FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
FORM 10-Q
[ X ]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended December 31, 2002
For the quarterly period ended March 31, 2007
OR
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________

	Exact Name of Registrant as
Commission File Number	Registrant; State of Incorporation; Address; and Telephone Number	IRS Employer Identification No.
	Specified in Charter, State of
	Incorporation, Address of
Commission	Principal Executive	IRS Employer
File Number	Office and Telephone Number	Identification Number
1-5540	PEOPLES ENERGY CORPORATION	36-2642766
	(an Illinois Corporation)
	130 East Randolph Drive, 24th Floor
	Chicago, Illinois 60601-6207
	Telephone (312) 240-4000
2-26983	THE PEOPLES GAS LIGHT AND COKE COMPANY	36-1613900
	(an Illinois Corporation)
	130 East Randolph Drive, 24th Floor
	Chicago, Illinois 60601-6207
	Telephone (312) 240-4000
2-35965	NORTH SHORE GAS COMPANY	36-1558720
	(an Illinois Corporation)
	(An Illinois Corporation)
	130 East Randolph Drive, 24th Floor
	130 East Randolph Drive
	24th Floor
	Chicago, Illinois 60601-6207
	Telephone (312) 240-4000
	(312) 240-4000
Indicate by check mark whether the registrants (1) have 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 shorter period that the registrant was required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date (January 31, 2003):
Peoples Energy Corporation	Common Stock, No par value, 35,698,548 shares outstanding
The Peoples Gas Light and Coke Company	Common Stock, No par value, 24,817,566 shares outstanding (all of which are owned beneficially and of record by Peoples Energy Corporation)
North Shore Gas Company	Common Stock, No par value, 3,625,887 shares outstanding (all of which are owned beneficially and of record by Peoples Energy Corporation)
This combined Form 10-Q is separately filed by Peoples Energy Corporation, The Peoples Gas Light and Coke Company, and North Shore Gas Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes no representation as to information relating to the other companies. The Peoples Gas Light and Coke Company and North Shore Gas Company meet the conditions set forth in General Instruction I(1)(a) and (b) of Form 10-K and are therefore filing this Form 10-Q with the reduced disclosure format permitted by General Instruction I(2) of Form 10-K.

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 a 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]

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 3,625,887 shares of common stock, without par value, outstanding at April 30, 2007, all of which were held, beneficially and of record, by Peoples Energy Corporation.

~~Part~~NORTH SHORE GAS ~~I - Financial Information~~COMPANY

~~Item~~FORM 10-Q FOR I.THE ~~Financial~~QUARTER ~~Statements~~ENDED MARCH 31, 2007

The condensed, unaudited financial statements of Peoples Energy Corporation (the Company), The Peoples Gas Light and Coke Company (Peoples Gas) and North Shore Gas Company (North Shore Gas), have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Peoples Gas and North Shore Gas are wholly-owned subsidiaries of the Company. CONTENTS

This Quarterly Report on Form 10-Q is a combined report of the Company, Peoples Gas and North Shore Gas.

		Page

	FORWARD-LOOKING STATEMENTS	4

PART I.	FINANCIAL INFORMATION

Item 1.	FINANCIAL STATEMENTS (Unaudited)
	Condensed Consolidated Statements of Income	5
	Condensed Consolidated Balance Sheets	6
	Condensed Consolidated Statements of Capitalization	7
	Condensed Consolidated Statements of Cash Flows	8

	CONDENSED NOTES TO FINANCIAL STATEMENTS	9

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28

Item 4.	Controls and Procedures	28

PART II.	OTHER INFORMATION

Item 1.	Legal Proceedings	29

Item 1A.	Risk Factors	29

Item 6.	Exhibits	29

Signature		30

Certain footnote disclosures and other information, normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP), have been condensed or omitted from these interim financial statements, pursuant to SEC rules and regulations. Therefore, the statements should be read in conjunction with the consolidated financial statements and related notes contained in the Company's, Peoples Gas' and North Shore Gas' Annual Report on Form 10-K for the fiscal year ended September 30, 2002. Certain items previously reported for the prior periods have been reclassified to conform with the presentation in the current period. Due to a number of factors, including seasonality of businesses and market price volatility, the quarterly results of operations and balances should not be considered indicative of the year as a whole.

EXHIBIT INDEX		31

12	North Shore Gas Company Ratio of Earnings to Fixed Charges

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 for North Shore Gas Company

31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 for North Shore Gas Company

32	Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 for North Shore Gas Company

In- 2 the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, including normal recurring accruals, necessary to present fairly the Company's, Peoples Gas', and North Shore Gas' financial position, its results of operations and cash flows for the interim periods presented.-

Peoples Energy Corporation
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
	Three Months Ended
	December 31,
	2002	2001
(In Thousands, except per-share amounts)
Revenues	$ 549,111	$ 377,548
Operating Expenses:
Cost of energy sold	329,505	186,503
Operation and maintenance	87,914	66,171
Depreciation, depletion and amortization	27,464	24,504
Taxes, other than income taxes	43,657	36,022
Total Operating Expenses	488,540	313,200
Operating Income	60,571	64,348
Equity Investment Income (Loss)	(253)	(3,509)
Total Operating Income
and Equity Investment Income	60,318	60,839
Other Income and (Expense)	716	2,106
Interest Expense	12,862	15,976
Earnings Before Income Taxes	48,172	46,969
Income Taxes	17,171	15,948
Net Income	$ 31,001	$ 31,021
Average Shares of Common Stock Outstanding
Basic	35,535	35,434
Diluted	35,582	35,485
Earnings Per Share of Common Stock
Basic	$ 0.87	$ 0.88
Diluted	$ 0.87	$ 0.87
Dividends Declared Per Share	$ 0.52	$ 0.51
The Notes to Consolidated Financial Statements are an integral part of these statements.

Commonly Used Acronyms

Peoples Energy Corporation
AG	Illinois Attorney General
CONSOLIDATED BALANCE SHEETS
CERCLA	The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended
(Unaudited)
EPA	United States Environmental Protection Agency
		December 31,	September 30,	December 31,
FASB	Financial Accounting Standards Board
(In Thousands)		2002	2002	2001
FIN	FASB Interpretation
ASSETS
ICC	Illinois Commerce Commission
CAPITAL INVESTMENTS:
IEPA	Illinois Environmental Protection Agency
Property, plant and equipment
LIFO	Last in, first out
Utility plant		$ 2,507,170	$ 2,493,323	$ 2,446,106
MD&A	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Oil and gas		325,608	285,885	251,379
MTM	Mark-to-market
Other		15,853	15,422	17,259
OMC	Outboard Marine Corporation
Total property, plant and equipment		2,848,631	2,794,630	2,714,744
NSG	North Shore Gas Company
Less - Accumulated depreciation, depletion and amortization		1,045,963	1,020,729	969,988
PCB	Polychlorinated biphenyl
Net property, plant and equipment		1,802,668	1,773,901	1,744,756
PEC	Peoples Energy Corporation
Investment in equity investees		149,993	154,857	102,965
PGL	The Peoples Gas Light and Coke Company
Other investments		22,681	22,893	25,644
PRP	Potentially Responsible Party
Total Capital Investments - Net		1,975,342	1,951,651	1,873,365
RAKTL	Ronald A. Katz Technology Licensing, L.P.
CURRENT ASSETS:
ROD	Record of decision
Cash and cash equivalents		13,669	5,433	7,532
SEC	Securities and Exchange Commission
Deposits with broker or trustee		34,663	28,726	2,474
SFAS	Statement of Financial Accounting Standards
Receivables -
Customers, net of reserve for uncollectible accounts
of $27,019, $34,669, and $39,275, respectively		350,026	180,601	336,461
Other		44,486	42,979	114,005
Materials and supplies, at average cost		13,282	12,691	14,644
Gas in storage		74,929	86,825	72,136
Gas costs recoverable through rate adjustments		24,083	10,218	6,302
Regulatory assets of utility subsidiaries		17,709	18,274	4,411
Other		8,467	6,122	3,833
Total Current Assets		581,314	391,869	561,798
OTHER ASSETS:
Prepaid pension costs		184,814	179,678	168,404
Noncurrent regulatory assets of utility subsidiaries		177,360	167,236	117,584
Deferred charges		35,857	33,213	36,251
Total Other Assets		398,031	380,127	322,239
Total Assets		$ 2,954,687	$ 2,723,647	$ 2,757,402
The Notes to Consolidated Financial Statements are an integral part of these statements.

Peoples Energy Corporation
CONSOLIDATED BALANCE SHEETS
(Unaudited)
	December 31,	September 30,	December 31,
(In Thousands, except shares)	2002	2002	2001
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common Stockholders' Equity:
Common stock, without par value -
Authorized 60,000,000 shares
Issued 35,815,527, 35,705,106, and
35,695,000 shares, respectively	$ 304,594	$ 301,699	$ 300,034
Retained earnings	534,885	522,381	519,532
Treasury stock (246,100, 246,100 and 247,300 shares,
respectively, at cost)	(6,760)	(6,760)	(6,793)
Accumulated other comprehensive income (loss)	(17,920)	(10,996)	(3,936)
Total Common Stockholders' Equity	814,799	806,324	808,837
Long-term debt, exclusive of sinking fund payments,
maturities due within one year and long-term maturities
classified as short-term debt	529,345	554,014	644,023
Total Capitalization	1,344,144	1,360,338	1,452,860
CURRENT LIABILITIES:
Commercial paper	229,590	85,871	74,610
Current maturities of long-term debt	90,000	90,000	-
Other short-term debt	202,000	202,000	302,000
Accounts payable	246,234	213,912	239,906
Regulatory liabilities of utility subsidiaries	56,345	29,976	-
Dividends payable	18,553	18,495	18,201
Customer deposits	62,401	70,641	62,644
Accrued taxes	68,489	47,283	61,177
Gas costs refundable through rate adjustments	1,797	28	21,724
Temporary LIFO liquidation credit	8,982	-	2,416
Accrued interest	13,495	11,582	14,513
Total Current Liabilities	997,886	769,788	797,191
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes	384,213	378,225	340,740
Investment tax credits	28,140	28,340	28,863
Noncurrent regulatory liabilities of utility subsidiaries,
environmental and other	200,304	186,956	137,748
Total Deferred Credits and Other Liabilities	612,657	593,521	507,351
Total Capitalization and Liabilities	$ 2,954,687	$ 2,723,647	$ 2,757,402
The Notes to Consolidated Financial Statements are an integral part of these statements.

- 3 -

Peoples Energy Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
	Three Months Ended
	December 31,
(In Thousands)	2002	2001
Operating Activities:
Net Income	$ 31,001	$ 31,021
Adjustments to reconcile net income to net cash:
Depreciation, depletion and amortization
Per statement of income	27,464	24,504
Charged to other accounts	1,193	1,126
Deferred income taxes and investment tax credits - net	6,868	8,857
Change in environmental and other liabilities	12,268	9,859
Change in prepaid pension costs	(5,136)	(12,838)
Change in noncurrent regulatory assets of utility subsidiaries	(10,124)	(3,202)
Change in undistributed earnings from equity investments	2,557	10,713
Major changes in key working capital accounts:
Receivables - net	(170,932)	(49,453)
Gas in storage	11,896	14,368
Gas costs recoverable through rate adjustments	(13,865)	539
Net regulatory assets/liabilities of utility subsidiaries	26,934	(530)
Customer deposits	(8,240)	22,274
Accounts payable	41,340	(62,032)
Accrued taxes	21,206	29,977
Gas costs refundable through rate adjustments	1,769	(25,615)
Temporary LIFO liquidation credit	8,982	2,416
Other	(9,432)	6,390
Net Cash Provided by (Used in) Operating Activities	(24,251)	8,374
Investing Activities:
Capital spending	(58,361)	(35,504)
Net change in advances to joint venture partnerships	-	147,616
Return of capital investments	2,297	55,045
Deposits with broker or trustee	(5,937)	851
Net Cash Provided by (Used in) Investing Activities	(62,001)	168,008
Financing Activities:
Proceeds from (payment of) overdraft facility	(9,018)	14,455
Short-term debt - net	143,719	(230,844)
Retirement of long-term debt	(24,669)	(285)
Proceeds from issuance of common stock	2,895	707
Dividends paid on common stock	(18,439)	(18,049)
Net Cash Provided by (Used in) Financing Activities	94,488	(234,016)
Net Increase (Decrease) in Cash and Cash Equivalents	8,236	(57,634)
Cash and Cash Equivalents at Beginning of Period	5,433	65,166
Cash and Cash Equivalents at End of Period	$ 13,669	$ 7,532
Supplemental information:
Income taxes paid, net of refunds	$ 187	$ 15,380
Interest paid, net of amounts capitalized	$ 10,582	$ 11,565
The Notes to Consolidated Financial Statements are an integral part of these statements.

Forward-Looking Statements

The Peoples Gas Light and Coke Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
	Three Months Ended
	December 31,
	2002	2001
(In Thousands)
Revenues	$ 352,415	$ 247,801
Operating Expenses:
Gas costs	184,769	101,039
Operation and maintenance	67,185	42,218
Depreciation and amortization	14,794	15,282
Taxes, other than income taxes	37,048	31,290
Total Operating Expenses	303,796	189,829
Operating Income	48,619	57,972
Other Income	698	611
Interest Expense	5,898	7,372
Earnings Before Income Taxes	43,419	51,211
Income Taxes	16,834	18,964
Net Income	$ 26,585	$ 32,247
The Notes to Consolidated Financial Statements are an integral part of these statements.

In this report, NSG and its subsidiary make statements concerning expectations, beliefs, plans, objectives, goals, strategies, and future events or performance. Such statements are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. Although NSG and its subsidiary believe that these forward-looking statements and the underlying assumptions are reasonable, it cannot provide assurance that they will prove correct. Except to the extent required by the federal securities laws, NSG and its subsidiary undertake no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The Peoples Gas Light and Coke Company
CONSOLIDATED BALANCE SHEETS
(Unaudited)
	December 31,	September 30,	December 31,
	2002	2002	2001
(In Thousands)
ASSETS
CAPITAL INVESTMENTS:
Property, plant and equipment	$ 2,162,990	$ 2,150,825	$ 2,110,353
Less - Accumulated depreciation and amortization	826,799	813,909	787,868
Net property, plant and equipment	1,336,191	1,336,916	1,322,485
Other investments	11,722	11,724	10,601
Total Capital Investments - Net	1,347,913	1,348,640	1,333,086
CURRENT ASSETS:
Deposits with broker or trustee	27,743	21,802	-
Receivables -
Customers, net of reserve for uncollectible accounts
of $24,161, $31,569 and $37,552, respectively	235,481	119,660	248,052
Intercompany receivables	31,915	20,071	6,482
Other	9,297	13,053	57,570
Materials and supplies, at average cost	9,259	8,974	9,745
Gas in storage, at last-in, first-out cost	49,871	65,364	50,505
Gas costs recoverable through rate adjustments	21,668	7,058	4,579
Regulatory assets	16,004	17,747	3,756
Other	1,582	1,354	1,720
Total Current Assets	402,820	275,083	382,409
OTHER ASSETS:
Prepaid pension costs	184,813	182,339	166,095
Noncurrent regulatory assets	147,379	138,742	96,013
Deferred charges	16,431	15,706	18,617
Total Other Assets	348,623	336,787	280,725
Total Assets	$ 2,099,356	$ 1,960,510	$ 1,996,220
The Notes to Consolidated Financial Statements are an integral part of these statements.

In addition to statements regarding trends or estimates in MD&A, forward-looking statements included or incorporated in this report include, but are not limited to statements regarding future:

The Peoples Gas Light and Coke Company
CONSOLIDATED BALANCE SHEETS
(Unaudited)
	December 31,	September 30,	December 31,
	2002	2002	2001
(In Thousands, except shares)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common Stockholder's Equity:
Common stock, without par value -
Authorized 40,000,000 shares
Outstanding 24,817,566 shares	$ 165,307	$ 165,307	$ 165,307
Retained earnings	479,055	471,070	472,717
Accumulated other comprehensive income (loss)	(491)	(491)	(3,015)
Total Common Stockholder's Equity	643,871	635,886	635,009
Long-term debt, exclusive of sinking fund payments, maturities
due within one year and long-term maturities classified
as short-term debt	175,000	175,000	250,000
Total Capitalization	818,871	810,886	885,009
CURRENT LIABILITIES:
Commercial paper	121,000	82,671	74,610
Current maturities of long-term debt	75,000	75,000	-
Other short-term debt	202,000	202,000	202,000
Accounts payable	128,995	126,445	169,627
Intercompany payables	44,759	18,845	72,483
Regulatory liabilities	48,080	24,763	-
Dividends payable	18,600	11,913	17,869
Customer deposits	53,915	60,389	55,315
Accrued taxes	60,531	37,810	58,464
Gas costs refundable through rate adjustments	582	28	16,452
Temporary LIFO liquidation credit	6,868	-	2,416
Accrued interest	2,975	5,208	3,067
Total Current Liabilities	763,305	645,072	672,303
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes	351,644	346,723	316,938
Investment tax credits	25,093	25,280	25,730
Noncurrent regulatory liabilities, environmental and other	140,443	132,549	96,240
Total Deferred Credits and Other Liabilities	517,180	504,552	438,908
Total Capitalization and Liabilities	$ 2,099,356	$ 1,960,510	$ 1,996,220
The Notes to Consolidated Financial Statements are an integral part of these statements.

·	Revenues or expenses,

The Peoples Gas Light and Coke Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
	Three Months Ended
	December 31,
	2002	2001
(In Thousands)
Operating Activities:
Net Income	$ 26,585	$ 32,247
Adjustments to reconcile net income to net cash:
Depreciation and amortization
Per statement of income	14,794	15,282
Charged to other accounts	1,074	1,021
Deferred income taxes and investment tax credits - net	3,402	8,999
Change in environmental and other liabilities	9,226	5,898
Change in prepaid pension costs	(2,474)	(11,380)
Change in noncurrent regulatory assets	(8,637)	(3,324)
Major changes in key working capital accounts:
Receivables - net	(123,909)	(28,504)
Gas in storage	15,493	16,647
Gas costs recoverable through rate adjustments	(14,610)	(110)
Net regulatory assets/liabilities	25,060	698
Customer deposits	(6,474)	19,898
Accounts payable	9,848	(56,485)
Accrued taxes	22,721	14,199
Gas costs refundable through rate adjustments	554	(19,186)
Temporary LIFO liquidation credit	6,868	2,416
Other	(3,472)	(2,488)
Net Cash Provided by (Used in) Operating Activities	(23,951)	(4,172)
Investing Activities:
Capital spending	(15,142)	(16,189)
Deposits with broker or trustee	(5,941)	-
Other	1	-
Net Cash Provided by (Used in) Investing Activities	(21,082)	(16,189)
Financing Activities:
Proceeds from (payment of) overdraft facility	(6,024)	14,455
Short-term debt - net	62,969	(54,915)
Dividends paid on common stock	(11,912)	-
Net Cash Provided by (Used in) Financing Activities	45,033	(40,460)
Net Increase (Decrease) in Cash and Cash Equivalents	-	(60,821)
Cash and Cash Equivalents at Beginning of Period	-	60,821
Cash and Cash Equivalents at End of Period	$ -	$ -
Supplemental information:
Income taxes paid, net of refunds	$ -	$ 18,210
Interest paid, net of amounts capitalized	$ 7,996	$ 9,027
The Notes to Consolidated Financial Statements are an integral part of these statements.

·	Capital expenditure projections, and

North Shore Gas Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
	Three Months Ended
	December 31,
	2002	2001
(In Thousands)
Revenues	$ 65,468	$ 41,927
Operating Expenses:
Gas costs	42,260	22,009
Operation and maintenance	7,987	6,943
Depreciation	1,713	1,609
Taxes, other than income taxes	4,625	3,553
Total Operating Expenses	56,585	34,114
Operating Income	8,883	7,813
Other Income and (Expense)	(11)	26
Interest Expense	1,154	1,348
Earnings Before Income Taxes	7,718	6,491
Income Taxes	2,958	2,479
Net Income	$ 4,760	$ 4,012
The Notes to Consolidated Financial Statements are an integral part of these statements.

