SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
-----------------
FORM 10-Q
THE REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL
INSTRUCTION H(1)(a) AND (b) OF FORM 10-Q AND IS THEREFORE FILING
THIS FORM WITH THE REDUCED DISCLOSURE FORMAT.
(Mark One)
|X| Quarterly report pursuant to section 13 or 15(d) of the Securities
Exchange Act of 1934 For the quarterly period ended September 30, 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
Indicate by check |X| whether the registrant: (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for at least the past 90 days. YES |X| NO
<PAGE>
PART I
Item 1. Financial Statements
SCE FUNDING LLC
BALANCE SHEETS
(in thousands)
<TABLE>
<CAPTION>
September 30, December 31,
ASSETS 1998 1997
------ ---- ----
(Unaudited)
Current Assets:
<S> <C> <C>
Cash & equivalents $ 1,156 $ 6,616
Current portion of note receivable 268,801 246,300
Interest receivable 1,702 8,163
----------------------------------------------------
Total Current Assets 271,659 261,079
----------------------------------------------------
Other Assets and Deferred Charges:
Restricted funds 11,673 12,254
Note receivable - net of discount 2,023,240 2,197,512
Unamortized bond issuance costs 16,873 15,974
----------------------------------------------------
Total Other Assets & Deferred Charges 2,051,786 2,225,740
----------------------------------------------------
Total Assets $ 2,323,445 $ 2,486,819
====================================================
LIABILITIES AND MEMBER'S EQUITY Current Liabilities:
Interest payable $ 2,013 $ 8,142
Current portion of long-term debt 268,801 246,300
Misc accrued expenses 82 3,382
----------------------------------------------------
Total Current Liabilities 270,896 257,824
----------------------------------------------------
Long term debt - net of discount 2,037,786 2,216,014
Member's equity 14,763 12,981
----------------------------------------------------
Total Liabilities and Member's Equity $ 2,323,445 $ 2,486,819
====================================================
</TABLE>
The accompanying notes are an integral part of this Financial Statement
1
<PAGE>
SCE FUNDING LLC
STATEMENT OF OPERATIONS AND CHANGES IN MEMBER'S EQUITY
FROM JANUARY 1, 1998 THROUGH SEPTEMBER 30, 1998
(Unaudited)
(in thousands)
<TABLE>
<CAPTION>
3 Months Ended 9 Months Ended
September 30, 1998 September 30, 1998
----------------------------------------------------
OPERATING REVENUE:
<S> <C> <C>
Interest income $38,165 $117,189
------------------------ -----------------------------
Total Operating Revenue 38,165 117,189
------------------------ -----------------------------
OPERATING EXPENSES:
Interest expense 37,819 115,638
Other expenses 1,387 4,406
------------------------ -----------------------------
Total Operating Expenses 39,206 120,044
------------------------ -----------------------------
Net Income (Loss) (1,041) (2,855)
------------------------ -----------------------------
Member's Equity- beginning of period 14,288 12,981
Member Contributions - net 1,516 4,637
======================== =============================
Member's Equity, end of period $14,763 $14,763
======================== =============================
</TABLE>
The accompanying notes are an integral part of this Financial Statement
2
<PAGE>
SCE FUNDING LLC
STATEMENT OF CASH FLOWS
FROM JANUARY 1, 1998 TO SEPTEMBER 30, 1998
(UNAUDITED)
(in thousands)
<TABLE>
<CAPTION>
Cash Flows from Operating Activities:
<S> <C>
Net Income (Loss) $ (2,855)
Adjustment for non-cash items:
Amortizations (30)
Other net 581
Changes in working capital:
Receivables 159,957
Interest payable (6,129)
Accounts payable and other current liabilities (3,300)
--------------------
Net Cash Provided by Operating Activities 148,224
--------------------
Cash Flows from Financing Activities:
Payment of additional bond issuance costs (2,542)
Payment of principal on rate reduction notes (155,779)
--------------------
Net Cash Used by Financing Activities (158,321)
--------------------
Cash Flows from Investing Activities:
Equity contributions from Southern California Edison 4,637
--------------------
Net Cash Provided by Investing Activities 4,637
--------------------
Net decrease in cash and equivalents (5,460)
Cash and equivalents, beginning of period 6,616
====================
Cash and equivalents, end of period $ 1,156
====================
</TABLE>
The accompanying notes are an integral part of this Financial Statement
3
<PAGE>
SCE FUNDING LLC
NOTES TO FINANCIAL STATEMENTS
(Unaudited)
In the opinion of management, all adjustments have been made that are
necessary to present a fair statement of the financial position and results of
operations for the periods covered by this report.
