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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
- -------------------------------------------------------------------------------------------------------------------
FORM 10-K
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, 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
--------------
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-6 6.38% Certificates; Class A-7 6.42% Certificates,
maturing serially from 2006 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 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]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes |_| No |X|.
The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as
of June 30, 2003 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., (now Deutsche Bank National Trust
Company), 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.
Page 1
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 Indenture as
required, the Servicing Agreement requires SCE, as the servicer of the Transition Property (Servicer), to seek,
and the Financing Order and the PU Code require the CPUC to approve, periodic adjustments to the FTA Charges.
Such adjustments will be based on actual collections and updated assumptions by the Servicer as to future usage
of electricity by specified customers, future expenses relating to the Transition Property, the Notes and the
Certificates, and the rate of delinquencies and write-offs. On August 19, 2003, 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. 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.
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 December 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 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 (Unaudited) and the Quarterly Servicer's Certificate (Unaudited) attached hereto as Exhibits
99.1 and 99.3, respectively.
Page 2
Item 3. Legal Proceedings.
No legal proceedings affecting either the Note Issuer or the Trust occurred in 2003.
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 2002.
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. The sale of the Note Issuer's membership
interests to SCE was exempt from registration under the Securities Act of 1933, as amended, pursuant to
Section 4(2) thereof. The Note Issuer has made no other sales of unregistered securities.
The Indenture prohibits the Note Issuer from making any distributions to the sole member from the amounts
allocated to the Note Issuer unless no default has occurred and is continuing thereunder and the book value of
the remaining equity of the Note Issuer, after giving effect to such distribution, is equal to at least 0.5% of
the original principal amount of all series of Notes which remains outstanding. As of December 31, 2003, the
original principal amount of all series of Notes (Class A-6 through A-7) which then remained outstanding and is
scheduled for liquidation during the years 2004-2007 is $1,054,932,551. In 2003, the Note Issuer made a cash
distribution of $1 million to SCE. There were no distributions in 2002 and 2001.
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
Page 4
primarily to income generated from the Transition Property, interest expense on the Notes and incidental
investment interest income.
In 2003, income generated from the Transition Property was $72 million compared with $92 million in 2002. The
decrease is due to lower outstanding note receivable from SCE. Interest expense in 2003 was $74 million compared
to $90 million in 2002. 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.
During the twelve months ending December 31, 2003, the non-bypassable FTA Charges billed to residential and small
commercial customers totaled $344 million. Collection of FTA Charges totaled $343 million. Scheduled
distributions in 2003 were $323 million. Collections were sufficient to cover 100% of scheduled payments on the
Notes. 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 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 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-6 of this report and are incorporated herein by reference. In addition, attached with respect to the
Note Issuer and the Trust as Exhibits 99.1, 99.2, and 99.3 are an Annual Statement (unaudited) summarizing
certain information with respect to collections from the Transition Property and payments on the Notes and
Certificates, 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 2003 through November 2003
(dated December 15, 2003).
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.
None.
Item 9A. Controls and Procedures.
Not applicable to the Trust or the Note Issuer.
Page 5
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.
Item 14. Principal Accountant Fees and Services.
Not applicable to the Trust or the Note Issuer.
PART IV
Item 15. 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 Accountants
Report of Predecessor Independent Public Accountants (Arthur Andersen)
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 Form 8-K.
None.
Page 5
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.
SCE FUNDING LLC
as Registrant
By:
/s/ W. James Scilacci
--------------------------------------------------
W. James Scilacci
President
Date: March 15, 2004
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
--------- ----- ----
/s/ W. James Scilacci Director and President March 12, 2004
- --------------------------------------------------------------- (Principal Executive
W. James Scilacci Officer)
/s/ Mary C. Simpson Director and Treasurer March 12, 2004
- --------------------------------------------------------------- (Principal Financial and
Mary C. Simpson Accounting Officer)
/s/ Anand Maniktala Director March 12, 2004
- ---------------------------------------------------------------
Anand Maniktala
Page 6
Exhibit Index
-------------
Exhibit
Number
------
3.1 Certificate of Formation (incorporated by reference to the same titled
exhibit to the Note Issuer's Registration Statement on Form S-3, File
No. 333-30785)
3.2 Limited Liability Company Agreement (incorporated by reference to the
same titled exhibit to the Note Issuer's Registration Statement on
