<PAGE>PAGE 1
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
June 30, 1998
For the quarterly period ended...........................
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 No. 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
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Sections 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......
<PAGE>PAGE 2
PART I
Item 1. Financial Statements.
SDG&E FUNDING LLC
STATEMENT OF OPERATIONS AND CHANGES IN MEMBER'S EQUITY (unaudited)
(In thousands of dollars)
Three Months Six Months
Ended June 30, Ended June 30,
1998 1998
-------------- --------------
INCOME
- ------
Interest income $ 9,900 $21,729
Other income 272 555
------- -------
Total Income 10,172 22,284
------- -------
EXPENSES
- --------
Interest expense 10,007 21,970
General & administrative expenses 165 317
------- -------
Total Expenses 10,172 22,287
------- -------
NET LOSS 0 (3)
Member's equity, beginning of period 3,290 3,293
------- -------
MEMBER'S EQUITY AT JUNE 30, 1998 $ 3,290 $ 3,290
======= =======
See note to financial statements.
<PAGE>PAGE 3
SDG&E FUNDING LLC
BALANCE SHEET
(In thousands of dollars)
June 30, December 31,
1998 1997
(unaudited)
----------- -----------
ASSETS
- -------
Current Assets:
Cash and cash equivalents $ 565 $ 2,427
Interest receivable -- 8
Current portion of
transition property 65,800 65,800
--------- ---------
Total Current Assets 66,365 68,235
Noncurrent Assets:
Transition property 563,337 585,204
Deferred financing costs 6,230 4,920
Restricted funds 6,137 3,190
--------- ---------
TOTAL ASSETS $ 642,069 $ 661,549
========= =========
LIABILITIES AND MEMBER'S EQUITY
- -------------------------------
Current Liabilities:
Current portion of
long-term debt $ 65,800 $ 65,800
Accounts payable and
accrued expenses 2,646 256
--------- ---------
Total Current Liabilities 68,446 66,056
Long-term debt 570,333 592,200
--------- ---------
Total Liabilities 638,779 658,256
Member's Equity 3,290 3,293
--------- ---------
TOTAL LIABILITIES AND
MEMBER'S EQUITY $ 642,069 $ 661,549
========= =========
See note to financial statements.
<PAGE>PAGE 4
SDG&E FUNDING LLC
STATEMENT OF CASH FLOWS (unaudited)
FOR THE SIX MONTHS ENDED JUNE 30, 1998
(In thousands of dollars)
CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss $ (3)
Adjustments to reconcile net loss to net cash
provided by operating activities:
Amortization of deferred financing costs 315
Decrease in interest receivable 8
Increase in accounts payable and
accrued expenses 2,390
--------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,710
--------
CASH FLOWS FROM FINANCING ACTIVITIES:
Collection of transition property from SDG&E 21,867
Payments on long-term debt (21,867)
Incurrence of deferred financing costs (1,625)
Increase in restricted funds (2,947)
--------
NET CASH USED BY FINANCING ACTIVITIES (4,572)
--------
NET DECREASE IN CASH AND CASH EQUIVALENTS (1,862)
CASH AND CASH EQUIVALENTS AT DECEMBER 31, 1997 2,427
--------
CASH AND CASH EQUIVALENTS AT JUNE 30, 1998 $ 565
========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Interest payments $ 21,653
=========
See note to financial statements.
<PAGE>PAGE 5
Note to Financial Statements
- -----------------------------
Basis of Presentation
This Quarterly Report on Form 10-Q includes the financial
statements of SDG&E Funding LLC, a Delaware special-purpose
limited-liability company, whose sole member is San Diego
Gas & Electric Company (SDG&E), a provider of electric and
natural-gas services. SDG&E is a wholly owned subsidiary
of Enova Corporation. This quarterly report should be read
in conjunction with SDG&E Funding LLC's Financial
Statements and Notes to Financial Statements included in
its 1997 Annual Report on Form 10-K and its Quarterly
Report on 10-Q for the three months ended March 31, 1998.
SDG&E Funding LLC believes that the accompanying statements
reflect all adjustments that are necessary to present a
fair statement of the financial position and results of
operations for the interim period. All material
adjustments are of a normal, recurring nature unless
otherwise disclosed in this Form 10-Q. Results of
operations for interim periods are not necessarily
indicative of results to be expected for a full year.
SDG&E Funding LLC was organized for the limited purposes of
issuing Notes and holding and servicing the Transition
Property. Transition Property is the right to be paid a
specified amount (presented in the financial statements as
"Transition Property") from a nonbypassable charge levied
on residential electric customers and small commercial
electric customers. The nonbypassable charge was
authorized by the California Public Utilities Commission
(CPUC) pursuant to the electric industry restructuring
mandated by California Assembly Bill 1890, as amended by
California Senate Bill 477.