The significant accounting policies of SCE Funding LLC (Note Issuer)
were described in Note 2 of "Notes to Financial Statements" included in its
Annual Report on Form 10-K for the fiscal year ended December 31, 1997, filed
with the Securities and Exchange Commission. The Note Issuer follows the same
accounting policies for interim reporting purposes. Results of operations for
the interim period are not necessarily indicative of results to be expected for
a full year. This quarterly report should be read in conjunction with the Note
Issuer's Annual Report on Form 10-K.
Certain prior-period amounts were reclassified to conform to the
September 30, 1998 financial statement presentation.
Note 1. Basis of Presentation.
The financial statements include the accounts of 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. The Note Issuer 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.
The Note Issuer 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 SCE was treated as the issuance of a promissory
note by SCE to the Note Issuer 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 the Note Issuer.
4
<PAGE>
The Note Issuer is restricted by its organizational documents from
engaging in any other activities. In addition, the Note Issuer's 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.
The Note Issuer 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 the Note Issuer (i.e., the Transition Property) is not
legally an asset of SCE or Edison International.
Note 2. California Proposition 9 - November Voter Initiative
In November 1997, individuals representing The Utility Reform Network,
Public Media Center and the Coalition Against Utility Taxes filed a proposed
voter initiative with the California Attorney General which seeks to amend the
electricity restructuring legislation so as, among other things, to prohibit the
collection of any customer charges for the Certificates or, alternatively,
require SCE, the Note Issuer or the Trust to offset such charges with an equal
credit to ratepayers. In addition, the proposed voter initiative states that
"any underwriter or bond purchaser who purchases rate reduction bonds after
November 15, 1997 . . . shall be deemed to have notice of the [proposed
initiative]."
On June 24, 1998, the California Secretary of State announced that the
proposed voter initiative qualified for the November 1998 ballot. On July 17,
1998, the Secretary of State designated the voter initiative as Proposition 9 on
the ballot.
On May 22, 1998, Californians for Affordable and Reliable Electric
Service (CARES), a Coalition of California Business Organizations and Utilities
(sponsored by the California Business Roundtable, the California Chamber of
Commerce, San Diego Gas & Electric Company, the California Manufacturers
Association, Pacific Gas and Electric Company, the California Retailers
Association, and SCE, among other groups) filed a petition for writ of mandate
with the Court of Appeal of the State of California, Third Appellate District.
The petition challenged the voter initiative as illegal and unconstitutional on
its face, and sought to remove it from the November 1998 ballot. On July 2,
1998, the Court of Appeal denied the CARES petition. On July 6, 1998, CARES
filed its appeal of the denial with the California Supreme Court. On July 15,
1998, the California Supreme Court denied the CARES petition for pre-election
review. In these rulings, the Court of Appeal of the State of California, Third
Appellate District, and the California Supreme Court both have decided, in
effect, not to consider the legality and constitutionality of Proposition 9
prior to the November 1998 ballot.
If Proposition 9 is voted into law, further litigation would ensue.
Under the terms of the Servicing Agreement between SCE and the Note Issuer, SCE,
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 electric restructuring legislation, the
financing order dated September 3, 1997 (Financing Order) issued by the CPUC, 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
5
<PAGE>
actions would be payable out of collections of the non-bypassable charges
payable by residential and small commercial customers. These charges are
authorized by the Financing Order and the related issuance advice letter and
would be charged as an operating expense of the Note Issuer.
Bankers Trust Company of California, N.A., acting as Certificate
Trustee for the holders of the Certificates, has informed the Note Issuer that
it has sent letters to the Certificate holders of record on October 14, 1998,
notifying them about certain actions the Certificate Trustee is taking related
to Proposition 9. The letter states that Proposition 9, if approved by the
voters and upheld by the courts, would impair the rights of the Certificate
holders and would lead to a default in the payment of principal and interest on
the Certificates. The letter also states that Proposition 9, if approved, would
breach the statutory and contractual pledge by the State of California not to
limit or alter payment of principal and interest on the Certificates, and that
such breach would constitute an event of default under the Trust Agreement
pursuant to which the Certificates were issued.
Therefore, the letter states, the Certificate Trustee is requesting
authorization from the Certificate holders to commence litigation to enjoin
Proposition 9 if it passes, to collect damages on behalf of the Certificate
holders for the breach of the State's statutory and contractual pledge, and for
other appropriate relief. The Certificate Trustee also requests indemnification
from Certificate holders if other sources of payment for the Certificate Trustee
are not available.
The Trustee's letter also attached letters from SCE, Pacific Gas and
Electric Company and San Diego Gas & Electric Company, in their capacities as
servicers of the Transition Property, restating their intention to comply with
their obligations under the related agreements to take reasonable and necessary
legal actions to overturn Proposition 9 if it is approved by the voters.
