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UNITED STATES
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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 September 30, 2004.
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
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California Infrastructure and Economic
Development Bank Special Purpose Trust SCE-1
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(Issuer of the Certificates)
SCE Funding LLC
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(Exact name of registrant as specified in its charter)
Delaware 95-4640661
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(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
2244 Walnut Grove Avenue,
Room 212T, Rosemead, California 91770
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (626) 302-1850
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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
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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|
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PART I-FINANCIAL INFORMATION
Item 1. Financial Statements
SCE FUNDING LLC
BALANCE SHEETS
(in thousands)
September 30, December 31,
2004 2003
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(Unaudited)
ASSETS
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Current Assets:
Cash & equivalents $ 1,913 $ 1,443
Restricted funds 70,007 66,470
Current portion of note receivable 246,672 246,300
Other receivable 4 5
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Total Current Assets 318,596 314,218
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Other Assets and Deferred Charges:
Note receivable - net of discount 555,493 731,363
Unamortized bond issuance costs 5,928 7,297
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Total Other Assets and Deferred Charges 561,421 738,660
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Total Assets $ 880,017 $ 1,052,878
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LIABILITIES AND MEMBER'S EQUITY
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Current Liabilities:
Interest payable $ 718 $ 875
Current portion of long-term debt 246,672 246,300
Miscellaneous accrued expenses 38,799 35,782
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Total Current Liabilities 286,189 282,957
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Long term debt - net of discount 561,392 738,628
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Commitments
Member's equity 32,436 31,293
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Total Liabilities and Member's Equity $ 880,017 $ 1,052,878
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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)
9 Months Ended
September 30,
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2004 2003
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OPERATING REVENUES:
Interest Income $ 46,379 $ 58,643
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Total Operating Revenue 46,379 58,643
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OPERATING EXPENSES:
Interest Expense 45,664 57,030
Other Expenses 1,843 2,301
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Total Operating Expenses 47,507 59,331
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Net Loss (1,128) (688)
Member's Equity, beginning of period 31,293 73,484
Member Contributions - net 2,271 6,565
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Member's Equity, end of period $ 32,436 $ 79,361
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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)
9 Months Ended
September 30,
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2004 2003
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Cash Flows from Operating Activities:
Net Loss $ (1,128) $ (688)
Adjustment to reconcile net loss to net
cash used by operating activities:
Amortization 3 2
Restricted funds (3,537) (14,768)
Other receivable 1 7
Interest payable (157) (155)
Miscellaneous accrued expenses 3,017 (2,523)
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Net Cash Used by Operating Activities (1,801) (18,125)
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Cash Flows from Financing Activities:
Payment of principal on rate reduction notes (176,916) (176,567)
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Net Cash Used by Financing Activities (176,916) (176,567)
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Cash Flows from Investing Activities:
Note receivable collections from SCE 176,916 187,912
Capital Transfer from SCE 2,271 6,565
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Net Cash Provided by Investing Activities 179,187 194,477
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Net increase (decrease) in cash and equivalents 470 (215)
Cash and equivalents, beginning of period 1,443 1,453
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Cash and equivalents, end of period $ 1,913 $ 1,238
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Cash payments for interest $ 44,401 $ 56,103
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, 2003, 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
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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 2003 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 15, 2003, SCE filed with the CPUC a routine annual true-up
mechanism advice letter filing. This filing decreased the FTA Charges for residential customers by 16.8%, from 1.085 cents to .903
cents per kilowatt hour, and for small commercial customers by 16.7% from 1.147 cents to .955 cents per kilowatt hour, effective
January 1, 2004. The FTA Charges were reduced for 2004 because the accumulation of excess collections in 2003 resulted in higher
than needed balances in the reserve subaccount. The decrease in FTA Charges is expected to result in undercollections in 2004, which
will require withdrawals from the reserve subaccount. On August 19, 2004, SCE filed with the CPUC an anniversary true-up mechanism
advice letter filing. The filing confirmed that the FTA Charges then in effect for residential and small commercial customers were
adequate to service the Notes and therefore no adjustment was necessary at that time.
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 September 30, 2004, 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 has a short-term rating of A-2 from Standard & Poor's and
P-2 from 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
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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 nine month period ended September 30, 2004, income generated from the
Transition Property was $46 million compared to $59 million for the same period in 2003. The decrease is due to a lower outstanding
note receivable from SCE. Interest expense for the nine months ended September 30, 2004 was $46 million compared to $57 million for
the same period in 2003. The decrease is due to the lower outstanding balances of the Notes. Interest expense includes interest on
the Notes, and amortization of debt issuance costs and the discount 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 is the Quarterly Servicer's Certificate for the collection period June 2004 through August 2004
(dated September 22, 2004), 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 subaccount under the Note Indenture. As noted therein on page 2
line 4e, collections of the FTA Charges and interest earnings thereon (the General Subaccount Balance) totaled $76.7 million and were
sufficient to pay 100% of all scheduled distributions and related expenses on the Notes ($76.4 million) for the scheduled Note
payment date (September 27, 2004). Excess collections during the period of $253 thousand were deposited to the reserve subaccount as
provided 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 because of such important factors as the commencement and outcome of voter initiatives and legal or
regulatory proceedings challenging the collection of the 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.
Item 4. Controls and Procedures.
Not applicable to the Trust or the Note Issuer.
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PART II
Item 1. Legal Proceedings.
Omitted because there are no reportable proceedings.
Item 2. Unregistered Sales of Equity 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 June 2004 through August 2004 (dated September 22, 2004), 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 subaccount under the Note
Indenture.
Item 6. Exhibits.
See the Exhibit Index of this report below.
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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: November 8, 2004 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
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Exhibit
Number
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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)*
32 Statement Pursuant to 18 U.S.C. 1350
99 Quarterly Servicer's Certificate dated September 22, 2004
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* Incorporated by reference pursuant to Rule 12b-32.