Form S-3, File No. 333-30785)
3.3 Amended and Restated Limited Liability Company Agreement (incorporated
by reference to exhibit number 3.4 to the Note Issuer's Registration
Statement on Form S-3, File No. 333-30785)
4.1 Note Indenture (incorporated by reference to the same titled exhibit
to the Note Issuer's Current Report on Form 8-K filed with the
Commission on December 11, 1997)
4.2 Series Supplement (incorporated by reference to the same titled
exhibit to the Note Issuer's Current Report on Form 8-K filed with the
Commission on December 11, 1997)
4.3 Note (incorporated by reference to the same titled exhibit to the Note
Issuer's Current Report on Form 8-K filed with the Commission on
December 11, 1997)
4.4 Amended and Restated Declaration and Agreement of Trust (incorporated
by reference to the same titled exhibit to the Note Issuer's Current
Report on Form 8-K filed with the Commission on December 11, 1997)
4.5 First Supplemental Agreement of Trust (incorporated by reference to
the same titled exhibit to the Note Issuer's Current Report on Form
8-K filed with the Commission on December 11, 1997)
4.6 Rate Reduction Certificate (incorporated by reference to the same
titled exhibit to the Note Issuer's Current Report on Form 8-K filed
with the Commission on December 11, 1997)
10.1 Transition Property Purchase and Sale Agreement (incorporated by
reference to the same titled exhibit to the Note Issuer's Current
Report on Form 8-K filed with the Commission on December 11, 1997)
10.2 Transition Property Servicing Agreement (incorporated by reference to
the same titled exhibit to the Note Issuer's Current Report on Form
8-K filed with the Commission on December 11, 1997)
Page 7
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)
10.5 Amendment dated as of June 30, 2002, to Transition Property Servicing
Agreement (incorporated by reference to the same titled exhibit to the
Note Issuer's Annual Report on Form 10-K filed with the Commission on
March 28, 2003
23 Consent of PricewaterhouseCoopers LLP
31 Rule 13a-14(a)/15d-14(a) Certification
32 Section 1350 Certification
99.1 Annual Statement (Unaudited)
99.2 Annual Certificate of Compliance (Unaudited)
99.3 Quarterly Servicer's Certificate (Unaudited)
Page 8
Report of Independent Auditors
To the Board of Directors and
Member of SCE Funding LLC
In our opinion, the accompanying balance sheets and the related statements of operations and changes in member's
equity, and cash flows present fairly, in all material respects, the financial position of SCE Funding LLC at
December 31, 2003 and 2002, and the results of its operations and its cash flows for the years then ended in
conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with
auditing standards generally accepted in the United States of America, which 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, assessing the accounting principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion. The financial statements of the Company for the year ended December 31, 2001 were audited by other
independent accountants who have ceased operations. Those independent accountants expressed an unqualified
opinion on the financial statements in their report dated March 25, 2002.
/s/ PricewaterhouseCoopers LLC
Los Angeles, California
March 10, 2004
Page 9
THE FOLLOWING REPORT IS A COPY OF A REPORT PREVIOUSLY ISSUED BY ARTHUR
ANDERSEN LLP AND HAS NOT BEEN REISSUED BY ARTHUR ANDERSEN LLP.
Report of Predecessor 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
Los Angeles, California
March 25, 2002
Page 10
Item 8. Financial Statements
SCE FUNDING LLC
BALANCE SHEETS
As of December 31,
(in thousands)
--------------
ASSETS 2003 2002
------ ---- ----
Current Assets:
Cash and equivalents $ 1,443 $ 1,453
Restricted funds 66,470 47,253
Current portion of note receivable 246,300 246,300
Other receivable 5 22
---------------------------------------------
Total Current Assets 314,218 295,028
---------------------------------------------
Other Assets and Deferred Charges:
Note receivable - net of discount 731,363 1,022,895
Unamortized bond issuance costs 7,297 9,121
---------------------------------------------
Total Other Assets and Deferred Charges 738,660 1,032,016
---------------------------------------------
Total Assets $ 1,052,878 $ 1,327,044
=============================================
LIABILITIES AND MEMBER'S EQUITY
-------------------------------
Current Liabilities:
Interest payable $ 875 $ 1,091
Current portion of long-term debt 246,300 246,300
Miscellaneous accrued expenses 35,782 21,310
---------------------------------------------
Total Current Liabilities 282,957 268,701
---------------------------------------------
Long term debt - net of discount 738,628 984,859
---------------------------------------------
Commitments (Notes 4 & 5)
Member's equity 31,293 73,484
---------------------------------------------
Total Liabilities and Member's Equity $ 1,052,878 $ 1,327,044
=============================================
The accompanying notes are an integral part of these financial statements.
Page 11
SCE FUNDING LLC
STATEMENTS OF OPERATIONS AND CHANGES IN MEMBER'S EQUITY
Year Ended December 31,
(in thousands)
2003 2002 2001
---- ---- ----
OPERATING REVENUE:
Interest income $75,147 $92,282 $108,814
-------------------- --------------- ---------------------
Total Operating Revenue 75,147 92,282 108,814
-------------------- --------------- ---------------------
OPERATING EXPENSES:
Interest expense 74,299 90,450 105,604
Other expenses 2,986 3,616 4,197
-------------------- --------------- ---------------------
Total Operating Expenses 77,285 94,066 109,801
-------------------- --------------- ---------------------
Net Loss (2,138) (1,784) (987)
-------------------- --------------- ---------------------
Member's Equity - beginning of year 73,484 54,616 52,465
Deemed dividend to SCE (44,771) - -
Member Contributions -- net 4,718 20,652 3,138
-------------------- --------------- ---------------------
Member's Equity, end of year $31,293 $73,484 $54,616
==================== =============== =====================
The accompanying notes are an integral part of these financial statements.