The qualification of the proposed voter initiative for the November
1998 ballot and denials of the petition for its pre-election review by the
California Court of Appeal and the California Supreme Court have had a material
adverse effect on the secondary market for the Certificates, including the price
and liquidity thereof. Furthermore, if Proposition 9 is voted into law and is
not immediately overturned or is not stayed pending judicial review of its
merits, depending on how the voter initiative is interpreted and applied, the
collection of charges necessary to pay the Certificates while the litigation is
pending could be precluded, which would adversely affect the Certificates, the
secondary market for the Certificates, including the pricing and liquidity
thereof, the dates of maturity thereof, and accordingly the weighted average
lives thereof. In addition, if Proposition 9 is voted into law and upheld by the
courts, then likewise depending on how it is interpreted and implemented, it
could have a further material adverse effect on the Certificates, the secondary
market for the Certificates, including the pricing and liquidity thereof, the
dates of maturity thereof and the weighted average lives thereof, and the
holders of the Certificates could incur losses on their investment. The Note
Issuer is unable to predict whether Proposition 9 will be voted into law and if
so the outcome of this matter.
6
<PAGE>
Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations.
The following analysis of SCE Funding LLC's (Note Issuer) financial
condition and results of operations is in an abbreviated format pursuant to
Instruction H of Form 10-Q. Such analysis should be read in conjunction with the
Financial Statements and Notes to the Financial Statements included herein, and
the Financial Statements and Notes to the Financial Statements included in the
Note Issuer's Annual Report on Form 10-K for the year ended December 31, 1997.
The Note Issuer is a special purpose, single member limited liability
company organized in June 1997 for the limited purposes of owning the Transition
Property (as described below) and issuing notes secured primarily by the
Transition Property. Southern California Edison Company (SCE) is the sole member
of the Note Issuer and owns all of the equity of the Note Issuer. The Note
Issuer's organizational documents require it to operate in a manner such that it
should not be consolidated in the bankruptcy estate of SCE in the event SCE
becomes subject to such a proceeding.
In December 1997, the Note Issuer acquired the Transition Property
(which for financial reporting purposes is treated as a note receivable) and
issued $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 Notes were issued pursuant to an indenture between the Note Issuer and
Bankers Trust Company of California, N.A., as trustee (Note Indenture). The Note
Issuer sold the 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 in a public
offering. The Note Issuer 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 certain administrative and operational duties for the Note Issuer.
The California Public Utilities Code (PU Code) provides for the
creation of Transition Property. A financing order dated September 3, 1997
(Financing Order) issued by the 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 Note Indenture and pay
all related costs and fees. Under the PU Code and the Financing Order, the owner
of the Transition Property is entitled to collect FTA Charges until such owner
has received amounts sufficient to retire all outstanding series of Certificates
and cover related fees and expenses and the Overcollateralization Amount
described in the Financing Order. The Transition Property is a 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
7
<PAGE>
with their expected amortization schedules, pay all related fees and
expenses, and fund certain accounts established pursuant to the Note Indenture
as required, the Servicing Agreement requires SCE, as the servicer of the
Transition Property (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. As of September
30, 1998, the Servicer has not sought any such adjustments.
The Note Issuer is limited by its organizational documents from
engaging in any activities other than owning the Transition Property, issuing
notes secured by the Transition Property and other limited collateral, and
activities related thereto. Accordingly, income statement effects were limited
primarily to income generated from the Transition Property, interest expense on
the Notes, and incidental investment interest income. During the three and nine
months ended September 30, 1998, income generated from the Transition Property
was approximately $37 million and $115 million, respectively. Interest on other
investments for the three and nine months ended September 30, 1998, was $717,000
and $1.8 million, respectively. Interest expense for the three and nine months
ended September 30, 1998, was approximately $38 million and $116 million,
respectively, and includes interest on the Notes and the amortization of debt
issuance costs.
The Note Issuer uses collections with respect to the Transition
Property to make scheduled principal and interest payments on the Notes.
Interest income earned on the Transition Property is expected to offset (1)
interest expense on the Notes, (2) amortization of debt issuance costs, the
discount on the Notes and (3) the fees charged by SCE for servicing the
Transition Property and providing administrative services to the Note Issuer.
Attached as Exhibit 99.1 is the Quarterly Servicer's Certificate for
the collection periods June 1998 through August 1998 (dated September 11, 1998),
delivered pursuant to the Note Indenture, which includes information relating to
the collections of the FTA Charges. As noted therein, collections of FTA Charges
are currently meeting expectations and were sufficient to pay 99% of all
scheduled payments on the Notes and related expenses for the Note payment due
September 25, 1998. The remaining amount (approximately $719,000) was drawn from
the Overcollateralization Subaccount ($428,000) and the Capital Subaccount
($291,000) established pursuant to the Note Indenture, which amounts will be
replenished to the extent there are sufficient excess collections of FTA Charges
in the future. The FTA Charges will be adjusted at least annually if there is a
material shortfall or overage in collections. The Note Issuer expects future
collections of FTA Charges (assuming no adverse impact from the effects of
Proposition 9 as discussed herein) to be sufficient to cover expenses and to
make scheduled payments on the Notes on a timely basis.
