Back to GetFilings.com
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
FOR ANNUAL AND TRANSITION REPORTS
PURSUANT TO SECTIONS 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
The registrant meets the conditions set forth in General Instruction I 1(a)
And (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
(Mark One)
|X| ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31,
1998
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 180, 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-2 6.14%
Certificates; Class A-3 6.17% Certificates; Class A-4 6.22% Certificates;
Class A-5 6.28% Certificates; Class A-6 6.38% Certificates; Class A-7 6.42%
Certificates, maturing serially from 2000 to 2009,
and underlying SCE Funding LLC Notes of the same respective classes
(Title of Class)
Indicate by check mark whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for at least the past 90 days. YES [X] NO [ ].
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K: [X] The aggregate market value of the voting and non-voting common
equity held by non-affiliates of the registrant as of March 1, 1999 was $0.
DOCUMENTS INCORPORATED BY REFERENCE.
Not applicable.
PART I
Item 1. Business.
General
SCE Funding LLC (the "Note Issuer") is a special purpose, single member limited
liability company organized under the laws of the State of Delaware. Southern
California Edison Company ("Edison"), 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 180,
Rosemead, California 91770. Its phone 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 Edison in the event
Edison 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 (the "Notes"), with scheduled maturities ranging from one to ten years
and final maturities ranging from three to twelve years; the receipt of amounts
payable pursuant to the Transition Property; the payment of principal and
interest with respect to the Notes; and related activities. The Notes were
issued pursuant to an indenture between the Note Issuer and Bankers Trust
Company of California, N.A., as trustee (the "Indenture"). The Note Issuer sold
the Notes to the California Infrastructure and Economic Development Bank Special
Purpose Trust SCE-1, a Delaware business trust (the "Trust"), which issued
certificates corresponding to each class of Notes (the "Certificates") in a
public offering.
The Note Issuer has no employees. It has entered into a servicing agreement (the
"Servicing Agreement") with Edison pursuant to which Edison 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 Edison
pursuant to which Edison performs administrative and operational duties for the
Note Issuer.
Transition Property
The California Public Utilities Code (the "PU Code") provides for the creation
of "Transition Property."A financing order dated September 3, 1997 (the
"Financing Order") issued by the California Public Utilities Commission (the
"CPUC"), together with the related Issuance Advice Letter, establishes, among
other things, separate nonbypassable charges (the "FTA Charges") payable by
residential electric customers and small commercial electric customers in an
aggregate amount sufficient to repay in full the Certificates, fund the
Overcollateralization Subaccount established under the Indenture and pay all
related costs and fees. Under the PU Code and the Financing Order, the owner of
the Transition Property is entitled to collect FTA Charges until such owner has
received amounts sufficient to retire all outstanding series of Certificates and
cover related fees and expenses and the Overcollateralization Amount described
in the Financing Order. The Transition Property is a property right under
California law that includes, without limitation, ownership of the FTA Charges
and any adjustments thereto as described in the next paragraph.
In order to enhance the likelihood that actual collections with respect to the
Transition Property are neither more nor less than the amount necessary to
amortize the Notes in accordance with their expected
1
amortization schedules, pay all related fees and expenses, and fund certain
accounts established pursuant to the Indenture as required, the Servicing
Agreement requires Edison, as the servicer of the Transition Property (in such
capacity, the "Servicer"), to seek, and the Financing Order and the PU Code
require the CPUC to approve, periodic adjustments to the FTA Charges. Such
adjustments will be based on actual collections and updated assumptions by the
Servicer as to future usage of electricity by specified customers, future
expenses relating to the Transition Property, the Notes and the Certificates,
and the rate of delinquencies and write-offs. On December 15, 1998, the Servicer
filed with the CPUC a routine annual true-up mechanism advice letter filing. The
filing decreased the FTA Charges from 1.723 cents to 1.306 cents per kilowatt
hour for residential customers and from 1.822 cents to 1.381 cents per kilowatt
hour for small commercial customers, effective January 1, 1999.
The Trust
The Trust was organized in November 1997 solely for the purpose of purchasing
the Notes and issuing the Certificates. It will not conduct any other material
business activities.
Item 2. Properties.
The Note Issuer has no materially important physical properties. Its primary
asset is the Transition Property described above in Item 1 (Business).
The Trust has no materially important physical properties. Its primary assets
are the Notes described above in Item 1 (Business).
