UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


(Mark One)
[X]		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended September 30, 2004 OR
[ ]		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934


		IRS Employer
Commission	Exact Name of Registrant as Specified in Charter, State of Incorporation,	Identification
File Number	Address of Principal Executive Office and Telephone Number	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) 130 East Randolph Drive, 24th Floor Chicago, Illinois 60601-6207 Telephone (312) 240-4000

Securities registered pursuant to Section 12(b) of the Act:


Title of Each Class		Name of each exchange on which registered
Peoples Energy Corporation Common Stock, without par value		New York Stock Exchange, Chicago Stock Exchange, and Pacific Exchange

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 by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [x]

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act).


Peoples Energy Corporation	Yes [x] No [ ]


The Peoples Gas Light and Coke Company	Yes [ ] No [x]


North Shore Gas Company	Yes [ ] No [x]

The aggregate market value of the voting stock held by non-affiliates of the registrants as of the last business day of the registrant’s most recently completed second fiscal quarter:


Peoples Energy Corporation		Approximately $1.7 billion computed on the basis of the closing market price of $44.65 for a share of Common Stock on March 31, 2004.

The Peoples Gas Light and Coke Company		None.

North Shore Gas Company		None.

Indicate the number of shares outstanding of each of the registrant’s classes of Common Stock, as of the latest practicable date (November 30, 2004):


	Peoples Energy Corporation
	Common Stock, no par value, 37,847,573 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-K 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-K with the reduced disclosure format permitted by General Instruction I(2).

Documents Incorporated by Reference


	Document	Part of Form 10-K



Peoples Energy Corporation	Portions of the Company’s Notice of Annual Meeting and Proxy Statement to be filed on or about January 7, 2005	Part III

The Peoples Gas Light and Coke Company	None

North Shore Gas Company	None

Contents


Item No.		Page No.


	Glossary of Terms		4
	Forward-Looking Information		6
Part I

Item 1.	Business		7
Item 2.	Properties		13
Item 3.	Legal Proceedings		15
Item 4.	Submission of Matters to a Vote of Security Holders		15
	Executive Officers of the Company		16
Part II

Item 5.	Market for the Company’s Common Stock and Related Stockholder Matters		18
Item 6.	Selected Financial Data		18
Item 7.	Management’s Discussion and Analysis of Results of Operations and Financial Condition		19
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk		40
Item 8.	Financial Statements and Supplementary Data		43
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure		94
Item 9A.	Controls and Procedures		95
Item 9B.	Other Information		96
Part III

Item 10.	Directors and Executive Officers of the Company		96
Item 11.	Executive Compensation		96
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		97
Item 13.	Certain Relationships and Related Transactions		97
Item 14.	Principal Accountant Fees and Services		97
Part IV

Item 15.	Exhibits and Financial Statement Schedules		98
	Signatures		101
	Exhibit Index		104
Amendment to the By-Laws
By-Laws
Amendment to the By-Laws
By-Laws
Credit Agreement
Form of Performance Share Award
Form of Annual Incentive Compensation Opportunity Letter
Severance Agreement
Severance Agreement
Severance Agreement
Severance Agreement
Confidentiality and Employment Agreement
Severance Agreement
Severance Agreement
Statement Re: Computation of Ratio of Earnings to Fixed Charges
Subsidiaries of the Company
Consent
Consent
Consent
Consent
Certification
Certification
Certification
Certification
Form 11-K


	WHERE TO FIND MORE INFORMATION
	Peoples Energy Corporation makes available through its Internet Web site, free of charge, its annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) of the Exchange Act as soon as reasonably practicable after it electronically files such material with, or furnishes it to the Securities and Exchange Commission. The Company’s Internet Web site address is http://www.PeoplesEnergy.com.

Peoples Energy Corporation

Glossary of Terms

Throughout this document, Peoples Energy Corporation, together with its consolidated subsidiaries, may be referred to as “Peoples Energy,” “the Company,” “management,” “we,” “us” or “our.” References to Peoples Gas and to North Shore Gas refer to The Peoples Gas Light and Coke Company and North Shore Gas Company, respectively. References to the Registrants mean Peoples Energy, Peoples Gas and North Shore Gas, unless the context clearly indicates otherwise. Additional abbreviations or acronyms used in this filing are defined below:


Units of Measure



Bbl		Barrel
Bcf		Billion cubic feet
Bcfe*		Billion cubic feet of gas equivalent
Btu		British thermal unit
Dth		1 dekatherm = 10 therms
MBbls		Thousand barrels
MBd		Thousand barrels per day
Mcf		Thousand cubic feet
MDth		Thousand dekatherms
Mcfe*		Thousand cubic feet of gas equivalent
MMbtu		Million British thermal units
MMcfe*		Million cubic feet of gas equivalent
MMcfd		Million cubic feet of gas per day
MMcfed*		Million cubic feet of gas equivalent per day
Mwh		Megawatt-hour
Therm		100,000 Btu (approximately 100 cubic feet)


*	denotes that oil reserves have been converted to their cubic feet equivalents at a rate of 6 Mcf per barrel


