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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, 1997.
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 333-30761
CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK SPECIAL PURPOSE TRUST
SDG&E-1
(Issuer of the Certificates)
SDG&E FUNDING LLC
(Exact name of registrant as specified in its Certificate of Formation)
DELAWARE 95-1184800
- -------------------------------------------------------------------------------
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
101 ASH STREET, ROOM 111,
SAN DIEGO, CALIFORNIA 92101
- -------------------------------------------------------------------------------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (619) 696-2328
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
SDG&E-1 Rate Reduction Certificates, Series 1997-1: Class A-1 5.97%
Certificates; Class A-2 6.04% Certificates; Class A-3 6.07% Certificates; Class
A-4 6.15% Certificates; Class A-5 6.19% Certificates; Class A-6 6.31%
Certificates; Class A-7 6.37% Certificates (maturing serially from 1998 to 2007,
and underlying SDG&E Funding LLC Notes of the same respective classes)
________________________________________________________________________________
(Title of Class)
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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. [ ]
The aggregate market value of the voting and non-voting common equity held by
non-affiliates of the registrant as of March 1, 1998 was $0.
DOCUMENTS INCORPORATED BY REFERENCE
Not applicable.
2
PART I
ITEM 1. BUSINESS.
GENERAL
SDG&E Funding LLC (the "Note Issuer") is a special-purpose, single-
member limited liability company organized under the laws of the State of
Delaware. San Diego Gas & Electric Company ("SDG&E"), 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 101 Ash Street, Room
111, San Diego, California 92101. Its phone number is (619) 696-2328. The
Note Issuer was organized in July 1997 for the limited purposes of holding and
servicing 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
SDG&E in the event SDG&E becomes subject to such a proceeding.
The only material business conducted by the Note Issuer has been the
acquisition of Transition Property and the issuance on December 16, 1997 of
$658,000,000 in principal amount of the SDG&E Funding LLC Notes, Series 1997-1,
Class A-1 through Class A-7 (the "Notes"), with scheduled maturities ranging
from one year to ten years and final maturities ranging from three to twelve
years. The specific interest rate and maturity of each class of Notes is
specified herein under Note C of the Notes to Financial Statements attached
hereto. 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 SDG&E-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 SDG&E, pursuant to which SDG&E 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 SDG&E pursuant to which SDG&E 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 amortization
schedules, pay all related fees and expenses, and fund certain accounts
established pursuant to the Indenture as required, the Servicing Agreement
requires SDG&E, 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 with respect thereto 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
3
and write-offs. The Servicer anticipates filing for such adjustments annually
beginning with calendar year 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 Note Issuer did not receive any collections from the Transition Property in
1997.
The Trust has no materially important physical properties. Its
primary assets are the Notes as described above in "Item 1. Business." The
Trust did not receive any payments with respect to the Notes in 1997.
ITEM 3. LEGAL PROCEEDINGS.
On October 6, 1997 The Utility Reform Network ("TURN"), a California
consumer-advocacy group, filed an application for rehearing with the California
Public Utilities Commission ("CPUC") seeking rehearing of the Financing Order,
alleging that the Financing Order was unlawful on various grounds. The CPUC
denied the application for rehearing on October 22, 1997. On November 24, 1997,
TURN, Public Media Center, Consumers Union and Harvey Rosenfield filed a
petition for writ of review of the Financing Order with the California Supreme
Court. In connection with their petition for writ of review, TURN and the other
petitioners requested that the California Supreme Court issue an interim writ or
order suspending implementation of the Financing Order until such time as the
Court resolved the petition for writ of review. On November 25, 1997, Pacific
Gas and Electric Company, San Diego Gas & Electric Company and Southern
California Edison Company jointly filed an opposition to the request for an
interim writ or order suspending implementation of the Financing Order. On
December 4, 1997, the California Supreme Court denied both the request for an
interim writ or order and the petition for writ of review.
Various consumer groups have filed a voter initiative with the
California Attorney General which seeks, among other things, to prohibit the
collection of any customer charges for the Certificates or, alternatively,
require SDG&E to offset such charges with an equal credit to customers. In
February 1998, the California Secretary of State released the title and summary
prepared for the proposed initiative by the office of the California Attorney
General. The sponsors of the initiative are now seeking sufficient signatures
to qualify the initiative for the November 1998 statewide ballot. If the
proposed initiative were voted into law, costly and time-consuming litigation
may ensue. Under the terms of the Servicing Agreement, SDG&E as the Servicer
is required to take such legal or administrative actions as may be reasonably
necessary to block or overturn any attempts to cause a repeal of, modification
of or supplement to the statute providing for the Certificates, or the Financing
Order, or the rights of holders of the Transition Property, by legislative
enactment, voter initiative or constitutional amendment that would be adverse to
holders of the Certificates. The costs of such actions would be payable out of
collections of the FTA Charges as an operating expense of the Note Issuer. If
the initiative were to qualify for the ballot, be voted into law and be upheld
by the courts, it could have a material adverse effect on the Note Issuer and
the holders of the Certificates.
