

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 March 31, 2007

	OR
o	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.
333-127545		PSE&G Transition Funding II LLC	55-0628725
		(A Delaware limited liability company) 80 Park Plaza – T4D P.O. Box 1171 Newark, New Jersey 07101-1171 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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act.)

(Check one):

Large accelerated filer ________

Accelerated filer ________

Non-accelerated filer X

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)

Yes No X

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.

		TABLE OF CONTENTS


			PAGE
FORWARD-LOOKING STATEMENTS			ii

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements		1
	Notes to Condensed Financial Statements
	Note 1. Organization and Basis of Presentation		4
	Note 2. The Bonds		5
	Note 3. Significant Agreements and Related Party Transactions		5

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		6
	Results of Operations		6
	Liquidity and Capital Resources		7

Item 3.	Qualitative and Quantitative Disclosures About Market Risk		7

Item 4.	Controls and Procedures		7

PART II. OTHER INFORMATION

Item 1.	Legal Proceedings		8

Item 6.	Exhibits		8

Signature			9

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, “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 Public Service Electric and Gas Company’s facilities and third party suppliers; and the payment patterns of customers including the rate of delinquencies.

PART I. FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

PSE&G TRANSITION FUNDING II LLC

CONDENSED STATEMENT OF OPERATIONS

(Thousands of Dollars)

(Unaudited)

	For the Quarters Ended
	March 31,
	2007		2006
OPERATING REVENUES	$	3,207	$	3,006
OPERATING EXPENSES
Amortization of Bondable Transition Property		2,169		1,846
Servicing and Administrative Fees		13		45
Total Operating Expenses		2,182		1,891
OPERATING INCOME		1,025		1,115
Interest Income		25		15
Interest Expense		(1,043)		(1,124)
NET INCOME	$	7	$	6

See Notes to Condensed Financial Statements.

PSE&G TRANSITION FUNDING II LLC

CONDENSED BALANCE SHEET

(Thousands of Dollars)

(Unaudited)


	March 31,		December 31,
	2007		2006
ASSETS
Current Assets:
Cash	$	38	$	31
Receivable from Member	2,589		2,482
Restricted Cash	3,644		539
Total Current Assets	6,271		3,052

Noncurrent Assets:
Restricted Cash	514		514
Bondable Transition Property	89,991		92,160
Total Noncurrent Assets	90,505		92,674
TOTAL ASSETS	$	96,776	$	95,726

LIABILITIES
Current Liabilities:
Current Portion of Long-Term Debt	$	9,395	$	9,395
Accrued Interest	1,229		186
Total Current Liabilities	10,624		9,581

Long-Term Debt	85,600		85,600

TOTAL LIABILITIES	96,224		95,181

MEMBER’S EQUITY
Contributed Capital	514		514
Retained Earnings	38		31
Total Member’s Equity	552		545
TOTAL LIABILITIES AND MEMBER’S EQUITY	$	96,776	$	95,726

See Notes to Condensed Financial Statements.

PSE&G TRANSITION FUNDING II LLC

CONDENSED STATEMENT OF CASH FLOWS

(Thousands of Dollars)

(Unaudited)

	For the Quarters Ended
	March 31,
	2007		2006
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	7	$	6
Adjustments to Reconcile Net Income to Net Cash
Flows from Operating Activities:
Amortization of Bondable Transition Property		2,169		1,846
Net Changes in Certain Current Assets and Liabilities:
Receivable from Member		(107)		11
Receivable from Affiliate		—		1,198
Restricted Cash		(3,105)		(4,211)
Accounts Payable		—		32
Accrued Interest		1,043		1,124
Net Cash Provided By Operating Activities		7		6

CASH FLOWS FROM INVESTING ACTIVITIES		—		—

CASH FLOWS FROM FINANCING ACTIVITIES		—		—

Increase in Cash and Cash Equivalents		7		6
Cash and Cash Equivalents at Beginning of Period		31		5
Cash and Cash Equivalents at End of Period	$	38	$	11

Interest Paid	$	—	$	—

See Notes to Condensed Financial Statements.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Note 1. Organization and Basis

Organization

Unless the context otherwise indicates, all references to “Transition Funding II,” “we,” “us” or “our” herein mean PSE&G Transition Funding II 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 18, 2005 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 the BGS bondable transition property (BTP) of PSE&G, 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.

