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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL INSTRUCTION H(1)(a) AND (b)
OF FORM 10-Q AND IS THEREFORE FILING THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
(Mark One)
|X| Quarterly report pursuant to section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended June 30, 2002.
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
Indicate by check |X| 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
PART I
Item 1. Financial Statements
SCE FUNDING LLC
BALANCE SHEETS
(in thousands)
June 30, December 31,
2002 2001
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(Unaudited)
ASSETS
Current Assets:
Cash & equivalents $ 1,446 $ 1,443
Restricted funds 31,170 34,812
Current portion of note receivable 246,689 246,300
Interest receivable 15 20
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Total Current Assets 279,320 282,575
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Other Assets and Deferred Charges:
Note receivable - net of discount 1,151,127 1,270,993
Unamortized bond issuance costs 10,033 10,945
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Total Other Assets and Deferred Charges 1,161,160 1,281,938
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Total Assets $ 1,440,480 $ 1,564,513
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LIABILITIES AND MEMBER'S EQUITY
Current Liabilities:
Interest payable $ 1,205 $ 1,305
Current portion of long-term debt 246,689 246,300
Miscellaneous accrued expenses 20,860 31,202
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Total Current Liabilities 268,754 278,807
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Long term debt - net of discount 1,115,917 1,231,090
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Member's equity 55,809 54,616
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Total Liabilities and Member's Equity $ 1,440,480 $ 1,564,513
======================= ===========================
The accompanying notes are an integral part of these financial statements
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SCE FUNDING LLC
STATEMENTS OF OPERATIONS AND CHANGES IN MEMBER'S EQUITY
(Unaudited)
(in thousands)
6 Months Ended
June 30,
-------------------------------------------------------
2002 2001
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OPERATING REVENUES:
Interest Income $ 48,157 $ 56,391
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Total Operating Revenue 48,157 56,391
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OPERATING EXPENSES:
Interest Expense 46,854 54,655
Other Expenses 1,897 2,170
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Total Operating Expenses 48,751 56,825
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Net Loss (594) (434)
Member's Equity, beginning of period 54,616 52,465
Member Contributions - net 1,787 166
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Member's Equity, end of period $ 55,809 $ 52,197
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The accompanying notes are an integral part of these financial statements
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SCE FUNDING LLC
STATEMENTS OF CASH FLOWS
(Unaudited)
(in thousands)
6 Months Ended
June 30,
---------------------------------------------------
2002 2001
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Cash Flows from Operating Activities:
Net Loss $ (594) $ (434)
Adjustment to reconcile net loss to net
cash provided by operating activities:
Amortization 1 1
Restricted funds 3,642 (11,097)
Other Receivable 5 11
Interest payable (100) (1,591)
Miscellaneous accrued expenses (10,342) 30,300
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Net Cash (Used) Provided by Operating Activities (7,388) 17,190
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Cash Flows from Financing Activities:
Payment of principal on rate reduction notes (114,818) (112,389)
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Net Cash Used by Financing Activities (114,818) (112,389)
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Cash Flows from Investing Activities:
Note receivable collections from SCE 120,422 93,986
Equity contributions from SCE 1,787 166
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Net Cash Provided by Investing Activities 122,209 94,152
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Net increase (decrease) in cash and equivalents 3 (1,047)
Cash and equivalents, beginning of period 1,443 2,485
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Cash and equivalents, end of period $ 1,446 $ 1,438
======================== ========================
The accompanying notes are an integral part of these financial statements
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SCE FUNDING LLC
NOTES TO FINANCIAL STATEMENTS
In the opinion of management, all adjustments have been made that are necessary to present a fair statement of the
financial position and results of operations for the periods covered by this report.
SCE Funding LLC's significant accounting policies were described in Note 2 of "Notes to Financial Statements" included in
its Annual Report on Form 10-K for the fiscal year ended December 31, 2001, filed with the Securities and Exchange Commission.
SCE Funding LLC follows the same accounting policies for interim reporting purposes. Results of operations for the interim
periods are not necessarily indicative of results to be expected for a full year. This quarterly report should be read in
conjunction with SCE Funding LLC's Annual Report on Form 10-K.
Note 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 organized in June 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).
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 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.
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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.
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
The following analysis of the Note Issuer's financial condition and results of operations is in an abbreviated format
pursuant to Instruction H of Form 10-Q. Such analysis should be read in conjunction with the Financial Statements included
herein, and the Financial Statements and Notes to the Financial Statements included in SCE Funding LLC's 2001 Annual Report on
Form 10-K.
The Note Issuer is a special purpose, single member limited liability company organized in June 1997 for the limited
purposes of owning the Transition Property (as described below) and issuing notes secured primarily by the Transition Property.
SCE is the sole member of the Note Issuer. 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 Note Issuer issued $2,463,000,000 in principal amount of the Notes in December 1997 with scheduled maturities ranging
from 1 to 10 years and final maturities ranging from 3 to 12 years, pursuant to an indenture with Deutsche Bank National Trust
Company (formerly Bankers Trust Company of California, N.A.), as trustee (Note Indenture). The Note Issuer also entered into a
servicing agreement (Servicing Agreement) with SCE that requires SCE to service the Transition Property on behalf of the Note
Issuer.
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 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 Note 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
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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 amortization schedules, pay all related
fees and expenses, and fund certain accounts established pursuant to the Note Indenture as required, the Servicing Agreement
requires SCE, as the Servicer of the Transition Property 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.
