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 Notes are scheduled to be paid in full by 2007); 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., (now Deutsche Bank National Trust Company), 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 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 August 15, 2006, SCE filed with the CPUC an anniversary true-up mechanism advice letter filing. The filing confirmed that the FTA Charges then in effect for residential and small commercial customers were adequate to service the Notes and therefore no adjustment was necessary at that time. On December 22, 2006, SCE filed with the CPUC a routine annual true-up mechanism advice letter filing. This filing decreased the FTA Charges for residential customers by 9.1%, from .784 cents to .713 cents per kilowatt hour, and for small commercial customers by 9.1% from .829 cents to .754 cents per kilowatt hour, effective January 1, 2007.
In June 2002, the Servicing Agreement was amended to provide for a routine quarterly true-up adjustment whenever, at the end of any of the first three calendar quarters of a year, the energy usage by SCE's customers is at least 3% lower than assumed and the balance in the Collection Account (excluding the General Subaccount) is below the required level. The purpose of the amendment was to further assure that actual collections are not less than the amounts necessary for the purposes specified in the Note Indenture. Through December 31, 2006, it was not necessary to file any such routine quarterly true-up adjustment.
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 and Poor's or P-1 or better by Moody's Investors Service (Moody's), 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 currently has a short-term rating of A-2 from Standard and Poor's and P-2 from 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 1A.
ITEM 1A. RISK FACTORS
Not applicable.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
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 (Unaudited) and the Quarterly Servicer's Certificate (Unaudited) attached hereto as Exhibits 99.1 and 99.3, respectively.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
No legal proceedings affecting either the Note Issuer or the Trust occurred in 2006.
ITEM 4.
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 2006.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
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. 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 thereunder and the book value of the remaining equity of the Note Issuer, after giving effect to such distribution, is equal to at least 0.5% of the original principal amount of all series of Notes which remains outstanding. As of December 31, 2006, the original principal amount of all series of Notes (Class A-7) which then remained outstanding and is scheduled for liquidation during the year 2007 is $246.3 million. On February 13, 2007, the Note Issuer made a cash distribution of $1.5 million. There were no distributions in 2006 or 2004. In 2005, the Note Issuer made cash distributions of $1.75 million and $1.0 million, respectively.
The registered owner for each class of the Certificates is Cede and 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.
ITEM 6. SELECTED FINANCIAL DATA
Omitted pursuant to Instruction I of Form 10-K.
ITEM 7.
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 interest other than those described in Item 1 (Business), income statement effects were limited
primarily to interest income generated from the note receivable related to the Transition Property, interest expense on the Notes and incidental investment interest income.
In 2006, interest income generated from the note receivable related to the Transition Property was $26 million compared with $41 million in 2005. The decrease is due to lower outstanding balance on the note receivable from SCE. Interest expense in 2006 was $28 million compared to $43 million in 2005. The decrease is due to lower outstanding balances on the Notes. Interest expense includes interest on the Notes, amortization of both debt issuance costs and the discount on the Notes.
During the twelve months ended December 31, 2006, the non-bypassable FTA Charges billed to residential and small commercial customers totaled $268 million. Collection of FTA Charges totaled $268 million. Scheduled distributions in 2006 were $275 million. Restricted funds in the amount of $7 million were used to support the scheduled distributions in excess of FTA charges collected. Interest earnings on restricted and unrestricted funds and prior period overcollections deposited to various restricted accounts are also used to assist with making the scheduled payments on the Notes. The Notes are scheduled to be paid off in December 2007 and the nonbypassable rates being charged to customers are expected to cease as of January 1, 2008.
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 legal or regulatory proceedings challenging the collection of FTA Charges or payment of Notes or Certificates.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable to the Note Issuer or the Trust.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The financial statements and related financial information required to be filed hereunder appear on pages through 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 the Notes and Certificates, 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 2006 through November 2006 (dated December 20, 2006), respectively.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Not applicable to the Trust or the Note Issuer.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT AND CORPORATE GOVERNANCE
Omitted pursuant to Instruction I of Form 10-K.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Omitted pursuant to Instruction I of Form 10-K.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Omitted pursuant to Instruction I of Form 10-K.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
Omitted with respect to the Note Issuer pursuant to Instruction I of Form 10-K.