Information about collections from the Transition Property and payments in
respect of the Notes is included in the Annual Statement and the Quarterly
Servicer's Certificate attached hereto as Exhibits 99.1 and 99.3, respectively.
Item 3. Legal Proceedings.
On November 3, 1998, California voters rejected the voter initiative designated
as Proposition 9. Approximately 73% of the total votes cast were voted against
the Proposition. Proposition 9 would have amended the PU Code to prohibit the
collection of FTA Charges for the payment of the Certificates. Harvey Rosenfield
of Californians against Utility Taxes (CUT), one of the principal backers of
Proposition 9, was quoted in the press immediately after Proposition 9's defeat
as saying that supporters of the Proposition may consider filing a lawsuit to
challenge the use of customer-financed bonds or prevent customers from being
billed for the $6 billion of rate reduction certificates issued in California.
At the date of this report, the Note Issuer is not aware of any such lawsuit
being filed. The Note Issuer is unable to predict whether or when any parties
will file lawsuits or take other actions to accomplish the same objectives as
Proposition 9, or the outcome if they do so.
No other legal proceedings affecting either the Note Issuer or the Trust
occurred in 1998.
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 1998.
2
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 Edison. The Note
Issuer's equity securities, or membership interests, were sold to Edison in June
1997 in exchange for an initial capital contribution of $5,000. Edison has made
capital contributions to the Note Issuer aggregating $12,320,000 as of December
31, 1998, net of the distribution described in the next paragraph. The sale of
the Note Issuer's membership interests to Edison 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, 1998, the original principal amount of all
series of Notes which then remained outstanding is $2,216,700,000. On December
21, 1998, the Note Issuer made a distribution to Edison in the amount of
$920,000. The Note Issuer intends to make distributions to Edison, as the sole
member, from time to time in the future as permitted by the Indenture and as
approved by the Note Issuer's Board of Directors.
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 is a newly organized
entity established in June 1997 for limited purposes, and on December 11, 1997,
the Note Issuer issued Notes in order to purchase Transition Property, which is
classified as a note receivable on the financial statements included under Item
8 (Financial Statements and Supplementary Data). As the Note Issuer is
restricted by its organizational documents from engaging in activities other
than those described in Item 1 (Business), income statement effects were limited
primarily to income generated from the Transition Property, interest expense on
the Notes and incidental investment interest income.
In 1998, income generated from the Transition Property was approximately $149.5
million. The Note Issuer also earned approximately $2.7 million in interest on
other investments. Interest expense of approximately $152.3 million relates to
interest on the Notes and the amortization of debt issuance costs and the
discount on the Notes.
During the twelve months ending December 31, 1998, the nonbypassable FTA Charges
billed to residential and small commercial customers totaled $475.7 million.
Collections of FTA Charges totaled
3
$452.3 million and were sufficient to cover 100% of the scheduled quarterly
payments on the Notes and provide additional funding of approximately $7.0
million for deposit to a previously established reserve sub-account. Interest
income earned was used 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 Edison for servicing the Transition Property and providing
administrative services to the Note Issuer. (These agreements are discussed in
greater detail in Note 5 to the financial statements attached hereto.) The FTA
Charges will be adjusted at least annually if there is a material shortfall or
overage in collections. Management of the Note Issuer expects future collections
of FTA Charges to be sufficient to cover expenses and to make scheduled payments
on the Notes on a timely basis.
Year 2000 Issue
Many of Edison's existing computer systems were originally programmed to
represent any date by using six digits (e.g., 12/31/99) rather than eight digits
(e.g., 12/31/1999). Accordingly, such programs, if not appropriately addressed,
could fail or create erroneous results when attempting to process information
containing dates after December 31, 1999. This situation has been referred to
generally as the Year 2000 Issue.
Under the Servicing Agreement, Edison, as Servicer, is responsible for
functions, such as data acquisition, usage and bill calculation, billing,
customer service, collections, payment processing, and remittance, that are
dependent on Edison's computer systems. Failure of those systems could adversely
affect the ability of the Note Issuer to make timely payments of principal and
interest on the Notes.
Edison has advised the Note Issuer as follows. Edison has a comprehensive
program in place to address potential Year 2000 impacts. Edison International
provides overall coordination of this effort, working with Edison and its
business units. Edison divides Year 2000 activities into five phases: inventory,
impact assessment, remediation, testing, and implementation. Edison's objective
for the Year 2000 readiness of critical systems is to be 100% complete by July
1999. Edison was 80% complete at year-end 1998 (the goal was 75%) and is on
track to meets its July 1999 goal.