·	Financing sources.

North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
(Unaudited)
	December 31,	September 30,	December 31,
	2002	2002	2001
(In Thousands)
ASSETS
CAPITAL INVESTMENTS:
Property, plant and equipment	$ 344,180	$ 342,498	$ 335,753
Less - Accumulated depreciation	133,119	131,523	128,724
Net property, plant and equipment	211,061	210,975	207,029
Other investments	22	22	22
Total Capital Investments - Net	211,083	210,997	207,051
CURRENT ASSETS:
Cash and cash equivalents	-	-	1,929
Deposits with broker or trustee	4,798	5,062	-
Receivables -
Customers, net of reserve for uncollectible
accounts of $768, $493, and $598, respectively	37,671	13,479	30,093
Intercompany receivables	7,619	5,608	102
Other	1,024	670	1,001
Materials and supplies, at average cost	1,680	1,708	1,810
Gas in storage, at last-in, first-out cost	7,896	8,796	9,330
Gas costs recoverable through rate adjustments	2,415	3,160	1,724
Regulatory assets	1,705	527	655
Other	142	234	345
Total Current Assets	64,950	39,244	46,989
OTHER ASSETS:
Prepaid pension costs	-	-	2,309
Noncurrent regulatory assets	29,981	28,494	21,571
Deferred charges	2,309	3,353	4,509
Total Other Assets	32,290	31,847	28,389
Total Assets	$ 308,323	$ 282,088	$ 282,429
The Notes to Consolidated Financial Statements are an integral part of these statements.

Forward-looking statements involve a number of risks and uncertainties. There are many factors that could cause actual results to differ materially from those expressed or implied in this report. Some risk factors that could cause results different from any forward-looking statement include those described in Item 1A of our combined PEC, PGL and NSG Annual Report on Form 10-K, as amended, for the fiscal year ended September 30, 2006 and as such may be amended or supplemented in Part II, Item 1A of this report. Other factors include:

North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
(Unaudited)
	December 31,	September 30,	December 31,
	2002	2002	2001
(In Thousands, except shares)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common Stockholder's Equity:
Common stock, without par value -
Authorized 5,000,000 shares
Outstanding 3,625,887 shares	$ 24,757	$ 24,757	$ 24,757
Retained earnings	80,086	77,726	77,338
Total Common Stockholder's Equity	104,843	102,483	102,095
Long-term debt, exclusive of sinking fund payments and
maturities due within one year	29,345	54,014	69,023
Total Capitalization	134,188	156,497	171,118
CURRENT LIABILITIES:
Commercial paper	21,300	-	-
Current maturities of long-term debt	15,000	15,000	-
Accounts payable	21,017	16,864	17,857
Intercompany payables	19,294	5,754	11,643
Regulatory liabilities	8,266	5,213	-
Dividends payable	2,400	-	2,611
Customer deposits	8,456	10,221	8,298
Accrued taxes	5,358	2,201	3,256
Gas costs refundable through rate adjustments	1,216	-	5,272
Temporary LIFO liquidation credit	2,114	-	-
Accrued interest	291	1,704	611
Total Current Liabilities	104,712	56,957	49,548
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes	28,225	26,769	26,282
Investment tax credits	3,048	3,061	3,133
Noncurrent regulatory liabilities, environmental and other	38,150	38,804	32,348
Total Deferred Credits and Other Liabilities	69,423	68,634	61,763
Total Capitalization and Liabilities	$ 308,323	$ 282,088	$ 282,429
The Notes to Consolidated Financial Statements are an integral part of these statements.

·	The successful combination of the operations of PEC and its subsidiaries, including NSG, within Integrys Energy Group, Inc. ("Integrys") (Integrys was formerly known as WPS Resources Corporation);

North Shore Gas Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
	Three Months Ended
	December 31,
	2002	2001
(In Thousands)
Operating Activities:
Net Income	$ 4,760	$ 4,012
Adjustments to reconcile net income to net cash:
Depreciation
Per statement of income	1,713	1,609
Charged to other accounts	118	103
Deferred income taxes and investment tax credits - net	965	859
Change in environmental and other liabilities	(176)	77
Change in prepaid pension costs	-	(443)
Change in noncurrent regulatory assets	(1,487)	122
Major changes in key working capital accounts:
Receivables - net	(26,557)	(9,105)
Gas in storage	900	(556)
Gas costs recoverable through rate adjustments	745	647
Net regulatory assets/liabilities	1,875	168
Customer deposits	(1,765)	3,299
Accounts payable	7,127	(3,247)
Accrued taxes	3,157	2,343
Gas costs refundable through rate adjustments	1,216	(6,430)
Temporary LIFO liquidation credit	2,114	-
Other	(249)	(644)
Net Cash Provided by (Used in) Operating Activities	(5,544)	(7,186)
Investing Activities:
Capital spending	(1,917)	(1,980)
Deposits with broker or trustee	264	-
Net Cash Provided by (Used in) Investing Activities	(1,653)	(1,980)
Financing Activities:
Proceeds from (payment of) overdraft facility	(2,994)	-
Short-term debt - net	34,860	7,905
Retirement of long-term debt	(24,669)	(285)
Net Cash Provided by (Used in) Financing Activities	7,197	7,620
Net Increase (Decrease) in Cash and Cash Equivalents	-	(1,546)
Cash and Cash Equivalents at Beginning of Period	-	3,475
Cash and Cash Equivalents at End of Period	$ -	$ 1,929
Supplemental information:
Income taxes paid, net of refunds	$ -	$ 2,532
Interest paid, net of amounts capitalized	$ 2,471	$ 2,265
The Notes to Consolidated Financial Statements are an integral part of these statements.

·	Unexpected costs or liabilities related to the merger between a subsidiary of Integrys and PEC;

~~NOTES~~· TOThe ~~CONSOLIDATED~~combined ~~FINANCIAL~~company ~~STATEMENTS~~of Integrys and PEC may be unable to achieve the forecasted synergies or it may take longer or cost more than expected to achieve these synergies;

· Resolution of pending and future rate cases and negotiations (~~Unaudited~~including the recovery of deferred costs) and other regulatory decisions impacting NSG;

1.· ~~SIGNIFICANT~~The ~~ACCOUNTING~~impact ~~POLICIES~~of recent and future federal and state regulatory change, including changes in environmental, tax and other laws and regulations to which NSG and its subsidiary are subject, as well as changes in application of existing laws and regulations;

~~Gas~~· inCurrent ~~Storage~~and future litigation, regulatory investigations, proceedings or inquiries, including but not limited to, manufactured gas plant site cleanup, proceedings concerning the prudence review of NSG’s gas purchases and costs actually incurred;

· The ~~Gas~~credit ~~Distribution~~ratings segment's inventory is carried at cost on a last-in, first-out (LIFO) method on a fiscal year basis. For interim periods, the difference between current replacement cost and the LIFO cost for quantities of ~~gas~~NSG ~~temporarily~~could ~~withdrawn~~change ~~from storage is recorded as a temporary LIFO liquidation credit. Any interim reductions~~ in the ~~LIFO layers are due to seasonality and are expected to be replenished by the fiscal year end.~~future;

~~Recovery~~· Resolution of ~~Gas~~audits ~~Costs~~by the Internal Revenue Service and Illinois state revenue agencies;

~~Under~~· ~~the~~The ~~tariffs of Peoples Gas and North Shore Gas~~effects, ~~all~~extent ~~prudently incurred gas costs are recoverable from customers. The difference for any month between costs recoverable through the Gas Charge~~ and ~~the~~timing ~~actual~~of ~~amount~~additional ~~billed~~competition toin ~~customers under~~ the ~~Gas~~markets ~~Charge~~in iswhich ~~recovered~~NSG from or refunded to customers through future adjustments to the Gas Charge. Such difference for any month is recorded either as a current asset or as a current liability (with a contra entry to Gas Costs). Gas Costs consist of two types - Commodity and Non-Commodity costs. The two types are tracked independently and may cause both an accounts receivable from and an accounts payable to customers. operates;

~~For~~· each utility subsidiary, the Illinois Commerce Commission (Commission) conducts annual proceedings regarding the reconciliation of revenues from the Gas Charge and related gas costs. In these proceedings, the accuracy of the reconciliation of revenues and costs is reviewed and the prudence of gas costs recovered through the Gas Charge is examined by interested parties. If the Commission were to find that the reconciliation was inaccurate or any gas costs were imprudently incurred, the Commission would order the utility to refund the affected amount to customers through subsequent Gas Charge filings. The ~~proceedings~~impact ~~are typically initiated shortly after the close~~ of ~~the~~fluctuations ~~fiscal~~in ~~year~~commodity and take at least a year to 18 months to complete. Proceedings regarding Peoples Gas and North Shore Gas for the fiscal year 2001 costs are currently pending before the Commission. In the proceeding regarding Peoples Gasprices, ~~the~~interest Commission Staff (Staff) has raised concerns about the prudence of gas costs associated with gas that Peoples Gas resold as part of its normal operational practices. The Staff has not yet submitted evidence or made a specific recommendationrates, ~~but as part of the discovery process, it filed a motion to compel the production of certain information about these transactions~~ and ~~their~~customer possible relationship to Peoples Gas' affiliates. The Commission's Administrative Law Judge has not ruled on the motion, which Peoples Gas is contesting. Peoples Gas submitted additional direct evidence on October 16, 2002. On January 23, 2003, the Administrative Law Judge set a status hearing for February 26, 2003, to address a schedule for further proceedings in this matter. An order from the Commission is not expected before the first quarter of fiscal 2004. Peoples Gas believes that its gas costs were prudently incurred but cannot predict the outcome of the proceedings. demand;

· The ~~fiscal~~effectiveness ~~year~~of ~~2002~~NSG’s ~~gas~~derivative ~~charge~~instruments ~~reconciliation~~and ~~case~~hedging ~~for~~activities ~~each~~and ~~utility~~their ~~subsidiary~~impact ~~was initiated~~ on ~~November 7, 2002. On December 18, 2002, the Administrative Law Judge granted each utility subsidiary's motion to extend time to file~~ its ~~direct~~future ~~testimony~~results toof ~~May 1, 2003. The Administrative Law Judge set a status hearing for both cases for May 15, 2003.~~ operations;

~~Stock~~· ~~Compensation~~Available ~~Plans~~sources and costs of natural gas;

~~The~~· ~~Financial~~Investment ~~Accounting~~performance ~~Standards Board (FASB) Statement~~ of Financial Accounting Standards (SFAS) No. 123, "Accounting for Stock-Based Compensation," was amended to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee ~~compensation. In~~benefit ~~addition,~~plan the disclosure requirements of SFAS No. 123 were amended to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. assets;

As· ~~allowed~~Advances under SFAS No. 123, the Company has chosen to continue accounting for stock-based compensation under Accounting Principles Board (APB) Opinion No. 25. Therefore, no compensation cost has been recognized for nonqualified stock options (under both the Long-Term Incentive Compensation Plan (LTIC) and Director Stock and Option Plan (DSOP)) and shares issued under the Employee Stock Purchase Plan (ESPP). There were 426,900 and 520,300 options granted in the first quarter of fiscal 2003 and 2002, respectively. There were 7,459 and 6,479 shares sold through the ESPP in the first quarter of fiscal 2003 and 2002, respectively. The compensation cost that has been charged against net income for restricted stock awards was $0.8 million and $1.0 million for the three months ended December 31, 2002 and 2001, respectively. Had compensation cost for stock options (under both LTIC and DSOP) and shares issued under the ESPP been determined consistent with SFAS No. 123, as amended, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:technology;

	Three Months Ended
		December 31,
(In Thousands, except per-share amounts		2002	2001
Net income as reported		$31,001	$31,021
Pro forma stock option and ESPP compensation expense under SFAS 123		235	418
Pro forma net income		$30,766	$30,603
Earnings per average common share:
Basic		$ 0.87	$ 0.88
Diluted		0.87	0.87
Pro forma basic		$ 0.87	$ 0.86
Pro forma diluted		$ 0.86	$ 0.86

·	Effects of and changes in political, legal and economic conditions and developments in the United States and Illinois;

· The ~~fair~~direct ~~value~~or ofindirect ~~each~~effects ~~option grant used to determine pro forma net income is estimated as~~ of ~~the~~terrorist ~~date~~incidents, ofnatural ~~grant~~disasters ~~using~~or aresponses ~~variation~~to ofsuch ~~the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in the three months ended December 31, 2002 and 2001.~~events;

Three Months Ended December 31,	2002	2001
Expected volatility	25.85%	24.76%
Dividend yield	5.4%	5.4%
Risk-free interest rate	2.09%	3.08%
Expected lives (years)	3	3
Weighted average fair value	$3.34	$4.82

·	Financial market conditions and the results of financing efforts, including risks associated with commodity prices (particularly natural gas), interest rates and counter-party credit;

·	Weather and other natural phenomena, in particular the effect of weather on natural gas sales;

·	The effect of accounting pronouncements issued periodically by standard-setting bodies; and

·	Other factors discussed elsewhere herein and in other reports filed by NSG and/or Integrys from time to time with the SEC.

Forward-looking statements are subject to assumptions and uncertainties, therefore actual results may differ materially from those expressed or implied by such forward-looking statements.

- 4 -

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

NORTH SHORE GAS COMPANY

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)		Three Months Ended
	March 31,
(Millions)		2007		2006

Gas operating revenues		$124.6		$121.6
Operating expenses
Gas purchased for resale		99.8		98.3
Operating and maintenance expenses		11.2		10.5
Gas charge settlement (credit)		-		(12.7	)
Depreciation and amortization		1.5		1.4
Taxes, other than income taxes		1.0		0.9
Operating income		11.1		23.2

Miscellaneous income		0.2		0.2
Interest expense		(1.0	)	(1.0	)
Other (expense) income		(0.8	)	(0.8	)

Income before taxes		10.3		22.4
Provision for Income taxes		3.7		8.6
Net Income		$6.6		$13.8

The accompanying condensed notes are an integral part of these statements.

- 5 -

NORTH SHORE GAS COMPANY

CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)	March 31,	December 31,	March 31,
(Millions)	2007	2006	2006
Assets
Current assets
Cash and cash equivalents	$0.8	$0.1	$23.3
Short-term investments	-	-	7.0
Customer and other receivables, net of reserves of $1.8, $1.4, and
$2.2 at March 31, 2007, December 31, 2006 and March 31, 2006	40.8	24.2	43.6
Receivables from related parties	27.9	0.4	0.4
Accrued unbilled revenues	14.7	20.6	17.3
Natural gas in storage, primarily at last-in, first-out cost	2.9	10.0	3.6
Materials and supplies, at average cost	1.1	1.0	1.2
Regulatory assets	2.3	21.5	12.0
Assets from risk management activities	1.2	-	-
Deferred income taxes	2.2	1.9	-
Prepayments and other	5.2	1.3	0.4
Total current assets	99.1	81.0	108.8

Property, plant, and equipment, net of accumulated depreciation of $152.4, $151.2, and
$146.4 at March 31, 2007, December 31, 2006 and March 31, 2006, respectively	225.0	224.6	219.7
Noncurrent regulatory assets	102.9	103.6	66.5
Investments and other assets	1.7	1.7	2.9
Long-term assets from risk management activities	0.1	-	-
Total assets	$428.8	$410.9	$397.9

Liabilities and Capitalization
Current liabilities
Accounts payable	$24.3	$25.0	$19.4
Payables to related parties	4.6	23.3	13.8
Current liabilities from risk management activities	1.6	3.2	-
Accrued interest and taxes	9.4	5.4	11.7
Gas costs refundable through rate adjustments	1.6	2.7	8.2
Customer credit balances	3.7	12.2	3.1
Current accumulated deferred income taxes	-	-	2.2
Temporary LIFO liquidation credit	38.3	-	40.5
Other	5.3	4.5	10.3
Total current liabilities	88.8	76.3	109.2
Long-term liabilities and deferred credits
Deferred income taxes	44.8	45.2	38.6
Deferred investment tax credits	2.8	2.8	2.8
Noncurrent regulatory liabilities	2.1	2.1	1.9
Environmental remediation liability	70.3	70.4	64.6
Pension and postretirement benefit obligations	23.3	22.5	11.5
Asset retirement obligations	19.8	19.5	-
Other	0.8	0.3	-
Total long-term liabilities and deferred credits	163.9	162.8	119.4

Commitments and contingencies

Capitalization
Common stock equity	107.0	102.7	100.1
Long-term debt	69.1	69.1	69.2
Total capitalization	176.1	171.8	169.3
Total liabilities and capitalization	$428.8	$410.9	$397.9

The accompanying condensed notes are an integral part of these statements.

- 6 -

NORTH SHORE GAS COMPANY


CONDENSED CONSOLIDATED STATEMENTS OF CAPITALIZATION (Unaudited)				March 31,		December 31,		March 31,
(Millions, except share amounts)				2007		2006		2006

Long-term debt
First mortgage bonds
	Series		Year Due
	M	5.00%	2028	$ 29.1		$ 29.1		$ 29.3
	N-2	4.625%	2013	40.0		40.0		40.0
Total first and refunding mortgage bonds and adjustable rate bonds				69.1		69.1		69.3
Unamortized (discount) premium on long-term debt, net				-		-		(0.1	)
Total long-term debt				69.1		69.1		69.2

Common stock equity
Common stock, without par value—
Authorized 5,000,000 shares
Outstanding 3,625,887 shares				24.8		24.8		24.8
Accumulated other comprehensive loss				(0.1	)	(0.1	)	(2.4	)
Retained earnings				82.3		78.0		77.7
Total common stock equity				107.0		102.7		100.1
Total capitalization				$176.1		$171.8		$169.3

The accompanying condensed notes are an integral past of these statements.

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NORTH SHORE GAS COMPANY


CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)	Three Months Ended
	March 31,
(Millions)	2007		2006

Operating Activities:
Net income (loss)	$6.6		$13.8
Adjustments to reconcile net income to cash provided by operations:
Depreciation	1.7		1.6
Deferred income taxes and investment tax credits—net	(0.6	)	2.6
Pension funding less than expense	0.8		0.9
Gas charge settlement credit	-		(12.7	)
Other adjustments	0.2		1.8
Net changes in:
Receivables—net	(13.0	)	7.9
Receivables from related parties	(0.1	)	(9.9	)
Gas in storage	7.1		5.8
Gas costs recoverable/refundable through rate adjustments	(5.0	)	7.0
Accounts payable	(0.7	)	(26.2	)
Payables to related parties	0.8		10.3
Accrued interest	0.8		0.8
Accrued taxes	3.2		6.1
Temporary LIFO liquidations	38.3		36.8
Customer credit balances	(8.5	)	(3.4	)
Other	0.9		(0.2	)
Net cash provided by (used in) operating activities	32.5		43.0

Investing Activities:
Capital spending	(2.1	)	(2.5	)
Short-term investments	-		(7.0	)
Intercompany loan receivable	(27.4	)	-
Net cash provided by (used in) investing activities	(29.5	)	(9.5	)

Financing Activities:
Intercompany loan payable	-		(9.9	)
Dividends paid on common stock	(2.3	)	(1.5	)
Net cash provided by (used in) financing activities	(2.3	)	(11.4	)

Net increase (decrease) in cash and cash equivalents	0.7		22.1
Cash and cash equivalents at beginning of period	0.1		1.2
Cash and cash equivalents at end of period	$0.8		$23.3

The accompanying condensed notes are an integral part of these statements.

- 8 -

NORTH SHORE GAS COMPANY

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, 2007

NOTE 1--FINANCIAL INFORMATION

We have prepared the condensed, consolidated financial statements of NSG and its wholly-owned subsidiary under the rules and regulations of the SEC.

This Quarterly Report on Form 10-Q is for NSG, a wholly-owned indirect subsidiary of Integrys. These financial statements have not been audited. Management believes that these financial statements include all adjustments (which unless otherwise noted include only normal recurring adjustments) necessary for a fair presentation of the financial results for each period shown.