Year 2000 Issue
Many computer systems recognize only the last two digits of a year and
therefore may not be able to distinguish, for example, between the years 1900
and 2000. If not corrected, such computer systems could fail or create erroneous
results with reference to the year 2000 and later years. This has been referred
to generally as the Year 2000 Issue.
8
<PAGE>
Under the Servicing Agreement, SCE, 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 SCE'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.
SCE has advised the Note Issuer as follows. SCE has a comprehensive
program in place to remediate potential impacts of the Year 2000 Issue. SCE's
plan is for critical systems to be 75 percent Year 2000-ready by year-end 1998,
and 100% Year 2000-ready by July 1999. Remediation of mainframe financial
systems was completed in the fourth quarter of 1997. The customer information
and billing system is scheduled to be replaced by the first quarter of 1999 with
a system designed to be Year 2000-ready. SCE is on track to have its business
information systems, including data acquisition for billing, Year 2000-ready
within the timeframe discussed above. The costs of such remediation will be
borne by SCE, not the Note Issuer. SCE also has advised the Note Issuer that it
is developing contingency plans for dealing with the Year 2000 Issue, which are
expected to be completed by March 1999. The Note Issuer does not have, nor does
it intend to create, any separate contingency plans.
Based upon the information provided by SCE, 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.
California Proposition 9 Litigation
In November 1997, individuals representing The Utility Reform Network,
Public Media Center and the Coalition Against Utility Taxes filed a proposed
voter initiative with the California Attorney General which seeks to amend
certain existing California statutes (collectively, the electric restructuring
legislation) so as, among other things, to prohibit the collection of any
customer charges for the Certificates or, alternatively, require SCE, the Note
Issuer or the Trust to offset such charges with an equal credit to ratepayers.
In addition, the proposed voter initiative states that "any underwriter or bond
purchaser who purchases rate reduction bonds after November 15, 1997 . . . shall
be deemed to have notice of the [proposed initiative]."
On June 24, 1998, the California Secretary of State announced that the
proposed voter initiative qualified for the November 1998 ballot. On July 17,
1998, the Secretary of State designated the voter initiative as Proposition 9 on
the ballot.
On May 22, 1998, Californians for Affordable and Reliable Electric
Service (CARES), a Coalition of California Business Organizations and Utilities
(sponsored by the California Business Roundtable, the California Chamber of
Commerce, San Diego Gas & Electric Company, the California Manufacturers
Association, Pacific Gas and Electric Company, the California Retailers
Association, and SCE, among other groups) filed a petition for writ of mandate
with the Court of Appeal of the State of California, Third Appellate District.
The petition challenged the voter initiative as illegal and unconstitutional on
its face, and sought to remove it from the
9
<PAGE>
November 1998 ballot. On July 2, 1998, the Court of Appeal denied the
CARES petition. On July 6, 1998, CARES filed its appeal of the denial with the
California Supreme Court. On July 15, 1998, the California Supreme Court denied
the CARES petition for pre-election review. In these rulings, the Court of
Appeal of the State of California, Third Appellate District, and the California
Supreme Court both have decided, in effect, not to consider the legality and
constitutionality of Proposition 9 prior to the November 1998 ballot.
If Proposition 9 is voted into law, further litigation would ensue.
Under the terms of the Servicing Agreement, SCE, 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 electric restructuring legislation, 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 and would be charged as an operating expense of
the Note Issuer.
Bankers Trust Company of California, N.A., acting as Certificate
Trustee for the holders of the Certificates, has informed the Note Issuer that
it has sent letters to the Certificate holders of record on October 14, 1998,
notifying them about certain actions the Certificate Trustee is taking related
to Proposition 9. The letter states that Proposition 9, if approved by the
voters and upheld by the courts, would impair the rights of the Certificate
holders and would lead to a default in the payment of principal and interest on
the Certificates. The letter also states that Proposition 9, if approved, would
breach the statutory and contractual pledge by the State of California not to
limit or alter payment of principal and interest on the Certificates, and that
such breach would constitute an event of default under the Trust Agreement
pursuant to which the Certificates were issued.
Therefore, the letter states, the Certificate Trustee is requesting
authorization from the Certificate holders to commence litigation to enjoin
Proposition 9 if it passes, to collect damages on behalf of the Certificate
holders for the breach of the State's statutory and contractual pledge, and for
other appropriate relief. The Certificate Trustee also requests indemnification
from Certificate holders if other sources of payment for the Certificate Trustee
are not available.