Not applicable to the Trust.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Not applicable to the Trust or the Note Issuer.
PART IV
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
(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 Registered Public Accounting Firm 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.
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.
SCE FUNDING LLC as Registrant
By:
/s/ Thomas M. Noonan -------------------------------- Thomas M. Noonan Chief Executive Officer
Date: February 28, 2006
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
/s/ Thomas M. Noonan Director, Chief February 28, 2007 -------------------------------------------------------Executive Officer Thomas M. Noonan and President (Principal Executive Officer)
/s/ George T. Tabata Director, Vice February 28, 2007 ---------------------------------------------------------President and George T. Tabata Treasurer (Principal Financial and Accounting Officer)
/s/ Anand Maniktala Director February 28, 2007 --------------------------------------------------------------- Anand Maniktala
Exhibit Index
Exhibit Number
3.1 Certificate of Formation (File No. 333-30785, filed as Exhibit 3.1 to SCE Funding's Form S-3, dated July 3, 1997)*
3.2 Limited Liability Company Agreement (File No. 333-30785, filed as Exhibit 3.2 to SCE Funding's Form S-3, File No. 333-30785)*
3.3 Amended and Restated Limited Liability Company Agreement (File No. 333-30785, filed as Exhibit 3.3 to SCE Funding's Form S-3, dated November 10, 1997)*
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 (File No. 333-30785, filed as Exhibit 4.2 to SCE Funding's Form 8-K, dated December 11, 1997)*
4.3 Note (File No. 333-30785, filed as Exhibit 4.3 to SCE Funding's Form 8-K, dated December 11, 1997)*
4.4 Amended and Restated Declaration and Agreement of Trust (File No. 333-30785, filed as Exhibit 4.4 to SCE Funding's Form 8-K, dated December 11, 1997)*
4.5 First Supplemental Agreement of Trust (File No. 333-30785, filed as Exhibit 4.5 to SCE Funding's Form 8-K, dated December 11, 1997)*
4.6 Rate Reduction Certificate (File No. 333-30785, filed as Exhibit 4.6 to SCE Funding's Form 8-K, dated December 11, 1997)*
10.1 Transition Property Purchase and Sale Agreement (File No. 333-30785, filed as Exhibit 10.1 to SCE Funding's Form 8-K, dated December 11, 1997)*
10.2 Transition Property Servicing Agreement (File No. 333-30785, filed as Exhibit 10.2 to SCE Funding's Form 8-K, dated December 11, 1997)*
10.3 Note Purchase Agreement (File No. 333-30785, filed as Exhibit 10.3 to SCE Funding's Form 8-K, dated December 11, 1997)*
10.4 Fee and Indemnity Agreement (File No. 333-30785, filed as Exhibit 10.4 to SCE Funding's Form 8-K, dated December 11, 1997)*
10.5 Amendment to Transition Property Servicing Agreement (File No. 333-30785, filed as Exhibit 10.5 to SCE Funding's Annual Report on Form 10-K, dated March 28, 2003)*
23 Consent of PricewaterhouseCoopers LLP
31 Rule 13a-14(a)/15d-14(a) Certification
32 Section 1350 Certification
99.1 Annual Statement (Unaudited)
99.2 Annual Certificate of Compliance (Unaudited)
99.3 Quarterly Servicer's Certificate (Unaudited)
_____________________
* Incorporated by reference pursuant to Rule 12b-32.