Effective February 21, 2007, the previously announced merger between a wholly-owned subsidiary of Integrys and PEC was consummated. NSG and PGL are wholly-owned by PEC. The merger was accounted for under the purchase method of accounting with Integrys treated as the acquirer. Effective with the merger, NSG adopted the financial statement presentation policies of Integrys. Certain items previously reported for the prior periods have been reclassified to conform to the presentation in the current period:

Condensed Consolidated Statements of Income

Revenues and taxes, other than income taxes, are presented net of pass-through taxes. (See Note 3--Revenue Recognition for further discussion.)

Condensed Consolidated Balance Sheets:

Accrued unbilled revenues are shown separately from customer receivables, net of reserve for uncollectible accounts.

Accrued interest and accrued taxes have been combined as one line item.

Certain current liabilities have been aggregated into other current liabilities as a single line item.

Postretirement benefit obligations have been reclassified from other long-term liabilities to pension and postretirement benefit obligations.

Condensed Consolidated Statements of Cash Flows:

Changes in cash overdraft balances within net changes in accounts payable are presented as an operating activity rather than as a financing activity.

Changes in margin account balances as part of deposits with a broker are presented as an operating activity rather than as a investing activity.

The NSG condensed consolidated financial statements do not reflect, and are not required to reflect, any push down basis of accounting as a result of the PEC merger.

We have condensed or omitted certain financial information and footnote disclosures normally included in our annual audited financial statements. These condensed consolidated financial statements should be read along with the audited financial statements and notes thereto included in the combined PEC, PGL and NSG Annual Report on Form 10-K, as amended, for the fiscal year ended September 30, 2006. Due

- 9 -

to a number of factors, including seasonality of NSG's businesses and market price volatility, the quarterly results of operations and statements of financial position and cash flows should not be considered indicative of the results to be expected for the year as a whole.

As previously disclosed in the combined PEC, PGL and NSG Transition Report on Form 10-Q for the Transition Period from October 1, 2006 to December 31, 2006, NSG changed its fiscal year from September 30 to December 31.

NOTE 2--CASH AND CASH EQUIVALENTS

Short-term investments with an original maturity of three months or less are reported as cash equivalents.

The following is supplemental disclosure to the NSG Condensed Consolidated Statements of Cash Flows:

	Three Months Ended March 31,
(Millions)	2007	2006
Cash paid for interest	$0.3	$0.1
Cash paid for income taxes	$2.4	$0.5

Under NSG's cash management practices, accounting overdraft cash balances of $0.3 million at March 31, 2007 were reclassified to accounts payable. NSG had no overdraft balance at December 31, 2006 or March 31, 2006.

NOTE 3--REVENUE RECOGNITION

Natural gas sales and transportation revenues are recorded on the accrual basis for all gas delivered during the month, including an estimate for gas delivered but unbilled at the end of each month.

In Illinois, delivering, supplying, furnishing or selling gas for use or consumption and not for resale is subject to state and, in some cases, municipal taxes (revenue taxes). The Illinois Public Utilities Act provides that the tax may be recovered from utility customers by adding an additional charge to customers’ bills. These pass-through taxes are due only to the extent they are collected as cash receipts as opposed to amounts billed. The revenues presented on the Condensed Consolidated Statements of Income exclude the billings to customers for these pass-through taxes. For the three months ended March 31, 2006, NSG previously reported most revenue taxes on a gross basis, whereby the billed amounts for the recovery of these taxes were included in revenues, and an offsetting expense amount (net of an administrative fee) representing the expected cash payment of the taxes was included in taxes, other than income taxes on the statement of income. Effective with the February 21, 2007 merger between a wholly-owned subsidiary of Integrys and PEC, NSG adopted the accounting policy of excluding such pass-through taxes from both revenues and taxes, other than income taxes. Revenue tax amounts excluded from revenues and taxes, other than income taxes for the three-month period ended March 31, 2006 were $5.6 million.

NOTE 4--GAS IN STORAGE

NSG prices storage injections, except for liquid propane, at the fiscal year average of the costs of natural gas supply purchased. Withdrawals from storage, except for liquid propane, are priced on the LIFO cost method. NSG accounts for liquid propane inventory using the average cost method. For interim periods, the difference between current projected replacement cost and the LIFO cost for quantities of gas temporarily withdrawn from storage is recorded as a temporary LIFO liquidation credit. Due to seasonality requirements, NSG expects interim reductions in LIFO layers to be replenished by year end.

- 10 -

NOTE 5--RISK MANAGEMENT ACTIVITIES

Derivative Instruments and Hedging Activities

~~The~~NSG's gas ~~Company~~supply ~~has~~costs may ~~hedged~~vary ~~various~~due ~~anticipated cash flow transactions through December 2006. The majority of these hedges are related~~ to ~~the~~changes ~~Company's~~in ~~forecasted~~commodity ~~sales~~prices ofthat ~~produced~~affect ~~oil and gas of~~ its ~~Oil and Gas subsidiary~~operations. ~~During~~ ~~the~~To manage ~~three~~this ~~months ended December 31~~volatility, ~~2002,~~NSG ~~the~~uses ~~Company~~forward ~~recorded~~contracts inand ~~earnings~~financial ~~a $1.9 million loss ($1.1 million~~instruments, including ~~net~~swaps ofand ~~tax) related to hedge activity~~options. ~~The~~ ~~majority~~It ofis ~~this activity was previously recorded in accumulated other comprehensive income (AOCI) with~~ the ~~exception~~policy of ~~gains~~NSG ~~and losses attributable~~ to ~~hedges~~use ~~entered~~these ~~into~~instruments solely ~~and~~for ~~settled during~~ the ~~first~~purpose ~~quarter~~ of ~~fiscal~~managing ~~2003,~~volatility ~~which~~and ~~accounted~~not for anany ~~insignificant amount~~speculative purpose. ~~The~~ ~~Company~~NSG ~~anticipates~~accounts ~~reclassifying,~~for inderivative ~~the~~financial ~~next~~instruments 12pursuant ~~months,~~to ~~$15~~SFAS No.8 133 ~~million~~“Accounting offor ~~deferred~~Derivatives ~~losses~~and ~~from~~Hedging ~~AOCI into earnings~~Activities”, as ~~calculated~~amended ~~using~~and interpreted ~~commodity~~("SFAS ~~prices~~No. ~~at December 31, 2002~~133"). As ofUnder ~~December 31, 2002,~~ the ~~Company~~provisions ~~has $35.0 million~~ of ~~derivative~~SFAS ~~liabilities, $10~~No.2 ~~million of derivative assets and has cumulative deferred losses in AOCI of $14.5 million~~133, ~~net~~all derivatives ofare ~~taxes.~~recognized ~~The~~on ~~Company~~the ~~also~~balance ~~records~~sheet ~~adjustments~~at ~~to AOCI to reflect its share of AOCI amounts recorded by partnerships related to~~ their ~~hedging~~fair ~~activity. The~~value ~~Company~~unless they qualify ~~records~~for anthe ~~offsetting~~normal ~~amount~~purchases toand ~~its~~sales ~~investment in the partnership~~exception.

~~Peoples~~Mark-To-Market Derivative ~~Gas~~Instruments. ~~and~~NSG uses ~~North~~derivative instruments ~~Shore~~to ~~Gas~~manage ~~use~~its ~~derivative~~cost ~~transactions~~of togas ~~mitigate~~supply ~~volatility~~and inmitigate ~~their~~price ~~respective gas charges~~volatility. ~~Since~~ All such ~~these~~ derivative instruments are ~~not~~measured ~~designated~~at asfair ~~hedges~~value. ~~and~~NSG's ~~are~~tariffs ~~employed~~allow for full torecovery ~~support~~from ~~gas~~its ~~costs~~customers ~~charged~~of toprudently ~~regulated~~incurred gas ~~customers~~supply costs, including ~~the~~gains ~~accounting~~or ~~for~~losses on these derivative instruments. isAs ~~subject~~a toresult, SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation” ("SFAS No. 71~~. Any~~"), allows ~~realized~~for these MTM derivative gains or losses ~~associated~~to ~~with~~be ~~this~~recorded ~~activity~~as ~~will~~regulatory assets beor ~~included~~regulatory inliabilities. ~~gas~~Realized ~~costs~~gains ~~passed~~or ~~through~~losses are recorded as an adjustment to ~~utility~~the ~~customers. As~~cost of ~~December~~gas ~~31,~~supply ~~2002,~~in ~~Peoples~~the ~~Gas~~period ~~and~~that ~~North~~the ~~Shore~~underlying ~~Gas~~gas purchase ~~have~~transaction ~~net~~takes ~~regulatory~~place. ~~liabilities~~The ~~related~~costs toand ~~these~~benefits ~~transactions~~ of ~~$44.2~~this ~~million~~activity are passed ~~and~~through ~~$7.5~~to ~~million,~~customers ~~respectively~~under the tariffs of NSG.

~~Recent~~The MTM ~~Accounting~~asset (liability) ~~Pronouncements~~value of the above contracts for NSG at March 31, 2007, December 31, 2006, and March 31, 2006 were zero, $(20.2) million, and $(9.0) million, respectively.

InCash Flow Hedges. ~~July 2001,~~ During the ~~FASB~~fiscal year ~~issued~~ended ~~SFAS~~September ~~No.~~30, ~~143~~2003, ~~"Accounting~~NSG ~~for~~entered ~~Asset~~into ~~Retirement~~treasury ~~Obligations." SFAS~~lock ~~No.~~agreements that hedged ~~143~~the ~~requires~~10-year antreasury ~~entity~~component toof ~~record~~ a ~~liability~~portion ~~and~~of ~~corresponding~~the ~~asset~~total ~~representing~~anticipated fiscal ~~the~~2003 ~~present~~debt ~~value~~financings. ofOn ~~legal~~April ~~obligations~~24, ~~associated~~2003, in connection with the ~~retirement~~ issuance of ~~tangible,~~the ~~long-lived~~new ~~assets. SFAS~~debt, ~~No.~~NSG ~~143~~unwound isits ~~effective~~treasury ~~for~~lock ~~fiscal~~positions ~~years~~resulting ~~beginning~~in ~~after~~a ~~June 2002~~$0. ~~The~~4 million ~~Company,~~loss ~~Peoples~~recorded ~~Gas~~to ~~and~~accumulated ~~North~~other ~~Shore~~comprehensive ~~Gas~~income. ~~adopted~~This ~~the~~amount is being ~~standard~~amortized onas ~~October~~interest 1,expense ~~2002~~over ~~and~~the ~~did~~10-year ~~not~~term ~~record~~of ~~any significant adjustments~~the debt.

InThe portion ~~December~~of accumulated ~~2002,~~other ~~the~~comprehensive ~~FASB~~income ~~issued~~(loss) ~~SFAS~~at ~~No.~~March ~~148~~31, ~~"Accounting~~2007 ~~for~~that ~~Stock-Based Compensation - Transition and Disclosure." It~~ is anexpected to ~~amendment~~be ofreclassified ~~SFAS No. 123~~ to ~~provide~~earnings ~~alternative~~during ~~methods of transition for a voluntary change to~~ the ~~fair~~next ~~value~~12 ~~based~~months ~~method~~is ~~of accounting for stock-based employee compensation and APB No. 28~~$(23, ~~Interim Financial Reporting~~000). In ~~addition,~~The maximum ~~this~~term ~~Statement allows companies to continue to report using the intrinsic method. It amends the disclosure requirements~~ of ~~SFAS~~accumulated ~~No.~~other ~~123~~comprehensive ~~for~~income ~~reporting~~(loss) ~~under~~expected ~~the intrinsic method~~ to be reclassified ~~require~~is ~~prominent~~73 ~~disclosures in both annual and interim financial statements about the pro forma stock option expense~~months. ~~The Company has continued to report based on the intrinsic method and reported stock option expense in Note 1.~~

~~In November 2002, the FASB issued Interpretation No. (FIN) 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others~~ - 11 an interpretation of SFAS No. 5, 57 and 107 and rescission of FIN 34." FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees that it has issued and in certain circumstances requires recognition of a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company will not be required to recognize a liability for any of its existing guarantees.-

2Summary. The ~~BUSINESS~~following table ~~SEGMENTS~~shows NSG’s assets and liabilities from all risk management activities. Certain commodity financial instruments are executed by NSG and shown as assets/liabilities from risk management activities. Other commodity financial instruments were previously executed by PEC on behalf of NSG and are represented on NSG's balance sheet as payables to related parties. Unrealized gains or losses on certain mark-to-market commodity contracts related to deposits with brokers are included within other receivables. Premiums paid on certain mark-to-market commodity option contracts at inception that are recoverable from customers through rates are recorded as regulatory assets.

Financial data by business segment is presented below.

	Assets				Liabilities
	March 31,		December 31,	March 31,	March 31,		December 31,	March 31,
(Millions)	2007		2006	2006	2007		2006	2006

Commodity contracts	$1.5		$2.5	$0.9	$1.5		$22.7	$9.9

Balance Sheet Presentation
Current
Assets/liabilities from risk management activities	$1.2		$ -	$ -	$1.6		$3.2	$ -
Other receivables	(0.2	)	2.1	-	-		-	-
Payables to related parties	-		-	-	-		18.9	9.9
Regulatory assets	0.4		0.4	0.9	-		-	-
Total current	$1.4		$2.5	$0.9	$1.6		$22.1	$9.9

Long-term
Assets/liabilities from risk management activities	$0.1		$ -	$ -	$ -		$ -	$ -
Payables to related parties	-		-	-	-		0.6	-
Regulatory assets/liabilities	-		-	-	(0.1	)	-	-
Total long-term	0.1		-	-	(0.1	)	0.6	-
Total	$1.5		$2.5	$0.9	$1.5		$22.7	$9.9

~~The~~NOTE 6--ASSET RETIREMENT activities of Peoples Gas and North Shore Gas are mainly within the Gas Distribution segment with only immaterial amounts of activity in other segments. Total segment capital assets include net property, plant and equipment and certain intangible assets classified in other assets.OBLIGATIONS

				Retail			Corporate
(In Thousands)	Gas	Power	Midstream	Energy	Oil and Gas		and
Three Months Ended 12-31-02	Distribution	Generation	Services	Services	Production	Other	Adjustments	Total
Revenues	$ 415,751	$ -	$ 60,769	$ 54,673	$ 22,194	$ 43	$ (4,319)	$ 549,111
Depreciation, Depletion and Amortization	16,507	32	106	417	10,376	3	23	27,464
Operating Income (Loss)	58,292	(1,098)	2,564	2,102	5,498	(300)	(6,487)	60,571
Equity Investment Income (Loss)	-	(63)	-	-	(626)	436	-	(253)
Operating and Equity Investment Income	58,292	(1,161)	2,564	2,102	4,872	136	(6,487)	60,318
Segment Capital Assets	1,547,253	996	5,959	7,953	245,215	1,240	1,266	1,809,882
Investments in Equity Investees	-	121,101	-	-	24,863	4,029	-	149,993
Capital Spending	$ 17,059	$ 1,158	$ 15	$ (3)	$ 39,723	$ 1	$ 408	$ 58,361
				Retail			Corporate
	Gas	Power	Midstream	Energy	Oil and Gas		and
Three Months Ended 12-31-01	Distribution	Generation	Services	Services	Production	Other	Adjustments	Total
Revenues	$ 290,733	$ -	$ 23,214	$ 50,249	$ 15,824	$ 10	$ (2,482)	$ 377,548
Depreciation, Depletion and Amortization	16,891	28	237	409	6,905	11	23	24,504
Operating Income (Loss)	68,449	(1,215)	2,820	1,402	3,279	(328)	(10,059)	64,348
Equity Investment Income (Loss)	-	(1,616)	(502)	-	(1,523)	132	-	(3,509)
Operating and Equity Investment Income	68,449	(2,831)	2,318	1,402	1,756	(196)	(10,059)	60,839
Segment Capital Assets	1,529,514	5,186	7,496	9,762	202,100	1,547	1,001	1,756,606
Investments in Equity Investees	-	70,431	2,164	-	25,852	4,518	-	102,965
Capital Spending	$ 18,168	$ 8,361	$ 297	$ (6)	$ 8,686	$ -	$ (2)	$ 35,504

Under the provisions of SFAS No. 143, “Accounting for Asset Retirement Obligations” ("SFAS No. 143"), and Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” ("FIN 47"), NSG has recorded liabilities for legal obligations associated with the retirement of tangible long-lived assets. NSG identified asset retirement obligations primarily related to distribution pipe removal (including asbestos and PCBs in pipes), asbestos and PCBs in buildings and removal of above ground storage tanks. In accordance with SFAS No. 71, NSG establishes regulatory assets and liabilities to record the differences between ongoing expense recognition under SFAS No. 143 and FIN 47 and the rate making practices for retirement costs authorized by the applicable regulators. All asset retirement obligations are recorded as other long-term liabilities on the balance sheet of NSG.

~~3. EQUITY~~The following ~~INVESTMENTS~~table shows all changes to the asset retirement obligation liabilities of NSG.

The Company has a number of investments that are accounted for as unconsolidated equity method investments. During the second quarter of fiscal 2002, the Company acquired Enron's 50 percent interest in enovate, its partnership with Enron. Results from this business were recorded in the Midstream Services segment as a consolidated subsidiary from March 2002 until enovate was liquidated in September 2002. Individually, the Company's equity investments do not meet the requirements for financial disclosure. However, in aggregate these investments were material at December 31, 2002. The Company records its share of income gains and losses based on financial information it receives from the partnerships.

(Millions)
Asset retirement obligations at December 31, 2006		$19.5
Accretion		0.3
Asset retirement obligations at March 31, 2007		$19.8

~~The~~- 12 ~~following table describes total activity of equity method investees and the Company's pro rata share of financial results from unconsolidated equity method investments.~~-

	Three Months Ended
	December 31,
(In Thousands)	2002	2001
Gross Results from Equity Investments
Revenues	$ 28,145	$ 47,854
Operating Income	9,685	59
Interest Expense	9,365	9,388
Net Income	724	(9,100)
Total Assets	881,326	802,152
Total Liabilities	$ 476,159	$ 567,535
Peoples Energy's Share
Total Equity Investments
Revenues	$ 10,757	$ 23,020
Operating Income	4,148	986
Interest Expense	4,603	4,593
Equity Investment Income (Loss)	(253)	(3,509)
Undistributed Partnership Income Included in Retained Earnings	2,557	10,713
Total Assets	383,367	369,078
Total Liabilities	$ 241,381	$ 268,618

NOTE 7--INCOME TAXES

The effective tax rates for the three months ended March 31, 2007 and 2006 were 35.9% and 38.4%, respectively. ~~ENVIRONMENTAL~~ ~~MATTERS~~NSG's provision for income taxes is calculated in accordance with APB Opinion No. 28, "Interim Financial Reporting." Accordingly, NSG's interim effective tax rate reflects its projected annual effective tax rate. The effective tax rate differs from the federal tax rate of 35% primarily due to the effect of state income taxation offset by the permanent tax effects of employee benefit-related deductions.

~~Former~~Effective January 1, ~~Manufactured~~2007, ~~Gas~~NSG ~~Plant~~adopted ~~Operations~~the provisions of FASB Interpretation No. 48 ("FIN 48"), “Accounting for Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109.” The cumulative effect of adopting FIN 48 was an increase of less than $0.1 million to the January 1, 2007 retained earnings balance.

