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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, 2001.
OR
|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _____________ to _____________
Commission file number 333-30785
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California Infrastructure and Economic
Development Bank Special Purpose Trust SCE-1
--------------------------------------------
(Issuer of the Certificates)
SCE Funding LLC
---------------
(Exact Name of Registrant as Specified in Its Charter)
Delaware 95-4640661
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(State or other Jurisdiction (I.R.S. Employer
of Incorporation or Organization) Identification No.)
2244 Walnut Grove Avenue,
Room 212T, Rosemead, California 91770
------------------------------- -----
(Address of Principal Executive Offices) (Zip Code)
Registrant's telephone number, including area code: (626) 302-1850
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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-5 6.28% Certificates; Class A-6 6.38% Certificates; Class A-7 6.42% Certificates, maturing
serially from 2003 to 2009, and underlying SCE Funding LLC Notes of the same respective classes
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(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, 2002 was $0.
DOCUMENTS INCORPORATED BY REFERENCE.
Not applicable.
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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., 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.
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 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 December 18, 2001, SCE filed with the CPUC a routine
annual true-up mechanism advice letter filing. The filing increased the FTA Charges for residential customers by
12%, from 1.089 cents to 1.222 cents per kilowatt hour, and for small commercial customers by 12%, from 1.152 to
1.292 cents per kilowatt hour, effective January 1, 2002.
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's current short-term ratings are C by Standard & Poor's and Not Prime by 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 and the Quarterly Servicer's Certificate attached hereto as Exhibits 99.1 and 99.3, respectively.
Item 3. Legal Proceedings.
No legal proceedings affecting either the Note Issuer or the Trust occurred in 2001.
2
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 2001.
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. SCE has made capital contributions to the Note Issuer
aggregating $8,320,000 as of December 31, 2001, net of distributions made from time to time from the Note Issuer to
SCE. 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 there under 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, 2001, the original principal
amount of all series of Notes which then remained outstanding was $1,661,607,334.
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 primarily to income generated from the Transition
Property, interest expense on the Notes and incidental investment interest income.
3
In 2001, income generated from the Transition Property was $109 million compared with $124 million in 2000. The
decrease is due to reduced sales and lower authorized FTA Charges per kilowatt hour during 2001. Interest expense
in 2001 was $106 million compared to $121 million in 2000. 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.
Conservation efforts in response to the energy crisis in 2001 resulted in a decrease in demand for electricity. As
a result, cash collections during 2001 were not sufficient to cover scheduled distributions. During 2001, $28.7
million was paid from various reserve accounts to cover scheduled distributions.
During the twelve months ending December 31, 2001, the non-bypassable FTA Charges billed to residential and small
commercial customers totaled $316 million. Collections of FTA Charges totaled $317 million. Scheduled
distributions in 2001 were $355 million. Collections were sufficient to cover approximately 89% of the scheduled
payments on the Notes. Prior period overcollections were used to cover scheduled distributions in 2001. 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 rate reduction notes.
An increase in the FTA Charges went into effect on January 1, 2002. The outstanding balance of the Notes payable to
Note holders at December 31, 2001, is $1.67 billion. The required capital reserve in the Capital Subaccount under
the Indenture is $8.3 million (0.5% of the outstanding balance of the Notes). The balance in the Capital Subaccount
as shown in Exhibit 99.1 is $11.3 million. 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.
The increase in miscellaneous accrued expenses in 2001 is due to accelerated cash remittances by SCE. 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 represent future commitments to be paid upon the liquidation of 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 the
commencement and outcome of voter initiatives and 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-7 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
4
the Notes and Certificate, 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 2001 through
November 2000 (dated December 12, 2001).
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.
See the Exhibit Index of this report below.
(b) Reports on 8-K.
None.
6
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 28, 2002.