Abbreviations



CERCLA		Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended
Chicago		City of Chicago, Illinois
COBRA		Consolidated Omnibus Budget Reconciliation Act
Commission		Illinois Commerce Commission
Committee		Compensation Committee
DD&A		Depreciation, depletion and amortization
DDC Plan		Directors Deferred Compensation Plan
DSOP		Directors Stock and Option Plan
EPA		United States Environmental Protection Agency
ESPP		Employee Stock Purchase Plan
FASB		Financial Accounting Standards Board
FERC		Federal Energy Regulatory Commission
FIN		Financial Interpretation No.
FSP		FASB Staff Position
GAAP		Accounting principles generally accepted in the United States
IEPA		Illinois Environmental Protection Agency
LDC		Local distribution company
LIFO		Last-in, first-out
LTIC		Long-Term Incentive Compensation
MD&A		Management’s Discussion and Analysis of Results of Operations and Financial Condition
NGL		Natural Gas Liquid
NYMEX		New York Mercantile Exchange
PRP		Potentially Responsible Party
PSA		Power Sales Agreement
RCRA		Resource Conservation and Recovery Act
ROD		Record of Decision
RSA		Restricted Stock Award
RSU		Restricted Stock Unit
SAR		Stock Appreciation Right
SCEP		Southeast Chicago Energy Project, LLC
SEC		Securities and Exchange Commission
SFAS		Statement of Financial Accounting Standards

Peoples Energy 4


Definitions



Basin		A geological feature in the earth’s subsurface that is composed of sedimentary rock and geological structures where oil and natural gas prospect and fields are potentially found.

Development well		Well drilled within the proved area of an oil or natural gas field to the depth of a stratigraphic horizon known to be productive.

Dry hole		Exploratory or development well that does not produce oil or gas in commercial quantities.

Exploratory well		Well drilled to find and produce oil or gas in an unproved area, to find a new reservoir in a gas field previously found to be productive of oil or in another reservoir, or to extend a known reservoir.

Field		Area consisting of a single reservoir or multiple reservoirs all grouped on or related to the same geological structural feature or stratigraphic condition.

Gross acres or gross wells		The total acres or wells in which a working interest is owned.

Heating degree days		A unit of measure used to represent each degree that the mean temperature for a 24-hour period is less than 65 degrees Fahrenheit.

Lease operating expenses		Expenses incurred to operate the wells and equipment on a producing lease.

Mark-to-market		A re-valuation of an asset or liability to its current fair value.

Net acreage and net wells		Obtained by multiplying gross acreage and gross wells by the Company’s working interest percentage in the properties.

Weather normalized		Usage, revenue or operating income excluding the effects of deviations from normal weather.

Proved developed reserves		Portion of proved reserves that can be expected to be recovered through existing wells with existing equipment and operating methods.

Proved reserves		Estimated quantities of natural gas, NGLs and crude oil which geological and engineering data demonstrate, with reasonable certainty, can be recovered in future years from known reservoirs under existing economic and operating conditions. Reservoirs are considered proved if shown to be economically producible by either actual production or conclusive formation tests.

Proved undeveloped reserves		Portion of proved reserves that can be expected to be recovered from new wells on undrilled proved acreage, or from existing wells where a relatively major expenditure is required for completion.

Regulatory asset/liability		An asset or liability recorded by the Company as a result of certain costs or revenues qualifying for regulatory treatment and deferred until recovered or refunded through rates.

Reservoir		A porous, permeable sedimentary rock formation containing quantities of oil and/or gas enclosed or surrounded by layers of less permeable or impervious rock.

Working Interest		The ownership interest under an oil and gas lease after accounting for the interests reserved for the lessor or landowner.

Peoples Energy 5

FORWARD-LOOKING INFORMATION

This document contains statements that may be considered forward-looking, such as: management’s expectations, the statements of the Company’s business and financial goals regarding its business segments, the effect of weather on net income, cash position, source of funds, financing activities, market risk, the insignificant effect on income arising from changes in revenue from customers’ gas purchases from entities other than the Gas Distribution subsidiaries, the adequacy of the Gas Distribution segment’s reserves for uncollectible accounts, capital expenditures of the Company’s subsidiaries, and environmental matters. These statements speak of the Company’s plans, goals, beliefs, or expectations, refer to estimates or use similar terms. Generally, the words “may,” “could,” “project,” “believe,” “anticipate,” “estimate,” “plan,” “forecast,” “will be” and similar words identify forward-looking statements. Actual results could differ materially, because the realization of those results is subject to many uncertainties including:


	•	adverse decisions in proceedings before the Commission concerning the prudence review of the utility subsidiaries’ gas purchases;
	•	the effects of the Company’s announced strategic restructuring;
	•	the future health of the United States and Illinois economies;
	•	the timing and extent of changes in interest rates and energy commodity prices, including but not limited to the effect of gas prices on cost of gas supplies, accounts receivable and the provision for uncollectible accounts and interest expense;
	•	adverse resolution of material litigation;
	•	effectiveness of the Company’s risk management policies and the creditworthiness of customers and counterparties;
	•	regulatory developments in the United States, Illinois and other states where the Company does business;
	•	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;
	•	the Company’s success in identifying diversified business segment projects on financially acceptable terms and generating earnings from projects in a reasonable time;
	•	operational factors affecting the Company’s Gas Distribution, Oil and Gas Production and Power Generation segments;
	•	Aquila, Inc. (Aquila)’s financial ability to perform under its PSAs with Elwood Energy LLC (Elwood);
	•	drilling risks and the inherent uncertainty of oil and gas reserve estimates;
	•	weather and price effects on energy demand; and
	•	terrorist activities.