The Trustee's letter also attached letters from SCE, Pacific Gas and
Electric Company and San Diego Gas & Electric Company, in their capacities as
servicers of the Transition Property, restating their intention to comply with
their obligations under the related agreements to take reasonable and necessary
legal actions to overturn Proposition 9 if it is approved by the voters.
The qualification of the proposed voter initiative for the November
1998 ballot and denials of the petition for its pre-election review by the
California Court of Appeal and the California Supreme Court have had a material
adverse effect on the secondary market for the Certificates, including the price
and liquidity thereof. Furthermore, if Proposition 9 is voted into law and is
not immediately overturned or is not stayed pending judicial review of its
merits, depending on how the voter initiative is interpreted and applied, the
collection of charges necessary to pay the Certificates while the litigation is
pending could be precluded, which would adversely affect the Certificates, the
secondary market for the Certificates, including the pricing and liquidity
thereof,
10
<PAGE>
the dates of maturity thereof, and accordingly the weighted average
lives thereof. In addition, if Proposition 9 is voted into law and upheld by the
courts, then likewise depending on how it is interpreted and implemented, it
could have a further material adverse effect on the Certificates, the secondary
market for the Certificates, including the pricing and liquidity thereof, the
dates of maturity thereof and the weighted average lives thereof, and the
holders of the Certificates could incur losses on their investment. The Note
Issuer is unable to predict whether Proposition 9 will be voted into law and if
so the outcome of this matter.
Forward-looking Information
In the preceding Management's Discussion and Analysis of Financial
Condition and Results of Operations, and elsewhere in this quarterly report, the
Note Issuer uses the words could, estimates, expects, anticipates, believes, 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 discussed above as
the passage and implementation of, and the commencement and outcome of
litigation involving, Proposition 9 on the November 1998 ballot and the ability
of SCE to address and to make Year 2000-ready the computer systems commonly used
by SCE and the Note Issuer.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Omitted with respect to the Note Issuer pursuant to Instruction H of
Form 10-Q.
11
<PAGE>
PART II
Item 1. Legal Proceedings
California Proposition 9
This matter is also discussed in Note 2 of the Notes to Financial
Statements under Item 1, and in Item 2, Management's Discussion and Analysis of
Financial Condition and Results of Operations, of this Report on Form 10-Q. For
definitions of terms used below, please refer to the above discussions.
As previously reported in Part II, Item 1 of the Note Issuer's
quarterly report on Form 10-Q for the quarter ended June 30, 1998, a voter
initiative, designated as Proposition 9, is on the California ballot for the
November 3, 1998 general election. Proposition 9 seeks to amend the electric
restructuring legislation so as, among other things, to prohibit the collection
of any customer charges for the Certificates or, alternatively, require SCE, the
Note Issuer or the Trust to offset such charges with an equal credit to
ratepayers. A petition for pre-election review of Proposition 9 seeking to have
the initiative removed from the November 1998 ballot was denied by the
California Court of Appeal and the California Supreme Court. A copy of the
proposed voter initiative was filed as Exhibit 99.1 to the Note Issuer's current
report on Form 8-K dated June 24, 1998.
If Proposition 9 is voted into law, further litigation would ensue.
Under the terms of the Servicing Agreement, SCE, 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 electric restructuring legislation, 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 and would be charged as an operating expense of
the Note Issuer.
As previously disclosed in the Note Issuer's current report on Form 8-K
dated October 15, 1998, Bankers Trust Company of California, N.A., acting as
Certificate Trustee for the holders of the Certificates, has informed the Note
Issuer that it has sent letters to the Certificate holders of record on October
14, 1998, notifying them about certain actions the Certificate Trustee is taking
related to Proposition 9. The letter states that Proposition 9, if approved by
the voters and upheld by the courts, would impair the rights of the Certificate
holders and would lead to a default in the payment of principal and interest on
the Certificates. The letter also states that Proposition 9, if approved, would
breach the statutory and contractual pledge by the State of California not to
limit or alter payment of principal and interest on the Certificates, and that
such breach would constitute an event of default under the Trust Agreement
pursuant to which the Certificates were issued.
Therefore, the letter states, the Certificate Trustee is requesting
authorization from the Certificate holders to commence litigation to enjoin
Proposition 9 if it passes, to collect damages on behalf of the Certificate
holders for the breach of the State's statutory and contractual pledge,
12
<PAGE>
and for other appropriate relief. The Certificate Trustee also requests
indemnification from Certificate holders if other sources of payment for the
Certificate Trustee are not available.
The Trustee's letter also attached letters from SCE, Pacific Gas and
Electric Company and San Diego Gas & Electric Company, in their capacities as
servicers of the Transition Property, restating their intention to comply with
their obligations under the related agreements to take reasonable and necessary
legal actions to overturn Proposition 9 if it is approved by the voters. A copy
of the Certificate Trustee's correspondence to Certificate holders was attached
as Exhibit 99.1 to the Note Issuer's current report on Form 8-K dated October
15, 1998.