No other legal proceedings affecting either the Note Issuer or the
Trust occurred in 1997.
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.
4
No matters were submitted for a vote or consent of holders of
Certificates in 1997.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
(a) There is no established public trading market for the Note Issuer's
equity securities. All of the Note Issuer's equity is owned by SDG&E. On August
11, 1997, SDG&E transferred $400,000 to the Note Issuer as an initial capital
contribution, and SDG&E has made capital contributions to the Note Issuer
aggregating to $3,290,000 as of December 31, 1997. The sale of such membership
interest 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 then remains outstanding. As of December 31, 1997, the original
principal amount of all series of Notes which then remained outstanding is
$658,000,000. As of December 31, 1997, the Note Issuer has not made any
distributions to SDG&E. The Note Issuer intends to make distributions to the
sole member from time to time in the future as permitted by the Indenture.
The registered owner for each class of the Certificates is Cede & Co.,
as nominee of The Depository Trust Company ("DTC"). DTC has informed the Note
Issuer that as of March 24, 1998, there were 73 beneficial holders of
Certificates. The Certificates are not registered and do not trade on any
established trading market.
(b) The Note Issuer's Amendment No. 4 to the Registration Statement No.
333-30761 on Form S-3, as filed with the Securities and Exchange Commission (the
"Commission") on November 21, 1997 (the "Registration Statement") for the sale
of the Notes and the Certificates was declared effective by the Commission on
November 24, 1997. The Certificates were offered for sale beginning on
December 4, 1997. Certificates in the aggregate amount of $658,000,000 were
sold on December 16, 1997. In connection with the offering of the Certificates,
Morgan Stanley, Inc. and Lehman Brothers Inc. acted as the managing
underwriters. The Trust purchased the Notes from the Note Issuer on December
16, 1997, pursuant to a private sale in the aggregate amount of $658,000,000.
Notes and Certificates in the aggregate principal amount of $800,000,000 were
registered and $658,000,000 have been offered and sold to date. All of the
Notes offered in the sale were purchased. The amount of each class of Notes and
Certificates registered and the respective sale prices, which exclude the
original issue discount, are as follows:
Class Principal Amount Registered Sale Price
- ----- --------------------------- ----------
Class A-1 Notes and Certificates $ 65,800,000.00 $ 65,797,058.74
Class A-2 Notes and Certificates $ 82,639,254.00 $ 82,628,229.92
Class A-3 Notes and Certificates $ 66,230,948.00 $ 66,218,105.82
Class A-4 Notes and Certificates $ 65,671,451.00 $ 65,648,886.29
Class A-5 Notes and Certificates $ 96,537,839.00 $ 96,536,159.24
Class A-6 Notes and Certificates $197,584,137.00 $197,544,718.97
Class A-7 Notes and Certificates $ 83,536,371.00 $ 83,481,128.40
--------------- ---------------
Total: $658,000,000.00 $657,854,287.38
=============== ===============
5
The net offering proceeds to the Trust were $654,728,789: the
$658,000,000 received in the sale of the Certificates less $3,125,498 of
underwriting discount and commission, and $145,713 of original issue discount.
The Trust used all of the net proceeds from the sale of Certificates to purchase
the Notes from the Note Issuer.
The estimated net offering proceeds to the Note Issuer were
$651,004,288, which consist of the $654,728,789 proceeds from the Trust less
estimated expenses of $3,724,501. The net offering proceeds to the Note Issuer
were used to purchase the Transition Property. Management believes that this is
a reasonable estimate of the expenses paid in connection with the offer and sale
of the Notes. Compensation for 1997 paid to the independent director of the
Note Issuer was $3,800. Other than the payment to the independent director, no
additional net offering proceeds were used to pay, either directly or
indirectly, any director, officer or affiliate of the Note Issuer in 1997.
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 above under Item 1 (Business), the Note Issuer is a newly
organized entity established in July 1997 for limited purposes. As discussed
above under Item 5 (Market for Registrant's Common Equity and Related
Stockholder Matters), on December 16, 1997, the Note Issuer issued Notes in
order to purchase Transition Property. The Note Issuer is restricted by its
organizational documents from engaging in activities other than those described
in Item 1 (Business).