The Electric Discount and Energy Competition Act, enacted in the State of New Jersey in February 1999 and amended in September 2002 (Competition Act), authorizes electric public utilities, such as PSE&G, to recover, among other costs, basic generation service (BGS) transition costs. BGS transition costs represent the amount by which a public utility’s cost of supplying BGS exceeds the net revenues received by the public utility for providing such service during a four-year transition period ended July 31, 2003. BGS is a regulated electric generation service provided to any electric utility consumer that has not chosen an alternative power supplier. A public utility may recover BGS transition costs through an irrevocable non-bypassable charge called a BGS transition bond charge (TBC) that is assessed on all retail electric consumers. The Competition Act permits special purpose entities formed by electric public utilities to issue debt securities secured by the right to receive revenues arising from the TBC.

BTP represents the irrevocable right of PSE&G, or its successor or assignee, to collect a TBC pursuant to a bondable stranded cost rate order (Finance Order), which was issued on July 12, 2005 by the New Jersey Board of Public Utilities (BPU) in accordance with the Competition Act. These orders are a matter of public record and are available from the BPU. The Finance Order authorizes the TBC to be sufficient to recover the $102.7 million 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 condensed financial statements included herein have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q. Certain information and note disclosures normally included in financial statements prepared in accordance with Generally Accepted Accounting Principles in the United States of America (GAAP) have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, the disclosures are adequate to make the information presented not misleading. These condensed financial statements and notes to condensed financial statements (Notes) should be read in conjunction with and update and supplement matters discussed in our 2006 Annual Report on Form 10-K.

The unaudited financial information furnished herein reflects all adjustments, which are, in the opinion of management, necessary to fairly state the results for the interim periods presented. The year-end condensed balance sheet was derived from the audited financial statements included in our 2006 Annual Report on Form 10-K.

NOTES TO CONDENSED FINANCIAL STATEMENTS (UNAUDITED)

Note 2. The Bonds

On September 23, 2005, we issued $102.7 million of Bonds in four classes with maturities ranging from two years to nine years. The net proceeds of the issuance were remitted to PSE&G as consideration for the BTP.

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 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 us, and the amounts outstanding, as of March 31, 2007 are as follows:

Class	Initial Principal Balance		Interest Rate	Payments Made On Bonds Through March 31, 2007		Current Portion Outstanding		Noncurrent Portion Outstanding		Final/ Expected Payment Date	Final Maturity Date
Class A-1	$	25,200,000	4.18%	$	7,705,415	$	9,394,895	$	8,099,690	12/15/08	12/15/10
Class A-2		35,000,000	4.34%		—		—		35,000,000	6/15/12	6/16/14
Class A-3		20,000,000	4.49%		—		—		20,000,000	12/16/13	12/15/15
Class A-4		22,500,000	4.57%		—		—		22,500,000	6/15/15	6/15/17
Total	$	102,700,000		$	7,705,415	$	9,394,895	$	85,599,690

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 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. In addition we pay miscellaneous operating expenses to PSE&G up to $100 thousand per quarter, administration fees up to $31 thousand per quarter and trustee fees up to $4 thousand per quarter. Servicing and administrative fees for the quarters ended March 31, 2007 and 2006 were approximately $13 thousand and $45 thousand, respectively.

As of March 31, 2007 and December 31, 2006, we had a receivable from our sole member, PSE&G, of approximately $2,589 thousand and $2,482 thousand, respectively, relating to TBC billings.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF

FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Following are the significant changes in or additions to information reported in our 2005 Annual Report on Form 10–K affecting the financial condition and the results of our operations. This discussion refers to our condensed financial statements (Statements) and related notes to condensed 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 General Instruction H of Form 10-Q.

On September 23, 2005, we issued $102.7 million of transition bonds in four classes with maturities ranging from two years to nine years. The net proceeds of the issuance were utilized to acquire Public Service Electric and Gas Company’s (PSE&G) property right in the BGS transition bond charge (TBC). We use collections of the TBC to make scheduled principal and interest payments on the transition bonds and to cover any additional administrative costs.

RESULTS OF OPERATIONS

Operating Revenues

TBC revenues increased approximately $201 thousand or 7% for the quarter ended March 31, 2007 as compared to the same period in 2006, primarily due to an increase in the TBC rate from 2006. In January 2007, as a result of the annual true-up approved by the State of New Jersey Board of Public Utilities (BPU), the TBC (exclusive of sales and use tax) increased from 0.0293 cents per Kilowatt-hour (kWh) to 0.0304 cents per kWh.