~~The~~At January ~~Company's~~1, ~~utility subsidiaries~~2007, ~~their predecessors and certain former affiliates operated facilities in~~ the ~~past~~amount ~~at multiple sites for the purpose~~ of ~~manufacturing~~unrecognized ~~gas~~tax ~~and~~benefits ~~storing~~was ~~manufactured~~$0.1 ~~gas~~million. In No unrecognized ~~connection~~tax ~~with~~benefits ~~manufacturing~~would ~~and~~affect ~~storing~~NSG's ~~gas,~~effective ~~various~~tax ~~by-products~~rate ~~and~~if ~~waste~~recognized in subsequent ~~materials~~periods. ~~were~~At ~~produced,~~the ~~some~~beginning of ~~which~~2007, ~~might~~approximately ~~have~~$0.1 ~~been~~million was included ~~disposed~~in ofthe ~~rather~~liability ~~than~~for ~~sold. Under~~uncertain ~~certain~~tax ~~laws~~positions ~~and~~for ~~regulations relating to~~ the ~~protection~~possible payment of ~~the~~interest ~~environment,~~and ~~the~~penalties. ~~subsidiaries~~There ~~might~~were beno ~~required~~significant tochanges ~~undertake remedial action with respect~~ to ~~some~~any of ~~these materials. Two of~~ the unrecognized ~~manufactured~~tax ~~gas~~benefit ~~sites~~balances ~~are~~during ~~discussed~~the infirst ~~more~~quarter ~~detail~~of ~~below. The~~2007 ~~subsidiaries~~and ~~are~~NSG does not ~~addressing~~expect anany ~~additional~~significant 32increases ~~manufactured~~or ~~gas~~decreases ~~sites~~to ~~under a program supervised by~~ the ~~Illinois~~total ~~Environmental~~amount ~~Protection Agency (IEPA). Investigations have been completed at all or portions~~ of unrecognized 27tax ~~sites. Remediations~~benefits ~~have~~within ~~been~~the ~~completed~~next attwelve ~~all or portions of four sites~~months.

InNSG records penalties ~~1990, North Shore Gas entered into an Administrative Order on Consent (AOC) with the United States Environmental Protection Agency (EPA)~~ and ~~the~~accrued ~~IEPA~~interest related to ~~implement~~uncertain ~~and~~tax ~~conduct~~positions ~~a remedial investigation/feasibility study (RI/FS) of a manufactured gas site located~~ in ~~Waukegan, Illinois, where manufactured gas and coking operations were formerly conducted (Waukegan Site)~~income tax expense. The RI/FS was comprised of an investigation to determine the nature and extent of contamination at the Waukegan Site and a feasibility study to develop and evaluate possible remedial actions. North Shore Gas entered into the AOC after being notified by the EPA that North Shore Gas, General Motors Corporation (GMC) and Outboard Marine Corporation (OMC) were each a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA), with respect to the Waukegan Site. A PRP is potentially liable for the cost of any investigative and remedial work that the EPA determines is necessary. Other parties identified as PRPs did not enter into the AOC.

~~Under~~NSG files ~~the~~income tax ~~terms~~returns ofin the ~~AOC, North Shore Gas is responsible for the cost of the RI/FS~~U. ~~North~~S. ~~Shore~~federal ~~Gas believes~~jurisdiction, ~~however,~~and ~~that~~in itvarious ~~will~~U.S. ~~recover~~state jurisdictions. With a ~~significant~~few ~~portion~~exceptions of(major ~~the~~exceptions ~~costs~~listed ofbelow), ~~the~~NSG is ~~RI/FS~~no longer ~~from~~subject ~~other~~to ~~entities~~U. ~~GMC~~S. ~~has~~federal, ~~shared~~state ~~equally~~and ~~with~~local ~~North~~income ~~Shore~~tax ~~Gas~~examinations inby tax authorities ~~funding~~for ofyears ~~the~~prior ~~RI/FS cost, without prejudice~~ to ~~GMC's or North Shore Gas' right to seek a lesser cost responsibility at a later date~~2002.

In· ~~1999,~~Illinois ~~the~~Department ~~EPA~~of ~~notified~~Revenue ~~GMC,~~- ~~OMC,~~NSG ~~Elgin~~has ~~Joliet~~agreed ~~and Eastern Railway Company and North Shore Gas that they were potentially liable with respect~~ to ~~the~~statute ~~Waukegan~~extensions ~~Site and that the EPA intended to begin discussions regarding the design and implementation of the remedial action selected~~ for ~~the~~tax ~~Waukegan~~years ~~Site~~covering 2001-2003.

In· ~~1999,~~United ~~the~~States ~~EPA~~Internal ~~issued~~Revenue ~~the~~Service ~~Record of Decision (ROD) selecting the remedial action for the Waukegan Site. The remedy consists of on~~-~~site~~ ~~treatment~~NSG ~~of ground water, off-site treatment and disposal of soil containing polynuclear aeromatic hydrocarbons or creosote, and on-site solidification/stabilization of arsenic-contaminated soils. The EPA~~ has ~~estimated~~agreed ~~the present worth of the remedy~~ to bestatute ~~$26.5~~extensions ~~million~~for ~~(representing~~tax ~~the~~years ~~present~~covering ~~worth of estimated capital costs and of estimated operation and maintenance costs)~~1999-2003.

InNSG has ~~2000,~~closed examinations ~~OMC~~for ~~filed a petition in federal bankruptcy court seeking protection under Chapter 11 of~~ the ~~United~~following ~~States~~major ~~Bankruptcy~~jurisdictions ~~Code. On~~for ~~August 20, 2001,~~ the ~~bankruptcy~~following ~~court entered an order converting OMC's Chapter 11 case to a Chapter 7 case.~~tax years:

~~North~~· ~~Shore~~United ~~Gas~~States ~~and~~Internal ~~the~~Revenue ~~other~~Service ~~parties~~- ~~notified~~NSG byhas ~~the~~a ~~EPA~~partially ~~have~~agreed ~~been~~to ~~discussing~~audit ~~implementation~~report ~~of the remedy~~ and ~~the~~closing ~~allocation~~statement offor ~~costs~~an ~~associated~~IRS ~~with~~examination ~~the investigation and remediation~~ of the ~~Waukegan~~1999-2003 ~~Site. In~~tax ~~July 2001~~years, ~~North~~but ~~Shore~~one ~~Gas~~un-agreed ~~and~~issue from the ~~other~~agents ~~PRPs~~report ~~entered~~has ~~into~~been anprotested ~~AOC~~by ~~with~~NSG ~~the~~and ~~EPA~~has tobeen ~~conduct~~sent ~~the~~to ~~remedial~~IRS ~~design~~appeals for ~~the~~potential ~~Waukegan Site~~resolution.

~~North Shore Gas~~ NSG has ~~entered~~open examinations ~~into~~for ~~a settlement agreement with one of~~ the ~~PRPs~~following ~~and~~major isjurisdictions ~~continuing~~for ~~discussion with~~ the ~~remaining~~following ~~parties.~~tax years:

In· ~~June~~United ~~2002,~~States ~~the~~Internal ~~City~~Revenue ofService ~~Waukegan~~- ~~purchased~~NSG ~~the~~has ~~Waukegan~~an ~~Site~~open ~~from~~examination ~~the~~for ~~OMC bankruptcy trustee. In October 2002,~~ the ~~City~~2004-2005 oftax ~~Waukegan rezoned the property from industrial to residential~~years.

In· ~~October~~Illinois ~~2002,~~Department ~~the~~of ~~City~~Revenue of- ~~Waukegan~~NSG ~~enacted~~has an ~~ordinance~~open ~~that~~examination ~~purports~~for ~~to require~~ the ~~remediation~~2001-2003 oftax ~~soil, at sites within a defined geographic area that includes the Waukegan Site, to levels more stringent than those set forth in the ROD~~years.

AtNOTE 8--COMMITMENTS AND ~~this time, management is unable to determine whether, or to what extent, the change in ownership, change in zoning or enactment of the ordinance will affect remedial costs at the Waukegan Site.~~CONTINGENCIES

~~The current owner of a site in Chicago, formerly called Pitney Court Station, filed suit against Peoples Gas in federal district court under CERCLA. The suit seeks recovery of the past~~ Commodity and ~~future~~Purchase ~~costs~~Order ofCommitments ~~investigating and remediating the site. Peoples Gas is contesting this suit.~~

~~The~~NSG has ~~utility~~obligations at ~~subsidiaries~~March ~~are accruing and deferring the costs they incur in connection with all of the manufactured gas sites~~31, ~~including~~2007 related ~~legal~~to ~~expenses,~~natural ~~pending~~gas ~~recovery~~supply ~~through~~and ~~rates~~transportation orcontracts with ~~from~~total ~~insurance~~estimated ~~carriers~~demand orpayments ~~other entities. At December 31, 2002, the total~~ of ~~the costs deferred (stated in current year dollars) for Peoples Gas was~~ $~~136~~68.17 million; ~~for~~through ~~North Shore Gas the total was $28~~2017.5 ~~million;~~NSG ~~and~~expects to ~~for~~recover ~~the Company on a consolidated basis the total deferred was $164.6 million. Each of~~ these ~~amounts includes the low end of a range of~~ costs ~~that management estimates the utilities will incur~~ in ~~investigating~~future ~~and~~customer ~~remediating the manufactured gas sites~~rates. ~~Management~~ ~~estimates that additional costs in the following amounts are reasonably possible: for Peoples Gas~~Additionally, ~~$45.2~~NSG ~~million;~~has ~~for~~contracts to ~~North~~sell ~~Shore~~natural Gas, $7.6 million; for the Company on a consolidated basis, $52.8 million. Management's estimates are based upon an ongoing review by management and its outside consultants of potential costs associated with conducting investigative and remedial actions at the manufactured gas ~~sites, including updated estimates based on completed investigations or specific remedial plans. While each subsidiary intends~~ to ~~seek contribution from other entities for the costs incurred at the sites, the full extent of such contributions cannot be determined at this time~~customers.

~~Peoples~~NSG also ~~Gas~~has commitments and North Shore Gas have filed suit against a number of insurance carriers for the recovery of environmental costs relating to the utilities' former manufactured gas operations. The suit asks the court to declare, among other things, that the insurers are liable under policies in ~~effect between 1937 and 1986 for costs incurred or to be incurred by~~ the ~~utilities~~form ~~in connection with five~~ of ~~their~~purchase ~~manufactured~~orders ~~gas~~issued ~~sites in Chicago and Waukegan. The utilities are also asking the court~~ to ~~award~~various ~~damages~~vendors ~~stemming from the insurers' breach of their contractual obligation to defend and indemnify the utilities against these costs~~totaling $1. ~~The~~8 ~~utilities~~million have reached settlement agreements with several of the insurance carriers. The utilities are applying portions of the proceeds from these settlements to pay costs otherwise recoverable through rates. The costs deferred at ~~December~~ March 31, ~~2002 have been reduced by the portions of the settlement proceeds that have yet to be applied to pay such costs~~2007. At this time, management cannot determine the timing and extent of the subsidiaries' recovery of costs from the other insurance carriers. Accordingly, the costs deferred at December 31, 2002 have not been reduced to reflect recoveries from other insurance carriers.

~~Management~~- 13 believes that the costs incurred by Peoples Gas and by North Shore Gas for environmental activities relating to former manufactured gas operations are recoverable from insurance carriers, other entities or through rates for utility service. Accordingly, management believes that the costs incurred by the subsidiaries in connection with former manufactured gas operations will not have a material adverse effect on the financial position or results of operations of the utilities. Peoples Gas and North Shore Gas are recovering the costs of environmental activities relating to the utilities' former manufactured gas operations, including carrying charges on the unrecovered balances, under rate mechanisms approved by the Commission.-

Environmental

Former Manufactured Gas Plant Sites

NSG, its predecessors and certain former affiliates operated facilities in the past at multiple sites for the purposes of manufacturing gas and storing manufactured gas. In connection with manufacturing and storing gas, waste materials were produced that may have resulted in soil and groundwater contamination at these sites. Under certain laws and regulations relating to the protection of the environment, NSG might be required to undertake remedial action with respect to some of these materials. NSG is addressing these sites under a program supervised by the IEPA. As is discussed below, NSG is pursuing the transfer of certain of these sites to a program administered by the EPA.

NSG is addressing five manufactured gas plant sites, including one site described in more detail below. Investigations have been completed at all or portions of four sites. Remediations have not yet been completed at any of these four sites. NSG has determined that remediation is not required at one of these four sites.

The EPA has identified NSG as a PRP under CERCLA at the Waukegan Coke Plant Site located in Waukegan, Illinois ("Waukegan Site"). The Waukegan Site is part of the OMC Superfund Site. The EPA also identified OMC, General Motors Corporation and certain other parties as PRPs at the Waukegan Site. The EPA has issued a ROD selecting the remedial action for the Waukegan Site. The selected remedy consists of on-site treatment of groundwater and off-site disposal of soil containing polynuclear aromatic hydrocarbons and arsenic. NSG and the other PRPs have executed a remedial action consent decree which has been entered by the federal district court. The consent decree requires NSG and General Motors, jointly and severally, to perform the remedial action and establish and maintain financial assurance of $27 million. The soil component of the remedial action was completed in August 2005. The final design for the groundwater component of the remedial action has been completed and construction of the groundwater treatment plant has commenced. The EPA has agreed to reduce the financial assurance requirement to $21 million to reflect completion of the soil component of the remedial action.

NSG is also pursuing the transfer of two additional manufactured gas plant sites which are presently being addressed under IEPA supervision to a program administered by the EPA. Under EPA supervision, the remedy decisions at these sites will be based on risk-based criteria typically used at Superfund sites.

NSG is accruing liabilities and deferring costs (recorded as regulatory assets) incurred in connection with all of the manufactured gas plant sites, including related legal expenses, pending recovery through rates or from other entities. At March 31, 2007, regulatory assets (stated in current year dollars) were $71.1 million. The foregoing amount reflects the net amount of (1) costs incurred to date, (2) carrying costs, (3) amounts recovered from insurance companies, other entities and customers, and (4) management’s best estimates of the costs NSG will spend in the future for investigating and remediating the manufactured gas plant sites. Management has recorded liabilities for the amounts described in clause (4) of the preceding sentence of $70.3 million. Management also estimates that additional costs in excess of the recorded liabilities of $79.1 million are reasonably possible. The foregoing estimates do not reflect the impact, if any, of placing certain manufactured gas plant sites under the EPA-administered program referred to above. If these sites are addressed under EPA supervision, the foregoing estimates may change.

Actual costs, which may differ materially from these estimates, will depend on several factors including whether contamination exists at all sites, the nature and extent of contamination and the level of remediation that may be required. Other factors that may affect such costs include, but are not limited to, changes in remediation technology, fluctuations in unit costs and changes in environmental laws and regulations.

NSG intends to seek contribution from other entities for the costs incurred at the sites, but the full extent of such contributions cannot be determined at this time.

- 14 -

NSG is recovering the costs of environmental activities relating to its former manufactured gas operations, including carrying charges on the unrecovered balances, under rate mechanisms approved by the ICC, which authorize recovery of prudently incurred costs. Costs incurred in each fiscal year are subject to a prudence review by the ICC during a reconciliation proceeding for such fiscal year. Costs are expensed in the statement of income in the same period they are billed to customers and recognized as revenues.

Management believes that any costs incurred by NSG for environmental activities relating to former manufactured gas operations that are not recoverable through contributions from other entities or from insurance carriers have been prudently incurred and are therefore recoverable through rates for utility service. Accordingly, management believes that the costs incurred by NSG in connection with former manufactured gas operations will not have a material adverse effect on the financial position or results of operations of NSG. However, any changes in NSG’s approved rate mechanisms for recovery of these costs, or any adverse conclusions by the ICC with respect to the prudence of costs actually incurred, could materially affect NSG’s recovery of such costs through rates.

Former Mineral Processing Site in Denver, Colorado

In 1994, ~~North~~NSG ~~Shore Gas~~ received a demand from the S.W. Shattuck Chemical Company, Inc. ~~(Shattuck)~~, a responsible party under CERCLA, for reimbursement, indemnification and contribution for the response costs incurred at aShattuck’s ~~former mineral processing site in~~ Denver, ~~Colorado (Denver~~ site). ~~Shattuck~~ Shattuck is a wholly- owned subsidiary of Salomon, Inc. (~~Salomon~~“Shattuck”). The demand alleges that ~~North~~NSG ~~Shore Gas~~ is a successor to the liability of a former entity that was allegedly responsible during the period 1934- through 1941 for the disposal of mineral processing wastes containing radium and other hazardous substances at the site. In 1992, the EPA issued the ROD for the Denver site. The remedy selected in the ROD consisted of the on-site stabilization, solidification and capping of soils containing radioactive wastes. In 1997, the remedial action was completed.

~~Denver~~NSG filed ~~site. The~~a declaratory ~~remedy~~judgment ~~selected~~action against Salomon in the ~~ROD~~United ~~consisted~~States ofDistrict Court for the ~~on-site~~Northern ~~stabilization,~~District ~~solidification and capping~~ of ~~soils~~Illinois. ~~containing~~The ~~radioactive~~suit ~~wastes. In~~asked ~~1997,~~ the ~~remedial~~court ~~action~~to ~~was~~declare that NSG ~~completed. The~~is ~~cost~~not ofliable ~~the~~for ~~remedy~~response costs at the Denver site. ~~has~~Salomon ~~been~~filed ~~estimated~~a counterclaim for costs incurred by Salomon and Shattuck towith berespect ~~approximately~~to ~~$31~~the site.0 ~~million. Salomon~~In ~~has~~1997, ~~provided~~the ~~financial~~district ~~assurance~~court granted NSG's motion for ~~the~~summary ~~performance~~judgment, declaring ofthat ~~the~~NSG ~~remediation~~is ofnot liable for any response costs in connection with the Denver site.

~~North~~In 1998, ~~Shore~~the ~~Gas~~United ~~filed~~States aCourt ~~declaratory~~of ~~judgment~~Appeals ~~action against Salomon in the District Court~~ for the ~~Northern~~Seventh ~~District~~Circuit ~~of Illinois. The suit asked~~ reversed the district court’s todecision ~~declare~~and ~~that~~remanded ~~North Shore Gas is not liable for response costs at~~ the ~~Denver~~case ~~site. Salomon filed a counterclaim~~ for ~~costs~~determination ~~incurred~~of bywhat liability, ~~Salomon~~if ~~and Shattuck with respect to the site. In 1997~~any, the ~~District~~former ~~Court~~entity ~~granted~~has, ~~North~~and ~~Shore~~therefore ~~Gas'~~NSG ~~motion for summary judgment~~has, ~~declaring that North Shore Gas is not liable~~ for ~~any~~activities at ~~response costs in connection with~~ the ~~Denver~~ site.

In ~~1998~~ 1999, the ~~United~~EPA ~~States~~announced ~~Court~~that ofit ~~Appeals,~~was ~~Seventh~~reopening ~~Circuit,~~the ~~reversed~~ROD for the ~~District~~Denver ~~Court'~~site. The EPA’s ~~decision~~announcement ~~and~~followed ~~remanded~~a ~~the~~six-month ~~case~~scientific/technical ~~for~~review ~~determination~~by the agency of ~~what~~the ~~liability,~~remedy’s ifeffectiveness. ~~any~~In 2000, the ~~former~~EPA ~~entity~~amended ~~has,~~the ~~and~~ROD ~~therefore~~to require ~~North~~removal ~~Shore~~of ~~Gas~~the ~~has,~~radioactive ~~for~~wastes ~~activities~~from at the site to a licensed off-site disposal facility.

In December ~~1999~~2001, ~~the~~Shattuck ~~EPA~~entered ~~announced~~into ~~that~~a itproposed ~~was~~settlement ~~reopening~~agreement with the United ~~ROD~~States ~~for~~and the ~~Denver~~State of Colorado regarding past and future response costs at the site. ~~The~~ ~~EPA's~~In ~~announcement~~August ~~followed~~2002, athe ~~six-month~~agreement ~~scientific/technical~~was ~~review~~approved by the ~~agency~~United ofStates District Court for the ~~remedy's~~District ~~effectiveness~~of Colorado. In ~~2000,~~Under the ~~EPA~~terms ~~amended~~of the ~~ROD~~agreement, Shattuck agreed to ~~require~~pay, ~~removal~~in ofaddition ~~the~~to ~~radioactive~~amounts ~~wastes~~already ~~from~~paid for response costs at the site, toapproximately $7.2 million in exchange for a ~~licensed~~release ~~off-site~~from ~~disposal~~further obligations ~~facility~~at the site. The ~~EPA~~release ~~estimates~~will ~~that~~not ~~this~~apply ~~action~~in ~~will~~the ~~cost~~event anthat ~~additional~~new information ~~$21.5~~shows ~~million~~that ~~(representing~~the remedy selected in the ~~present~~amended ~~worth~~ROD is not protective of ~~estimated~~human ~~capital~~health ~~costs~~or ~~and~~the ~~estimated~~environment ~~operation~~or ~~and~~if ~~maintenance~~it ~~costs)~~becomes necessary to remediate contaminated groundwater beneath or emanating from the site.

