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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
(Mark One)
[ X ] QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30,2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
Commission Registrant, State of Incorporation, I.R.S. Employer
File Number Address, and Telephone Number Identification No.
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333-83635 PSE&G Transition Funding LLC 22-3672053
(A Delaware limited liability company)
80 Park Plaza - T4D
P.O. Box 1171
Newark, New Jersey 07102-1171
973 297-2227
http://www.pseg.com
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes X No
Registrant is a wholly owned subsidiary of Public Service Electric and Gas
Company. Registrant meets the conditions set forth in General Instruction H(1)
(a) and (b) of Form 10-Q and is filing this Form 10-Q with the reduced
disclosure format authorized by General Instruction H.
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PSE&G TRANSITION FUNDING LLC
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PAGE
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PART I. FINANCIAL INFORMATION
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Item 1. Financial Statements
Statement of Income........................................... 1
Balance Sheets................................................ 2
Statement of Cash Flows....................................... 3
Notes to Financial Statements................................. 4
Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations........................................ 7
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings............................................... 9
Item 6. Exhibits and Reports on Form 8-K................................ 9
Signature............................................................... 10
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS
PSE&G TRANSITION FUNDING LLC
STATEMENTS OF INCOME
(Thousands of Dollars)
(Unaudited)
For the Quarter Ended For the Six Months Ended
June 30, June 30,
--------------------- ------------------------
2002 2001 2002 2001
-------- ---------- ---------- -----------
OPERATING REVENUES....................................... $ 71,099 $ 66,747 $138,644 $103,437
OPERATING EXPENSES
Amortization of Bondable Transition Property......... 30,105 23,705 57,569 31,507
Servicing and Administrative Fees.................... 368 316 719 526
-------- -------- --------- --------
Total Operating Expenses................... 30,473 24,021 58,288 32,033
-------- -------- --------- --------
OPERATING INCOME......................................... 40,626 42,726 80,356 71,404
Interest Expense......................................... 40,568 42,496 80,237 71,174
-------- -------- --------- --------
NET INCOME............................................... $ 58 $ 230 $ 119 $ 230
======== ======== ======== ========
See Notes to Financial Statements.
PSE&G TRANSITION FUNDING LLC
BALANCE SHEETS
(Thousands of Dollars)
(Unaudited)
June 30, December 31,
2002 2001
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ASSETS
Current Assets:
Cash.......................................................... $ 482 $ 363
Restricted Cash............................................... 13,311 11,935
Receivable from Member........................................ 57,023 53,301
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Total Current Assets..................................... 70,816 65,599
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Noncurrent Assets:
Bondable Transition Property.................................. 2,376,136 2,433,705
Regulatory Asset - Interest Rate Swap......................... 32,194 18,492
Deferred Issuance Costs....................................... 103,119 103,245
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Total Noncurrent Assets.................................. 2,511,449 2,555,442
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TOTAL ASSETS.......................................................... $ 2,582,265 $ 2,621,041
===================== ===================
LIABILITIES
Current Liabilities:
Current Portion of Long- Term Debt............................ $ 126,730 $ 120,455
Current Portion of Payable to Member.......................... 5,112 4,757
Overcollateralization......................................... 1,206 780
Accrued Interest.............................................. 11,704 12,505
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Total Current Liabilities................................ 144,752 138,497
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Long-Term Liabilities:
Long-Term Debt................................................ 2,293,020 2,351,156
Derivative Liability.......................................... 32,194 18,492
Payable to Member............................................. 99,192 99,908
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Total Long-Term Liabilities.............................. 2,424,406 2,469,556
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TOTAL LIABILITIES..................................................... 2,569,158 2,608,053
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MEMBER'S EQUITY
Contributed Capital........................................... 12,625 12,625
Retained Earnings............................................. 482 363
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Total Member's Equity.................................... 13,107 12,988
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TOTAL LIABILITIES AND MEMBER'S EQUITY................................. $ 2,582,265 $ 2,621,041
===================== ===================
See Notes to Financial Statements.