	Some of these uncertainties that may affect future results are discussed in more detail in Item 1— Business and Item 7— MD&A. All forward-looking statements included in this document are based upon information presently available, and the Company, Peoples Gas and North Shore Gas assume no obligation to update any forward-looking statements.

Peoples Energy 6

Part I

ITEM 1 Business


	GENERAL
	Peoples Energy is solely a holding company and does not engage directly in any business of its own, but does provide administrative services that support the business activities of its subsidiaries. Income is derived principally from the Company’s regulated utility subsidiaries, Peoples Gas and North Shore Gas. The Company also derives income from its other subsidiaries, Peoples Energy Resources Company, LLC (Peoples Energy Resources), Peoples Energy Services Corporation (Peoples Energy Services), Peoples Energy Production Company (Peoples Energy Production) and Peoples District Energy Corporation (Peoples District Energy). The Company and its subsidiaries had 2,370 employees at September 30, 2004 prior to restructuring. (See Item 7— MD&A— Executive Summary.)

	The Company was incorporated in 1967 under the Illinois Business Corporation Act and has its principal executive offices at 130 East Randolph Drive, Chicago, Illinois 60601-6207 (Telephone (312) 240-4000).

	The Company has six reportable business segments: Gas Distribution, Oil and Gas Production, Power Generation, Midstream Services, Retail Energy Services and Corporate and Other. (See Note 2 of the Notes to Consolidated Financial Statements for financial information about the Company’s business segments for the last three fiscal years.)

	1. GAS DISTRIBUTION SEGMENT
	Principal Products and Markets
	The Gas Distribution segment is the Company’s core business. Its two regulated utilities (Peoples Gas and North Shore Gas) purchase, store, distribute, sell and transport natural gas to approximately one million customers through a 6,000-mile distribution system serving Chicago and 54 communities in northeastern Illinois. The customer base includes residential, commercial and industrial sales and transportation accounts that provide a broad and diversified foundation for the utilities’ business.

	For fiscal 2004 and on September 30, 2004, the Gas Distribution segment accounted for 66 percent of revenues, 82 percent of operating income and 82 percent of capital assets.

	Peoples Gas was formed in 1855 and had 1,636 employees at September 30, 2004, of which 892 are union employees, prior to restructuring. (See Item 7— MD&A— Executive Summary.) It has approximately 812,000 residential, commercial and industrial retail sales and transportation customers in Chicago.

	North Shore Gas was formed in 1900 and had 210 employees at September 30, 2004, of which 145 are union employees, prior to restructuring. (See Item 7— MD&A— Executive Summary.) It has approximately 153,000 residential, commercial and industrial retail sales and transportation customers within its service area of approximately 275 square miles, located in northeastern Illinois.

	The basic marketing plans of Peoples Gas and North Shore Gas are to maintain their existing shares in traditional market segments, which include space-heating, water heating, clothes drying and cooking. North Shore Gas’ service territory has potential for expansion through increasing population density.

	Competition
	Competition in varying degrees exists between natural gas and other fuels or forms of energy available to consumers in the Midwest and the utilities’ respective service territories, such as electricity and diesel fuel.

	Absent extraordinary circumstances, potential competitors are barred from constructing competing gas distribution systems in the utility subsidiaries’ service territories by a judicial doctrine known as the “first in the field” doctrine. In addition, the high cost of installing duplicate distribution facilities would render the construction of a competing system impractical.

Peoples Energy 7


	A pipeline may seek to provide transportation service directly to end-users. Such direct service by a pipeline to an end-user would bypass the local distributor’s service and reduce the distributor’s earnings. No Peoples Gas customers have been lost to bypass service; only one end-user in North Shore Gas’ service territory is served directly by a pipeline supplier. Both utility subsidiaries have a bypass rate approved by the Commission, which allows the utilities to negotiate rates with customers that are potential bypass candidates.

	Since 2002, all customers have had the opportunity to choose a gas supplier. A substantial portion of the gas that Peoples Gas and North Shore Gas deliver to their customers consists of gas that the subsidiaries’ customers purchase directly from producers and marketers rather than from the utilities (see Current Sources and Availability of Natural Gas below). These direct customer purchases have little effect on net income because the utilities provide transportation service for such gas volumes and recover margins similar to those applicable to conventional gas sales.

	Current Sources and Availability of Natural Gas
	Peoples Gas and North Shore Gas have each entered into long-term and short-term firm gas supply contracts with various suppliers, including BP Canada Energy Marketing Corp., Occidental Energy Marketing, Inc., Oneok Energy Services Company, L.P., and Tenaska Marketing Ventures, with contract terms up to four years. When used in conjunction with contract peaking and contract storage, company-owned storage and peak-shaving facilities, such supply is deemed sufficient to meet current and foreseeable peak and annual market requirements. Although the Company believes North American gas supply to be sufficient to meet current and prospective United States market demands, it is unable to quantify or otherwise make specific representations regarding national supply availability and the cost of the supply.