Report of Independent Registered Public Accounting Firm
To the Board of Directors and Member of SCE Funding LLC
In our opinion, the accompanying balance sheets and the related statements of operations, changes in member's equity and cash flows present fairly, in all material respects, the financial position of SCE Funding LLC at December 31, 2006 and 2005, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2006 in conformity with accounting principles generally accepted in the United States of America. 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 of these statements in accordance with the standards of the Public Company Accounting Oversight Board (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, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
/s/ PricewaterhouseCoopers LLP Los Angeles, California February 28, 2007
ITEM 8. FINANCIAL STATEMENTS
SCE FUNDING LLC BALANCE SHEETS As of December 31, (in thousands)
ASSETS 2006 2005
Current Assets: Cash and equivalents $ 1,868 $ 879 Restricted funds 55,595 56,890 Current portion of note receivable - net 244,428 246,300 Unamortized bond issuance costs 1,824 - Prepayments and other current assets - 2 --------------------------------------------- Total Current Assets 303,715 304,071 ---------------------------------------------
Other Assets and Deferred Charges: Note receivable - net of discount - 242,544 Unamortized bond issuance costs - 3,648 --------------------------------------------- Total Other Assets and Deferred Charges - 246,192 ---------------------------------------------
Total Assets $ 303,715 $ 550,263 =============================================
LIABILITIES AND MEMBER'S EQUITY
Current Liabilities: Interest payable $ 219 $ 438 Current portion of long-term debt - net 246,234 246,300 Deferred revenue 16,395 21,636 --------------------------------------------- --------------------------------------------- Total Current Liabilities 262,848 268,374 ---------------------------------------------
Long term debt - net of discount - 246,166 ---------------------------------------------
Member's equity 40,867 35,723 ---------------------------------------------
Total Liabilities and Member's Equity $ 303,715 $ 550,263 =============================================
The accompanying notes are an integral part of these financial statements.
SCE FUNDING LLC STATEMENTS OF OPERATIONS AND CHANGES IN MEMBER'S EQUITY Year Ended December 31, (in thousands)
2006 2005 2004
OPERATING REVENUE: Interest income $31,517 $46,087 $60,129 ------------------- ------------------- ----------------- Total Operating Revenue 31,517 46,087 60,129 ------------------- ------------------- -----------------
OPERATING EXPENSES: Interest expense 27,548 43,275 59,000 Other expenses 1,157 1,899 2,376 ------------------- ------------------- ----------------- Total Operating Expenses 28,705 45,174 61,376 ------------------- ------------------- -----------------
Net Income (Loss) 2,812 913 (1,247)
Member's Equity, - beginning of year 35,723 33,612 31,293 Capital Transfer from SCE 2,332 1,198 3,566 ------------------- ------------------- ----------------- Member's Equity, - end of year $40,867 $35,723 $33,612 =================== =================== =================
The accompanying notes are an integral part of these financial statements.
SCE FUNDING LLC STATEMENTS OF CASH FLOWS Year Ended December 31, (in thousands)
2006 2005 2004
Cash flows from Operating Activities: Net Income (Loss) $ 2,812 $ 913 $ (1,247) Adjustments to reconcile net income (loss) to net cash used by operating activities: Amortizations 8 2 3 Changes in working capital: Restricted funds 1,295 4,485 5,095 Prepayments and other current assets 2 6 (3) Interest payable (219) (218) (219) Deferred revenue (5,241) (7,422) (6,723) --------------------------------------------- Net Cash Used by Operating Activities (1,343) (2,234) (3,094) ---------------------------------------------
Cash Flows from Financing Activities: Payment of principal on rate reduction notes (246,300) (246,300) (246,300) Capital Transfer from SCE 2,332 1,198 3,566 -------------------------------------------- Net Cash Used by Financing Activities (243,968) (245,102) (242,734) --------------------------------------------
Cash Flows from Investing Activities: Note receivable collections from SCE 246,300 246,300 246,300 -------------------------------------------- Net Cash Provided by Investing Activities 246,300 246,300 246,300 --------------------------------------------
Net Increase (decrease) in cash and equivalents 989 (1,036) 472 Cash and equivalents, beginning of year 879 1,915 1,443 Cash and equivalents, end of year $ 1,868 $ 879 $ 1,915 -------------------------------------------
Cash payments for interest $ 25,875 $ 41,600 $ 57,325 ===========================================
The accompanying notes are an integral part of these financial statements.
SCE FUNDING LLC NOTES TO FINANCIAL STATEMENTS DECEMBER 31, 2006
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 to retail customers in central, coastal and southern California. 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.
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.
Deferred Revenue
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 amounts collected from SCE in excess of current commitments are classified as deferred revenue on the financial statements. These pre-collection amounts will be applied against SCE's future remittance obligations.
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.