PSE&G TRANSITION FUNDING LLC
STATEMENTS OF CASH FLOWS
(Thousands of Dollars)
(Unaudited)
For the Six Months Ended
June 30,
-------------------------------------
2002 2001
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CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 119 $ 230
Adjustments to reconcile net income to net cash flows from.........
operating activities:
Amortization of Bondable Transition Property..................... 57,569 31,507
Amortization of Deferred Issuance Costs.......................... 126 1,545
Net Changes in Certain Current Assets and Liabilities:
Restricted Cash................................................... (1,376) (62,366)
Accounts Receivable-Member........................................ (3,722) (53,710)
Accounts Payable-Member........................................... (361) 76,093
Overcollateralization............................................. 426 355
Accrued Interest.................................................. (801) 70,044
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Net Cash Provided By Operating Activities....................... 51,980 63,698
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CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of Bondable Transition Property........................... -- (2,525,000)
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Net Cash Used in Investing Activities........................... -- (2,525,000)
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CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of Long-Term Debt......................................... -- 2,525,000
Repayment of Long-Term Debt........................................ (51,861) --
Deferred Issuance Costs............................................ -- (76,092)
Contributed Capital................................................ -- 12,624
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Net Cash (Used in) Provided By Financing Activities............. (51,861) 2,461,532
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Net Change in Cash and Cash Equivalents.................................. 119 230
Cash and Cash Equivalents at Beginning of Period......................... 363 1
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Cash and Cash Equivalents at End of Period............................... $ 482 $ 231
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Interest Paid............................................................ $ 81,619 $ --
See Notes to Financial Statements.
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PSE&G TRANSITION FUNDING LLC
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NOTES TO FINANCIAL STATEMENTS
(UNAUDITED)
Note 1. Organization and Basis of Presentation
Organization
Unless the context otherwise indicates, all references to "Transition Funding,"
"we," "us" or "our" herein mean PSE&G Transition Funding LLC, a Delaware limited
liability company located at 80 Park Plaza, Newark, New Jersey 07102.
We were formed under the laws of the State of Delaware on July 21, 1999 and
operate pursuant to a limited liability company agreement with Public Service
Electric and Gas Company (PSE&G) as our sole member. PSE&G is an operating
electric and gas utility and is a wholly owned subsidiary of Public Service
Enterprise Group Incorporated (PSEG). We were organized for the sole purpose of
purchasing and owning bondable transition property of PSE&G (BTP), issuing
transition bonds (Bonds), pledging our interest in BTP and other collateral to a
debt/security trustee (Trustee) to collateralize the Bonds, and performing
activities that are necessary, suitable or convenient to accomplish these
purposes.
BTP represents the irrevocable right of PSE&G, or its successor or assignee, to
collect a non-bypassable transition bond charge (TBC) from electric customers
pursuant to a bondable stranded cost rate order (Finance Order), and rate
unbundling and restructuring proceedings (Final Order), which were issued on
September 17, 1999 by the State of New Jersey Board of Public Utilities (BPU) in
accordance with the New Jersey Electric Discount and Energy Competition Act
enacted in February 1999. These orders are a matter of public record and are
available at the BPU. The Finance Order authorizes the TBC to be sufficient to
recover $2.525 billion aggregate principal amount of Bonds, plus an amount
sufficient to provide for any credit enhancement, to fund any reserves and to
pay interest, redemption premiums, if any, servicing fees and other expenses
relating to the Bonds.
Our organizational documents require us to operate in a manner so that we should
not be consolidated in the bankruptcy estate of PSE&G in the event PSE&G becomes
subject to a bankruptcy proceeding.
Basis of Presentation
The financial statements included herein have been prepared pursuant to the
rules and regulation of the Securities and Exchange Commission (SEC). Certain
information and note disclosures normally included in financial statements
prepared in accordance with generally accepted accounting principles have been
condensed or omitted pursuant to such rules and regulations. However, in the
opinion of management, the disclosures are adequate to make the information
presented not misleading. These Financial Statements and Notes to Financial
Statements (Notes) update and supplement matters discussed in our 2001 Annual
Report on Form 10-K and our March 31, 2002 Quarterly Report on Form 10-Q and
should be read in conjunction with those Notes.