InThe EPA’s ~~December~~website indicates ~~2001,~~that ~~Shattuck entered into a proposed settlement agreement with~~ the ~~United~~remediation ~~States and the State~~ of ~~Colorado regarding past and future response costs at~~ the site~~. In~~ ~~August 2002, the agreement~~ was ~~approved~~completed ~~by the District Court for the District of Colorado. Under the terms of the agreement, Shattuck will pay,~~ in ~~addition~~July to2006 ~~amounts~~and that all ~~already~~radioactive ~~paid~~waste ~~for~~has ~~response~~been ~~costs at the site, approximately $7~~removed.2 ~~million~~The inwebsite ~~exchange for a release from~~ further ~~obligations~~indicates at that the site~~. The~~ ~~release~~has ~~will~~been ~~not~~deemed ~~apply in the event that new information shows that the remedy selected in the amended ROD is not~~ protective of human health orand the environment. orAccording to ifa itpublished ~~becomes~~news ~~necessary~~report, tothe ~~remediate~~EPA ~~contaminated~~has ~~groundwater~~stated ~~beneath~~that orthe ~~emanating~~total ~~from~~cost of the remedy was ~~site~~$57 million.

~~North~~- 15 Shore Gas does not believe that it has liability for the response costs, but cannot determine the matter with certainty. At this time, North Shore Gas cannot reasonably estimate what range of loss, if any, may occur. In the event that North Shore Gas incurred liability, it would pursue reimbursement from insurance carriers, other responsible parties, if any, and through its rates for utility service.-

5NSG does not believe that it has liability for the response costs, but cannot determine the matter with certainty. ~~ACCOUNTS~~ ~~RECEIVABLE~~At this time, NSG cannot reasonably estimate what range of loss, if any, may occur. In the event that NSG incurs liability, it would pursue reimbursement from insurance carriers and other responsible parties, if any.

~~Accounts~~Gas Charge Reconciliation ~~receivable~~Proceedings ~~balances for the Company includes accrued unbilled revenues of $103.9 million, $32.1 million~~ and ~~$80.3~~Related ~~million at December 31, 2002, September 30, 2002 and December 31, 2001, respectively, related primarily to Gas Distribution operations.~~Matters

For NSG, the ICC conducts annual proceedings regarding the reconciliation of revenues from the gas charge and related gas costs. The ~~following~~gas ~~table~~charge ~~presents~~represents the ~~status~~cost of ~~customer~~gas and transportation ~~accounts~~and ~~receivable~~storage ~~balances~~services purchased ("Gas Charge"). In these proceedings, the accuracy of the ~~Company's~~reconciliation ~~utility~~of ~~subsidiaries~~revenues and costs is reviewed and the prudence of gas costs recovered through the Gas Charge is examined by interested parties. If the ICC were to find that the reconciliation was inaccurate or any gas costs were imprudently incurred, the ICC would order NSG to refund the affected amount to customers through subsequent Gas Charge filings. The proceedings are initiated shortly after the close of the fiscal year and historically take at least a year to 18 months to complete.

	Peoples Gas			North Shore Gas
	Accounts Receivable Balance At			Accounts Receivable Balance At
	December 31,	September 30,	December 31,	December 31,	September 30,	December 31,
	2002	2002	2001	2002	2002	2001
	(Dollars In Millions)
Gross customer accounts receivable	$ 259.7	$ 151.2	$ 285.6	$ 38.5	$ 14.0	$ 30.7
Reserve for uncollectible accounts	24.2	31.5	37.5	0.8	0.5	0.6
Net customer accounts receivable	$ 235.5	$ 119.7	$ 248.1	$ 37.7	$ 13.5	$ 30.1
Reserve for uncollectible accounts as a percent of gross customer accounts receivable	9.3%	20.8%	13.1%	2.1%	3.6%	2.0%

The ICC issued orders on March 28, 2006, approving a settlement that resolved all proceedings regarding NSG for fiscal 2001 - 2004 costs. The recommendation that proceedings for NSG's fiscal 2000 be reopened was made moot by approval of the settlement. The orders, which became publicly available March 30, adopted a January 17, 2006 Settlement Agreement and Release among and between NSG, the People of the State of Illinois through the AG, the City of Chicago ("Chicago") and the Citizens Utility Board, as amended by an Amendment and Addendum dated March 6, 2006 (the "Agreement").

~~The~~In its ~~following~~orders approving ~~table~~the Agreement, ~~details~~the ~~Peoples~~ICC ~~Gas'~~determined ~~aging~~that $4 million should be refunded to customers of NSG. ~~customer~~In ~~accounts~~April ~~receivable~~2006, ~~balances:~~the refund was credited to customer accounts.

	Total
	Accounts		Past Due
	Receivable	Current	30-89 Days	90-149 Days	Over 150 Days
	(Dollars in Millions)
December 31, 2002	$259.7	$180.2	$31.0	$9.7	$38.8
Percentage	100	69	12	4	15
September 30, 2002	$151.2	$52.0	$21.7	$19.0	$58.5
Percentage	100	34	14	13	39
December 31, 2001	$285.6	$146.7	$32.8	$15.8	$90.3
Percentage	100	51	11	6	32

Pursuant to the Agreement, NSG also paid $0.2 million jointly to Chicago and the AG in 2006. PEC also agreed to pay up to $5 million per year over the next five years (the “Subsequent Payments”) towards the funding of conservation and weatherization programs for low and moderate-income residential dwellings (the “Conservation Programs”). The five Subsequent Payments of up to $5 million shall be paid based upon Conservation Programs to be developed by Chicago and/or the AG. NSG will not seek recovery in any future rate or reconciliation cases of any amounts associated with the Conservation Programs. As of March 31, 2007, no liability for Subsequent Payments was recorded by NSG. On an ongoing basis and at least quarterly, NSG will continue to evaluate whether amounts should be recorded for probable and reasonably estimable liabilities for some or all of the remaining $25 million in Subsequent Payments related to the Conservation Programs. Triggering events that would lead us to conclude that the liabilities are probable and estimable for the Subsequent Payments include evidence that Chicago and the AG have established or are taking steps to develop valid Conservation Programs and have provided the estimated costs for those programs as required under the Agreement.

Under the Agreement, NSG agreed to forgive all outstanding bad debt from fiscal years 2000-2005 existing as of March 6, 2006, remove the bad debt from customers’ records and to not use any forgiven indebtedness as a reason to deny gas service. ~~COMPREHENSIVE~~ ~~INCOME~~NSG ~~(LOSS)~~had written off an estimated $7 million in prior periods.

~~Other~~The Agreement provides ~~comprehensive~~that ~~income~~NSG ~~(loss)~~will ~~recorded~~cooperate inwith Chicago and the ~~reported~~AG ~~periods~~to ~~consists~~identify those customers of ~~unrealized~~NSG ~~gains~~who ~~and~~were ~~losses~~not ~~from~~receiving ~~derivative~~gas ~~financial~~as ~~instruments~~of ~~accounted~~the ~~for~~date asof ~~cash~~the ~~flow~~Agreement that are ~~hedges~~financial hardship cases. ~~Total~~The ~~comprehensive~~hardship ~~income~~cases ~~(loss)~~were ~~consisted~~identified ofby the utilities, ~~following:~~the AG and Chicago. Following identification, NSG reconnected the hardship cases. NSG forgave all outstanding debt for reconnected customers.

	Three months ended
	December 31,
	2002	2001
	(In Thousands)
Other comprehensive income
Net income	$ 31,001	$ 31,021
Other comprehensive income (loss), net of tax	(6,924)	(3,427)
Total other comprehensive income	$ 24,077	$ 27,594

The Agreement also provides that NSG agrees to implement recommendations proposed by the ICC’s Staff and the intervenors to conduct internal and external audits of its gas procurement practices. A gas supply management audit performed by a consulting firm retained by the ICC is in progress. No findings or recommendations have yet been communicated.

~~Total~~- 16 ~~Other Comprehensive Income for Peoples Gas and North Shore Gas is equal to Net Income as shown on the their respective Income Statements.~~-

~~Item 2~~A $4. ~~Management's~~3 ~~Discussion~~million ~~and~~charge ~~Analysis~~was allocated to NSG in accordance with the orders. In anticipation of ~~Results~~the March 28, 2006 orders from the ICC, NSG recorded estimated gas charge settlement costs for the three-month period ended December 31, 2005 of ~~Operations~~$17.0 ~~and~~million. ~~Financial~~As ~~Condition~~a result, a $12.7 million credit adjustment to the gas charge settlement was recorded in the three-month period ended March 31, 2006.

Amounts refunded in connection with the Gas Charge reconciliation cases for fiscal years 2001 through 2004 relate to specific issues that occurred during that period and NSG does not believe them to be indicative of future actions that may be taken by the ICC with respect to current outstanding and future gas charge reconciliation cases.

The fiscal 2005 Gas Charge reconciliation case was initiated in November 2005 and NSG filed direct testimony. The settlement of the prior fiscal years’ Gas Charge reconciliation proceedings does not affect these cases. ICC Staff and intervenor direct testimony was filed January 18, 2007. Staff witnesses recommended a disallowance of approximately $1.1 million for NSG. An intervenor witness (on behalf of the Citizens Utility Board) recommended a disallowance of approximately $1.1 million for NSG. The majority of the proposed disallowances are for a one-time adjustment by NSG to transportation customers’ bank (storage) gas liability balances. NSG filed its rebuttal testimony on February 22, 2007, and Staff and intervenors filed their rebuttal testimony on April 25, 2007. In their rebuttal testimony, the Staff witnesses reduced their recommended disallowance to about $1 million. Management cannot predict the outcome of these cases but has recorded as of March 31, 2007 a $0.4 million liability primarily related to the Staff’s proposed disallowance associated with the Gas Purchase and Agency Agreement that was at issue in the fiscal 2001-2004 cases, which NSG stated in its rebuttal testimony it is not contesting and which is inclusive of accrued interest.

The hearing for this reconciliation case is scheduled for May 30, 2007.

The fiscal 2006 Gas Charge reconciliation case was initiated on November 21, 2006. NSG filed its direct testimony on April 10, 2007. Staff and intervenors are required to file a pleading by August 1, 2007, identifying their issues, if any.

Class Action

In February 2004, a purported class action was filed in Cook County Circuit Court against PEC, PGL and NSG by customers of PGL and NSG alleging, among other things, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act related to matters at issue in the utilities’ fiscal year 2001 Gas Charge reconciliation proceedings. The suit, Alport et al. v. Peoples Energy Corporation, seeks unspecified compensatory and punitive damages. PGL and NSG have been dismissed as defendants and the only remaining counts of the suit allege violations of the Consumer Fraud and Deceptive Business Practices Act and that PEC acted in concert with others to commit a tortious act. PEC denies the allegations and is vigorously defending the suit.

Based upon the settlement and dismissal of NSG's fiscal years 2001 through 2004 reconciliation cases by the ICC, the court on September 25, 2006 granted in part PEC's motion to dismiss the case by limiting the potential class members in the suit to those persons who were customers during the time that PEC’s joint venture with Enron was in operation and did not receive part of the settlement proceeds from the reconciliation cases. However, the court denied PEC’s motion to dismiss the case to the extent that the complaint seeks punitive damages (regardless of whether such customers received part of the settlement proceeds from the reconciliation cases). The plaintiffs filed a third amended complaint and a motion for class certification, to which PEC provided an opposing answer. On April 25, 2007, the court denied, without prejudice, plaintiffs’ motion for class certification. The court set the case for a status hearing on May 16, 2007. Management cannot predict the outcome of this litigation and has not recorded a liability associated with this contingency.

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Builders Class Action

In June 2005, a purported class action was filed against PEC and its utility subsidiaries, including NSG, by Birchwood Builders, LLC in the Circuit Court of Cook County, Illinois alleging that NSG was fraudulently and improperly charging fees to customers with respect to utility connections, disconnections, reconnections, relocations, extensions of gas service pipes and extensions of distribution gas mains and failing to return related customer deposits. NSG filed two motions to dismiss the lawsuit. On January 25, 2007, the judge entered an order dismissing the complaint, but allowing the plaintiffs the option of filing an amended complaint (except as to the plaintiffs’ seeking of declaratory relief, which was dismissed with prejudice). The judge also ruled that the plaintiffs could file their claims directly with the ICC. The plaintiffs have not yet filed a new complaint with the court nor have they filed complaints at the ICC. NSG continues to believe it has meritorious defenses and intends to vigorously defend against the class action lawsuit. Management cannot predict the outcome of this litigation and has not recorded a liability associated with this contingency.

Technology License

RAKTL has offered PEC a license to a portfolio of patents, claiming that certain products and services utilized by PEC or its utility subsidiaries, including NSG, may infringe the patents. The patents purportedly relate to various aspects of telephone call processing in PEC’s customer call center. Discussions with RAKTL are ongoing, and no legal proceedings have been instituted against PEC or NSG. Based on its current analysis of this matter, PEC has decided to seek a license from RAKTL. Based on the information available at this time, management does not believe resolution of this matter will have a material adverse impact on NSG's financial position or results of operations.

NOTE 9--COMPREHENSIVE INCOME

SFAS No. 130, “Reporting Comprehensive Income,” requires the reporting of other comprehensive income in addition to net income (loss). Total comprehensive income includes all changes in equity during a period except those resulting from investments by NSG's shareholder and distributions to NSG's shareholder. NSG’s total comprehensive income (loss) is equal to its net income of $6.6 million and $13.8 million for the three months ended March 31, 2007 and 2006, respectively.

Changes to accumulated other comprehensive income (loss) from December 31, 2006 to March 31, 2007 were not significant.

NOTE 10-- EMPLOYEE BENEFIT PLANS

The following table provides the components of allocated net periodic benefit cost to NSG for PEC’s benefit plans for the three months ended March 31, 2007 and 2006:

					Other Postretirement
	Pension Benefits				Benefits
Three Months Ended March 31, (Millions)	2007		2006		2007	2006
Service cost	$0.3		$0.4		$0.2	$0.1
Interest cost	0.4		0.4		0.2	0.1
Expected return on plan assets	(0.3	)	(0.3	)	-	-
Amortization of:
Net transition (asset)/obligation	-		-		-	-
Prior service cost	0.1		-		-	-
Net actuarial (gain)/loss	0.1		0.2		-	0.1
Net periodic benefit cost	0.6		0.7		0.4	0.3

Effect of lump sum settlements upon retirement	0.2		0.2		-	-
Net benefit cost	$0.8		$0.9		$0.4	$0.3

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Retiring employees have the option of receiving retirement benefits in the form of an annuity or a lump sum payment. NSG follows SFAS No. 88, "Employer's Accounting for Settlements and Curtailments of Defined Benefit Plans and for Termination Benefits" ("SFAS No. 88"), to account for unrecognized gains and losses related to the settlement of its pension plans' projected benefit obligations ("PBO"). During the three-month periods ended March 31, 2007 and 2006, a portion of each pension plan's PBO was settled by the payment of lump sum benefits, resulting in a settlement cost under SFAS No. 88.

Under the provisions of SFAS No. 71, amounts otherwise charged/credited to other comprehensive income upon application of SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS No. 158"), should be recorded as a regulatory asset or liability if the utility has historically recovered or currently recovers pension expense under SFAS No. 87, “Employers’ Accounting for Pensions”, and other postretirement benefit expense under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” in rates and there is no negative evidence that the existing regulatory treatment will change. In accordance with SFAS No. 71, NSG recorded in regulatory assets and regulatory liabilities the net impact of recognizing the funded status of its plans upon implementation of SFAS No. 158 on December 31, 2006.

The amount of pension and other postretirement benefit costs deferred as a net regulatory asset at March 31, 2007 was $11.3 million and $2.8 million, respectively. Deferred amounts are expected to be recovered in rates over the employees' average remaining service period.

Contributions to the plans are made in accordance with legal and tax requirements and do not necessarily occur evenly throughout the year. NSG does not expect to make contributions to either its pension plans or its other postretirement benefit plans during the year ending December 31, 2007. As of March 31, 2007, no contributions have been made.

NSG also has defined contribution plans that allow eligible employees to contribute a portion of their income in accordance with specified guidelines. NSG matches a percentage of the employee contribution up to certain limits. The cost of the NSG matching contribution to the plans for the three-month periods ended March 31, 2007 and 2006 totaled $0.1 million and $0.1 million, respectively.

NOTE 11--REGULATORY ENVIRONMENT

Merger

Effective February 21, 2007, the previously announced merger between a subsidiary of Integrys and PEC was consummated. NSG and PGL are wholly-owned by PEC.

On February 7, 2007, the ICC approved the merger by accepting an agreed upon order among the active parties to the merger case. The order included Conditions of Approval regarding:

·	commitments by the applicants to provide certain reports,

·	promote and hire a limited number of union employees in specific areas,

·	maintain NSG's operation and maintenance and capital budgets at recent levels,

·	file a plan for formation and implementation of a services company,

·	accept certain limits on the merger-related costs that can be recovered from ratepayers, and

·	not seek cost recovery for any increase in deferred tax assets that may result from the tax treatment of the NSG storage gas inventory in connection with closing the merger.

The Conditions of Approval also include commitments with respect to the pending rate cases of PGL and NSG. These are the inclusion of combined merger synergy savings of $1.6 million at NSG) in the proposed test year, the recovery of $0.8 million at NSG of the merger-related costs in the test year (reflecting recovery of $4.2 million for NSG of costs over 5 years), proposing a combined PGL and NSG $7.5 million energy efficiency program which will be contingent on receiving cost recovery in the rate case

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orders, and filing certain changes to the small volume transportation service programs. Finally, the order provides authority for PGL and NSG to recover from ratepayers in a future rate case after the pending rate cases up to an additional $9.9 million of merger costs, for a maximum potential recovery of $44.9 million. PGL and NSG must demonstrate in the future that merger synergy savings realized have exceeded the merger costs.

Rate Case

On March 9, 2007, Integrys filed a request with the ICC to increase natural gas rates for NSG by $6.3 million for 2008. The proposed rate increase is required to allow NSG to recover its current cost of service and to earn a reasonable rate of return on its investment. The filing includes an 11.06% return on common equity and a common equity ratio of 56% in its regulatory capital structure.

The rate case process in Illinois requires receipt of a written order from the ICC within 11 months from the date of filing, which would be February 6, 2008. Testimony of the various parties will be filed during the summer of 2007 with hearings scheduled for the second and third weeks of September 2007.

NOTE 12--SEGMENTS OF BUSINESS

Prior to the merger between a subsidiary of Integrys and PEC, NSG reported all of its utility and non-utility operations within the Gas Distribution segment and reported general corporate allocations to it under the Corporate and Other segment.

Effective with the quarter ended March 31, 2007, NSG’s results of operations, including allocations for corporate activities, are reported in the Gas Utility segment with non-utility operations reported in the Other segment. Corresponding items for the prior year have been restated for the change in segment reporting. No material items were reportable for the Other segment for either period.

Segments of Business	Gas		NSG
(Millions)	Utility⁽¹⁾	Other⁽²⁾	Consolidated

Three Months Ended
March 31, 2007
Revenues	$124.6	$ -	$124.6
Operating expenses	113.5	-	113.5
Operating income	11.1	-	11.1
Net income	6.6	-	6.6

Three Months Ended
March 31, 2006
Revenues	$121.6	$ -	$121.6
Operating expenses	98.4	-	98.4
Operating income	23.2	-	23.2
Net income	13.8	-	13.8

(1) Includes only utility operations.
(2) Nonutility operations are included in the Other column. Amounts for all categories rounded to less than $0.1 million.