As shown in Exhibit 99.1 (page 3), the outstanding balance of the Notes payable to the Note holders at June 30, 2002, is
$1.4 billion. The minimum required capital reserve in the Capital Subaccount under the Note Indenture at June 30, 2002, is
approximately $7.1 million (0.5% of the outstanding principal amount of the currently outstanding Notes before giving effect to
any payments). The balance in the Capital Subaccount as shown in Exhibit 99.1 (page 3) is approximately $4.7 million and is
approximately $2.4 million below the required minimum reserve. The required funding amount for the Overcollateralization
Subaccount through June 2002 is approximately $5.5 million. The balance in the Overcollateralization Subaccount as shown in
Exhibit 99.1 (page 3) is $3.1 million, and is approximately $2.4 million below the required funding level. The next series of
Notes is not scheduled for maturity until September 2003.
As of June 20, 2002, the Servicing Agreement was amended to provide for a routine quarterly true-up adjustment whenever,
at the end of any of the first three calendar quarters of a year, the energy usage by SCE's customers is at least 3% lower than
assumed and the balance in the Collection Account (excluding the General Subaccount) is below the required level. The purpose of
the amendment was to further assure that actual collections are not less than the amounts necessary for the purposes specified in
the Note Indenture.
Management of the Note Issuer expects future collections of FTA Charges to be sufficient to cover expenses, make
scheduled payments on the Notes on a timely basis, and eventually restore the balances in the Overcollateralization Subaccount and
the Capital Subaccount to their minimum required reserve amounts.
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
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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. Because SCE currently does not have any short-term debt
outstanding, both Moody's and Standard & Poor's withdrew their short-term ratings for SCE on March 1, 2002.
The Note Issuer is limited by its organizational documents from engaging in any activities other than owning the
Transition Property, issuing notes secured by the Transition Property and other limited collateral, and activities related
thereto. Accordingly, income statement effects are limited primarily to income generated from the Transition Property, interest
expense on the Notes, servicing fees to SCE, and incidental investment interest income. During the six month period ended June
30, 2002, the income generated from the Transition Property was $48 million compared to $56 million for the same period in 2001.
The decrease is due to reduced sales partially offset by higher FTA Charges per kilowatt hour, effective January 1, 2002.
Interest expense for the six months ended June 30, 2002 was $47 million compared to $55 million for the same period in 2001, and
includes interest on the Notes and the amortization of debt issuance costs. The decrease is due to a lower outstanding principal
balance on the Notes.
The Note Issuer uses collections with respect to the Transition Property to make scheduled principal and interest
payments on the Notes. Interest income earned on the Transition Property is expected to offset (1) interest expense on the Notes,
(2) amortization of debt issuance costs and the discount on the Notes, and (3) the fees charged by SCE for servicing the
Transition Property and providing administrative services to the Note Issuer.
Attached as Exhibit 99.1 is the Quarterly Servicer's Certificate for the collection period March 2002 through May 2002
(dated June 17, 2002), delivered pursuant to the Note Indenture, which includes information relating to the collections and
distributions of the FTA Charges, and the balances in the reserve subaccounts under the Note Indenture. As noted therein on line
4e, collections of FTA Charges and interest earnings thereon (the General Subaccount Balance) totaled $79.1 million and were
sufficient to pay 100% of all scheduled distributions and related expenses on the Notes and restore funding of $3.1 million of the
$4.7 million previously withdrawn from the Overcollateralization Subaccount.
Forward-looking Information
In the preceding Management's Discussion and Analysis of Financial Condition and Results of Operations, and elsewhere in
this quarterly report, the Note Issuer uses the words could, estimates, expects, anticipates, believes, planned 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 3. Quantitative and Qualitative Disclosures About Market Risk.
Omitted with respect to the Note Issuer pursuant to Instruction H of Form 10-Q.
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PART II
Item 1. Legal Proceedings.
Omitted because there are no reportable proceedings.
Item 2. Changes in Securities and Use of Proceeds.
Omitted with respect to the Note Issuer pursuant to Instruction H of Form 10-Q.
Item 3. Defaults Upon Senior Securities.
Omitted with respect to the Note Issuer pursuant to Instruction H of Form 10-Q.
Item 4. Submission of Matters to a Vote of Security Holders.
Omitted with respect to the Note Issuer pursuant to Instruction H of Form 10-Q.
Item 5. Other Information.
Attached, with respect to the Note Issuer and the Trust, as Exhibit 99.1 is the Quarterly Servicer's Certificate for the
collection period March 2002 through May 2002 (dated June 17, 2002), delivered pursuant to the Note Indenture, which includes
information relating to the collection and distributions of the FTA Charges and the balances in the reserve subaccounts under the
Note Indenture.
Item 6. Exhibits and Reports on Form 8-K.
(a) See the Exhibit Index of this report below.
(b) Reports on Form 8-K filed during the quarter ended June 30, 2002.
The Note Issuer did not file any reports on Form 8-K during the quarter
ended June 30, 2002.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report
to be signed on its behalf by the undersigned thereunto duly authorized.
Dated: August 14, 2002 SCE FUNDING LLC
as Registrant
By Mary C. Simpson
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Name: Mary C. Simpson
Title: Treasurer (Principal Financial and
Accounting Officer)
Exhibit Index
Exhibit
Number
3.1 Certificate of Formation (incorporated by reference to the same titled
and numbered 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 and numbered 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 the same titled exhibit, included as exhibit number
3.4 to the Note Issuer's Registration Statement on Form S-3, File No.
333-30785)*
99.1 Quarterly Servicer's Certificate dated June 17, 2002
99.2 Statement Pursuant to 18 U.S.C. 1350
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* Incorporated by reference pursuant to Rule 12b-32.