Member's Equity
Pursuant to the indenture for the Notes, SCE Funding LLC is restricted from making distributions to SCE to the extent that such distributions would cause the book value of the remaining equity in SCE Funding LLC to decline below 0.5 percent of the original principal amount of all series of Notes which remain outstanding. As of December 31, 2006, the original principal amount of all series of Notes outstanding was $246.3 million. On February 13, 2007, the Note Issuer made a cash distribution of $1.5 million. There were no distributions in 2006 or 2004. In 2005, the Note Issuer made cash distributions of $1.75 million.
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 of America 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, 2006 and 2005, SCE Funding LLC had a financial asset (representing its note receivable from SCE), and financial liabilities (representing its Notes due to the Trust) each with a cost basis of approximately $244 million and $489 million, respectively. 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, with an approximate fair value of $246 million and $493 million at December 31, 2006 and 2005, respectively, and their fair value is also based on brokers' quotes.
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 six classes of Notes (Classes A-1 through A-6) matured in December 1998, March 2000, 2001, and 2002, September 2003, and December 2006, respectively. The remaining class of Notes matures in 2007, with an interest rate of 6.42%. The Notes are collateralized 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 due 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, effective January 2001, SCE began making daily rather than monthly remittances to the trustee. The debt service requirements include an overcollateralization amount of approximately $1.2 million per year, 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 and ultimately to SCE. The required annual liquidation amount of the Notes for the year 2007 is $246.3 million. Scheduled maturity and interest rate for the Notes payable due to the Trust at December 31, 2006, are as follows:
Scheduled Interest Amount Class Maturity Date Rate (in thousands)
A-7 December 26, 2007 6.42% 246,300 $ Less: Unamortized Discount (66) --------------- Current Portion of Long-Term Debt Net of Discount $ 246,234 ===============
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 $1.1 million in servicing, administration and trustee fees in 2006. 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, Deutsche Bank National Trust Company, the Certificate Trustee, is responsible for purchasing the Notes and authenticating and delivering the Certificates to the investors. Deutsche Bank National Trust Company, 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.
EXHIBIT 23
Consent of independent Registered Public Accounting Firm
We hereby consent to the incorporation by reference in the Registration Statement on Forms S-3 (No. 333-30785) of SCE Funding LLC of our report dated February 28, 2007 relating to the financial statements, which appear in this Form 10-K.
/s/ PricewaterhouseCoopers LLP
PricewaterhouseCoopers LLP Los Angeles, California February 28, 2007
EXHIBIT 31
CERTIFICATION
I, THOMAS M. NOONAN, certify that:
1. I have reviewed this annual report on Form 10-K, and all reports on Form 10-Q containing distribution or servicing reports filed in respect of periods included in the year covered by this annual report, of SCE Funding LLC;
2. Based on my knowledge, the information in these reports, taken as a whole, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the distribution or servicing information required to be provided to the trustee by the servicer under the pooling and servicing, or similar, agreement, for inclusion in these reports is included in these reports; and
4. Based on my knowledge and upon the annual compliance statement included in the report and required to be delivered to the trustee in accordance with the terms of the pooling and servicing, or similar, agreement, and except as disclosed in the reports, the servicer has complied with its servicing obligations and minimum servicing standards under the servicing agreement.
In giving the certifications above, I have reasonably relied on information provided to me by Southern California Edison Company, as servicer and depositor.
Date: February 28, 2007 /s/ THOMAS M. NOONAN ________________________________ THOMAS M. NOONAN Chief Executive Officer SCE Funding LLC
CERTIFICATION
I, GEORGE T. TABATA, certify that:
1. I have reviewed this annual report on Form 10-K, and all reports on Form 10-Q containing distribution or servicing reports filed in respect of periods included in the year covered by this annual report, of SCE Funding LLC;
2. Based on my knowledge, the information in these reports, taken as a whole, does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the distribution or servicing information required to be provided to the trustee by the servicer under the pooling and servicing, or similar, agreement, for inclusion in these reports is included in these reports; and
4. Based on my knowledge and upon the annual compliance statement included in the report and required to be delivered to the trustee in accordance with the terms of the pooling and servicing, or similar, agreement, and except as disclosed in the reports, the servicer has complied with its servicing obligations and minimum servicing standards under the servicing agreement.