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NOTE 13--NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. The standard eliminates the current requirement for deferring "day one" gains on energy contracts that are not evidenced by quoted market prices or other current market transactions. The standard will be effective for NSG beginning January 1, 2008. NSG is currently evaluating the impact that SFAS No. 157 will have on its financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” ("SFAS No. 159"). This standard permits entities to choose to measure many financial instruments and certain other items at fair value, following the provisions of SFAS No. 157. Included within the scope of the standard are all recognized financial assets and financial liabilities, except consolidated investments, consolidated interests in a variable interest entity, obligations for pension and certain other benefits, leases, and financial instruments that are classified as a component of shareholder's equity. Also included in the scope of the standard are firm commitments that would otherwise not be recognized at inception and that involve only financial instruments, nonfinancial insurance contracts and warranties that the insurer can settle by paying a third party to provide those goods or services, and host financial instruments resulting from separation of an embedded nonfinancial derivative instrument from a nonfinancial hybrid instrument. SFAS No. 159 is effective for NSG beginning January 1, 2008. NSG is currently evaluating the impact that SFAS No. 159 will have on its financial statements.

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Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

NSG is a regulated utility, which purchases, stores, distributes, sells and transports natural gas to about 157,000 customers in 54 communities in northeastern Illinois.

Strategic Overview

The focal point of NSG's business plan is the creation of long-term value for Integrys and its shareholders and for NSG's customers through growth, operational excellence, asset management, and the continued emphasis on reliable, competitively priced, and environmentally sound energy and energy related services.

A strong regulated utility base is important in order to maintain a strong balance sheet, predictable cash flows, a desired risk profile, attractive dividends, and quality credit ratings, which are critical to our success. NSG believes the merger between a subsidiary of Integrys and PEC will help maintain and grow its regulated utility base.

Rate Case

NSG has also proposed three "riders" that would allow changes in costs to be passed through between rate cases. The three riders are:

·	a "decoupling" mechanism that would allow NSG to adjust rates going forward to recover or refund the difference between actual recovered non-gas cost revenue and authorized non-gas cost revenue;

·	a mechanism to recover the gas cost portion of uncollectible expense based on current gas prices; and

·	a mechanism to recover $1.1 million of energy efficiency costs under a program to be approved by the ICC.

NSG is also seeking modifications of tariffs, primarily to reflect current operating conditions in the transportation service riders.

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RESULTS OF OPERATIONS

~~Summary~~First Quarter 2007 Compared with First Quarter 2006

Net income for the Company for the three months ended December 31, 2002 totaled $31.0 million, or $.87 per diluted share, essentially unchanged from the previous period. Operating and equity investment income totaled $60.3 million for the first quarter, versus $60.8 million reported for the prior year. The Gas Distribution business benefited from a return to more normal weather, although that improvement was overshadowed by a significant reduction in pension credits and an increase in the provision for uncollectible accounts. All Overview of the diversified energy businesses posted strong results, and the Company expanded the production base and earnings potential of the Oil and Gas Production segment with the purchase in November 2002 of additional gas reserves in Texas. Operations

ANSG's net ~~summary~~income was of$6.6 ~~variations~~million ~~affecting~~for ~~net~~the ~~income~~three-month period ended ~~between~~March ~~periods~~31, is2007, ~~presented~~compared ~~below~~to $13.8 million for the same quarter in 2006. Results for the three-month period ended March 31, ~~followed~~2006 were positively impacted by ~~explanations~~a pretax credit adjustment of ~~significant~~$12.7 ~~differences~~million byrelated ~~segment~~to the settlement of gas charge proceedings for fiscal years 2001 through 2004. Due to a number of factors, including seasonality of NSG's businesses and market price volatility, the quarterly results of operations should not be considered indicative of the results to be expected for the year as a whole.

	Three Months Ended
	December 31,		Increase /
	2002	2001	(Decrease)
(In Thousands)
Operating and Equity Investment Income:
Gas Distribution	$ 58,292	$ 68,449	$ (10,157)
Power Generation	(1,161)	(2,831)	1,670
Midstream Services	2,564	2,318	246
Retail Energy Services	2,102	1,402	700
Oil and Gas Production	4,872	1,756	3,116
Other	136	(196)	332
Corporate and Adjustments	(6,487)	(10,059)	3,572
Total Operating and Equity Investment Income	60,318	60,839	(521)
Other Income and (Expense)	716	2,106	(1,390)
Interest Expense	12,862	15,976	3,114
Income Taxes	17,171	15,948	(1,223)
Net Income	$ 31,001	$ 31,021	$ (20)

Revenues for the three-month period ended March 31, 2007 increased $3.0 million compared with the same year-ago period. These results reflected the impact on revenues of increased deliveries due to weather (approximately $14 million) that was 14.2% colder compared with the same year-ago period. The increase was partially offset by the impact on revenues of lower natural gas prices (approximately $11 million) that are recovered on a dollar-for-dollar basis. Natural gas costs were 11.1% lower (on a per-unit basis) during the quarter ended March 31, 2007, compared to the same quarter in 2006. Following regulatory practice, changes in the total cost of natural gas are passed on to customers.

~~Gas~~NSG's margin increased ~~Distribution~~$1.5 ~~Segment~~million (6.4%) for the quarter ended March 31, 2007, compared to the same quarter in 2006, primarily due to the impact of increased deliveries due to weather (approximately $1.7 million) that was 14.2% colder compared with the same year-ago period.

~~The~~See Notes ~~Company's~~1 ~~core~~and ~~business~~3 of is the ~~distribution~~Condensed ofNotes ~~natural gas. Peoples Gas and North Shore Gas purchase, store, distribute, sell and transport natural gas~~ to ~~approximately~~Financial ~~one~~Statements ~~million customers (816,000~~ for ~~Peoples~~a ~~Gas~~discussion ~~and 151,000 for North Shore Gas). Peoples Gas' 4,000 mile distribution system serves the City~~ of ~~Chicago~~a ~~and North Shore Gas' 2,000 mile distribution system serves 54 communities~~ change in accounting ~~northeastern~~policy ~~Illinois. The~~with ~~customer~~regards ~~base~~to ~~includes~~presenting ~~residential,~~both ~~commercial~~revenues and ~~industrial~~taxes, ~~retail~~other than income ~~sales and transportation accounts~~taxes, ~~and~~net ~~provides~~of acertain ~~broad~~taxes ~~foundation with no reliance~~ on ~~any~~the ~~particular~~Condensed Consolidated Statements ~~group~~ of ~~customers~~Income. ~~Peoples Gas also owns a storage facility in central Illinois and a pipeline that connects the storage facility and six major interstate pipelines to Chicago.~~

~~Revenues of Peoples Gas and North Shore Gas are affected by changes in the unit cost of the utilities~~NSG's results ~~gas purchases and do not include the cost~~ of operations ~~gas supplies~~ for ~~customers who purchase gas directly from producers and marketers. In a normal gas price environment,~~ the ~~unit~~quarters ~~cost~~ended ofMarch ~~gas~~31 ~~does~~are ~~not~~shown have a significant direct effect on operating income because the utilities' tariffs provide for dollar-for-dollar recovery of gas costs. (See Note 1 of the Notes to Consolidated Financial Statements.) However, significant changes in ~~gas costs can materially affect~~ the ~~reserve for uncollectible accounts and working capital needs.~~ following table:

The following table sets forth net margin and degree day statistics for the Gas Distribution segment.

	Three Months Ended March 31,
NSG Results *(Millions)*	2007	2006	Change

Revenues	$124.6	$121.6	2.5	%
Purchased gas costs	99.8	98.3	1.5	%
Margins	$24.8	$23.3	6.4	%

Throughput in therms
Residential	91.2	79.9	14.1	%
Commercial and industrial	20.2	17.6	14.8	%
Transport	46.1	44.0	4.8	%
Total sales in therms	157.5	141.5	11.3	%

Weather
Heating degree days - actual	3,131	2,741	14.2	%

Gas Distribution Statistics
	Three Months Ended
Net Margin	December 31,
(In Thousands)	2002	2001	2002 vs. 2001
Gas Distribution Revenues:
Sales
Residential
Heating	$ 306,987	$ 204,020	$ 102,967
Non-heating	12,762	12,523	239
Commercial	47,383	28,145	19,238
Industrial	8,782	4,737	4,045
Total Sales	375,914	249,425	126,489
Transportation
Residential	11,157	9,020	2,137
Commercial	14,648	12,583	2,065
Industrial	5,906	5,451	455
Contract Pooling	3,386	2,375	1,011
Total Transportation	35,097	29,429	5,668
Other Gas Distribution Revenues	4,740	11,879	(7,139)
Total Gas Distribution Revenues	$ 415,751	$ 290,733	$ 125,018
Less: Gas Costs	227,029	123,048	103,981
Revenue Taxes	37,289	30,509	6,780
Environmental Costs Recovered	6,206	1,503	4,703
Net Margin Before Taxes	$ 145,227	$ 135,673	$ 9,554
Gas Distribution Deliveries (MDth):
Gas Sales
Residential
Heating	39,229	31,839	7,390
Non-heating	927	1,059	(132)
Commercial	6,408	4,790	1,618
Industrial	1,304	966	338
Total Gas Sales	47,868	38,654	9,214
Transportation
Residential	7,334	6,090	1,244
Commercial	12,967	11,111	1,856
Industrial	6,845	6,681	164
Total Transportation	27,146	23,882	3,264
Total Gas Distribution Deliveries	75,014	62,536	12,478
Margin per Dth Delivered	$ 1.94	$ 2.17	$ (0.23)
Degree Days as a Percent of Normal *	103	82

- 23 -

* Normal degree days for December 31, 2002 and 2001 (2,279) are based on a 30-year average of monthly temperatures at Chicago's O'Hare Airport for the years 1970-1999.Operating Expenses

The discussion of the Gas Distribution segment variations is primarily the result of Peoples Gas and North Shore Gas activity. Operating revenues also include the impact of the Company's weather insurance policy, which is recorded by Peoples Energy. Prior period revenue includes $4.3 million in weather insurance accruals. There were no weather insurance accruals reflected in the current period.

	Three Months Ended March 31,
NSG's Operating Expenses (Millions)	2007	2006		Change
Operating and maintenance expenses	$11.2	$10.5		6.7	%
Gas charge settlement (credit)	-	(12.7	)	-100.0	%
Depreciation and amortization	1.5	1.4		7.1	%
Taxes, other than income taxes	1.0	0.9		11.1	%

Revenues for Peoples Gas for the three-month period increased $105.7 million over the previous period due primarily to an increase in deliveries resulting from weather that was 26.5 percent or 494 heating degree days colder than the previous period and from the higher unit cost of gas. Operating income decreased $7.0 million compared with the previous period resulting from a $13.2 million reduction in first quarter pension credits. The decrease in pension credits was expected due primarily to the inclusion in the prior period of a $6.4 million credit associated with a special retirement program, as well as the ongoing effects of both lower pension plan returns and Maintenance the effect of falling interest rates on the discount rate. Also affecting the variation was an increase in the provision for uncollectible accounts ($6.7 million). Partially offsetting these negative impacts is the effect of the colder weather in the current period as well as a reduction in the municipal and state utility tax accrual ($4.1 million) and a decline in labor costs ($1.5 million).Expenses

InOperating and maintenance ~~addition~~expenses toincreased a$0.7 ~~normal~~million ~~increase in the provision for uncollectible accounts resulting from higher revenues~~(6.7%), ~~about~~to $311.02 million of during the ~~increase relates to higher than expected~~ first quarter ~~net~~of ~~write offs~~2007, ~~principally~~from of$10.5 ~~older~~million ~~outstanding~~during ~~customer receivables related to~~ the ~~winter of fiscal 2001 and a large~~ first quarter ~~bankruptcy~~ of ~~one of the Company's customers. In addition~~2006, driven ~~the~~by ~~provision rate for uncollectibles was increased from 2.0 percent of revenues to approximately 2.5 percent in order to conservatively manage~~ the ~~possible~~following: ~~impact on future collections of higher customer bills resulting from colder weather and higher natural gas costs.~~

~~Revenues~~· ~~for~~Increased ~~North~~injuries Shore Gas for the three-month period increased $23.5 million over the prior period due primarily to an increase in deliveries resulting from weather that was 26.5 percent or 494 heating degree days colder than the previous period and ~~from~~damages ~~the~~expense ~~higher unit cost~~ of ~~gas. Operating income for the three-month period increased~~ $~~1.1 million resulting from the effects of the colder weather, partially offset by a $~~0.85 million ~~increase in first quarter pension expense and a $0~~.~~6 million increase in the provision for uncollectible accounts.~~

~~Power~~· ~~Generation~~Increased ~~Segment~~employee benefits expense of $0.3 million.

~~The~~· ~~Power~~Accrued ~~Generation~~expenses ~~segment, through Peoples Energy Resources, is engaged in the development, construction, operation and ownership~~ of ~~electric generation facilities for sales to electric utilities and marketers~~$0. ~~Currently,~~4 ~~the~~million ~~Company has an ownership interest~~ in ~~two~~connection ~~electric~~with ~~generation~~the ~~facilities. The~~fiscal ~~Company~~2005 ~~and~~Gas ~~Dominion~~Charge ~~Energy,~~reconciliation ~~Inc.~~case ~~(Dominion)~~as ~~are~~discussed ~~equal investors~~ in ~~Elwood,~~Note ~~which~~8 ~~owns~~of ~~and operates a 1,400-megawatt peaking facility near~~ the ~~City~~Condensed ofNotes ~~Chicago. Power~~to ~~generated~~Financial ~~by Elwood is sold through long-term contracts with Exelon Generation Company, LLC (Exelon), Engage Energy America, LLC (Engage) and Aquila, Inc~~Statements. (Aquila). The Company has a 30 percent interest in Southeast Chicago Energy Project, LLC (SCEP), a partnership with Exelon, that owns and operates a 350-megawatt facility. Commercial operations began in July 2002.

~~Revenue~~· ~~recognition~~Decreased ~~for~~utility ~~the~~environmental ~~Elwood~~costs ~~facility~~of is$0.3 ~~based~~million onrelated ~~contract~~to ~~provisions,~~investigation ~~which~~and ~~assign~~remediation ~~higher~~activities ~~value~~at tomultiple ~~summer~~sites ~~capacity.~~that ~~The~~formerly ~~majority~~had ofoperations ~~Elwood's~~for ~~annual~~gas ~~capacity~~manufacturing ~~revenues~~and ~~are~~the ~~recognized~~storage inof manufactured gas (see Note 8 of the ~~June~~Condensed Notes to ~~September~~Financial ~~period,~~Statements ~~resulting~~for infurther ~~operating~~discussion). ~~losses~~These incosts are recovered through the ~~first~~utility’s rate mechanism and ~~second~~a ~~quarters. Revenue~~similar amount is ~~recognized~~included byin ~~SCEP~~revenues, ~~evenly~~therefore ~~across~~these ~~the~~costs ~~fiscal~~do ~~year~~not ~~based~~affect onoperating ~~contract provisions~~income.

~~The~~· ~~operating~~Decreased ~~and~~bad ~~equity~~debt ~~investment~~expense ~~loss~~of ~~for the three-month period amounted to~~ $10.2 million, ~~compared~~due ~~to a $2.8 million loss in the previous period. The improvement was~~ primarily ~~due~~ to ~~equity~~lower ~~investment income generated from the 350~~weather-~~megawatt~~normalized ~~SCEP~~deliveries ~~project,~~and ~~which~~lower ~~began~~natural ~~commercial~~gas ~~operations in July 2002 ($1.6 million). Because the majority of Elwood's capacity revenues are recognized in the June to September period~~prices, ~~Elwood~~as ~~recorded~~well aas ~~loss~~improved incredit ~~the~~and ~~first~~collection ~~quarter offsetting the income generated from SCEP~~experience.

~~Moody's~~Gas Charge Settlement Investors Service and Standard & Poor's Ratings Services recently downgraded Aquila's senior unsecured debt rating to below investment grade. As a result of Aquila's credit rating downgrades, Aquila has posted letters of credit equal to six months of capacity payments, as required under its contracts, for the benefit of Elwood. Aquila continues to make its monthly capacity payments to Elwood on time. In the event Aquila does not fulfill its payment obligations or terminates its power sales tolling agreements and Elwood cannot make adequate alternate arrangements, Elwood could suffer a revenue shortfall or an increase in its costs that could adversely affect the ability of Elwood to fully perform its obligations under the indenture related to its outstanding bonds. If Elwood is adversely affected by the failure of Aquila to make payments under its power sales agreements, the Company may receive substantially reduced or no investment income from Elwood. At this time, the Company cannot determine whether or to what extent Aquila's failure to pay Elwood would result in a material adverse effect on the Company.(Credit)

~~Midstream~~In the ~~Services~~three-month period ~~Segment~~ended March 31, 2006, NSG recorded a pretax credit adjustment of $12.7 million related to a settlement of NSG's gas charge proceedings for 2001 through 2004 with the ICC, as discussed in Note 8 of the Condensed Notes to Financial Statements.

~~The Midstream Services segment is engaged in wholesale activities that provide services to marketers, utilities, pipelines~~ Depreciation and ~~gas-fired power generation facilities in the upper Midwest. Peoples Gas owns and operates a natural gas hub. Peoples Energy Resources owns a natural gas liquids peaking facility.~~ Amortization

~~Revenues~~Depreciation and amortization expense for ~~December~~the ~~31,~~three-month ~~2002~~period increased $370.6 1 million (7.1%) asmainly ~~compared~~due ~~with~~to the ~~previous~~impacts ~~period. In~~of ~~previous periods, income from enovate,~~ a ~~former~~higher ~~partnership~~year-over-year ~~with Enron~~property, ~~was reported as equity investment income,~~ plant and equipment ~~therefore, related revenues were not recognized~~balance. ~~All operations are now performed in a 100 percent owned subsidiary and therefore, recorded revenues and expenses have increased versus last year.~~

~~Operating~~Taxes Other Than and equity investment income increased $0.3 million in the first quarter compared with the prior period primarily due to losses incurred in the year-ago first quarter associated with enovate, which ceased operations in March 2002 ($1.0 million). Offsetting this effect was lower contributions from the hub ($1.2 million).Income

~~Retail~~Taxes other ~~Energy~~than income ~~Services~~for ~~Segment~~the three-month period increased $0.1 million (11.1%) primarily due to higher payroll-related taxes resulting from increased labor expenses.

~~The Retail Energy Services segment provides energy, including energy alternatives, to industrial, commercial and residential customers regionally within Illinois. Residential customer choice~~ Provision for ~~Illinois~~Income ~~became available during the period of March through May 2002, for both gas and electricity.~~ Taxes

~~Revenues~~Income tax expense for the three-month period ~~increased~~decreased $4.4 9 million ~~compared~~primarily ~~with the previous period~~ due to anlower pretax ~~increase~~income. inThe ~~natural~~overall ~~gas~~effective ~~commodity~~tax ~~prices. Operating~~rates ~~income~~ for the three-month ~~period~~periods ended March ~~increased~~31, $02007 and 2006 were 35.79% ~~million~~and ~~due~~38.4%, ~~mainly~~respectively. The effective tax rate differs from the federal tax rate of 35% primarily due to ~~lower~~the ~~operating~~effect of state ~~costs~~income taxation, offset by the permanent tax effects of employee benefit-related deductions.

~~The~~- 24 ~~following table summarizes operating statistics for Peoples Energy Services, the main contributor to the Retail Energy Services segment:~~-

	Three Months Ended December 31,
(In Thousands, except customers)	2002	2001
Gas sales sendout (Dth)	11,141	11,303
Number of gas customers	11,358	12,969
Electric sales sendout (Mwh)	209	226
Number of electric customers	1,102	1,049

Oil and Gas Production Segment

The Oil and Gas Production segment, through Peoples Energy Production, is active in the acquisition, development and production of oil and gas reserves in selected onshore basins in North America. Business is pursued through direct ownership interests in oil, gas and mineral leases. Peoples Energy Production also has an equity investment in EnerVest ($24.9 million as of December 31, 2002), which develops and manages a portfolio of oil and gas producing properties. Peoples Energy Production's primary focus is on natural gas, with growth coming from low-to-moderate-risk drilling opportunities and acquisition of proved reserves with upside potential, which can be realized through drilling, production enhancements and reservoir optimization programs. Certain producing properties owned by Peoples Energy Production qualified for income tax credits as defined in Section 29 of the Internal Revenue Code of 1986. The Section 29 income tax credits were computed based on units of production and recorded to income as earned. These credits expired on December 31, 2002.