The Note Issuer expects to use 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 expenses
and the discount on the Notes and (3) the fees charged by SDG&E for servicing
the Transition Property and providing administrative services to the Note
Issuer. (These agreements are discussed in greater detail in Note D to the
Financial Statements attached hereto.)
Collections of FTA Charges are currently meeting expectations. For
the first quarter of 1998, collections were sufficient to cover scheduled
payments on the Notes and related expenses. Such collections resulted in a
surplus of approximately $1 million after deducting scheduled payments on the
Notes and related expenses. The excess collections will be applied toward
future payments on the Notes. Management believes that it is reasonable to
expect future collections of FTA Charges to be sufficient to make scheduled
payments on the Notes and pay related expenses on a timely basis.
The Note Issuer has no computer systems of its own and relies on certain
systems of SDG&E for information. While there is the potential for SDG&E's
system to be unable to recognize the year 2000, SDG&E is in the process of an
extensive evaluation of its computer systems and an enterprise-wide date-
conversion project.
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 are indexed on page F-1 of this report and are incorporated
herein by reference.
6
Since the Trust is a pass-through entity with no assets other than the
Notes, financial statements for the Trust are not included. In addition,
Exhibit 99.1 contains financial information regarding collections of FTA Charges
by the Servicer for the month of December 1997.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.
Not applicable with respect to the Note Issuer or the Trust.
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.
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 accountants are included in Item 8:
Report of Independent Accountants
Statement of Income and Changes in Member's Equity
Balance Sheet
Statement 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:
7
Exhibit Description
------- -----------
3.1 Certificate of Formation. (1)
3.2 Limited Liability Company Agreement. (1)
3.3 Amended and Restated Limited Liability Company Agreement. (1)
4.1 Note Indenture. (2)
4.2 Amended and Restated Declaration and Agreement of Trust. (1)
4.3 Series Supplement. (2)
4.4 Form of Note. (1)
4.5 First Supplemental Trust Agreement. (2)
4.6 Form of Rate Reduction Certificate. (2)
10.1 Transition Property Purchase and Sale Agreement. (2)
10.2 Transition Property Servicing Agreement. (2)
10.3 Note Purchase Agreement. (2)
10.4 Fee and Indemnity Agreement. (2)
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
99.1 Monthly Servicer's Certificate dated January 13, 1998.
____________________________
(1) Incorporated by reference to the same-titled exhibit to the Note Issuer and
Trust's Registration Statement on Form S-3, as amended, File No. 333-
30761.
(2) Incorporated by reference to the same-titled exhibit to the Note Issuer and
Trust's Current Report on Form 8-K filed with the Commission on December
23, 1997.
(b) Reports on 8-K.
The Note Issuer and Trust filed a Current Report on Form 8-K dated December 23,
1997 filing certain agreements entered into by the Note Issuer and the Trust.
8
FINANCIAL STATEMENT INDEX
Report of Independent Accountants........................ F-2
Statement of Income and Changes In Member's Equity....... F-3
Balance Sheet............................................ F-4
Statement of Cash Flows.................................. F-5
Notes to Financial Statements............................ F-6
F-1
INDEPENDENT AUDITORS' REPORT
SDG&E Funding LLC:
We have audited the accompanying balance sheet of SDG&E Funding LLC (the
"Company") as of December 31, 1997, and the related statements of income and
changes in member's equity and of cash flows for the period from July 1, 1997
(inception) 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, such financial statements present fairly, in all material
respects, the financial position of the Company as of December 31, 1997, and the
results of its operations and its cash flows for the period from July 1, 1997
(inception) to December 31, 1997 in conformity with generally accepted
accounting principles.
DELOITTE & TOUCHE LLP
/s/ Deloitte & Touche LLP
San Diego, California
March 25, 1998
F-2
SDG&E FUNDING LLC
STATEMENT OF INCOME AND CHANGES IN MEMBER'S EQUITY
FOR THE PERIOD FROM INCEPTION (JULY 1, 1997) TO DECEMBER 31, 1997
(In Thousands)
Interest income $ 8
General & administrative expenses 3
------
Income before income taxes 5
Income tax expense (2)
------
NET INCOME $ 3
Member's equity at inception (July 1, 1997) --
Member's contributions 3,290
------
MEMBER'S EQUITY AT DECEMBER 31, 1997 $3,293
See notes to financial statements.