The unaudited financial information furnished reflects all adjustments which
are, in the opinion of management, necessary to fairly state the results for the
interim periods presented. The year-end balance sheets were derived from the
audited financial statements included in our 2001 Annual Report on Form 10-K and
our March 31, 2002 Quarterly Report on Form 10-Q. Certain reclassifications of
amounts reported in prior periods have been made to conform with the current
presentation.
Note 2. The Bonds
On January 31, 2001, we issued $2.525 billion of Bonds in eight classes with
maturities ranging from one year to fifteen years. The net proceeds of the
issuance were remitted to PSE&G as consideration for the property right in the
TBC.
Under applicable law, the Bonds are not an obligation of PSE&G or secured by the
assets of PSE&G, but rather the Bonds are only recourse to us and are
collateralized on a pro rata basis by the BTP and our equity and assets. TBC
collections are deposited at least monthly by PSE&G with the Trustee and are
used to pay our expenses, to pay our debt service on the Bonds and to fund any
credit enhancement for the Bonds. We have also pledged the capital contributed
by PSE&G to secure the debt service requirements of the Bonds. The debt service
requirements include an overcollateralization subaccount, a capital subaccount
and a reserve subaccount which are available to bond holders. Any amounts
collateralizing the Bonds will be returned to PSE&G upon payment of the Bonds.
The significant terms of the Bonds issued by Transition Funding as of June 30,
2002 are as follows:
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Payments
Initial Made On Current Noncurrent Final/ Final
Principal Interest Bonds Portion Portion Expected Maturity
Balance Rate Through Outstanding Outstanding Payment Date Date
June 30,
2002
========= ============== ======== ============ ============ ============== ============ ==========
Class A-1 $105,249,914 5.46% $105,249,914 -- -- 6/17/02 6/15/04
Class A-2 $368,980,380 5.74% $126,729,888 $242,250,492 3/15/05 3/15/07
Class A-3 $182,621,909 5.98% -- -- $182,621,909 6/15/06 6/15/08
Class A-4 $496,606,425 LIBOR + -- -- $496,606,425 6/15/09 6/15/11
0.30%
Class A-5 $328,032,965 6.45% -- -- $328,032,965 3/15/11 3/15/13
Class A-6 $453,559,632 6.61% -- -- $453,559,632 6/15/13 6/15/15
Class A-7 $219,688,870 6.75% -- -- $219,688,870 6/15/14 6/15/16
Class A-8 $370,259,905 6.89% -- -- $370,259,905 12/15/15 12/15/17
-------------- ------------ ------------ --------------
Total $2,525,000,000 $105,249,914 $126,729,888 $2,293,020,198
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We have entered into an interest rate swap on our sole class of floating rate
Bonds (Class A-4). The interest rate swap effectively converts the existing
floating rate debt into fixed rate borrowings at 6.2875%. The notional amount of
the interest rate swap is $497 million and is indexed to the three-month LIBOR
rate. The fair value of the interest rate swap was approximately $(32) million
as of June 30, 2002 and $(18) million as of December 31, 2001 and was recorded
as a derivative liability, with an offsetting amount recorded as a regulatory
asset on the Balance Sheet. The fair value of this swap will vary over time as a
result of changes in market conditions and is expected to be recovered through
the TBC.
We incurred approximately $230 million in issuance costs, $125 million of which
were included in BTP with the balance in deferred issuance costs, in connection
with the securitization transaction, including $201 million of costs of a
hedging arrangement as permitted by the Finance Order. Costs in excess of the
$125 million of transaction costs provided for in the Finance Order were paid by
PSE&G and are being recovered on a subordinated basis by us through the TBC and
remitted to PSE&G with interest at a rate of 6.48%. The TBC rate became
effective on February 7, 2001, in accordance with the Final Order.
Note 3. Significant Agreements and Related Party Transactions
Under the servicing agreement entered into by PSE&G and us, concurrently with
the issuance of the first Series of Bonds, PSE&G, as servicer, is required to
manage and administer our BTP and to collect the TBC on our behalf. Under the
Finance Order, PSE&G withholds from the TBC collections an annual servicing fee
equal to 0.05% of the initial balance of Bonds issued. Interest earned on funds
in the Capital Subaccount results in Net Income for us and will be periodically
dividended to PSE&G. Servicing and administrative fees paid to PSE&G for the
quarters ended June 30, 2002 and 2001 were $368 thousand and $316 thousand,
respectively. Servicing and administrative fees paid to PSE&G for the six months
ended June 30, 2002 and 2001 were $719 thousand and $526 thousand, respectively.
