==================================================================================================================================== UNITED STATES ==================================================================================================================================== SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- 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 March 31, 2003. 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 ----- --- Indicate by check mark |X| whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). YES NO |X| --- ----PART I-FINANCIAL INFORMATION Item 1. Financial Statements SCE FUNDING LLC BALANCE SHEETS (in thousands) March 31, December 31, 2003 2002 ----------------- ----------------- (Unaudited) ASSETS ------ Current Assets: Cash & equivalents $ 1,014 $ 1,453 Restricted funds 45,163 47,253 Current portion of note receivable 246,255 246,300 Interest receivable 49 22 ----------------------- ----------------------- Total Current Assets 292,481 295,028 ----------------------- ----------------------- Other Assets and Deferred Charges: Note receivable - net of discount 958,649 1,022,895 Unamortized bond issuance costs 8,665 9,121 ----------------------- ----------------------- Total Other Assets and Deferred Charges 967,314 1,032,016 ----------------------- ----------------------- Total Assets $ 1,259,795 $ 1,327,044 ======================= ======================= LIABILITIES AND MEMBER'S EQUITY ------------------------------- Current Liabilities: Interest payable $ 1,036 $ 1,091 Current portion of long-term debt 246,255 246,300 Miscellaneous accrued expenses 19,047 21,310 ----------------------- ----------------------- Total Current Liabilities 266,338 268,701 ----------------------- ----------------------- Long term debt - net of discount 922,681 984,859 ----------------------- ----------------------- Member's equity 70,776 73,484 ----------------------- ----------------------- Total Liabilities and Member's Equity $ 1,259,795 $ 1,327,044 ======================= ======================= The accompanying notes are an integral part of these financial statements 1 SCE FUNDING LLC STATEMENTS OF OPERATIONS AND CHANGES IN MEMBER'S EQUITY (Unaudited) (in thousands) 3 Months Ended March 31, ------------------------------------------------------- 2003 2002 ------------------------- ----------------------- OPERATING REVENUES: Interest Income $ 20,482 $ 24,508 ------------------------ ------------------------ Total Operating Revenue 20,482 24,508 ------------------------ ------------------------ OPERATING EXPENSES: Interest Expense 19,710 23,907 Other Expenses 831 980 ------------------------ ------------------------ Total Operating Expenses 20,541 24,887 ------------------------ ------------------------ Net Loss (59) (379) Member's Equity, beginning of period 73,484 54,616 Member Contributions (Transfers) - net (2,649) 910 ------------------------ ------------------------ Member's Equity, end of period $ 70,776 $ 55,147 ======================== ======================== The accompanying notes are an integral part of these financial statements 2 SCE FUNDING LLC STATEMENTS OF CASH FLOWS (Unaudited) (in thousands) 3 Months Ended March 31, --------------------------------------------------- 2003 2002 ------------------------ ------------------------ Cash Flows from Operating Activities: Net Loss $ (59) $ (379) Adjustment to reconcile net loss to net cash (used) provided by operating activities: Amortization 1 1 Restricted funds 2,090 6,422 Interest receivable (27) (15) Interest payable (55) (54) Miscellaneous accrued expenses (2,262) (1,620) ------------------------ ------------------------ Net Cash (Used) Provided by Operating Activities (312) 4,355 ------------------------ ------------------------ Cash Flows from Financing Activities: Payment of principal on rate reduction notes (62,240) (62,223) ------------------------ ------------------------ Net Cash Used by Financing Activities (62,240) (62,223) ------------------------ ------------------------ Cash Flows from Investing Activities: Note receivable collections from SCE 64,762 56,934 Capital Transfer (to) from SCE (2,649) 910 ------------------------ ------------------------ Net Cash Provided by Investing Activities 62,113 57,844 ------------------------ ------------------------ Net decrease in cash and equivalents (439) (24) Cash and equivalents, beginning of period 1,453 1,443 ------------------------ ------------------------ Cash and equivalents, end of period $ 1,014 $ 1,419 ======================== ======================== The accompanying notes are an integral part of these financial statements 3 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, 2002, 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). 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 4 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 2002 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 5 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 16, 2002, SCE filed with the CPUC a routine annual true-up mechanism advice letter filing. The filing decreased the FTA Charges for residential customers by 11%, from 1.222 cents to 1.085 cents per kilowatt hour, and for small commercial customers by 11%, from 1.292 cents to 1.147 cents per kilowatt hour, effective January 1, 2003. In June 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. Through March 31, 2003, it was not necessary to file any such routine quarterly true-up adjustment. 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 currently does not have any short-term ratings from either Standard & Poor's or Moody's. 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 three month period ended March 31, 2003, the income generated from the Transition Property was $20 million compared to $25 million for the same period in 2002. The decrease is due primarily to lower FTA Charges per kilowatt hour, effective January 1, 2003 (discussed above). Interest expense for the three months ended March 31, 2003 was $20 million compared to $24 million for 6 the same period in 2002, and includes interest on the Notes and the amortization of debt issuance costs. The decrease is due to a lower outstanding principal balance of 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 December 2002 through February 2003 (dated March 14, 2003), 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 page 2 line 4e, collections of FTA Charges and interest earnings thereon (the General Subaccount Balance) totaled $84.7 million and were sufficient to pay 100% of all scheduled distributions and related expenses on the Notes ($83 million) and provide approximately $1.4 million for deposit to the reserve subaccounts under the Note Indenture. 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. 7 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 is the Quarterly Servicer's Certificate for the collection period December 2002 through February 2003 (dated March 14, 2003), 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 March 31, 2003. The Note Issuer did not file any reports on Form 8-K during the quarter ended March 31, 2003. 8 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: May 12, 2003 SCE FUNDING LLC as Registrant By Mary C. Simpson ------------------------------------------------------ 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 March 14, 2003 99.2 Statement Pursuant to 18 U.S.C. 1350 - ---------------- * Incorporated by reference pursuant to Rule 12b-32.