Year 2000 readiness preparations for Edison's mainframe financial systems were
completed in the fourth quarter of 1997, and preparations for Edison's material
management system were completed in the second quarter of 1998. Edison's
customer information and billing system is in the process of being replaced with
a system designed to be Year 2000-ready and final conversion activities are
expected to be completed by the first quarter of 1999. Edison has implemented a
process to identify and contact vendors and business partners to determine their
Year 2000 status, and is evaluating the responses. The costs of such remediation
will be borne by Edison, not the Note Issuer. Edison also has advised the Note
Issuer that it is developing contingency plans for dealing with the Year 2000
Issue, and that these plans will continue to be revised and enhanced as the year
2000 approaches. Edison will test their contingency plans by conducting or
participating in exercises and industry -wide drills during 1999. The Note
Issuer does not have, nor does it intend to create, any separate contingency
plans.
Based upon the information provided by Edison, the Note Issuer does not expect
any material adverse impact on the Note Issuer or its financial position or
results of operations, or on the payment of principal and interest on the Notes,
as a result of any inability of the computer systems on which it currently
relies to recognize or otherwise function correctly with respect to the year
2000 and later years.
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,
4
expects, anticipates, believes, and other similar expressions that are intended
to identify forward-looking information that involves risks and uncertainties.
Actual results or outcomes could differ materially as a result of such important
factors as the commencement and outcome of voter initiatives and legal or
regulatory procedings challenging the collection of FTA Charges or payment of
the Notes or Certificates and the ability of Edison to address and to make Year
2000-ready the computer systems commonly used by Edison and the Note Issuer.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable to the Note Issuer on 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 summarizing
certain information with respect to collections from the Transition Property and
payments on the Notes and Certificates, an Annual Certificate of Compliance with
respect to the Servicer's activities, and the Quarterly Servicer's Certificate
for the collection periods September 1998 through November 1998 (dated December
9, 1998).
Item 9. Changes in and Disagreements With Accountants on Accounting and
Financial Disclosure.
None.
PART III
Item 10. Directors and Executive Officers of the Registrant.
Omitted pursuant to Instruction I of Form 10-K.
Item 11. Executive Compensation.
Omitted pursuant to Instruction I of Form 10-K.
Item 12. Security Ownership of Certain Beneficial Owners and Management.
Omitted pursuant to Instruction I of Form 10-K.
Item 13. Certain Relationships and Related Transactions.
Omitted with respect to the Note Issuer pursuant to Instruction I of Form 10-K.
Not applicable to the Trust.
5
PART IV
Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.
(a) The following documents are filed as part of this report:
1. Financial Statements.
The following financial statements of the Note Issuer and report of
independent public accountants are included in Item 8 (Financial Statements and
Supplementary Data):
Report of Independent Public Accountants
Balance Sheets
Statements of Operations and Changes in Member's Equity
Statements of Cash Flows
Notes to Financial Statements
2. Financial Statement Schedule.
None.
3. Exhibits.
The following exhibits are filed as a part of this report:
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. 33-30785)
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)
6
4.4 Amended and Restated Declaration and Agreement of Trust
(incorporated by reference to the same titled exhibit to the Note
Issuer's Current Report on Form 8-K filed with the Commission
on December 11, 1997)
4.5 First Supplemental Agreement of Trust (incorporated by reference
to the same titled exhibit to the Note Issuer's Current Report on
Form 8-K filed with the Commission on December 11, 1997)
4.6 Rate Reduction Certificate (incorporated by reference to the same
titled exhibit to the Note Issuer's Current Report on Form 8-K filed
with the Commission on December 11, 1997)
10.1 Transition Property Purchase and Sale Agreement (incorporated by
reference to the same titled exhibit to the Note Issuer's Current
Report on Form 8-K filed with the Commission on December 11, 1997)
10.2 Transition Property Servicing Agreement (incorporated by reference
to the same titled exhibit to the Note Issuer's Current Report
on Form 8-K filed with the Commission on December 11, 1997)
10.3 Note Purchase Agreement (incorporated by reference to the same titled
exhibit to the Note Issuer's Current Report on Form 8-K filed with
the Commission on December 11, 1997)
10.4 Fee and Indemnity Agreement (incorporated by reference to the same
titled exhibit to the Note Issuer's Current Report on Form 8-K
filed with the Commission on December 11, 1997)
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
99.1 Annual Statement
99.2 Annual Certificate of Compliance
99.3 Quarterly Servicer's Certificate
(b) Reports on 8-K.