Page 12
SCE FUNDING LLC
STATEMENTS OF CASH FLOWS
Year Ended December 31,
(in thousands)
2003 2002 2001
---- ---- ----
Cash flows from Operating Activities:
Net Loss $ (2,138) $ (1,784) $ (987)
Adjustments to reconcile net loss to net cash
used by operating activities:
Amortizations 2 2 2
Changes in working capital:
Restricted funds (19,217) (12,441) 7,273
Other receivable (1) (2) 9
Interest payable (216) (214) (212)
Miscellaneous accrued expenses 16,842 (9,892) 29,496
-----------------------------------------------------
Net Cash (Used) Provided by Operating Activities (4,728) (24,331) 35,581
----------------------------------------------------
Cash Flows from Financing Activities:
Payment of principal on rate reduction notes (246,300) (246,300) (246,300)
-----------------------------------------------------
Net Cash Used by Financing Activities (246,300) (246,300) (246,300)
-----------------------------------------------------
Cash Flows from Investing Activities:
Note Receivable Collections from SCE 246,300 249,989 206,539
Member Contributions -- net 4,718 20,652 3,138
----------------------------------------------------
Net Cash Provided by Investing Activities 251,018 270,641 209,677
----------------------------------------------------
Net Increase (decrease) in cash and equivalents (10) 10 (1,042)
Cash and equivalents, beginning of year 1,453 1,443 2,485
----------------------------------------------------
Cash and equivalents, end of year $ 1,443 $ 1,453 $ 1,443
====================================================
Cash payments for interest $ 72,961 $ 88,432 $ 103,771
----------------------------------------------------
The accompanying notes are an integral part of these financial statements.
Page 13
SCE FUNDING LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 2003
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.
2. Summary of Accounting Policies
Cash Equivalents
Cash equivalents include working funds and short-term investments with initial maturities of 90 days or less.
Page 14
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 and amounts collected in excess of current
commitments are classified as miscellaneous accrued expenses on the financial statements. These pre-collection
amounts will be applied against SCE's future remittance obligations.
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.
Member's Equity
Pursuant to the indenture for the Notes, SCE Funding LLC is restricted from making distributions to SCE to the
extent that such distributions would cause the book value of the remaining equity in SCE Funding LLC to decline
below 0.5 percent of the original principal amount of all series of Notes which remain outstanding. As of
December 31, 2003, the original principal amount of all series of Notes outstanding was $1,054,933,000. In 2003,
SCE Funding LLC made a cash distribution of $1 million to SCE. There were no distributions in 2002 and 2001.
In 2003, SCE Funding LLC made a non-cash deemed dividend of $44,771,000 relating to excess collections previously
reflected as capital contributions. This amount was reflected as a reduction of SCE Funding LLC's Note
Receivable from SCE, as well as an increase in the pre-collection amounts included in miscellaneous accrued
expenses.
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.
Page 15
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, 2003 and 2002, 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 $978 million and $1,268 million, respectively. 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, with an approximate fair value of $985 million and
$1,231 million at December 31, 2003 and 2002 respectively, and their fair value is based on brokers' quotes.
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 five classes of Notes (Classes A-1 through A-5) matured in December 1998,
March 2000, 2001, and 2002, and September 2003, respectively. The remaining two classes of Notes have maturities
in 2006 and 2007, respectively, with interest rates of 6.38% and 6.42%, respectively. 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, effective January 2001, SCE began making daily rather than monthly remittances to
the trustee. The debt service requirements include an overcollateralization amount of approximately $1.2 million
per year, 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 and ultimately to SCE. The required annual liquidation amount of the
Notes for the years 2004-2007 is $246.3 million. Scheduled maturities and interest rates for the Notes payable
to the Trust at December 31, 2003, are as follows:
Scheduled Interest Amount
Class Maturity Date Rate (in thousands)
----- ------------- ---- ------------
A-6 September 25, 2006 6.38% 670,256
A-7 December 26, 2007 6.42% 314,944
-----------------
$ 985,200
Less: Current Maturities (246,300)
Less: Unamortized Discount (272)
-----------------
Long-Term Debt Net of Discount $ 738,628
=================
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
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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 $2.9 million in servicing, administration and trustee fees in 2003. 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, Deutsche Bank National Trust Company, the Certificate
Trustee, is responsible for purchasing the Notes and authenticating and delivering the Certificates to the
investors. Deutsche Bank National Trust Company, 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.
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