	Peoples Gas and North Shore Gas purchase firm transportation and storage services from interstate pipelines in the ordinary course of business. Seven interstate pipelines interconnect with Peoples Gas’ utility system and two interstate pipelines and one LDC interconnect with North Shore Gas’ utility system. Having multiple pipelines that serve the utilities’ service territories improves reliability, provides access to diverse supply and fosters competition among these service providers that can lead to favorable conditions for the utilities when negotiating new agreements.

	The following table shows the expected design peak-day availability of gas in MDth during the 2004-2005 heating season for Peoples Gas and North Shore Gas:

Peoples Gas

North Shore Gas

Design Peak-Day

Year of

Design Peak-Day

Year of

Availability

Contract

Availability

Contract

Source

(MDth)

Expiration

(MDth)

Expiration

Firm pipeline supply

320

2007–2008

Firm city-gate supply

156

2005

Liquefied petroleum gas

—

Peaking Service:

Peoples Natural Gas Liquids

—

Storage gas:

Contract

583

2006–2007

233

2006–2007

Peoples-Manlove

993

—

Customer-owned

291

Total expected design

Peak-day availability

2,403

425


	Peoples Gas and North Shore Gas forecast maximum peak day demands of 2,342 MDth and 414 MDth, respectively.

Peoples Energy 8


	The sources of gas supply (including gas transported for customers) in MDth for Peoples Gas and North Shore Gas were as follows:



	Peoples Gas									North Shore Gas



For Fiscal Years Ended September 30,	2004			2003			2002			2004			2003			2002



Gas purchases		118,532			145,613			118,186			25,479			27,744			23,436
Liquefied petroleum gas produced		—			—			115			1			6			24
Customer-owned gas received		78,007			82,968			80,208			13,106			11,531			10,971
Underground storage—net		214			(9,634	)		515			(964	)		18			(6	)
Exchange gas—net		—			—			(1,538	)		—			—			—
Purchased storage compressor fuel, Company use, franchise requirements, and unaccounted-for gas		(4,435	)		(9,139	)		(6,338	)		(647	)		(851	)		(960	)

Total		192,318			209,808			191,148			36,975			38,448			33,465


	Importance of Regulatory Environment
	Legislation and Regulation at State Level. Peoples Gas and North Shore Gas are subject to the jurisdiction of and regulation by the Commission, which has general supervisory and regulatory powers over practically all phases of the public utility business in Illinois. These include rates and charges, issuance of securities, services and facilities, systems of accounts, investments, safety standards, transactions with affiliated interests and other matters.

	Peoples Gas and North Shore Gas are authorized, by statute and/or certificates of public convenience and necessity, to conduct operations in the territories they serve. In addition, these subsidiaries operate under franchises and license agreements granted to them by the municipalities they serve. Peoples Gas holds a perpetual, nonexclusive franchise to serve Chicago. North Shore Gas’ franchises with municipalities within its service territory are of various terms and expiration dates.

	Impact on Sales and Rates. Peoples Gas and North Shore Gas sell natural gas having an average heating value of approximately 1,000 Btu per cubic foot. Sales are made and service rendered by Peoples Gas and North Shore Gas pursuant to rate schedules on file with the Commission containing various service classifications largely reflecting customers’ different uses and levels of consumption. In addition to the rate for distribution of gas, Peoples Gas and North Shore Gas each bills a gas charge representing the cost of gas and transportation and storage services purchased. This gas charge is determined in accordance with a rider to the rate schedules (Rider 2, Gas Charge) to recover the costs incurred by Peoples Gas and North Shore Gas to purchase, transport and store gas supplies. The level of the Gas Charge under both subsidiaries’ rate schedules is adjusted monthly to reflect increases or decreases in natural gas supplier charges, gains, losses and costs incurred under its hedging program, purchased storage service costs, transportation charges and liquefied petroleum gas costs. In addition, under the tariffs of Peoples Gas and North Shore Gas, the difference for any month between costs recoverable through the Gas Charge and revenues billed to customers under the Gas Charge is refundable to or recoverable from customers. (See Notes 1I and 7 of the Notes to Consolidated Financial Statements.)

	Commission rules place restrictions on when the utility subsidiaries may terminate or deny service to customers who do not pay their bills for utility service. Though each utility’s current rates were established to recover an estimated bad debt expense, in recent years bad debt expense has exceeded these estimates by significant amounts, particularly for Peoples Gas. Both the federal and state governments have legislation that provides for additional funding for assistance to low-income energy users, including customers of the Company’s utility subsidiaries. The state legislation creates a fund, financed by charges to electric and gas customers of public utilities, participating municipal utilities and electric co-ops, which supplements currently available federal energy assistance.