Since SDG&E Funding LLC is a single-member, limited-
liability company, all of its federal income tax effects
and its material State of California franchise tax effects
accrue to SDG&E.
<PAGE>PAGE 6
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations.
The following analysis of the financial condition and results of
operations for SDG&E Funding LLC (the Note Issuer) 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 Note to Financial Statements included in Item 1, above, and the
Financial Statements and Notes to Financial Statements included in
the Note Issuer's Annual Report on Form 10-K for the year ended
December 31, 1997 and the Note Issuer's Quarterly Report on Form 10-Q
for the three months ended March 31, 1998.
The Note Issuer is limited by its organizational documents to
engaging in the activities of owning certain property created
pursuant to the California Public Utilities Code (the "Transition
Property") and issuing notes secured by the Transition Property and
other limited collateral, and related activities. Accordingly,
operating-statement effects were limited primarily to income
generated from the Transition Property, interest expense on the SDG&E
Funding LLC Notes, Series 1997-1, Class A-1 through Class A-7 (the
"Notes"), and incidental investment interest income. The Note
Issuer's primary operating expense is servicing fees payable to
SDG&E. Offsetting this expense are the investment earnings on the
monthly remittances from SDG&E. The investment earnings are not
expected to fully offset servicing expenses payable to SDG&E.
During the three- and six-month periods ended June 30, 1998 the
income generated from the Transition Property was $10 million and $22
million, respectively. Interest expense of $10 million and $22
million, respectively, relates to interest on the Notes and the
amortization of debt-issuance costs.
Collections of FTA Charges are currently meeting expectations and
were sufficient to pay all scheduled payments on the Notes and
related expenses for the Note payment due June 25, 1998. For the
second quarter of 1998 collections of approximately $31,177,000
resulted in a surplus of approximately $1,782,000 after deducting
scheduled principal and interest payments of approximately
$28,838,000, payments of approximately $473,000 for servicing fees
and other expenses, and approximately $83,000 retained to fund the
Overcollateralization Account established under the Notes's indenture.
This surplus will be applied toward future payments on the Notes. The
FTA Charges will be adjusted at least annually if there is a material
shortfall or overage in collections. Management 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 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 systems 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 3. Quantitative and Qualitative Disclosures About Market Risk.
Not applicable to the Note Issuer or the Trust.
<PAGE>PAGE 7
PART II
OTHER INFORMATION
Item 1. Legal Proceedings.
Voter Initiative
As previously discussed under the caption "RECENT DEVELOPMENTS" VOTER
INITIATIVE" in the Prospectus Supplement dated December 4, 1997 (the
"Prospectus") for the California Infrastructure and Economic
Development Bank Special Purpose Trust SDG&E-1, Rate Reduction
Certificates, Series 1997-1 (the "Certificates"), certain California
groups had previously submitted to the California State Attorney
General a proposed ballot initiative (the "Voter Initiative")
relating to the Certificates, which were issued in December 1997.
In June 1998 a coalition of consumer groups received verification
that its Voter Initiative received the needed signatures to qualify
for the November 1998 California ballot. The Voter Initiative seeks
to amend or repeal Assembly Bill 1890, Chapter 854, California
Statutes of 1996 (as amended, the "Statute") in various respects,
including requiring utilities to provide a 10% reduction in
electricity rates charged to residential and small commercial
customers in addition to the 10% rate reduction that was effect as of
January 1, 1998. Among other things, the Voter Initiative would
prohibit a utility from collecting the separate nonbypassable charges
payable by residential and small commercial customers (the "FTA
Charges") for the payment of rate reduction bonds, such as the
Certificates or, if such a prohibition were found to be unenforceable
by a court of competent jurisdiction, require the utility to offset
any such FTA Charge by crediting back to the customer the amount of
such charge. In addition, the 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
[Voter Initiative]."
In May 1998 a statewide coalition of California's investor-owned
electric utilities and business groups known as "Californians for
Affordable and Reliable Electric Services (CARES)" filed a lawsuit
with the Third District Court of Appeal to block the initiative. On
July 2, 1998 the Third District Court of Appeal issued a one-sentence
order refusing to grant review of the lawsuit prior to the November
balloting. On July 6, 1998 the CARES coalition filed a petition in
the California Supreme Court seeking to overturn the Third District
Court of Appeal's denial. On July 16, 1998 the California Supreme
Court rejected the CARES petition.