In giving the certifications above, I have reasonably relied on information provided to me by Southern California Edison Company, as servicer and depositor.
Date: February 28, 2007 /s/ GEORGE T. TABATA ________________________________ GEORGE T. TABATA Director, Vice President and Treasurer SCE Funding LLC
EXHIBIT 32
STATEMENT PURSUANT TO 18 U.S.C. SECTION 1350, AS ENACTED BY SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the accompanying Annual Report on Form 10-K for the year ended December 31, 2006 (the Annual Report) of SCE Funding LLC (the "Company"), and pursuant to 18 U.S.C. Section 1350, as enacted by Section 906 of the Sarbanes-Oxley Act of 2002, each of the undersigned certifies, to the best of his knowledge, that:
1. The Annual Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and
2. The information contained in the Annual Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
/s/ Thomas M. Noonan --------------------------------------------------------- Thomas M. Noonan Chief Executive Officer SCE Funding LLC
/s/ George T. Tabata --------------------------------------------------------- George T. Tabata Director, Vice President and Treasurer SCE Funding LLC
Date: February 28, 2007
This statement accompanies the Annual Report pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not, except to the extent required by the Sarbanes-Oxley Act of 2002, be deemed filed by the Company for purposes of Section 18 of the Securities Exchange Act of 1934, as amended.
A signed original of this written statement required by Section 906 has been provided to SCE Funding LLC and will be retained by SCE Funding LLC and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 99.1
SCE Funding LLC Annual Summary of Monthly Certificates Year Ended December 2006 Unaudited
Small Residential Commercial Customers Customers Total
Kilowatt hours of electricity billed 28,983,526,767 4,932,258,752 33,915,785,519
FTA Charged per kilowatt hour (Jan.-Dec. 2006)(cents) 0.784 0.829 N/A
Billed FTA Charges $227,230,850 $40,888,425 $268,119,275
Estimated FTA Payments $226,094,696 $40,724,871 $266,819,567
Estimated Write-off $1,136,154 $163,554 $1,299,708
Remittance Shortfall - increased payment $403,922 $80,841 $484,763 to the Collection Account Excess Remittance - reduced payment $0 $0 $0 to the Collection Account Net Write-off $1,540,076 $244,395 $1,784,471
FTA Payments estimated to have been $227,147,220 $40,927,818 $268,075,038 received by the Servicer Remittance Shortfall - increased payment $403,922 $80,841 $484,763 to the Collection Account Excess Remittance - reduced payment $0 $0 $0 to the Collection Account Aggregate Remittance to the Collection Account $227,551,142 $41,008,659 $268,559,801
EXHIBIT 99.2
CERTIFICATE OF COMPLIANCE
The undersigned hereby certifies that he is the duly elected and acting Assistant Treasurer of Southern California Edison Company, as servicer (the "Servicer") under the Transition Property Servicing Agreement dated as of December 11, 1997 (the "Servicing Agreement") between the Servicer and SCE Funding LLC (the "Note Issuer") and further that:
1. A review of the activities of the Servicer and of its performance under the Servicing Agreement during the twelve months ended June 30, 2006 has been made under the supervision of the undersigned pursuant to Section 3.03 of the Servicing Agreement; and
2. To the best of the undersigned's knowledge, based on such review, the Servicer has fulfilled all of its material obligations in all material respects under the Servicing Agreement throughout the twelve months ended June 30, 2006, except for those material defaults in the fulfillment of material obligations listed on Annex A hereto.
Executed this 28th day of February, 2007.
SOUTHERN CALIFORNIA EDISON COMPANY
By: /s/ George T. Tabata ------------------------------------------------------------- George T. Tabata Director, Vice President and Treasurer SCE Funding LLC
ANNEX A TO CERTIFICATE OF COMPLIANCE
LIST OF SERVICER DEFAULTS
The following material defaults known to the undersigned occurred during the twelve months ended June 30, 2006.
Nature of Default Status
None
EXHIBIT 99.3
Page 1 of 3 December 20, 2006
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: September 2006 through November 2006 Distribution Date: December 25, 2006
Capitalized terms used in this Quarterly Servicer's Certificate have their respective meanings set forth in the Transition Property Servicing Agreement.