The qualification of the proposed voter initiative for the November
1998 ballot and denials of the petition for its pre-election review by the
California Court of Appeal and the California Supreme Court have had a material
adverse effect on the secondary market for the Certificates, including the price
and liquidity thereof. Furthermore, if Proposition 9 is voted into law and is
not immediately overturned or is not stayed pending judicial review of its
merits, depending on how the voter initiative is interpreted and applied, the
collection of charges necessary to pay the Certificates while the litigation is
pending could be precluded, which would adversely affect the Certificates, the
secondary market for the Certificates, including the pricing and liquidity
thereof, the dates of maturity thereof, and accordingly the weighted average
lives thereof. In addition, if Proposition 9 is voted into law and upheld by the
courts, then likewise depending on how it is interpreted and implemented, it
could have a further material adverse effect on the Certificates, the secondary
market for the Certificates, including the pricing and liquidity thereof, the
dates of maturity thereof and the weighted average lives thereof, and the
holders of the Certificates could incur losses on their investment. The Note
Issuer is unable to predict whether Proposition 9 will be voted into law and if
so the outcome of this matter.
Item 2. Changes in Securities and Use of Proceeds.
Omitted with respect to the Note Issuer pursuant to Instruction H of
Form 10-Q.
Item 3. Defaults Upon Senior Securities.
Omitted with respect to the Note Issuer pursuant to Instruction H of
Form 10-Q.
Item 4. Submission of Matters to a Vote of Security Holders.
Omitted with respect to the Note Issuer pursuant to Instruction H of
Form 10-Q.
Item 5. Other Information.
Attached, with respect to the Note Issuer and the Trust, as Exhibit
99.1 is the Quarterly Servicer's Certificate for the collection periods: June
1998 through August 1998 (dated September 11, 1998), delivered pursuant to the
Note Indenture, which includes information relating to the collections of the
FTA Charges.
13
<PAGE>
Item 6. Exhibits and Reports on Form 8-K.
(a) See Exhibit Index of this report.
(b) Reports on Form 8-K filed during the quarter ended September 30,
1998.
June 24, 1998: Item 5. Other Events Proposed Voter Initiative
July 2, 1998: Item 5. Other Events Proposed Voter Initiative
14
<PAGE>
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934,
the registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
SCE FUNDING LLC
as Registrant
By /s/ Mary C. Simpson
Name: Mary C. Simpson
Title: Treasurer (Principal Financial and
Accounting Officer)
October 30, 1998
Exhibit Index
Sequential
Numbered Exhibit
Exhibit Page
Number
3.1 Certificate of Formation (incorporated by reference to the same title and
numbered exhibit to the Note Issuer's Registration Statement on Form S-3,
File No. 333-30785)
3.2 Limited Liability Company Agreement (incorporated by reference to the same
titled and numbered exhibit to the Note Issuer's Registration Statement on
Form S-3, File No. 333-30785)
3.3 Amended and Restated Limited Liability Company Agreement (incorporated by
reference to the same titled exhibit, included as exhibit number 3.4 to the
Note Issuer's Registration Statement on Form S-3, File No. 333-30785)
4.1 Note Indenture (incorporated by reference to the same titled and numbered
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 and
numbered 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 and numbered 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 and numbered 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 and numbered 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
and numbered 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 and numbered 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 and numbered 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 and
numbered 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
and numbered exhibit to the Note Issuer's Current Report on Form 8-K filed
with the Commission on December 11, 1997)
27.1 Financial Data Schedule for the nine months ended September 30, 1998
99.1 Quarterly Servicer's Certificate dated September 11, 1998
<TABLE> <S> <C>
<ARTICLE> UT
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-START> JAN-01-1998
<PERIOD-END> SEP-30-1998