As stated in the Prospectus Supplement under the caption "RECENT
DEVELOPMENTS - VOTER INITIATIVE," and in the Prospectus dated
December 4, 1997 for the Certificates under the caption "RISK FACTORS"
Unusual Nature of the Transition Property " Possible State
Amendment or Repeal of the Statute and Related Litigation," in
connection with the issuance of the Certificates, Brown & Wood LLP
provided an opinion that, under applicable United States and State of
California constitutional principles relating to the impairment of
contracts, the State of California could not repeal or amend the
Statute (by way of legislative process or California voter
initiative) if such repeal or amendment would substantially impair
the rights of the Certificateholders, absent a demonstration by the
State of California of a "great public calamity" that justifies a
<PAGE>PAGE 8
contractual impairment. There have been numerous cases in which
legislative or popular concerns with the burden of taxation or
government charges have led to adoption of legislation reducing or
eliminating taxes or charges which supported bonds or other
contractual obligations entered into by public instrumentalities.
However, such concerns have not been considered by the courts to
provide sufficient justification for a substantial impairment of the
security for such bonds or obligations provided by the taxes or
governmental charges involved. Brown & Wood LLP opined further in
connection with the issuance of the Certificates that knowledge of
the pendency of a proposed voter initiative by prospective
Certificateholders should not diminish the protection afforded by the
contracts clause of the United States Constitution (and, by analogy,
the Constitution of the State of California). The opinions of Brown
& Wood LLP were based upon analogous case law; none of such cases
addresses these particular circumstances directly. The opinions of
Brown & Wood LLP have not been reissued since the Certificates were
issued and do not constitute a guarantee of the outcome of any
particular litigation.
The passage of the Voter Initiative could have a material adverse
effect on the secondary market for the Certificates, including the
price and liquidity thereof. The refusal of the Third District Court
of Appeal and California Supreme Court to grant review of the CARES
petition could have a further material adverse effect on the
secondary market for the Certificates, including the price and
liquidity thereof. Such rulings did not represent rulings on the
merits of the arguments presented; rather, the rulings were decisions
by the courts not to consider the merits of the petition prior to the
November balloting. If the Voter Initiative is voted into law and is
not immediately overturned or is not stayed pending judicial review
of its merits, 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 the Voter Initiative were to be voted
into law and be upheld by the courts, 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 a loss on their
investment.
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 quarter ended
June 30, 1998 delivered pursuant to the Note Indenture. It includes
information relating to the collections of the nonbypassable charges
(the "FTA Charges") payable by residential electric customers and
small commercial electric customers.
<PAGE>PAGE 9
Item 6. Exhibits and Reports on Form 8-K.
(a) Exhibits required to be filed by Item 601 of Regulation S-K:
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 Supplement 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)
27.1 Financial Data Schedule for the quarter ended
June 30, 1998
99.1 Quarterly Servicer's Certificate dated June 18, 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 Form 8-K:
A Current Report on Form 8-K was filed on July 8, 1998 to
announce the completion of the merger between Pacific
Enterprises and Enova Corporation, parent of SDG&E, and to
announce the qualification of the Voter Initiative for the
November 1998 ballot.
A Current Report on Form 8-K was filed on July 27, 1998 to
announce the California Supreme Court denial of a petition to
remove the Voter Initiative from the November ballot.
<PAGE>PAGE 10
SIGNATURES
Pursuant to the requirement 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
Date: August 14, 1998 By: /s/ James P. Trent
-----------------------------
James P. Trent
Chief Financial Officer and
Chief Accounting Officer
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> YEAR
<FISCAL-YEAR-END> DEC-31-1997
<PERIOD-END> JUN-30-1998
<CASH> 565
<SECURITIES> 0
<RECEIVABLES> 0
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 66,365
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 642,069
<CURRENT-LIABILITIES> 68,446
<BONDS> 570,333
0 <F1>
0 <F1>
<COMMON> 0 <F1>
<OTHER-SE> 3,290 <F1>
<TOTAL-LIABILITY-AND-EQUITY> 642,069
<SALES> 0
<TOTAL-REVENUES> 22,284
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 317
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 21,970
<INCOME-PRETAX> (3)
<INCOME-TAX> 0
<INCOME-CONTINUING> (3)
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> (3)
<EPS-PRIMARY> 0 <F1>
<EPS-DILUTED> 0 <F1>
<FN>
<F1> NO COMMON OR PREFERRED SHARES ISSUED AND OUTSTANDING.
EQUITY = MEMBER'S EQUITY
</TABLE>