The Note Issuer filed Current Reports on Form 8-K dated October 15, 1998
and November 3, 1998, respectively, reporting under "Item 5 - Other Events"
developments regarding Proposition 9, the voter initiative challenging payments
on the Certificates.
7
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange
Act of 1934, the registrant has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized, as of March 23, 1999.
SCE FUNDING LLC
as Registrant
By: Theodore F. Craver, Jr.
-------------------------------
Name: Theodore F. Craver, Jr.
Title: President
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed below by the following persons on behalf of the
registrant and in the capacities and on the dates indicated.
Signature Title Date
- --------- ----- ----
Theodore F. Craver, Jr. Director and President March 23,1999
Theodore F. Craver, Jr. (Principal Executive
Officer)
Mary C. Simpson Director and Treasurer March 23, 1999
Mary C. Simpson (Principal Financial and
Accounting Officer)
Anand Maniktala Director March 23, 1999
Anand Maniktala
Exhibit Index
Sequential
Numbered
Exhibit Exhibit
Number Page
- ------- ----------
3.1 Certificate of Formation (incorporated by reference to the same titled
exhibit to the Note Issuer's Registration Statement on Form S-3, File
No. 333-30785)
3.2 Limited Liability Company Agreement (incorporated by reference to
the same titled exhibit to the Note Issuer's Registration
Statement on Form S-3, File No. 333-30785)
3.3 Amended and Restated Limited Liability Company Agreement (incorporated
by reference to exhibit number 3.4 to the Note Issuer's Registration
Statement on Form S-3, File No. 333-30785)
4.1 Note Indenture (incorporated by reference to the same titled exhibit
to the Note Issuer's Current Report on Form 8-K filed with the
Commission on December 11, 1997)
4.2 Series Supplement (incorporated by reference to the same titled
exhibit to the Note Issuer's Current Report on Form 8-K filed with the
Commission on December 11, 1997)
4.3 Note (incorporated by reference to the same titled exhibit to the Note
Issuer's Current Report on Form 8-K filed with the Commission on
December 11, 1997)
4.4 Amended and Restated Declaration and Agreement of Trust
(incorporated by reference to the same titled exhibit to the
Note Issuer's Current Report on Form 8-K filed with the Commission
on December 11, 1997)
4.5 First Supplemental Agreement of Trust (incorporated by reference
to the same titled exhibit to the Note Issuer's Current Report on
Form 8-K filed with the Commission on December 11, 1997)
4.6 Rate Reduction Certificate (incorporated by reference to the same
titled exhibit to the Note Issuer's Current Report on Form 8-K filed
with the Commission on December 11, 1997)
10.1 Transition Property Purchase and Sale Agreement (incorporated by
reference to the same titled exhibit to the Note Issuer's Current
Report on Form 8-K filed with the Commission on December 11, 1997)
10.2 Transition Property Servicing Agreement (incorporated by reference
to the same titled exhibit to the Note Issuer's Current Report on
Form 8-K filed with the Commission on December 11, 1997)
10.3 Note Purchase Agreement (incorporated by reference to the same titled
exhibit to the Note Issuer's Current Report on Form 8-K filed
with the Commission on December 11, 1997)
10.4 Fee and Indemnity Agreement (incorporated by reference to the
same titled exhibit to the Note Issuer's Current Report on
Form 8-K filed with the Commission on December 11, 1997)
23.1 Consent of Arthur Andersen LLP
27.1 Financial Data Schedule
99.1 Annual Statement
99.2 Annual Certificate of Compliance
99.3 Quarterly Servicer's Certificate
Report of Independent Public Accountants
To the Members of SCE Funding LLC:
We have audited the accompanying balance sheets of SCE Funding LLC (a Delaware
Limited Liability Company) as of December 31, 1998 and 1997 and the related
statements of operations and changes in member's equity and cash flows for the
year ended December 31, 1998 and for the period from inception (June 27, 1997)
to December 31, 1997. 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 audit.
We conducted our audit in accordance with generally accepted auditing standards.
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 audit provides 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, 1998 and 1997, and the results of its operations and its cash flows for year
ended December 31, 1998 and for the period from inception (June 27, 1997) to
December 31, 1997 in conformity with generally accepted accounting principles.
