer) Anand Maniktala Director March 28, 2002 - --------------------------------------------------------------- Anand Maniktala 7 Exhibit Index ------------- Sequential Numbered Exhibit Exhibit Number Page ------ ---- 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 99.1 Annual Statement (Unaudited) 99.2 Annual Certificate of Compliance 99.3 Quarterly Servicer's Certificate (Unaudited) 99.4 Letter to United States Securities and Exchange Commission Regarding the Issuer's Independent Public Accountants, Arthur Andersen LLP 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, 2001 and 2000 and the related statements of operations and changes in member's equity and cash flows for each of the three years in the period ended December 31, 2001. 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, 2001 and 2000, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2001, in conformity with accounting principles generally accepted in the United States. ARTHUR ANDERSEN LLP ARTHUR ANDERSEN LLP Los Angeles, California March 25, 2002 Item 8. Financial Statements SCE FUNDING LLC BALANCE SHEETS As of December 31, (in thousands) -------------- ASSETS 2001 2000 ------ ---- ---- Current Assets: Cash and equivalents $ 1,443 $ 2,485 Restricted funds 34,812 42,085 Current portion of note receivable 246,300 246,300 Interest receivable 20 29 ------------------------------------------------------- Total Current Assets 282,575 290,899 ------------------------------------------------------- Other Assets and Deferred Charges: Note receivable - net of discount 1,270,993 1,475,641 Unamortized bond issuance costs 10,945 12,769 ------------------------------------------------------- Total Other Assets and Deferred Charges 1,281,938 1,488,410 ------------------------------------------------------- Total Assets $ 1,564,513 $ 1,779,309 ======================================================= LIABILITIES AND MEMBER'S EQUITY ------------------------------- Current Liabilities: Interest payable $ 1,305 $ 1,517 Current portion of long-term debt 246,300 246,300 Miscellaneous accrued expenses 31,202 1,706 ------------------------------------------------------- Total Current Liabilities 278,807 249,523 ------------------------------------------------------- Long term debt - net of discount 1,231,090 1,477,321 ------------------------------------------------------- Member's equity 54,616 52,465 ------------------------------------------------------- Total Liabilities and Member's Equity $ 1,564,513 $ 1,779,309 ======================================================= 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 Year Ended December 31, (in thousands) 2001 2000 1999 OPERATING REVENUE: Interest income $108,814 $124,045 $137,670 ----------------------- -------------------- --------------------- Total Operating Revenue 108,814 124,045 137,670 ----------------------- -------------------- --------------------- OPERATING EXPENSES: Interest expense 105,604 120,727 135,565 Other expenses 4,197 4,844 5,430 ----------------------- -------------------- --------------------- Total Operating Expenses 109,801 125,571 140,995 ----------------------- -------------------- --------------------- Net Loss (987) (1,526) (3,325) ----------------------- -------------------- --------------------- Member's Equity - beginning of year 52,465 38,134 23,167 Member Contributions -- net 3,138 15,857 18,292 ----------------------- -------------------- --------------------- Member's Equity, end of year $54,616 $52,465 $38,134 ======================= ==================== ===================== The accompanying notes are an integral part of these financial statements F-2 SCE FUNDING LLC STATEMENTS OF CASH FLOWS Year Ended December 31, (in thousands) 2001 2000 1999 ---- ---- ---- Cash flows from Operating Activities: Net Loss $ (987) $ (1,526) $ (3,325) Adjustments to reconcile net loss to net cash used by operating activities: Amortizations 2 2 2 Changes in working capital: Restricted funds 7,273 (6,139) (15,108) Interest Receivables 9 (24) 2,319 Interest payable (212) (211) (210) Miscellaneous accrued expenses 29,496 1,144 (4) ----------------------------------------------------- Net Cash Provided (Used) in Operating Activities 35,581 (6,754) (16,326) ----------------------------------------------------- Cash Flows from Financing Activities: Payment of principal on rate reduction notes (246,300) (246,300) (246,300) ----------------------------------------------------- Net Cash Used in Financing Activities (246,300) (246,300) (246,300) ----------------------------------------------------- Cash Flows from Investing Activities: Note Receivable Collections from SCE 206,539 238,364 245,469 Equity contributions from Southern California Edison Company 3,138 15,857 18,292 ---------------------------------------------------- Net Cash Provided by Investing Activities 209,677 254,221 263,761 ---------------------------------------------------- Net (decrease) Increase in cash and equivalents (1,042) 1,167 1,135 Cash and equivalents, beginning of period 2,485 1,318 183 ---------------------------------------------------- Cash and equivalents, end of period $ 1,443 $ 2,485 $ 1,318 ==================================================== Cash payments for interest $ 103,771 $ 119,045 $ 133,882 - ---------------------------------------------------------------------------------------------------------------- The accompanying notes are an integral part of these financial statements F-3 SCE FUNDING LLC NOTES TO FINANCIAL STATEMENTS December 31, 2000 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 initial 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 of the Notes. 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. Miscellaneous accrued expenses Effective January 1, 2001, because of lower credit ratings, SCE was required to begin making daily rather than monthly remittances to the collection account maintained with the trustee for the Notes. The result is an acceleration of cash collections. These accelerated payments represent future commitments to be paid upon the liquidation of the Notes and are classified as miscellaneous accrued expenses on the financial statements. 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, 2001, 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 $1.5 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 four classes of Notes (Classes A-1 through A-4) matured in December 1998, and March 2000, 2001, and 2002, respectively. The remaining three classes of Notes have maturities beginning in 2003 and ending in 2007, with interest rates ranging from 6.28% 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 with the Trustee by SCE as servicer of the Transition Property. Because of the negative impact the California energy crisis has had on SCE's credit ratings, SCE has, effective January 2001, begun making daily rather than monthly remittances to the trustee. 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, 2001, are as follows: Scheduled Interest Amount Class Maturity Date Rate (in thousands) ----- ------------- ---- ------------ A-4 March 25, 2002 6.22% 62,223 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 ---------- $1,477,800 Less: Current Maturities (246,300) Less: Unamortized Discount (410) ---------- Long-Term Debt Net of Discount $1,231,090 ========== 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 $4.2 million in servicing, administration and trustee fees in 2001. 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 are paid by SCE Funding LLC.