In November 2002, the Company acquired an interest in five properties in south Texas and the upper Texas gulf area from a subsidiary of Magnum Hunter Resources, Inc. (Magnum Hunter). The reserves acquired, 99 percent of which are natural gas, were purchased for approximately $33.0 million and added approximately 11 MMcfe per day production at the time of the acquisition.

Revenues and operating and equity investment income for the three-month period increased $6.4 million and $3.1 million, respectively, compared with the previous period due mainly to an increase in net realized prices and higher production. Realized gas prices increased from $3.10 per Mcf in the previous quarter to $3.61 per Mcf in the current quarter. First quarter 2003 gas production increased 28 percent to 59.7 MMcf per day compared with 46.8 MMcf per day for the previous period. The properties acquired from Magnum Hunter during the first quarter added 7.4 MMcf per day of gas production for the quarter with the remaining 5.5 MMcf per day of the increase coming from the Company's drilling and workover programs and the East White Point acquisition closed in June 2002. Oil production was flat compared to the previous period at 1.2 MBbls per day. Results from the segment's equity investment in EnerVest, which is in the process of being liquidated, improved for the quarter.

As of December 31, 2002, the Company had hedges in place for 13,937 MMbtus of its remaining expected fiscal 2003 production. These hedges are a combination of swaps and no cost collars. As of December 31, 2002, the weighted average hedge price for the remainder of fiscal year 2003 was $3.53 utilizing the collar floors. In addition, as of December 31, 2002, the Company had hedges in place for 195,450 Bbls of its remaining expected fiscal 2003 oil production at an average price of $21.25 per Bbl. The majority of these hedges are valued against the New York Merchantile Exchange's Henry Hub Natural Gas Contract.

The Company anticipates quarterly earnings over this fiscal year to be impacted, either positively or negatively, as its equity investment is exited through the periodic sale of EnerVest's properties. The gains or losses on the sale of these properties will be recognized in the quarter in which they occur. The Company continues to work with EnerVest and the other partners to maximize the value of the partnership.

The following table summarizes operating statistics for the Oil and Gas Production segment:

	Three Months Ended December 31,
	2002	2001
Total production - gas equivalent (MMcfe) (1)	6,182	4,962
Daily average production - gas equivalent (MMcfed) (1)	67.2	53.9
Gas production (percentage)	89%	87%
Net realized gas prices received - ($/Mcf)	$3.61	$3.10
Net realized oil price received - ($/Bbl)	$20.57	$22.36
Depreciation, depletion and amortization rate ($/Mcfe)	$1.67	$1.39

(1) Oil production is converted to gas equivalents based on a conversion of six Mcf of gas per barrel of oil.

The increase in the depreciation, depletion and amortization rate was caused by the development of reserves that were previously classified as proved, undeveloped and the transfer of acquisition and development costs related to properties previously classified as probable, which are now classified as proved. Such costs have been added to the depreciation, depletion and amortization pool.

Other Segment

The Company is involved in other activities such as district heating and cooling through its Trigen-Peoples District Energy Company (Trigen-Peoples) partnership and miscellaneous nonmaterial investments. These and certain business development activities do not fall under the above segments and are reported in the Other segment. The reported results also include income from the operation of fueling stations for natural gas vehicles.

Operating and equity investment income for the three-month period remained relatively flat as compared with the year-ago period.

Corporate and Adjustments

Corporate activities that support the business segments, as well as consolidating adjustments, are included in Corporate and Adjustments.

The operating and equity investment loss for the three-month period was $6.5 million compared to $10.1 million in the previous period. The decrease was mainly a result of lower compensation costs and a reduction in outside services expense.

Other Income and Expense

Other income, net of other expense, for the three-month period for the Company decreased $1.4 million compared with the previous period due mainly to a reduction in interest income ($1.7 million).

Other income, net of other expense, for the three-month period for both Peoples Gas and North Shore Gas were insignificant compared with the prior period.

Interest Expense

Interest expense for the Company for the three-month period decreased $3.1 million as compared to the previous period, primarily due to lower average short-term borrowing requirements and to lower interest rates on the short-term borrowings. Average short-term borrowing requirements were reduced due to a combination of factors including lower working capital requirements at the utilities and advances to Elwood prior to project-financing at that facility.

For Peoples Gas, interest expense for the three-month period decreased $1.5 million as compared to the previous period, due primarily to reduced interest rates and lower average short-term borrowing requirements. The reduction in interest rates was primarily due to financing short-term needs principally with commercial paper in the current period and principally with higher cost notes in the prior period. Average short-term borrowings were reduced due to lower working capital needs.

For North Shore Gas, the variation in interest expense for the three-month period was insignificant.

Critical Accounting Policies

See Management's Discussion and Analysis of Results of Operations and Financial Condition (MD&A) in the Company's Annual Report on Form 10-K for the year ended September 30, 2002 for a detailed discussion of the Company's critical accounting policies. These policies include Regulated Operations, Environmental Activities Relating to Former Manufactured Gas Operations, Retirement and Postretirement Benefits, Derivative Instruments and Hedging Activities and Depreciation, Depletion and Amortization.

Other Matters

Accounting Standards.

LIQUIDITY AND CAPITAL RESOURCES

~~The~~We believe ~~following~~that isour acash ~~summary~~balances, liquid assets, operating cash flows, access to capital markets, and borrowing capacity (intercompany and third-party) made available because of strong credit ratings, when taken together, provide adequate resources to fund ongoing operating requirements and future capital expenditures. However, our operating cash flows ~~for~~and ~~the~~access ~~Company~~to ~~for~~capital ~~the~~markets can ~~three~~be ~~months~~impacted ~~ended~~by ~~December 31:~~macroeconomic factors outside of our control. In addition, our borrowing costs can be impacted by short-term and long-term debt ratings assigned by independent rating agencies.

	For the Three Months Ended December 31,
(In Thousands)	2002	2001
Net cash provided by (used in) operations	($24,251)	$8,374
Net cash provided by (used in) investing activities	($62,001)	$168,008
Net cash provided by (used in) financing activities	$94,488	($234,016)

Cash Flows Variations

The following ~~primary decrease in cash from operations at December 31, 2002 over 2001~~ is ~~due~~a summary ~~to an increase in utility receivables caused by colder weather and higher gas prices. The net cash provided by investing activities in the prior period was due to the repayment~~ of ~~advances made in connection with the expansion of the Elwood facility. The net~~ cash ~~used~~flows ~~in investing activities~~ for the current period reflects normal capital spending, including an oil and gas acquisition. The increase in net cash provided by financing activities is primarily due to the increased use of commercial paper to meet working capital needs in the current period as compared to a reduction in short term debt in the prior period resulting from the project financing of the Elwood facility. Partially offsetting this increase was a reduction in long-term debt in the current period.NSG:

See the Consolidated Statement of Cash Flows and the discussion of major balance sheet variations for more detail.

(Millions)	Three Months Ended March 31, 2007		Three Months Ended March 31, 2006
Net cash provided by (used in) operating activities	$32.5		$43.0
Net cash provided by (used in) investing activities	$(29.5	)	$(9.5	)
Net cash provided by (used in) financing activities	$(2.3	)	$(11.4	)

Operating Cash Flows

Cash provided by operating activities decreased for the three-month period ended March 31, 2007 as compared to the three-month period ended March 31, 2006, primarily due to unfavorable net changes in working capital. In the accompanying cash flow statements, balance sheet changes in current deferred tax assets and other receivables exclude certain noncash transactions (primarily the effects of MTM accounting). For the three-month period ended March 31, 2007, balance sheet changes in intercompany assets/liabilities of NSG exclude the noncash effects of derivative activity previously conducted on its behalf by PEC.

Investing Cash Flows

Net cash used in investing activities increased primarily as a result of an intercompany loan to PGL.

Financing Cash Flows

Net cash used in financing activities decreased primarily due to the reduction in the intercompany loan payable to PGL in 2006.

Credit Ratings

The current credit ratings for NSG have not changed since the filing of the combined PEC, PGL and NSG Annual Report on Form 10-K, as amended for the fiscal year ended September 30, 2006.

Balance Sheet Variations

~~The~~Total assets ~~Company's~~at March ~~total~~31, ~~assets~~2007 atincreased $17.9 million compared to December 31, ~~2002~~2006, ~~increased~~due to a seasonal increase in customer receivables and a loan receivable due from PGL for $~~231~~27.05 million. ~~compared~~These increases were partially offset by decreases in regulatory assets (related primarily to ~~September~~MTM 30accounting for the utility gas costs hedging program) and a seasonal decrease in natural gas in storage. The increase in current liabilities was driven by a seasonal increase in the temporary LIFO liquidation credit, ~~2002~~partially offset by a decrease in payables to related parties due primarily to the transfer of remaining derivative contracts from PEC to NSG). NSG’s long-term liabilities and deferred credits and total capitalization did not change significantly.

~~The~~- 25 increase in total assets was primarily due to an increase in customer accounts receivable of $169.4 million as a result of colder weather and higher gas prices. Also, an increase in the oil and gas property, plant and equipment of $39.7 million was primarily a result of the Company acquiring an interest in five properties in south Texas and the upper Texas gulf area. -

~~Short-term~~Total assets ~~debt~~at March 31, 2007 increased $~~143~~30.79 million ~~resulting~~compared ~~from~~to anMarch 31, 2006, due to an increase in ~~commercial~~regulatory ~~paper~~assets ~~borrowing~~(related primarily to ~~meet~~MTM ~~working~~accounting ~~capital~~for ~~needs~~the utility gas costs hedging program) and the recognition of asset retirement obligations required under FIN 47 as of September 30, 2006. ~~The~~ Also contributing to the increase in ~~current~~total ~~regulatory~~assets ~~liabilities~~at ~~primarily~~March ~~reflects~~31, ~~the~~2007 ~~impact~~is ofa ~~the~~loan ~~Gas~~receivable ~~Distribution~~due ~~segment~~from PGL for ~~entering~~$27.5 ~~into~~million. ~~derivative~~These ~~contracts~~increases towere ~~protect~~partially ~~the~~offset ~~price~~by ofa ~~expected~~combined ~~natural~~decrease in ~~gas~~cash ~~purchases~~and cash equivalents and short-term investments. The decrease in current liabilities ~~mark-~~was driven by a decrease in payables to~~-market~~ ~~value~~related ofparties due primarily to the transfer of some derivative contracts isfrom ~~recorded~~PEC to NSG and a decrease in ~~other~~gas ~~receivables~~costs ~~with~~refundable ato ~~contra~~customers. ~~entry~~Long-term liabilities and deferred credits increased due to ~~current~~increases ~~regulatory~~in deferred income taxes and environmental remediation liabilities~~. Partially~~, ~~offsetting~~the recognition of asset retirement obligations under FIN 47 and the ~~mark-to-market~~increase ~~effect~~in onpension and other ~~receivables~~postretirement benefits ~~was~~liabilities with the ~~previous~~adoption ~~year~~of ~~weather~~SFAS ~~insurance~~No. ~~accrual~~158 at December 31, 2006. NSG’s total capitalization did not change significantly.

~~The~~Future Capital ~~increase~~Requirements ~~in the debit balance in AOCI is due to larger deferred losses on cash flow hedges in place related to future oil~~ and ~~gas production at Peoples Energy Production. These losses result from higher natural gas and oil commodity prices and will be amortized to income when production is sold.~~ Resources

The change in the net of gas costs recoverable and gas costs refundable is a short-term timing difference between cost of gas delivered by Peoples Gas and North Shore Gas and the gas costs billed to customers. Contractual Obligations

~~Financial~~The following ~~Sources~~table shows the contractual obligations of NSG as of March 31, 2007:

The Company and its two regulated utilities have access to outside capital markets, commercial paper markets and internal sources of funds that together provide sufficient resources to meet cash requirements. The Company does not anticipate any changes that would materially alter its current liquidity position.

	Payments Due by Period
			2008-	2010-	2012 and
(Millions)	Total	2007	2009	2011	Thereafter
Total debt	$69.1	$ -	$ -	$ -	$69.1
Estimated interest payments on debt	44.0	3.3	6.6	6.6	27.5
Operating leases	-	-	-	-	-
Purchase obligations	70.4	13.6	25.2	9.8	21.8
Total contractual cash obligations	$183.5	$16.9	$31.8	$16.4	$118.4

~~Due~~The table toabove does ~~the~~not ~~seasonal~~reflect ~~nature~~any ofpayments ~~gas~~related ~~usage,~~to ~~a major portion of~~ the ~~utilities'~~manufactured ~~cash~~gas ~~collections~~plant ~~occurs~~remediation liability ~~between~~of ~~January~~$70.3 ~~and~~million ~~June. Because~~at ofMarch ~~timing~~31, ~~differences~~2007 inas the ~~receipt~~amount and ~~disbursement~~timing of payments ~~cash~~are ~~and~~uncertain. ~~the~~See ~~level~~Note 8 of ~~construction requirements,~~ the ~~utility~~Condensed ~~subsidiaries~~Notes ~~borrow from time-~~to~~-time~~ onFinancial Statements afor ~~short-term~~more ~~basis. Short-term~~information ~~borrowings~~about ~~are~~NSG’s ~~repaid with cash from operations, other short-term borrowings or refinanced on a permanent basis with debt or equity, depending on market conditions and capital structure considerations~~environmental liabilities.

~~In addition to cash generated internally by operations, as~~ As of ~~December~~March 31, ~~2002~~2007, ~~the~~NSG ~~Company~~ had ~~credit~~issued ~~facilities~~surety ofbonds ~~$257.7~~totaling ~~million which primarily support its commercial paper borrowing, of which~~ $~~170~~0.32 million ~~was available. The Company's credit facilities provide that the lenders under such facilities may terminate the credit commitments~~ and has authorized ~~declare any outstanding amounts due and payable if~~ the ~~Company's~~issuance ~~debt-to-total capital ratio exceeds 65 percent during any period~~ of ~~time~~a ~~that~~standby ~~the~~letter ~~Company's senior unsecured debt rating falls below A- (Standard & Poor's) or A3 (Moody's Investor Services). Also, Peoples Gas has $142.3 million~~ of credit ~~facilities of which up to $41.0 million may be utilized~~ by ~~North~~a ~~Shore~~financial ~~Gas. As~~institution in ~~of December 31, 2002, none of~~ the ~~$142.3~~amount ~~million was available. As~~ of ~~December 31, 2002, Peoples Gas and North Shore Gas had outstanding loans from the Company of~~ $~~40.1 million and $15.8 million~~10, ~~respectively~~000. The credit facilities of the Company as well as those of the utilities are expected to be renewed when they expire, although the exact amount of the renewals will be evaluated at that time and may change from the current levels.

The Company has been assigned corporate credit ratings of A3 by Moody's, A- by Standard & Poor's and A+ by Fitch Ratings. The commercial paper ratings are P-2, A-2 and F-1, respectively. The senior unsecured debt rating is BBB+ by Standard & Poor's, A3 by Moody's and A+ by Fitch Ratings. Senior secured debt of each utility subsidiary is rated Aa3 by Moody's, A- by Standard & Poor's and AA by Fitch Ratings. The commercial paper of each utility subsidiary is rated P-1 by Moody's, A-2 by Standard & Poor's and F-1+ by Fitch Ratings. Capital Requirements

~~Off-balance~~NSG makes ~~sheet debt at December 31, 2002 and December 31, 2001 consists of the Company's pro rata share of nonrecourse debt of various equity~~ large investments, ~~including~~in ~~Trigen-Peoples~~capital ~~($15~~assets.6 ~~million~~Net ~~and~~construction ~~$15.8~~expenditures ~~million),~~are ~~EnerVest~~expected to (be $~~2.7~~33 million ~~and~~in ~~$18.4~~the ~~million)~~aggregate ~~and~~for ~~Elwood~~the ~~($196.9~~2007 ~~million~~through ~~and~~2009 ~~$201~~period.0 ~~million). At~~The ~~December~~largest of these ~~31,~~expenditures ~~2002~~is ~~and~~for ~~2001,~~the ~~this~~pipe ~~debt~~distribution ~~amounted to $215~~system.~~2 million and $235.2 million, respectively.~~

The Company has amended its shelf registration statement to allow for the issuance from time-to-time of up to 1.5 million shares of common stock pursuant to a continuous equity offering in one or more negotiated transactions or "at-the-market" offerings.Capital Resources

~~Financial~~NSG has ~~Uses~~the ability to borrow up to $50 million from PEC and to loan to or borrow from PGL up to $50 million. As of March 31, 2007, there were no loans from PEC or PGL to NSG. As of March 31, 2007, there were loans of $27.5 million from NSG to PGL.

~~Capital~~NSG's indenture ~~Spending~~relating to its first mortgage bonds contains provisions and covenants restricting the payment of cash dividends and the purchase or redemption of capital stock. At March 31, 2007, such restrictions amounted to $6.9 million of NSG's total retained earnings of $82.3 million. As of March 31, 2007, NSG was in compliance with all of the covenants under its credit facilities and other obligations. For the period 2007 through 2009, NSG plans to use internally generated funds net of forecasted dividend payments, debt financings and equity infusions to fund capital requirements. NSG plans to

~~Retirement~~- 26 ~~of Debt.~~-

Onmaintain current debt ~~December~~to 5,equity ~~2002,~~ratios ~~North~~at ~~Shore~~appropriate ~~Gas~~levels ~~redeemed~~to ~~$24.6~~support ~~million~~current ofcredit ~~its~~ratings and ~~First~~corporate ~~Mortgage~~growth. ~~Bonds,~~Management ~~Series~~believes J,NSG ~~using~~has ~~cash~~adequate onfinancial ~~hand,~~flexibility and ~~intercompany~~resources ~~loans~~to ~~and~~meet ~~commercial~~its ~~paper~~future needs.

OnOther Future January 9, 2003, Peoples Gas received authorization from the Illinois Development Finance Authority (IDFA) to issue $100.0 million of tax-exempt debt to refinance its $50.0 million of First and Refunding Mortgage Bonds, Series X, which will result in the redemption of the City of Chicago Gas Supply Revenue Bonds, 1985 Series A (The Peoples Gas Light and Coke Company Project), and $50.0 million of First and Refunding Mortgage Bonds, Series GG, which will result in the redemption of the City of Chicago Gas Supply Revenue Bonds, 2000 Series A (The Peoples Gas Light and Coke Company Project). The $50.0 million of First and Refunding Mortgage Bonds, Series X, were called for redemption on February 6, 2003.Considerations

~~Issuance~~Gas Charge Reconciliation ofProceedings ~~Bonds.~~ and Related Matters

~~Dividends~~For NSG, the ICC conducts annual proceedings regarding the reconciliation of revenues from the Gas Charge and related gas costs. In these proceedings, the accuracy of the reconciliation of revenues and costs is reviewed and the prudence of gas costs recovered through the gas charge is examined by interested parties. (See Note 8 of the Condensed Notes to Financial Statements.)

~~Commitments~~In February 2004, a purported class action was filed against PEC, PGL and ~~Contingencies~~NSG by customers of PGL and NSG alleging, among other things, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act related to matters at issue in the utilities' gas charge reconciliation proceedings. (See Note 8 of the Condensed Notes to Financial Statements.)

Contractual Obligations.

Guarantees of Unconsolidated Equity Investees and Standby Letters of Credit.