<BOOK-VALUE> PER-BOOK
<TOTAL-NET-UTILITY-PLANT> 0
<OTHER-PROPERTY-AND-INVEST> 0
<TOTAL-CURRENT-ASSETS> 271,659
<TOTAL-DEFERRED-CHARGES> 16,873
<OTHER-ASSETS> 2,034,913
<TOTAL-ASSETS> 2,323,445
<COMMON> 0
<CAPITAL-SURPLUS-PAID-IN> 17,877
<RETAINED-EARNINGS> (3,114)
<TOTAL-COMMON-STOCKHOLDERS-EQ> 14,763
0
0
<LONG-TERM-DEBT-NET> 2,037,786
<SHORT-TERM-NOTES> 0
<LONG-TERM-NOTES-PAYABLE> 0
<COMMERCIAL-PAPER-OBLIGATIONS> 0
<LONG-TERM-DEBT-CURRENT-PORT> 268,801
0
<CAPITAL-LEASE-OBLIGATIONS> 0
<LEASES-CURRENT> 0
<OTHER-ITEMS-CAPITAL-AND-LIAB> 2,095
<TOT-CAPITALIZATION-AND-LIAB> 2,323,445
<GROSS-OPERATING-REVENUE> 117,189
<INCOME-TAX-EXPENSE> 0
<OTHER-OPERATING-EXPENSES> 4,406
<TOTAL-OPERATING-EXPENSES> 4,406
<OPERATING-INCOME-LOSS> 112,783
<OTHER-INCOME-NET> 0
<INCOME-BEFORE-INTEREST-EXPEN> 112,783
<TOTAL-INTEREST-EXPENSE> 115,638
<NET-INCOME> (2,855)
0
<EARNINGS-AVAILABLE-FOR-COMM> 0
<COMMON-STOCK-DIVIDENDS> 0
<TOTAL-INTEREST-ON-BONDS> 115,638
<CASH-FLOW-OPERATIONS> 148,224
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
</TABLE>
EXHIBIT 99
Page 1 of 3 September 11, 1998
Quarterly Servicer's Certificate
(to be delivered pursuant to Section 4.01(d)(ii) of
the Transition Property Servicing Agreement on or before each Remittance Date)
Southern California Edison Company, as Servicer
CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK SPECIAL PURPOSE TRUST
SCE-1
Pursuant to the Transition Property Servicing Agreement dated as of December 11,
1997 (the "Transition Property Servicing Agreement") between Southern California
Edison Company, as Servicer, and SCE Funding LLC, as Note Issuer, the Servicer
does hereby certify as follows:
Collection Periods: June 1998 through August 1998
Distribution Date: September 25, 1998
Capitalized terms used in this Quarterly Servicer's Certificate have
their respective meanings set forth in the Transition Property Servicing
Agreement.
In WITNESS WHEREOF, the undersigned has duly executed and delivered
this Quarterly Servicer's Certificate this 11th day of September, 1998.
SOUTHERN CALIFORNIA EDISON COMPANY, as Servicer
By: Mary C. Simpson
---------------------------------------------
Mary C. Simpson
Title: Assistant Treasurer
1. Distribution of Principal per $1,000 of Original Principal Amount
<TABLE>
<CAPTION>
Principal Payment
per $1,000 of
Original Principal
Original Principal Principal Payment Amount
(A) (B) (B /A x 1,000)
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
a. Class A-1 $ 246,300,000.00 $ 78,476,151.00 $318.62018270
b. Class A-2 307,251,868.00 - -
c. Class A-3 247,840,798.00 - -
d. Class A-4 246,030,125.00 - -
e. Class A-5 360,644,658.00 - -
f. Class A-6 739,988,148.00 - -
g. Class A-7 314,944,403.00 - -
2. Distribution of Interest per $1,000 of Original Principal Amount
Interest Payment per
$1,000 of Original
Original Principal Interest Payment Principal Amount
(A) (B) (B / A x 1,000)
- ------------------------------------------------------------------------------------------------------------
a. Class A-1 $ 246,300,000.00 $ 2,526,510.16 $ 10.25785692
b. Class A-2 307,251,868.00 4,716,316.17 15.34999999
c. Class A-3 247,840,798.00 3,822,944.31 15.42500000
d. Class A-4 246,030,125.00 3,825,768.44 15.54999998
e. Class A-5 360,644,658.00 5,662,121.13 15.70000000
f. Class A-6 739,988,148.00 11,802,810.96 15.95000000
g. Class A-7 314,944,403.00 5,054,857.67 16.05000001
</TABLE>
Page 2 of 3 September 11, 1998
Quarterly Servicer's Certificate
(to be delivered pursuant to Section 4.01(d)(ii) of
the Transition Property Servicing Agreement on or before each Remittance Date)
Southern California Edison Company, as Servicer
CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK SPECIAL PURPOSE TRUST
SCE-1
Pursuant to the Transition Property Servicing Agreement dated as of December 11,
1997 (the "Transition Property Servicing Agreement") between Southern California
Edison Company, as Servicer, and SCE Funding LLC, as Note Issuer, the Servicer
does hereby certify as follows:
<TABLE>
<CAPTION>
Collection Periods: June 1998 through August 1998
Distribution Date: September 25, 1998
3. As of this Payment Date
<S> <C>
a. Required Overcollateralization Level $ 923,625.00
b. Required Capital Level 12,215,000.00
c. Outstanding principal balance of Series 1997-1 Notes
i. prior to giving effect to any payments made on this Payment Date 2,385,697,335.00
ii. per Expected Amortization Schedule 2,307,221,184.00