SCE FUNDING LLC
as Registrant
By: W. James Scilacci
----------------------------------------------
Name: W. James Scilacci
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
--------- ----- ----
W. James Scilacci Director and President March 28, 2002
- --------------------------------------------------------------- (Principal Executive
W. James Scilacci Officer)
Mary C. Simpson Director and Treasurer March 28, 2002
- --------------------------------------------------------------- (Principal Financial and
Mary C. Simpson Accounting Officer)
Anand Maniktala Director March 28, 2002
- ---------------------------------------------------------------
Anand Maniktala
7
Exhibit Index
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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
99.1 Annual Statement (Unaudited)
99.2 Annual Certificate of Compliance
99.3 Quarterly Servicer's Certificate (Unaudited)
99.4 Letter to United States Securities and Exchange Commission Regarding
the Issuer's Independent Public Accountants, Arthur Andersen LLP
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, 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
ARTHUR ANDERSEN LLP
Los Angeles, California
March 25, 2002
Item 8. Financial Statements
SCE FUNDING LLC
BALANCE SHEETS
As of December 31,
(in thousands)
--------------
ASSETS 2001 2000
------ ---- ----
Current Assets:
Cash and equivalents $ 1,443 $ 2,485
Restricted funds 34,812 42,085
Current portion of note receivable 246,300 246,300
Interest receivable 20 29
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Total Current Assets 282,575 290,899
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Other Assets and Deferred Charges:
Note receivable - net of discount 1,270,993 1,475,641
Unamortized bond issuance costs 10,945 12,769
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Total Other Assets and Deferred Charges 1,281,938 1,488,410
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Total Assets $ 1,564,513 $ 1,779,309
=======================================================
LIABILITIES AND MEMBER'S EQUITY
-------------------------------
Current Liabilities:
Interest payable $ 1,305 $ 1,517
Current portion of long-term debt 246,300 246,300
Miscellaneous accrued expenses 31,202 1,706
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Total Current Liabilities 278,807 249,523
-------------------------------------------------------
Long term debt - net of discount 1,231,090 1,477,321
-------------------------------------------------------
Member's equity 54,616 52,465
-------------------------------------------------------
Total Liabilities and Member's Equity $ 1,564,513 $ 1,779,309
=======================================================
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
Year Ended December 31,
(in thousands)
2001 2000 1999
OPERATING REVENUE:
Interest income $108,814 $124,045 $137,670
----------------------- -------------------- ---------------------
Total Operating Revenue 108,814 124,045 137,670
----------------------- -------------------- ---------------------
OPERATING EXPENSES:
Interest expense 105,604 120,727 135,565
Other expenses 4,197 4,844 5,430
----------------------- -------------------- ---------------------
Total Operating Expenses 109,801 125,571 140,995
----------------------- -------------------- ---------------------
Net Loss (987) (1,526) (3,325)
----------------------- -------------------- ---------------------
Member's Equity - beginning of year 52,465 38,134 23,167
Member Contributions -- net 3,138 15,857 18,292
----------------------- -------------------- ---------------------
Member's Equity, end of year $54,616 $52,465 $38,134
======================= ==================== =====================
The accompanying notes are an integral part of these financial statements
F-2
SCE FUNDING LLC
STATEMENTS OF CASH FLOWS
Year Ended December 31,
(in thousands)
2001 2000 1999
---- ---- ----
Cash flows from Operating Activities:
Net Loss $ (987) $ (1,526) $ (3,325)
Adjustments to reconcile net loss to net
cash used by operating activities:
Amortizations 2 2 2
Changes in working capital:
Restricted funds 7,273 (6,139) (15,108)
Interest Receivables 9 (24) 2,319
Interest payable (212) (211) (210)
Miscellaneous accrued expenses 29,496 1,144 (4)
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Net Cash Provided (Used) in Operating Activities 35,581 (6,754) (16,326)
-----------------------------------------------------
Cash Flows from Financing Activities:
Payment of principal on rate reduction notes (246,300) (246,300) (246,300)
-----------------------------------------------------
Net Cash Used in Financing Activities (246,300) (246,300) (246,300)
-----------------------------------------------------
Cash Flows from Investing Activities:
Note Receivable Collections from SCE 206,539 238,364 245,469
Equity contributions from Southern California Edison
Company 3,138 15,857 18,292
----------------------------------------------------
Net Cash Provided by Investing Activities 209,677 254,221 263,761
----------------------------------------------------
Net (decrease) Increase in cash and equivalents (1,042) 1,167 1,135
Cash and equivalents, beginning of period 2,485 1,318 183
----------------------------------------------------
Cash and equivalents, end of period $ 1,443 $ 2,485 $ 1,318
====================================================
Cash payments for interest $ 103,771 $ 119,045 $ 133,882
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The accompanying notes are an integral part of these financial statements
F-3
SCE FUNDING LLC
NOTES TO FINANCIAL STATEMENTS
December 31, 2000
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.
F-4
2. Summary of Accounting Policies
Cash Equivalents
Cash equivalents include working funds and short-term investments with initial 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 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 represent future commitments to be
paid upon the liquidation of the Notes and are classified as miscellaneous accrued expenses on the
financial statements.
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.
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.
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, 2001, 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 $1.5 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 four classes of Notes (Classes A-1 through A-4) matured in December 1998, and
March 2000, 2001, and 2002, respectively. The remaining three classes of Notes have maturities beginning in 2003
and ending in 2007, with interest rates ranging from 6.28% 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 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, SCE has, effective January 2001, begun making daily rather than monthly remittances to the
trustee. 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, 2001, are as
follows:
Scheduled Interest Amount
Class Maturity Date Rate (in thousands)
----- ------------- ---- ------------
A-4 March 25, 2002 6.22% 62,223
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
----------
$1,477,800
Less: Current Maturities (246,300)
Less: Unamortized Discount (410)
----------
Long-Term Debt Net of Discount $1,231,090
==========
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 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 $4.2 million in servicing,
administration and trustee fees in 2001. 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, 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 are
paid by SCE Funding LLC.