	Legislation and Regulation at Federal Level. The Company is a holding company as defined in the Public Utility Holding Company Act of 1935 (1935 Act). By Order entered on December 6, 1968 (Holding Company Act Release No. 16233), the SEC, pursuant to Section 3(a)(1) of the 1935 Act, exempted the Company and its subsidiary companies as such from the provisions of the 1935 Act, other than Section 9(a)(2) thereof.

	Most of the gas distributed by Peoples Gas and North Shore Gas is transported to the utilities’ distribution systems by interstate pipelines. The pipelines’ services (transportation and storage service) are regulated by the FERC

Peoples Energy 9


	under the Natural Gas Act and the Natural Gas Policy Act of 1978. (See Impact on Sales and Rates and Current Sources and Availability of Natural Gas.)

	Under United States Department of Transportation regulations, the Commission is responsible for monitoring Peoples Gas’ and North Shore Gas’ safety compliance program for its pipelines under 49 CFR Part 192 (Transportation of Natural and Other Gas by Pipeline: Minimum Federal Safety Standards) and 49 CFR Part 195 (Transportation of Hazardous Liquids by Pipeline).

	The Pipeline Safety Improvement Act of 2002 makes numerous changes to pipeline safety law, the most significant of which is the requirement that operators of pipeline facilities implement written integrity management programs. Such programs must include a baseline integrity assessment of an operator’s transmission facilities that must be completed within 10 years after enactment of the legislation. Peoples Gas owns and operates 429 miles of pipelines subject to this requirement, and North Shore Gas owns and operates 95 miles of pipelines subject to this requirement. Implementation of this legislation is not expected to have a material adverse effect on the financial condition or operations of the Company.

	Seasonality
	The business of the Company’s utility subsidiaries is influenced by seasonal weather conditions because a large element of the subsidiaries’ customer load consists of space heating. Therefore, weather-related deliveries can have a significant positive or negative impact on net income. (For discussion of the Company’s weather insurance arrangements mitigating the effect of the seasonal nature of gas revenues on cash flow, see Item 7A— Quantitative and Qualitative Disclosures About Market Risk— Risk Management Activities— Weather Risk.)

	During fiscal 2004, the Gas Distribution segment recorded 68 percent of its revenues from November through March.

	Practices Relating to Working Capital
	The seasonality of revenues causes the timing of cash collections to be concentrated from January through June. A portion of the winter gas supply needs is typically purchased and stored from April through November. Also, planned capital spending on the Gas Distribution facilities is concentrated in April through November. Because of these timing differences, the cash flow from customers is likely to be supplemented with temporary increases of short-term commercial paper and bank loans during the late summer and fall. Short-term debt is likely reduced over the January through June period.

	Effects of Environmental Legislation
	The Company and its subsidiaries are subject to federal and state environmental laws. Peoples Gas and North Shore Gas are conducting environmental investigations and remedial work at the sites of former manufactured gas plant operations. (See Note 6A of the Notes to Consolidated Financial Statements.) In 1994, North Shore Gas received a demand for payment of environmental response costs at a former mineral processing site in Denver, Colorado (Denver Site). North Shore Gas does not believe that it has liability for the response costs but cannot determine the matter with certainty. (See Note 6B of the Notes to Consolidated Financial Statements.)

	Peoples Gas and North Shore Gas did not incur and do not anticipate any material expenditures to construct environmental control facilities due to normal operations.

	2. 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 the United States through direct ownership in oil, gas and mineral leases. Peoples Energy Production also has a 30 percent equity investment in EnerVest Energy, L.P. (EnerVest), 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 that can be realized through drilling, production enhancements and reservoir optimization programs. Certain producing properties owned by Peoples Energy Production previously qualified for income tax credits as defined in Section 29 of the Internal Revenue Code of 1986. These credits expired on December 31, 2002.

Peoples Energy 10


	Competition in acquiring oil and gas leases and producing properties in the Company’s targeted onshore basins is substantial. Competitors include the major oil companies, as well as many independents, some of which have significantly greater resources. In order to grow the current asset base, replace and expand reserves, and increase operating income, the Company must select and acquire from third parties quality producing properties and prospects for future drilling. The Company has no control over the timing of when these opportunities may become available. When available, the Company believes that it has the ability to evaluate opportunities quickly and to acquire properties without a financing contingency, which may give it a competitive advantage.

	Extensive federal, state and local laws govern oil and natural gas operations, regulate the discharge of materials into the environment or otherwise relate to the protection of the environment. Numerous governmental agencies issue rules and regulations to implement and enforce such laws that are often difficult and costly to comply with and which may carry substantial administrative, civil and even criminal penalties for failure to comply. The regulatory burden on the oil and natural gas extractive industry increases its cost of doing business and consequently affects its profitability. These laws, rules and regulations affect the Company’s operations, as well as the oil and gas exploration and production industry in general. The costs of such compliance have not been material to Peoples Energy Production to date. The Company believes that it is in substantial compliance with current applicable environmental laws, rules and regulations and that continued compliance with existing requirements will not have a material adverse impact on the Oil and Gas Production segment. The Company currently has no material estimated capital expenditures for environmental control facilities.