As of June 30, 2002 and December 31, 2001, we had a receivable from our sole
member, PSE&G, of approximately $57 million and $53 million, respectively,
relating to TBC billings. As of June 30, 2002 and December 31, 2001 our payable
to our sole member was approximately $104 million and $105 million,
respectively, which primarily relates to the costs in excess of the $125 million
of transaction costs provided for in the Finance Order that were paid by PSE&G
and billed to us.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Unless the context otherwise indicates, all references to "Transition Funding,"
"we," "us" or "our" herein mean PSE&G Transition Funding LLC, a Delaware limited
liability company located at 80 Park Plaza, Newark, New Jersey 07102.
Following are the significant changes in or additions to information reported in
our 2001 Annual Report on Form 10-K and March 31, 2002 Quarterly Report on Form
10-Q affecting the financial condition and the results of our operations. This
discussion refers to our Financial Statements (Statements) and related Notes to
Financial Statements (Notes) and should be read in conjunction with such
Statements and Notes. The following analysis of the financial condition and our
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 Financial Statements included in Item 1 above.
RESULTS OF OPERATIONS
Operating Revenues
TBC revenues increased approximately $4 million or 7% for the quarter ended June
30, 2002 as compared to the quarter ended June 30, 2001 primarily due to an
increase in the Transition Bond Charge. This TBC rate increased from 0.6739
cents per kwh to 0.7250 cents per kwh as part of our annual rate true-up,
effective in January 2002, which was approved by the New Jersey Board of Public
Utilities (BPU). The increased TBC rate is designed to replenish the Capital
Subaccount and the Overcollateralization account and enable us to meet our
scheduled payments to PSE&G.
TBC revenues increased approximately $35 million or 34% for the six months ended
June 30, 2002 as compared to the six months ended June 30, 2001 primarily due to
revenues being recorded for a full period in the current year compared to
revenues in 2001 being recorded, starting February 7, 2001, when the TBC
commenced. This was supplemented by an increase in the TBC rate as discussed
above.
Operating Expenses
Amortization of Bondable Transition Property (BTP)
Amortization of BTP increased approximately $6 million or 27% for the quarter
ended June 30, 2002 as compared to the quarter ended June 30, 2001 primarily due
to an increase in the TBC rate as discussed above. A portion of the TBC rate is
designed to recover the amortization of the BTP. As a regulated entity, we
amortize an amount equal to what we record as revenue for the portion of the TBC
relating to the BTP. Accordingly, the higher TBC rates in 2002 increased the
amortization that was recorded.
Amortization of BTP increased approximately $26 million or 83% for the six
months ended June 30, 2002 as compared to the six months ended June 30, 2001
primarily due to expenses being recorded for a full period in the current year
as compared to four months in 2001. This was supplemented by an increase in the
TBC rate as discussed above.
Servicing and Administrative Fees
Servicing and Administrative Fees increased approximately $52 thousand or 16%
for the quarter ended June 30, 2002 as compared to the quarter ended June 30,
2001 primarily due to both servicing and administration fees being incurred in
the current quarter. Administrative expenses are billed to us by the Servicer,
Public Service Electric and Gas Company (PSE&G), when interest and principal
payments are made on the Bonds. Accordingly, we did not record certain
administrative expenses until the first payment was made on the Bonds, which
occurred on September 17, 2001.
Servicing and Administrative Fees increased $193 thousand or 37% for the six
months ended June 30, 2002 as compared to the six months ended June 30, 2001
primarily due to the Bonds being outstanding for a full period in the current
year as compared to four months in 2001. This was supplemented by both servicing
and administrative fees being recorded in the current year as discussed above.
Interest Expense
Interest expense decreased approximately $2 million or 5% for the quarter ended
June 30, 2002 as compared to the quarter ended June 30, 2001 primarily due to a
reduction in the total amount of debt outstanding.