In WITNESS HEREOF, the undersigned has duly executed and delivered this Quarterly Servicer's Certificate this 20th day of December, 2006.
SOUTHERN CALIFORNIA EDISON COMPANY, as Servicer
By: /s/ Robert C. Boada ---------------------------------------------
Title: VP and Treasurer ---------------------------------------------
1. Distribution of Principal per $1,000 of Original Principal Amount Principal Payment per $1,000 of Original Principal Original Principal Principal Payment Amount (A) (B) (B / A x 1,000) ---------------------------------------------------------------------------------------------------------------
a. Class A-1 $ 246,300,000.00 $ - $ - 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 68,644,403.00 217.95720878
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 $ - $ - 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 5,054,857.67 16.05000001
Page 2 of 3 December 20, 2006
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: September 2006 through November 2006 Distribution Date: December 25, 2006
3. As of this Payment Date a. Required Overcollateralization Level $ 11,083,500.00 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 314,944,403.00 ii.per Expected Amortization Schedule 246,300,000.00
4. Amounts available for distribution this Payment Date: a. Remittances for September 2006 Collection Period $ 27,896,348.72 b. Remittances for October 2006 Collection Period 24,464,484.72 c. Remittances for November 2006 Collection Period 21,584,886.71 d. Net Earnings on Collection Account 894,030.46 e. General Subaccount Balance (sum of a through d above) 74,839,750.61 f. Reserve Subaccount Balance 11,006,477.14 g. Overcollateralization Subaccount Balance 10,775,625.00 h. Capital Subaccount Balance 12,215,000.00 i. Collection Account Balance (sum of e through h above) 108,836,852.75
5. Distribution of amounts remitted: a. Note, Delaware, Certificate Trustee Fees $ 1,083.33 b. Servicing Fees 196,840.25 c. Quarterly Administration Fees 25,003.00 d. Operating Expenses (up to a maximum of $100,000.00) 10,672.95 e. Quarterly Interest 5,054,857.67 f. Principal Due and Payable - g. Quarterly Principal 68,644,403.00 h. Operating Expenses in excess of those in d above - i. Deposit to Overcollateralization Subaccount (up to required level) 307,875.00 j. Deposit to Capital Subaccount (up to required level) - k. Released to the Note Issuer: Net earnings on Collection Account 599,015.41 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 $ 74,839,750.61 -----------------
6. For this Payment Date a. Withdrawal, if any, from Reserve Subaccount (including $128,990.36 in net earnings) $128,990.36 b. Withdrawal, if any, from Overcollateralization Subaccount (including $139,966.04 in net earnings) 139,966.04 c. Withdrawal, if any, from Capital Subaccount (including $159,989.90 in net earnings) 159,989.90
Page 3 of 3 December 20, 2006
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: September 2006 through November 2006 Distribution Date: December 25, 2006
7. For this Payment Date a. Current Payment Date December 25, 2006 b. Prior Payment Date* September 25, 2006 c. 30/360 Days in Interest Accrual Period (a-b) 90
8. Interest due and payable as of this Payment Date
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 ---------------------------------------------------------------------------------------------------------------------
a. Class A-1 $ - 5.98% $ - $ - b. Class A-2 - 6.14% - - c. Class A-3 - 6.17% - - d. Class A-4 - 6.22% - - e. Class A-5 - 6.28% - - f. Class A-6 - 6.38% - - 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 $ - $ - $ - $ - b. Class A-2 - - - - c. Class A-3 - - - - d. Class A-4 - - - - e. Class A-5 - - - - f. Class A-6 - - - - g. Class A-7 314,944,403.00 68,644,403.00 246,300,000.00 - -------------- Total $246,300,000.00 -------------- Projected outstanding balance of Series 1997-1 $246,300,000.00 --------------
10. Ending balance this Payment Date: a. Reserve Subaccount $11,006,477.14 b. Overcollateralization Subaccount 11,083,500.00 c. Capital Subaccount 12,215,000.00
* or Series Issuance Date in the case of the first payment date.