	3. POWER GENERATION SEGMENT
	The Power Generation segment, through Peoples Energy Resources, is engaged in the development, operation and ownership of electric generation facilities for sales to electric utilities and marketers. Currently, the Company has an ownership interest in two electric generation facilities. Peoples Energy Resources and Dominion Energy, Inc. (Dominion) are equal investors in Elwood, which owns and operates a 1,400-megawatt peaking facility near Chicago. The plant capacity has been sold through long-term contracts with Exelon Generation Company, LLC (Exelon), Engage Energy America LLC (Engage) and Aquila. Due to the structure of these contracts and the fact that Elwood is a peaking facility, the majority of Elwood’s revenues and the Company’s equity earnings in this investment are recognized in the Company’s third and fourth fiscal quarters. Peoples Energy Resources is also a 29 percent owner of SCEP, a 350-megawatt peaking facility on Chicago’s southeast side. Power generated by SCEP is sold through a long-term contract with Exelon and revenue is recognized evenly throughout the year.

	Peoples Energy Resources has also been involved in developing three power generation projects in the western United States. The projects, which are in the early stages of development, are located in New Mexico, Oregon and Texas. The proposed project in New Mexico is a 280-megawatt gas-fired peaking facility. The proposed Oregon project is a 1,150-megawatt gas-fired combined cycle facility located near Klamath Falls, Oregon, near the California-Oregon Border trading hub. The Texas project activity to date consists primarily of acquiring land options. The investments in the New Mexico and Oregon facilities have been limited to permitting work and buying land and water options. Peoples Energy Resources continues to work towards monetizing these power development sites.

	Under the 1935 Act, an exempt wholesale generator (EWG) is exempt from being deemed a public utility for purposes of the 1935 Act and no company will become a holding company under the 1935 Act as a result of owning an interest in an EWG. To qualify as an EWG, an entity must be engaged exclusively in the business of owning or operating an eligible facility and selling electricity at wholesale. An eligible facility is a generating facility used solely to produce electricity exclusively for sale at wholesale. Elwood was first certified as an EWG by FERC in 1999 and SCEP was first certified as an EWG by FERC in fiscal 2002.

	Both Elwood and SCEP are public utilities under the Federal Power Act and subject to the jurisdiction of FERC with respect to wholesale electric rates and other matters. Elwood has received authority from FERC to make wholesale sales of electricity at market-based rates. The FERC’s order, as is customary with market-based rate schedules, reserves the right to revoke Elwood’s market-based rate authority if it is subsequently determined that Elwood or its affiliates possess excessive market power. SCEP has on file with the FERC a cost-based wholesale PSA with Exelon.

Peoples Energy 11


	Air quality regulations of the EPA and the IEPA in accordance with the federal Clean Air Act and the Clean Air Act Amendments of 1990 require permits to construct and operate certain emission sources and impose restrictions on the emission of certain pollutants, including sulfur dioxide and nitrogen oxide. Elwood and SCEP are currently in compliance with these permitting requirements. The 1990 Amendments require the reduction of sulfur dioxide emissions from electric generating utilities to reduce acid rain. Elwood and SCEP comply with the sulfur dioxide emission limitations by purchasing sulfur dioxide allowances. The price of sulfur dioxide allowances is not expected to fluctuate in a manner that would have a material effect on Elwood or SCEP. Illinois has adopted regulations requiring reductions in nitrogen oxide emissions to begin in 2004. Elwood has complied with these reductions with the use of NOx allowances received from IEPA through the New Source Set Aside (NSSA) allowances. SCEP has complied with these reductions by receiving the necessary nitrogen oxide emission allowances from Exelon.

	Illinois has enacted “multi-pollutant” legislation that establishes a rulemaking process that could lead to emission reduction requirements for nitrogen oxide, sulfur dioxide and mercury from certain electric generating units such as Elwood and SCEP and authorizes IEPA to establish a voluntary program for reducing greenhouse gas emissions. IEPA has not promulgated regulations implementing this legislation. Accordingly, management is not able to evaluate the impact, if any, of the legislation.

	4. MIDSTREAM SERVICES SEGMENT
	The Midstream Services segment provides wholesale services to marketers, utilities, pipelines and gas-fired power generation facilities. Peoples Energy Resources and Peoples Gas engage in activities in this segment. This segment is focused on the Midwest by providing value-added asset-based supply and services and is capitalizing on the reliability of hard assets and the strength of the Company’s balance sheet to assure performance.

	“Asset-based” means that the Midstream Services segment has the physical assets, either through direct ownership or through contractual transportation and storage agreements, to provide services to utilities, pipelines, power plants and gas marketers in the upper Midwest marketplace. These services include gas transportation, storage and supply services. The phrase “asset-based” is intended to differentiate Peoples Energy Resources’ business from that of certain marketers in the wholesale natural gas business who enter into gas supply and storage contracts without the backing of physical or contractual assets, intending instead to always settle with counterparties on the delivery date through the payment of money without delivery of gas. The quarterly results of operations should not be considered indicative of the year as a whole.