ARTHUR ANDERSEN LLP
ARTHUR ANDERSEN LLP
Los Angeles, California
March 22, 1998
Item 8. Financial Statements
SCE FUNDING LLC
BALANCE SHEETS
(in thousands)
Year Ended Year Ended
ASSETS December 31, 1998 December 31, 1997
------ ----------------- -----------------
Current Assets:
Cash & equivalents $ 183 $ 6,616
Current portion of note receivable 246,300 246,300
Interest receivable 1,324 8,163
-------------------------------------------------------
Total Current Assets 248,807 261,079
-------------------------------------------------------
Other Assets and Deferred Charges:
Restricted funds 20,837 12,254
Note receivable - net of discount 1,955,693 2,197,512
Unamortized bond issuance costs 16,417 15,974
-------------------------------------------------------
Total Other Assets & Deferred Charges 1,992,947 2,225,740
-------------------------------------------------------
Total Assets $ 2,241,754 $ 2,486,819
=======================================================
LIABILITIES AND MEMBER'S EQUITY Current Liabilities:
Interest payable $ 1,938 $ 8,142
Current portion of long-term debt 246,300 246,300
Misc accrued expenses 566 3,382
-------------------------------------------------------
Total Current Liabilities 248,804 257,824
-------------------------------------------------------
Long term debt - net of discount 1,969,783 2,216,014
Member's equity 23,167 12,981
-------------------------------------------------------
Total Liabilities and Member's Equity $ 2,241,754 $ 2,486,819
=======================================================
The accompanying notes are an integral part of these Financial Statements
F-1
SCE FUNDING LLC
STATEMENTS OF OPERATIONS AND CHANGES IN MEMBER'S EQUITY
(in thousands)
Year Ended Year Ended
December 31, 1998 December 31, 1997
----------------- -----------------
OPERATING REVENUE:
Interest income $154,279 $ 8,304
-------------------------- ------------------------
Total Operating Revenue 154,279 8,304
-------------------------- ------------------------
OPERATING EXPENSES:
Interest expense 152,274 8,231
Other expenses 6,584 332
-------------------------- ------------------------
Total Operating Expenses 158,858 8,563
-------------------------- ------------------------
Net Loss (4,579) (259)
-------------------------- ------------------------
Member's Equity- beginning of period 12,981 -
Member Contributions - net 14,765 13,240
========================== ========================
Member's Equity, end of period $ 23,167 $ 12,981
========================== ========================
The accompanying notes are an integral part of these Financial Statements
F-2
SCE FUNDING LLC
STATEMENT OF CASH FLOWS
(in thousands)
Year Ended Year Ended
December 31, 1998 December 31, 1997
------------------------------------------
Cash flows from Operating Activities:
Net Income (Loss) $ (4,579) $ (259)
Adjustment for non-cash items:
Amortizations (30) (13)
Other net (8,583) (12,254)
Changes in working capital:
Receivables 249,856 (2,451,873)
Interest payable (6,204) 8,142
Accounts payable and other current liabilities (2,816) 3,382
-------------------------------------
Net Cash Provided (Used) by Operating Activities 227,644 (2,452,875)
--------------------------------------
Cash Flows from Financing Activities:
Proceeds from Issuance of Notes Payable -- 2,462,310
Payment of bond issuance costs (2,542) (16,059)
Payment of principal on rate reduction notes (246,300) --
Net Cash Provided (Used) by Financing Activities (248,842) (2,446,251)
--------------------------------------
Cash Flows from Investing Activities:
Equity contributions from Southern California Edison 14,765 13,240
-------------------------------------
Net Cash Provided by Investing Activities 14,765 13,240
-------------------------------------
Net Increase (decrease) in cash and equivalents (6,433) 6,616
Cash and equivalents, beginning of period 6,616 --
-------------------------------------
Cash and equivalents, end of period $ 183 $ 6,616
-------------------------------------
The accompanying notes are an integral part of these Financial Statements
F-3
SCE FUNDING LLC
NOTES TO FINANCIAL STATEMENTS
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 (Edison), a
provider of electric services. All of the issued and outstanding common stock of
Edison 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 Edison 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 Edison to provide a 10% electric rate reduction to Edison'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 electric restructuring
legislation. For financial reporting purposes, the purchase of the Transition
Property by the Note Issuer from Edison was treated as the issuance of a
promissory note by Edison 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 Edison 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 Edison, in the event Edison becomes subject to such a proceeding.
SCE Funding LLC is legally separate from Edison. The assets and revenues of
the Note Issuer, including, without limitation, the Transition Property, are not
available to creditors of Edison or Edison International, and the note
receivable from Edison to the SCE Funding LLC (i.e., the Transition Property) is
not legally an asset of Edison or Edison International.