4. Amounts available for distribution this Payment Date:
a. Remittances for June 1998 Collection period 33,577,595.95
b. Remittances for July 1998 Collection Period 36,780,172.16
c. Remittances for August 1998 Collection Period 45,790,610.04
d. Net Earnings on Collection Account 704,552.18
e. General Subaccount Balance (sum of a through d above) 116,852,930.33
f. Reserve Subaccount Balance -
g. Overcollateralization Subaccount Balance 423,592.85
h. Capital Subaccount Balance 11,500,173.28
i. Collection Account Balance (sum of e through h above) 128,776,696.46
5. Distribution of amounts remitted:
a. Note, Delaware, Certificate Trustee Fees 1,113.33
b. Servicing Fees 1,491,060.83
c. Quarterly Administration Fees 25,000.00
d. Operating Expenses (up to a maximum of $100,000.00) 3,127.82
e. Quarterly Interest 37,411,328.84
f. Principal Due and Payable -
g. Quarterly Principal 78,476,151.00
h. Operating Expenses in excess of those in d above -
i. Deposit to Overcollateralization Subaccount (up to required level) -
j. Deposit to Capital Subaccount (up to required level) -
k. Released to the Note Issuer: Net earnings on Collection Account -
l. Released to the Note Issuer upon Series retirement: Overcollateralization Subaccount -
m. Released to the Note Issuer upon Series retirement: Capital Subaccount Balance -
n. Deposit to Reserve Account -
o. Released to Note Issuer upon Series Retirement: Collection Account -
------------------------
TOTAL $ 117,407,781.82
========================
6. For this Payment Date
a. Withdrawal, if any, from Reserve Subaccount (including $0.00 in net earnings) $ -
b. Withdrawal, if any, from Overcollateralization Subaccount (including
$4,333.88 in net earnings) 427,926.73
c. Withdrawal, if any, from Capital Subaccount (including $159,829.22 in net earnings) 291,087.87
</TABLE>
Page 3 of 3 September 11, 1998
Quarterly Servicer's Certificate
(to be delivered pursuant to Section 4.01(d)(ii) of
the Transition Property Servicing Agreement on or before each Remittance Date)
Southern California Edison Company, as Servicer
CALIFORNIA INFRASTRUCTURE AND ECONOMIC DEVELOPMENT BANK SPECIAL PURPOSE TRUST
SCE-1
Pursuant to the Transition Property Servicing Agreement dated as of December 11,
1997 (the "Transition Property Servicing Agreement") between Southern California
Edison Company, as Servicer, and SCE Funding LLC, as Note Issuer, the Servicer
does hereby certify as follows:
Collection Periods: June 1998 through August 1998
Distribution Date: September 25, 1998
7. For this Payment Date
a. Current Payment Date September 25, 1998
b. Prior Payment Date* June 25, 1998
c. 30/360 Days in Interest Accrual Period (a-b) 90
8. Interest due and payable as of this Payment Date
<TABLE>
<CAPTION>
Principal Amount
(before giving effect Interest Due
to any payments) Note Interest Rate for this Period Interest Paid
(A) (B) (A x B x 7c /360) this Period
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
a. Class A-1 $ 168,997,335.00 5.98% $ 2,526,510.16 $ 2,526,510.16
b. Class A-2 307,251,868.00 6.14% 4,716,316.17 4,716,316.17
c. Class A-3 247,840,798.00 6.17% 3,822,944.31 3,822,944.31
d. Class A-4 246,030,125.00 6.22% 3,825,768.44 3,825,768.44
e. Class A-5 360,644,658.00 6.28% 5,662,121.13 5,662,121.13
f. Class A-6 739,988,148.00 6.38% 11,802,810.96 11,802,810.96
g. Class A-7 314,944,403.00 6.42% 5,054,857.67 5,054,857.67
9. Principal amount as of this Payment Date
Difference Between
Outstanding
Principal Amount
Principal Amount Principal Amount and Amount Shown
(before giving effect (after giving effect to on Expected
to any payments) Principal Payment any payments) Amortization
(A) (B) (A-B) Schedule
- --------------------------------------------------------------------------------------------------------------------
a. Class A-1 $ 168,997,335.00 $ 78,476,151.00 $ 90,521,184.00 $ -
b. Class A-2 307,251,868.00 - 307,251,868.00 -
c. Class A-3 247,840,798.00 - 247,840,798.00 -
d. Class A-4 246,030,125.00 - 246,030,125.00 -
e. Class A-5 360,644,658.00 - 360,644,658.00 -
f. Class A-6 739,988,148.00 - 739,988,148.00 -
g. Class A-7 314,944,403.00 - 314,944,403.00 -
--------------
Total $2,307,221,184.00
Projected outstanding balance of Series 1997-1 $2,307,221,184.00
</TABLE>
10. Ending balance this Payment Date:
a. Reserve Subaccount $ -
b. Overcollateralization Subaccount -
c. Capital Subaccount 11,368,914.64
* or Series issuance Date in the case of the first payment date.