F-3
SDG&E FUNDING LLC
BALANCE SHEET
DECEMBER 31, 1997
(In Thousands)
ASSETS
------
Current assets:
Cash and cash equivalents $ 2,427
Interest receivable 8
---------
Total current assets 2,435
Transition property 651,004
Unamortized debt issuance costs 4,774
Unamortized issue discount 146
Restricted funds 3,190
---------
TOTAL $ 661,549
=========
LIABILITIES AND MEMBER'S EQUITY
-------------------------------
Current liabilities:
Current portion of long-term debt $ 65,800
Accounts payable and accrued expenses 256
---------
Total current liabilities 66,056
Long-term debt 592,200
---------
Total liabilities 658,256
Member's equity 3,293
---------
TOTAL $ 661,549
=========
See notes to financial statements.
F-4
SDG&E FUNDING LLC
STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION (JULY 1, 1997) TO DECEMBER 31, 1997
(In Thousands)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income $ 3
Adjustments to reconcile net income to net cash
provided by operating activities:
Accounts payable and accrued expenses 256
Interest receivable (8)
---------
NET CASH PROVIDED BY OPERATING ACTIVITIES 251
---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of underlying notes 654,729
Equity contribution from San Diego Gas & Electric 3,290
Debt issuance discount and costs (1,649)
Increase in restricted funds (3,190)
---------
NET CASH PROVIDED BY FINANCING ACTIVITIES 653,180
---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of transition property (651,004)
---------
NET INCREASE 2,427
CASH AND CASH EQUIVALENTS AT INCEPTION
(JULY 1, 1997) --
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1997 $ 2,427
=========
SUPPLEMENTAL SCHEDULE OF NONCASH FINANCING ACTIVITIES:
Debt issuance costs deducted from the
proceeds received from the issuance of
underlying notes $ 3,125
=========
See notes to financial statements.
F-5
Notes to Financial Statements
- -----------------------------
A. NATURE OF OPERATIONS
The financial statements include the accounts of SDG&E Funding LLC (SDG&E
Funding), a Delaware special-purpose limited-liability company, whose sole
member is San Diego Gas & Electric Company (San Diego Gas & Electric), a
provider of electric and natural gas services. San Diego Gas & Electric is a
wholly owned subsidiary of Enova Corporation. SDG&E Funding was formed on July
1, 1997, in order to effect the issuance of notes (the Underlying Notes)
intended to support a 10-percent electric-rate reduction. This reduction is
provided to San Diego Gas & Electric's residential and small commercial
customers in connection with the electric industry restructuring mandated by
California Assembly Bill 1890.
SDG&E Funding was organized for the limited purposes of issuing the Underlying
Notes and purchasing Transition Property. Transition Property is the right to
be paid a specified amount from a nonbypassable charge levied on residential and
small commercial customers. The nonbypassable charge has been authorized by the
California Public Utility Commission (CPUC) pursuant to electric restructuring
legislation.
SDG&E Funding is restricted by its organizational documents from engaging in any
other activities. In addition, SDG&E Funding's organizational documents require
it to operate in such a manner that it should not be consolidated in the
bankruptcy estate of San Diego Gas & Electric in the event that San Diego Gas &
Electric becomes subject to such a proceeding.
SDG&E Funding is legally separate from San Diego Gas & Electric. The assets of
SDG&E Funding are not available to creditors of San Diego Gas & Electric or
Enova Corporation, and the Transition Property is not legally an asset of San
Diego Gas & Electric or Enova Corporation. SDG&E Funding will cease to exist
upon the maturation or retirement of the Underlying Notes.
B. SUMMARY OF ACCOUNTING POLICIES
Restricted Funds
SDG&E Funding is required to maintain funds of approximately $3 million. These
funds are to be used to make scheduled payments on the Underlying Notes and to
pay other expenses of SDG&E Funding in the event that collections of the
nonbypassable charge provide insufficient funds to make such payments.
Unamortized Debt Issuance Expense
The expenses associated with the issuance of the Underlying Notes have been
capitalized and are being amortized over the life of the Underlying Notes.
Income Taxes
SDG&E Funding is a single-member limited-liability company. Accordingly, all
federal income tax effects and all material State of California franchise tax
effects of SDG&E Funding's activities accrue to San Diego Gas & Electric.
F-6
Use of Estimates
The preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenues and expenses during
the reporting period. Actual results could differ from these estimates.
C. LONG TERM DEBT
In December 1997, SDG&E Funding issued $658 million of the Underlying Notes to
the California Infrastructure and Economic Development Bank Special Purpose
Trust (the Trust). The Trust, in turn, issued pass-through certificates known
as "rate-reduction bonds" with an original principal amount equal to the
original principal amount of the Underlying Notes. SDG&E Funding used the
proceeds from the Underlying Notes to purchase the Transition Property from San
Diego Gas & Electric.