	Peoples Energy Resources is authorized by the FERC to sell gas for resale at negotiated rates. The FERC conferred this authority in a rulemaking (Order 547), and Peoples Energy Resources did not need to seek specific approval to make sales for resale at negotiated rates. The FERC does not regulate the sales rates, nor are there any reporting requirements associated with these sales. The FERC, in November 2003, issued Order 644 in which it established a code of conduct applicable to entities making sales pursuant to Order 547 and required such sellers to report to the FERC whether they report prices to publications that publish natural gas price indices.

	Peoples Energy Resources owns a propane-based peaking plant and has several contractual assets of pipeline transportation and storage in the Midwest region which enables it to perform in other asset-based wholesale activities. Peoples Energy Resources also owns approximately 40 miles of small diameter pipes which are used to provide services to local refineries in the Chicago area.

	As part of this segment, Peoples Gas utilizes its storage and pipeline supply assets as a natural gas hub. Hub activity is recorded as part of Midstream Services’ results due to the nature of its service to wholesalers. This activity is regulated by FERC and consists of providing wholesale transportation and storage services in interstate commerce.

	5. RETAIL ENERGY SERVICES SEGMENT
	Peoples Energy Services, the major contributor to the Retail Energy Services segment, provides gas, electricity and energy management services to industrial, commercial and residential customers regionally within Illinois.

Peoples Energy 12


	Peoples Energy Services’ operating income can be influenced by seasonal weather conditions. Although margins per unit may not vary materially month-to-month, total margin can be impacted by usage. In addition, revenue sensitive items such as customer accounts receivable balances are typically impacted when natural gas or electric prices increase as certain products of the segment are tied to an index. However, some risk to accounts receivables and reserves for uncollectible accounts can be mitigated because of fixed price products. The quarterly results of operations and balances should not be considered indicative of the year as a whole.

	Peoples Energy Services is one of the largest nonutility energy marketers in the northern Illinois retail energy marketplace. It is certified by the Commission as an Alternative Retail Electric Supplier (ARES), authorizing it to be a nonutility marketer of electricity, and as an Alternative Gas Supplier (AGS), authorizing it to be a nonutility marketer of natural gas for residential and small commercial customers; AGS certification is not required to serve other customers. As of September 30, 2004, there were a total of 12 ARESs in addition to three electric utilities offering supply service outside their service territories and nine AGSs in Illinois, as well as several other national gas marketers focused on the commercial and industrial segment. Peoples Energy Services was also recently licensed as an AGS by the Michigan Public Service Commission and expects to begin operations in this state in fiscal 2005. Peoples Energy Services has customers from a wide variety of commercial and industrial segments, as well as residential customers. This minimizes the impacts of business cycle risks in any one segment. The Company continually evaluates opportunities to further diversify its customer base and product offerings.

	6. CORPORATE AND OTHER SEGMENT
	Peoples District Energy is involved in district heating and cooling as a partner in Trigen-Peoples District Energy Company (Trigen-Peoples). This and certain business development activities do not fall under the five major business segments and are reported in the Corporate and Other segment. Corporate administrative activities that support the business segments, as well as consolidating adjustments, are also included in Corporate and Other.

ITEM 2 Properties


	The Company’s assets consist primarily of its investments in its subsidiaries. The principal properties of those subsidiaries are described below.

	GAS DISTRIBUTION
	The properties of Peoples Gas and North Shore Gas consist primarily of its gas distribution system, which includes 6,357 miles of gas mains, approximately 610,995 service pipes, and odorization and regulation facilities. Peoples Gas owns and operates an underground gas storage reservoir and a liquefied natural gas plant at Manlove Field located in central Illinois. Peoples Gas also owns a natural gas pipeline system that runs from Manlove Field to Chicago with seven major interstate pipeline interconnects at various points. The underground storage reservoir also serves North Shore Gas under a contractual arrangement. General properties include a substantial investment in office and service buildings, garages, repair shops and motor vehicles, together with the equipment, tools and fixtures necessary to conduct utility business.

	Most of the principal plants and properties of Peoples Gas and North Shore Gas, other than mains, services, meters, regulators and cushion gas in underground storage, are located on property owned in fee. Substantially all gas mains are located under public streets, alleys and highways, or under property owned by others under grants of easements. Meters and house regulators in use and a portion of services are located on premises being served. Certain storage wells and other facilities of the Manlove Field storage reservoir and certain portions of the transmission system are located on land held pursuant to leases, easements or permits. Peoples Gas leases its headquarters office in Chicago.

	Substantially all of the physical properties now owned or hereafter acquired by Peoples Gas or North Shore Gas are subject to (a) the first-mortgage lien of each utility’s respective mortgage to U.S. Bank National Association, as Trustee, to secure each utility’s respective outstanding first mortgage bonds and (b) in certain cases, other exceptions and defects that do not interfere with the use of the property.

Peoples Energy 13


	OIL AND GAS PRODUCTION
	The Oil and Gas Production segment, through Peoples Energy Production, owns working interests in substantial oil and gas leasehold positions located in various areas of Texas, Louisiana, New Mexico, Arkansas, Oklahoma and North Dakota. The Company operates a number of Texas, New Mexico and Louisiana properties, with its principal operating areas being located in South Texas and along the Gulf Coast of Texas. As of September 30, 2004, total proved reserves were approximately 189.5 Bcfe, of which approximately 80 percent are operated by the Company. The Company also owns a 30 percent equity investment interest ($19.2 million) in EnerVest, which manages and develops a portfolio of oil and gas producing properties.