Operating Expenses

Amortization of Bondable Transition Property (BTP)

As a regulated entity, our amortization expense fluctuates with changes in revenue and interest expense. Amortization of BTP increased approximately $323 thousand or 17% for the quarter ended March 31, 2007 as compared to the same period in 2006, due to increased revenues and decreased interest expense.

Servicing and Administrative Fees

PSE&G withholds from the TBC collections an annual servicing fee equal to 0.05% of the initial balance of the Bonds issued and charges an additional fee for various administrative costs. Servicing and Administrative Fees decreased approximately $32 thousand or 71% for the quarter ended March 31, 2007 as compared to the same periods in 2006, due to decreases in administrative expenses billed to us by the Servicer, PSE&G.

Interest Income

Interest Income increased approximately $10 thousand for the quarter ended March 31, 2007 as compared to the same period in 2006 primarily due to higher interest rates in 2007. The average return on investments increased to approximately 5.1% for the three months ended March 31, 2007 compared to approximately 4.5% for the three months ended March 31, 2006.

Interest Expense

Interest expense decreased approximately $81 thousand or 7% for the quarter ended March 31, 2007 as compared to the same period in 2006 due primarily to a reduction in the total amount of debt outstanding.

LIQUIDITY AND CAPITAL RESOURCES

The principal amount of the Bonds, interest and fees are being recovered through the TBC. 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.

ITEM 3. QUALITATIVE AND QUANTITATIVE

DISCLOSURES ABOUT MARKET RISK

We are not subject to risk of fluctuating interest rates as all four classes of Bonds were issued with fixed interest rates.

ITEM 4. CONTROLS AND PROCEDURES

Disclosure Controls and Procedures

We have established and maintain disclosure controls and procedures which are designed to provide reasonable assurance that material information is made known to the Chief Executive Officer and the Chief Financial Officer by others within the entity. We have established a disclosure committee which is made up of several key management employees and which reports directly to the Chief Financial Officer and the Chief Executive Officer. The committee monitors and evaluates the effectiveness of these disclosure controls and procedures. The Chief Financial Officer and the Chief Executive Officer have evaluated the effectiveness of the disclosure controls and procedures as of March 31, 2007 and, based on this evaluation, have concluded that the disclosure controls and procedures were effective in providing reasonable assurance during the period covered in this quarterly report.

Internal Controls

There have been no changes in internal control over financial reporting that occurred during the first quarter of 2007 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Electric Discount and Energy Competition Act (Competition Act)

On April 23, 2007, PSE&G and our affiliate PSE&G Transition Funding LLC (Transition Funding I) were served with a copy of a purported class action complaint (Complaint), to which we are not a party, challenging the constitutional validity of certain provisions of New Jersey’s Competition Act, seeking injunctive relief against continued collection from PSE&G’s electric customers of the transition bond charge (TBC) of Transition Funding I, as well as recovery of TBC amounts previously collected. Notice of the filing of the Complaint was also provided to New Jersey’s Attorney General. Under New Jersey law, the Competition Act, enacted in 1999, is presumed constitutional. PSE&G has advised that preliminary review indicates the claim is without merit and that it and Transition Funding I will vigorously defend the matter.

ITEM 6. EXHIBITS

A listing of exhibits being filed with this document is as follows:


Exhibit Number	Document
31.1	Certification by Thomas M. O’Flynn, Chief Executive Officer of PSE&G Transition Funding II LLC Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934

31.2	Certification by Morton A. Plawner, Chief Financial Officer of PSE&G Transition Funding II LLC Pursuant to Rules 13a-14 and 15d-14 of the Securities Exchange Act of 1934

32.1	Certification by Thomas M. O’Flynn, Chief Executive Officer of PSE&G Transition Funding II LLC Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code

32.2	Certification by Morton A. Plawner, Chief Financial Officer of PSE&G Transition Funding II LLC Pursuant to Section 1350 of Chapter 63 of Title 18 of the United States Code

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 II LLC
		(Registrant)

	By:	/s/ Derek M. DiRisio
		Derek M. DiRisio
		Controller
		(Principal Accounting Officer)


Date: May 11, 2007

PSE&G Transition Funding II LLC 10-Q