The Underlying Notes are secured solely by the Transition Property and other
assets of SDG&E Funding. Scheduled maturities and interest rates for the
Underlying Notes at December 31, 1997, are as follows:
Scheduled
Maturity Interest Amount
Class Date Rate (in thousands)
- ------------------------------------------------------------------------
A-1 December 26, 1998 5.97% $ 65,800
A-2 March 25, 2000 6.04% 82,639
A-3 March 25, 2001 6.07% 66,231
A-4 March 25, 2002 6.15% 65,672
A-5 September 25, 2003 6.19% 96,538
A-6 September 25, 2006 6.31% 197,584
A-7 December 26, 2007 6.37% 83,536
---- --------
658,000
Less: Current portion (65,800)
--------
Long-term debt $592,200
========
The estimated fair value of the Underlying Notes was approximately $658 million
at December 31, 1997. The fair value of the Underlying Notes is estimated to
approximate the carrying value due to the relatively short period of time
between the issuance date and the valuation date, and the relative market
stability during those periods.
The source of repayment will be a nonbypassable charge authorized by the CPUC.
This nonbypassable charge will be collected by San Diego Gas & Electric, as
Servicer, from its residential and small commercial customers. Collections of
the nonbypassable charge are deposited on a monthly basis by San Diego Gas &
Electric with SDG&E Funding in an account maintained by the trustee (Bankers
Trust Company). Each quarter such monies are used to make principal and interest
payments on the Underlying Notes. The debt service requirements include an over-
collateralization amount that is retained for the benefit of the holders
F-7
of the Underlying Notes. Any amounts not required for debt service will be
returned to SDG&E Funding.
D. SIGNIFICANT AGREEMENTS AND RELATED PARTY TRANSACTIONS
Under a Transition Property Servicing Agreement, San Diego Gas & Electric, the
Servicer, is required to manage and administer the Transition Property of SDG&E
Funding and to collect the nonbypassable charge from electric customers on
behalf of SDG&E Funding. SDG&E Funding pays a servicing fee equal to 0.25% of
the outstanding principal amount of the Underlying Notes. The Servicer is also
entitled to receive as compensation any interest earnings on nonbypassable
charge collections prior to remittance to the Trust and any late payment charges
collected from San Diego Gas & Electric's customers.
The Trust was created for the limited purposes of purchasing the Underlying
Notes from SDG&E Funding, issuing the rate-reduction bonds, and applying the
proceeds from the Underlying Notes to the payment of the rate-reduction bonds.
Under a Fee and Indemnity Agreement, SDG&E Funding is responsible for paying all
fees and expenses incurred by the Certificate Trustee (Bankers Trust Company)
and the Delaware Trustee (Bankers Trust Delaware).
F-8
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.
SDG&E Funding LLC,
as Registrant
By: /s/ Charles A. McMonagle
------------------------------
Name: Charles A. McMonagle
Title: President and Chief
Executive Officer
Pursuant to the requirements of the Securities 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 date indicated.
Signature Title Date
- --------- ----- ----
/s/ Charles A. McMonagle President, Chief Executive March 30, 1998
- ------------------------
Charles A. McMonagle Officer and Director
/s/ James P. Trent Chief Financial Officer, Chief March 30, 1998
- -----------------------
James P. Trent Accounting Officer and Director
/s/ Donald J. Puglisi Director March 30, 1998
- -----------------------
Donald J. Puglisi
S-1
EXHIBIT INDEX
Exhibit Description
- ------- -----------
3.1 Certificate of Formation. (1)
3.2 Limited Liability Company Agreement. (1)
3.3 Amended and Restated Limited Liability Company Agreement. (1)
4.1 Note Indenture. (2)
4.2 Amended and Restated Declaration and Agreement of Trust. (1)
4.3 Series Supplement. (2)
4.4 Form of Note. (1)
4.5 First Supplemental Trust Agreement. (2)
4.6 Form of Rate Reduction Certificate. (2)
10.1 Transition Property Purchase and Sale Agreement. (2)
10.2 Transition Property Servicing Agreement. (2)
10.3 Note Purchase Agreement. (2)
10.4 Fee and Indemnity Agreement. (2)
23.1 Consent of Deloitte & Touche LLP.
27.1 Financial Data Schedule.
99.1 Monthly Servicer's Certificate dated January 13, 1997.
_____________________
(1) Incorporated by reference to the same-titled exhibit to the Note Issuer and
Trust's Registration Statement on Form S-3, as amended, File No. 333-30761.
(2) Incorporated by reference to the same-titled exhibit to the Note Issuer and
Trust's Current Report on Form 8-K filed with the Commission on December
23, 1997.