F-4
2. Summary of Accounting Policies
Cash Equivalents
Cash equivalents include working funds and short-term investments with
maturities of 90 days or less.
Restricted Funds
SCE Funding LLC is required to maintain funds of approximately 0.5% of the
outstanding principal balance. 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 nonbypassable tariffs prove insufficient to
make such payments.
Unamortized Debt Issuance Expenses
The costs associated with the issuance of the Notes to the Trust have been
capitalized and will be amortized over the life of the Notes.
Income Taxes
SCE Funding LLC is a single-member limited liability company. Accordingly,
for federal and state income tax purposes, any income tax effect of SCE Funding
LLC's activities will be reflected in Edison's financial statements.
Use of Estimates
Certain prior year balances have been reclassified to conform with the
current year presentation.
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions. These estimates and assumptions may affect the reported amount of
revenue, expenses, assets, and liabilities and disclosure of contingencies.
Actual results could differ from these estimates.
3. Fair Value of Financial Instruments
Due to their short maturities, amounts reported for cash equivalents and
restricted funds approximate fair value. In addition to these amounts, at
December 31, 1998, SCE Funding LLC had a financial asset (representing its note
receivable from Edison), and financial liabilities (representing its Notes to
the Trust) each with a cost basis of approximately $2.2 billion. The note
receivable is carried at cost which approximates fair value. Fair value is
estimated based on brokers' quotes of notes with similar characteristics.
Financial liabilities are recorded at cost, which approximates fair value, and
their fair value is based on brokers' quotes.
F-5
4. Long Term Debt
In December 1997, SCE Funding LLC issued approximately $2.5 billion of
Notes to the Trust. There were originally seven classes of Notes. The first
class in the amount of $246.3 million matured in December 1998. The remaining
Notes consists of six classes and have maturities ranging from one to nine
years, and bear interest at rates ranging from 6.14% to 6.42%. The Notes are
secured solely by the Transition Property (see Note 1) and certain other assets
of SCE Funding LLC, and the holders of the Notes do not have any recourse to any
assets or revenue of Edison 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 Edison to SCE Funding LLC.
Principal and interest payments on the Notes are due quarterly and are paid
from funds deposited monthly with the Trustee by Edison as servicer of the
Transition Property. The debt service requirements include an
overcollateralization amount, which will be retained for the benefit of the
holders of the Notes. Any amounts not required for debt service will be returned
to SCE Funding LLC. Scheduled maturities and interest rates for the Notes
payable to the Trust at December 31, 1998, are as follows:
Scheduled Interest Amount (in
Class Maturity Date Rate thousands)
----- ------------- ------- ----------
A-2 March 25, 2000 6.14% $ 307,252
A-3 March 25, 2001 6.17% 247,841
A-4 March 25, 2002 6.22% 246,030
A-5 September 25, 2003 6.28% 360,645
A-6 September 25, 2006 6.38% 739,988
A-7 December 26, 2007 6.42% 314,944
----------
$2,216,700
Less: Current Maturities (246,300)
Less: Unamortized Discount (617)
----------
Long-Term Debt $1,969,783
==========
5. Significant Agreements and Related Party Transactions
Under the Transition Property Servicing Agreement, Edison, the servicer, is
required to manage and administer the Transition Property of SCE Funding LLC and
to collect the nonbypassable tariffs from the electricity ratepayers on behalf
of SCE Funding LLC. SCE Funding LLC shall pay an annual servicing fee equal to
.25% of the outstanding principal balance of the Notes for so long as the
nonbypassable 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 nonbypassable 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 $6,104,103 in servicing fees in
1998. Edison is also entitled to receive as compensation any interest earnings
on the nonbypassable tariff collections, and any late payment charges collected
from Edison's customers prior to remittance to the Trust.
The Trust was created solely for the purpose of purchasing the Notes from
SCE Funding LLC, issuing the Certificates, and applying the payments received in
respect of the Notes to the payment of interest and principal in respect of the
Certificates. Under the Trust Agreement, Bankers Trust Company, the Certificate
Trustee, is responsible for purchasing the Notes and authenticating and
delivering the Certificates to the investors. Bankers Trust Company Delaware,
the Delaware Trustee, is responsible for the maintenance of all records that are
necessary to form and maintain the existence of the Trust. All fees and expenses
of the Certificate Trustee and the Delaware Trustee will be paid by SCE Funding
LLC.
F-6