	Commitments Due by Period
	Total
(In millions)	Amounts	Less than	1 to 3	4 to 5	More than
Other commercial commitments	Committed	1 Year	Years	Years	5 Years
Standby letters of credit	$ 5.9	$ 3.8	$ -	$ -	$ 2.1
Guarantees of unconsolidated equity investees	55.4	-	12.5	-	42.9
Total other commercial commitments	$ 61.3	$ 3.8	$ 12.5	$ -	$ 45.0

Peoples Gas has two standby letters of credit totaling $3.9 million as of December 31, 2002. North Shore Gas has none.

			As of December 31, 2002
			(In Millions)
Guarantees of unconsolidated equity investees
Elwood	- Debt service reserve account	$13.9
	- Operational	22.5
Trigen-Peoples	- Operational	19.0
Total guarantees of unconsolidated equity investees			$55.4

In connection with Elwood's project financing, the Company and Dominion have each guaranteed 50 percent of the amount required to be maintained by Elwood in a debt service reserve account. The amount of the Company's guarantee varies over the life of the loan but will not exceed $16.5 million. Subject to the Company's right to terminate the guarantee upon Elwood's depositing sufficient cash in the debt service reserve account, the guarantee continues until Elwood's payment of its outstanding bonds in full, expected to occur July 5, 2026.

The Company has guaranteed 50 percent of Elwood's financial obligations to Aquila in connection with the Aquila power sales agreements. The Company's aggregate liability under the guarantees is limited to $10.0 million. The guarantees terminate August 31, 2016 and August 31, 2017. The Company has also guaranteed 50 percent of Elwood's financial obligations to Engage in connection with the Engage power sales agreement. The Company's aggregate liability under this guarantee is limited to $12.5 million. The guarantee terminates December 31, 2004.

The Company and Trigen Energy Corporation (Trigen) are equal partners in Trigen-Peoples, which provides heating and cooling services to the Metropolitan Pier and Exposition Authority (MPEA) at the McCormick Place Exposition Center in Chicago pursuant to a Development and Energy Services Agreement (MPEA Agreement). Under the MPEA Agreement, Trigen-Peoples must deliver to MPEA and maintain a standby letter of credit to secure Trigen-Peoples' obligations. In addition, the Company and Trigen have provided MPEA with a joint and several guarantee of Trigen-Peoples' obligations under the MPEA Agreement. The guarantee is limited to $11.0 million, plus providing from $4.0 million to $8.0 million in replacement letters of credit, of which the Company would be entitled to collect half of such amounts from Trigen. The guarantee continues for the term of the MPEA Agreement, which ends January 1, 2022.

The Company and Trigen are also party to a Sponsor Support and Equity Contribution Agreement (Sponsor Agreement) with Trigen-Peoples' lender, Prudential Insurance Company of America (Prudential). Under the Sponsor Agreement, the Company and Trigen each agree to pay Prudential 50 percent of Trigen-Peoples' outstanding loan obligations only upon the occurrence of certain events relating to material destruction of the plant, taking of the plant by eminent domain, purchase of the plant by MPEA or default by Trigen-Peoples, the Company or Trigen of certain obligations under the MPEA Agreement and only to the extent that proceeds received by Trigen-Peoples as a result of any such events, plus other cash of Trigen-Peoples, are not sufficient to pay the Prudential loan obligations. None of such events is currently expected to occur. Trigen-Peoples outstanding loan from Prudential was $31.2 million at December 31, 2002. The guarantee continues until payment of the Prudential loan in full, expected to occur December 31, 2017. The Company is not able to estimate the maximum potential amount of future payments under the Sponsor Agreement, if any, because it cannot ascertain the amount of eminent domain proceeds that would be available to the partnership in the unlikely event of a government taking of the plant, nor can it estimate the amount of yield maintenance premium payable with respect to the partnership's loan obligations as such amount is a function of the outstanding loan balance and interest rates at the time the event occurs.

Environmental Matters

InNSG is ~~1994,~~conducting environmental ~~North~~investigations ~~Shore~~and ~~Gas~~remedial work at certain sites that were the locations of former manufactured gas operations. NSG received a demand from a responsible party under CERCLA, for environmental costs associated with a ~~former mineral processing~~ site in Denver, Colorado. ~~The~~ ~~demand alleged that North Shore Gas is a successor to the liability of a former entity that allegedly disposed of mineral processing wastes there between 1934 and 1941.~~ (See Note 48 of the Condensed Notes to ~~Consolidated~~ Financial Statements.)

~~Risk~~Proposed Illinois ~~Management~~Gross Receipts Tax

~~Market~~On March ~~Risk~~7, 2007, Illinois' Governor, in his Budget Address, proposed replacing the corporate income tax with a gross receipts tax ("GRT"). Under this proposal, the GRT rate on goods would be 0.85% and the rate on services would be 1.95%; the GRT would not apply to businesses with sales of less than $2 million. It is not clear which rate NSG would be subject to. The tax would take effect on January 1, 2008, and the first full year of implementation would be the calendar year 2008. During this period, businesses would receive a 100% credit against corporate income taxes paid. The personal property replacement tax would remain intact and continue to apply to partnerships and corporations. It is unclear how existing Illinois net operating losses and Illinois corporate income tax credits will apply to the GRT. The proposed tax would require unitary filings only with members who have Illinois nexus and allow intercompany eliminations among these members only.

~~The following table presents the valuation of outstanding contracts at December 31, 2002 and 2001:~~Service Company

	Derivative Type
	Cash Flow		Fair Value
	Hedges		Hedges		Mark-to-Market
(In Thousands)	2003	2002	2003	2002	2003	2002
Value of contracts outstanding at the beginning of the quarter	$ (13,720)	$ 14,246	$ (201)	$ -	$ 31,042	$ -
Less: contracts realized or otherwise settled during the period	(1,947)	2,805	(40)	-	7,513	-
Plus: value of new contracts entered into during the period
and outstanding at year-end	(2,648)	2,479	(325)	-	7,004	-
Plus: changes in fair value attributable to changes in valuation
techniques and assumptions	-	-	-	-	-	-
Plus: other changes in fair values	(8,802)	1,020	57	-	21,955	-
Value of contracts outstanding at the end of the quarter	$ (23,223)	$ 14,940	$ (429)	$ -	$ 52,488	$ -

As part of the regulatory approval process for the merger with PEC, Integrys agreed to formally propose the formation of a centralized service company to provide administrative support primarily to the Integrys six regulated utilities, which includes NSG and PGL. This includes services such as Legal, Accounting and Finance, Environmental, Information Technology, Purchasing and Warehousing, Human Resources, Administrative Services (e.g. Real Estate, Printing, etc.), Regulatory, Gas Services, and Gas Supply. In addition, some of these services will also be provided to the Integrys nonregulated companies. The creation of a centralized service company will require Integrys' subsidiaries to move many of the employees supporting these functions into the new service company, including employees from PEC and PGL. Certain assets will also be transferred by Integrys' subsidiaries to the service company. Integrys has 120 days from the February 21, 2007 merger closing date (until June 21, 2007) to file for approval of its service company plan with the Public Service Commission of Wisconsin and ICC, and related filings will also be made with the Michigan Public Service Commission and Minnesota Public Utility Commission. The requested approvals will relate to and include the categories of services to be delivered by the service company, the contracts and arrangements governing the provision of such inter-company

~~The maturity of the fair value hedges and the mark~~-~~to-market~~ 27 ~~contracts fall within the next 12 months. Included in the value of mark~~-to-market contracts are amounts relating to the utility subsidiaries' gas price protection program ($51.7 million). All gains or losses from these contracts at maturity will be included in the gas charge to customers. The maturities of the cash flow hedges are detailed in the table below. All valuations are based on NYMEX closing prices at December 31, 2002.

Cash Flow Hedges
Value by Year of Maturity
(In Thousands)
		Less than	1 to 2	2 to 3	3 to 4	4 to 5	More than
	Total	1 Year	Years	Years	Years	Years	5 Years
Value at December 31, 2002	$ (23,223)	$ (14,285)	$ (5,811)	$ (1,583)	$ (1,544)	$ -	$ -
MMbtue	41,324	19,223	11,226	7,989	2,886	-	-
Average Hedge Price	$ 3.46	$ 3.45	$ 3.48	$ 3.58	$ 3.12	$ -	$ -
Value at December 31, 2001	$ 14,940	$ 8,790	$ 3,953	$ 2,059	$ 1,315	$ (1,177)	$ -
MMbtue	36,947	15,290	8,650	5,829	5,138	2,040	-
Average Hedge Price	$ 3.35	$ 3.28	$ 3.36	$ 3.41	$ 3.65	$ 2.94	$ -

services, and the methodologies for allocating the costs for these services to Integrys' subsidiaries who use these services. The required regulatory approvals or waivers will be requested such that the service company can become operational as early as January 1, 2008.

~~Interest~~CRITICAL ACCOUNTING ~~Rate Risk~~POLICIES

~~Indenture~~See MD&A ~~Restrictions~~in the combined PEC, PGL and NSG Annual Report on Form 10-K, as amended, for the fiscal year ended September 30, 2006 for a detailed discussion of NSG's critical accounting policies. These policies include Regulated Operations, Environmental Activities Relating to Former Manufactured Gas Operations, Retirement and Postretirement Benefits, Derivative Instruments and Hedging Activities, Provision for Uncollectible Accounts, and Depreciation and Amortization.

~~Peoples District Energy owns a 50 percent equity interest in Trigen-Peoples~~Item 3. ~~The~~ Quantitative ~~Sponsor Support~~ and ~~Equity~~Qualitative ~~Contribution~~Disclosures ~~Agreement~~about related to Trigen-Peoples' project financing prohibits any distribution that would result in the partners' total capital account in Trigen-Peoples to be less than $7.0 million. At December 31, 2002, the partners' capital account was $7.8 million.Market Risk

Elwood's trust indenture and other agreements related to its project financing prohibit Elwood from making distributions, unless Elwood has maintained certain minimum historic and projected debt service coverage ratiosNone. At January 6, 2003, the most recent semi-annual distribution date, the minimum debt service coverage ratio of 1.2 to 1.0 was required and Elwood's actual debt service coverage ratio was approximately 1.5 to 1.0.

~~FORWARD-LOOKING~~Item 4. Controls ~~INFORMATION~~and Procedures

~~Adverse decisions in proceedings before the Commission concerning the prudence review~~ Evaluation of ~~the~~Disclosure ~~utility~~Controls ~~subsidiaries'~~and ~~gas purchases;~~Procedures

As of the ~~future~~end ~~health~~of the period covered by this Quarterly Report on Form 10-Q, NSG's management, including NSG's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the ~~United~~design ~~States~~and operation of NSG’s disclosure controls and ~~Illinois~~procedures ~~economies;~~(as defined in the Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) and has concluded that, as of the date of such evaluation, NSG’s disclosure controls and procedures were effective in accumulating and timely alerting management to information relating to NSG as appropriate to allow timely decisions regarding required disclosure to be included in NSG's periodic Securities and Exchange Commission filings, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

~~the~~Changes In Internal timing and extent of changes in interest rates and energy commodity prices, including but not limited to the effect of unusually high gas prices on cost of gas supplies, accounts receivable and the provision for uncollectible accounts and interest expense;Control

~~adverse~~Other than ~~resolution~~the merger between a subsidiary of ~~material~~Integrys ~~litigation;~~and PEC discussed below, there were no changes in NSG's internal control over financial reporting during the three-month period ended March 31, 2007 that have materially affected, or are reasonably likely to materially affect, NSG's internal control over financial reporting.

~~business~~Effective February 21, 2007, the merger mentioned above was consummated. Integrys is in the process of integrating PEC's operations and ~~competitive~~has ~~conditions~~included ~~resulting~~PEC's ~~from~~activity ~~deregulation~~in its evaluation of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act of 2002. See Notes 1, 3, 11 and ~~consolidation~~12 of the ~~energy~~Condensed Notes ~~industry;~~to Financial Statements for additional information related to the merger.

~~effectiveness~~- 28 ~~of the Company's risk management policies and the creditworthiness of customers and counterparties;~~-

~~regulatory~~Part II ~~developments~~- Other ~~in the United States, Illinois and other states where the Company does business;~~Information

~~changes in the nature of the Company's competition resulting from industry consolidation, legislative change, regulatory change and other factors, as well as action taken by particular competitors;~~Item 1. Legal Proceedings

See Note 8 of the Condensed ~~Company's~~Notes ~~success~~to inFinancial ~~identifying~~Statements ~~diversified~~for ~~business~~discussions ~~segment~~pertaining ~~projects~~to environmental onmatters ~~financially~~and ~~acceptable~~other ~~terms~~events and ~~generating~~proceedings ~~earnings~~and ~~from~~for ~~projects~~matters pertaining into aproceedings ~~reasonable~~at ~~time;~~the ICC regarding the prudency of gas costs recovered by NSG through the Gas Charge, which note is incorporated herein by reference.

~~operational factors affecting the Company's Gas Distribution, Power Generation and Oil and Gas Production segments;~~Item 1A. Risk Factors

~~Aquila's~~There were ~~financial~~no material ~~ability~~changes to ~~perform~~the ~~under~~risk ~~its~~factors ~~power~~pertaining ~~sales~~to ~~tolling~~NSG ~~agreements~~as ~~with~~presented ~~Elwood;~~in the combined PEC, PGL and NSG Annual Report on Form 10-K, as amended, for the fiscal year ended September 30, 2006.

~~drilling risks and the inherent uncertainty of oil and gas reserve estimates;~~Item 6. Exhibits

~~weather~~The following documents ~~related~~are ~~energy~~attached ~~demand;~~as ~~and~~exhibits:

terrorist activities.

	Exhibit
	Number		Description of Document

	12		North Shore Gas Company Ratio of Earnings to Fixed Charges

	31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 for North Shore Gas Company

	31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 for North Shore Gas Company

	32		Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 for North Shore Gas Company

~~ITEM~~- 29 ~~3. Quantitative and Qualitative Disclosures about Market Risk~~-

~~Quantitative and Qualitative Disclosures about Market Risk are reported in Item 2. MD&A - Risk Management Activities.~~SIGNATURE

~~ITEM~~Pursuant to ~~4. Controls~~the requirements ~~and~~of ~~Procedures~~the Securities Exchange Act of 1934, as amended, the registrant, North Shore Gas Company, has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

The Company, Peoples Gas and North Shore Gas maintain disclosure controls and procedures (as defined in Rule 13a-14 of the Securities Exchange Act of 1934, as amended) which are designed to ensure that information required to be disclosed by the Company, Peoples Gas and North Shore Gas in the reports that are submitted or filed with the Commission is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. Thomas M. Patrick, principal executive officer and Thomas A. Nardi, principal financial officer of the Company, Peoples Gas and North Shore Gas, have evaluated the disclosure controls and procedures within 90 days of the filing of this report. Based upon that evaluation, Messrs. Patrick and Nardi have concluded that the disclosure controls and procedures are effective.

	North Shore Gas Company



Date: May 9, 2007	/s/ Diane L. Ford
	Diane L. Ford
	Vice President and Corporate Controller

	(Duly Authorized Officer and
	Chief Accounting Officer)

~~There~~- 30 have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of Messrs. Patrick's and Nardi's most recent evaluation. -

~~PART~~NORTH SHORE GAS ~~II. OTHER INFORMATION~~COMPANY

Item 1. Legal Proceedings
See Note 4 of the Notes to Consolidated Financial Statements for a discussion pertaining to environmental matters.
Item 2. Changes in Securities and Use of Proceeds
None.
Item 3. Defaults Upon Senior Securities
None.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 5. Other Information
None.
Item 6. Exhibits and Reports on Form 8-K
	Peoples Energy Corporation:
		a. Exhibits
			Exhibit
			Number	Description of Document
			3(a)	Amendment to the By-Laws of the Registrant, dated December 4, 2002
			3(b)	By-Laws of the Registrant, amended as of December 4, 2002
			10(a)	Amendment to Transportation Rate Schedule DSS Agreement between Peoples Gas and Natural Gas Pipeline Company of America dated February 22, 2002
			10(b)	Amendment to Transportation Rate Schedule DSS Agreement between North Shore Gas and Natural Gas Pipeline Company of America dated February 22, 2002
			10(c)	Executive Deferred Compensation Plan, amended as of December 4, 2002
			10(d)	Long-Term Incentive Compensation Plan, amended as of December 4, 2002
			10(e)	Long-Term Incentive Plan for Diversified Business Units, amended as of December 4, 2002
			10(f)	Short Term Incentive Compensation Plan, amended as of December 4, 2002

EXHIBIT INDEX TO FORM 10-Q

			12		Statement re: Computation of Ratio of Earnings to Fixed Charges for the Company
			99(a)		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
			99(b)		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

FOR THE QUARTER ENDED MARCH 31, 2007

	b. Reports on Form 8-K filed or furnished during the quarter ended December 31, 2002
Exhibit
		Date of Report - October 25, 2002
Number		Description of Document
		Item 9 - Regulation FD Disclosure
12		North Shore Gas Company Ratio of Earnings to Fixed Charges
		Press Release and Conference Call Script
31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 for North Shore Gas Company
		Date of Report - October 25, 2002
31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 for North Shore Gas Company
		Item 5 - Other Events
32		Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 for North Shore Gas Company
		Forward Looking Financial Information
		Date of Report - November 13, 2002
		Item 9 - Regulation FD Disclosure
		Item 7 - Financial Statements and Exhibits
		Security Analyst Presentation

The Peoples Gas Light and Coke Company:
	a. Exhibits
		Exhibit
		Number	Description of Document
		10(a)	Amendment to Transportation Rate Schedule DSS Agreement between Peoples Gas and Natural Gas Pipeline Company of America dated February 22, 2002
		99(a)	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
		99(b)	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	b. Reports on Form 8-K filed during the quarter ended December 31, 2002
			None

- 31 -

North Shore Gas Company:
	a. Exhibits
		Exhibit
		Number	Description of Document
		10(b)	Amendment to Transportation Rate Schedule DSS Agreement between North Shore Gas and Natural Gas Pipeline Company of America dated February 22, 2002
		99(a)	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
		99(b)	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
	b. Reports on Form 8-K filed during the quarter ended December 31, 2002
		None.

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
		Peoples Energy Corporation
		(Registrant)
February 11, 2003		By: /s/ THOMAS A. NARDI
(Date)		Thomas A. Nardi
		Senior Vice President, Chief Financial Officer and Treasurer
		(Same as above)
		Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
		The Peoples Gas Light and Coke Company
		(Registrant)
February 11, 2003		By: /s/ THOMAS A. NARDI
(Date)		Thomas. A. Nardi
		Senior Vice President, Chief Financial Officer and Treasurer
		(Same as above)
		Principal Financial Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
		North Shore Gas Company
		(Registrant)
February 11, 2003		By: /s/ THOMAS A. NARDI
(Date)		Thomas. A. Nardi
		Senior Vice President, Chief Financial Officer and Treasurer
		(Same as above)
		Principal Financial Officer

CERTIFICATIONS

I, Thomas M. Patrick, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Peoples Energy Corporation;

2. Based on my knowledge, this quarterly report 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 quarterly report;

3. Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have:

a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions):

a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

6. The registrant's other certifying officer and I have indicated in this quarterly report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.

Date: February 11, 2003

/s/ Thomas M. Patrick

I, Thomas A. Nardi, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Peoples Energy Corporation;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

Date: February 11, 2003

/s/ Thomas A. Nardi

I, Thomas M. Patrick, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Peoples Gas Light and Coke Company;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

Date: February 11, 2003

/s/ Thomas M. Patrick

I, Thomas A. Nardi, certify that:

1. I have reviewed this quarterly report on Form 10-Q of The Peoples Gas Light and Coke Company;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

Date: February 11, 2003

/s/ Thomas A. Nardi

I, Thomas M. Patrick, certify that:

1. I have reviewed this quarterly report on Form 10-Q of North Shore Gas Company;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

Date: February 11, 2003

/s/ Thomas M. Patrick

I, Thomas A. Nardi, certify that:

1. I have reviewed this quarterly report on Form 10-Q of North Shore Gas Company;

b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the "Evaluation Date"); and

c) presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and

Date: February 11, 2003

/s/ Thomas A. Nardi

Filing Compare · NORTH SHORE GAS CO /IL/