Interest expense increased approximately $9 million or 13% primarily due to the
Bonds being outstanding for a full period in the current year partially offset
by a reduction in the total amount of debt outstanding.
LIQUIDITY AND CAPITAL RESOURCES
The principal amount of the Bonds, interest, fees and funding of the
overcollateralization subaccount are being recovered through the TBC payable by
retail customers of electricity within PSE&G's service territory who receive
electric delivery service from PSE&G. As part of PSE&G's responsibility as
servicer under the Servicing Agreement, PSE&G remits the TBC collections to the
Trustee to make scheduled payments on the Bonds. On March 17, 2002 and June 17,
2002, payments of bond principal, interest and all related expenses were made by
the Trustee totaling approximately $68 million and $69 million respectively,
including replenishments to the Capital Subaccount and the Overcollateralization
account to required levels. The payment was primarily funded from our TBC
collections and interest earned on those funds.
Critical Accounting Policies
Regulation
The application of generally accepted accounting principles by us as a regulated
entity differs in certain respects from applications by non-regulated
businesses. We prepare our financial statements in accordance with the
provisions of Statement of Financial Accounting Standards (SFAS) No. 71
"Accounting for the Effects of Certain Types of Regulation" (SFAS 71). In
general, SFAS 71 recognizes that accounting for rate-regulated enterprises
should reflect the economic effects of regulation. As a result, a rate regulated
entity is required to defer the recognition of costs (a regulatory asset) or the
recognition of obligations (a regulatory liability) if it is probable that,
through the rate-making process, there will be a corresponding increase or
decrease in future rates. Accordingly, we have deferred certain costs, which
will be amortized over various future periods.
FORWARD LOOKING STATEMENTS
Except for the historical information contained herein, certain of the matters
discussed in this report constitute "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995. Such
forward-looking statements are subject to risks and uncertainties which could
cause actual results to differ materially from those anticipated. Such
statements are based on management's beliefs as well as assumptions made by and
information currently available to management. When used herein, the words
"will", "anticipate", "intend", "estimate", "believe", "expect", "plan",
"potential", variations of such words and similar expressions are intended to
identify forward-looking statements. We undertake no obligation to publicly
update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise. The following review of factors should
not be construed as exhaustive.
In addition to any assumptions and other factors referred to specifically in
connection with such forward-looking statements, factors that could cause actual
results to differ materially from those contemplated in any forward-looking
statements include, among others, the following: state and federal legal or
regulatory developments; national or regional economic conditions; market demand
and prices for energy; customer conservation; distributed generation technology;
weather variations affecting customer energy usage; the effect of continued
electric industry restructuring; operating performance of PSE&G's facilities and
third party suppliers; and the payment patterns of customers including the rate
of delinquencies and the accuracy of the collections curve.
ITEM 3. QUALITATIVE AND QUANTITATIVE
DISCLOSURES ABOUT MARKET RISK
The market risk inherent in our Bonds is the potential loss arising from adverse
changes in interest rates. We have entered into an interest rate swap on our
sole class (Class A-4) of floating rate Bonds (see Note 3. The Bonds). The
interest rate swap effectively converts the existing floating rate debt into
fixed rate borrowings at 6.2875%. Any gain or loss on this financial instrument
will be recovered from or refunded to PSE&G's customers.
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS
There are no updates to information reported under Item 3 of Part I of our 2001
Annual Report on Form 10-K and March 31, 2002 Quarterly Report on Form 10-Q.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(A) A listing of exhibits being filed with this document is as follows:
Exhibit Number Document
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99 Certification by Robert E. Busch, Chief
Executive Officer and Chief Financial Officer of
PSE&G Transition Funding LLC Pursuant to Section
1350 of Chapter 63 of Title 18 of the United
States Code
(B) Reports on Form 8-K and 8-K/A:
None.
SIGNATURE
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.
PSE&G TRANSITION FUNDING LLC
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(Registrant)
By: PATRICIA A. RADO
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Patricia A. Rado
Controller
(Principal Accounting Officer)
Date: August 13, 2002