	Information detailing the Company’s gas and oil operations is presented below:

Location of Oil and Gas Properties— Distribution of Production and Reserves

(Location Map)

Peoples Energy 14


	The following tables summarize certain property and drilling statistics for Peoples Energy Production’s oil and gas production activities.


		At September 30, 2004



Proved reserves (Bcfe)			189.5

Productive wells
	Gross oil wells		27
	Net oil wells		16
	Gross gas wells(1)		502
	Net gas wells(1)		224

Acreage
	Gross developed acres		105,334
	Net developed acres		48,882
	Gross undeveloped acres		18,470
	Net undeveloped acres		12,277


	(1)	28 gross (12 net) wells have multiple completions.


For Fiscal Years Ended September 30,			2004		2003		2002



Net Wells Drilled
	Productive
		Exploratory		2.2		1.0		0.2
		Developmental		22.2		20.9		15.2

	Dry
		Exploratory		1.5		0.3		0.0
		Developmental		0.2		3.2		0.6


	As of September 30, 2004, 1 gross (0.25 net) well was in progress.

	Peoples Energy Production leases office space in Houston, Texas. Total capital outlays in fiscal 2004 for drilling and exploration projects were approximately $102 million.

ITEM 3 Legal Proceedings

See Notes 6 and 7 of the Notes to Consolidated Financial Statements for a discussion of material legal proceedings. The Company, Peoples Gas and North Shore Gas are involved in various other claims and legal actions arising out of the normal course of business. Management does not expect that the outcome of these other proceedings will have a material adverse effect on the Company’s, Peoples Gas’ and North Shore Gas’ financial position or results of operations.

ITEM 4 Submission of Matters to a Vote of Security Holders


	None.

Peoples Energy 15

EXECUTIVE OFFICERS OF THE COMPANY


	The following is a list of the names, ages and positions of the executive officers of the Company. Executive officers were elected to serve for a term of one year or until their successors are duly elected and qualified.


	Age at
Name	11/30/2004		Position with the Company



Katherine A. Donofrio	47	Senior Vice President (Business Services) of the Company (2001). Ms. Donofrio is also Senior Vice President of Peoples Gas and North Shore Gas (2002). Prior to becoming Senior Vice President, Ms. Donofrio was Vice President of Utility Rates, Marketing and Business Development (1997). Prior to that she was Director of Regulatory Services (1996). Ms. Donofrio has been an employee of the Company and/or its subsidiaries since 1978.
Linda M. Kallas	45	Vice President and Controller (2004) of the Company. Ms. Kallas is also Vice President and Controller (2004) of Peoples Gas and North Shore Gas. Prior to becoming Vice President, Ms. Kallas was Assistant Vice President and Controller (2002). Prior to becoming Controller, Ms. Kallas was Director of Corporate Accounting (1999) and Manager of various accounting departments (1996). Ms. Kallas has been an employee of the Company and/or its subsidiaries since 1981.
Peter H. Kauffman	58	Assistant General Counsel and Secretary (1998) of the Company. Mr. Kauffman is also Assistant General Counsel and Secretary of Peoples Gas and North Shore Gas (1998). Mr. Kauffman has been an employee of the Company and/or its subsidiaries since 1972.
Mark J. McGuire	51	Associate General Counsel of the Company (2004). Mr. McGuire is also General Counsel of Peoples Gas and North Shore Gas (2003). Mr. McGuire is also a partner in the law firm of McGuireWoods LLP (2002). Prior to joining McGuireWoods, Mr. McGuire was a partner in the Chicago law firm of Jenner & Block (1993– 2001). Prior to that, Mr. McGuire served as Assistant General Counsel of both Peoples Gas and North Shore Gas (1985– 1993).
William E. Morrow	48	Executive Vice President of Operations (2004) of the Company and Vice Chairman (2004) and a Director (2000) of Peoples Gas and North Shore Gas. Mr. Morrow is also President of Peoples Energy Resources (2000). Prior to becoming Executive Vice President of Operations, Mr. Morrow was Executive Vice President of the Company (2000). Mr. Morrow was also Executive Vice President (2001) of Peoples Gas and North Shore Gas. Prior to becoming Executive Vice President, Mr. Morrow was Vice President (1999) of the Company and its utility subsidiaries. Prior to that Mr. Morrow was Vice President of Gas Supply (1996). Mr. Morrow has been an employee of the Company and/or its subsidiaries since 1979.

Peoples Energy 16


Thomas A. Nardi	50	Senior Vice President and Chief Financial Officer (2001) of the Company. Mr. Nardi is also Senior Vice President, Chief Financial Officer and a Director of Peoples Gas and North Shore Gas (2002). Prior to becoming Senior Vice President, Mr. Nardi was President of Peoples Energy Services (2000). Mr. Nardi has been an employee of the Company and/or its subsidiaries since 2000. Prior to working for the Company, Mr. Nardi was briefly employed by Andersen Consulting providing consulting services to the utility and energy industry. Prior to that, he was an officer and employee of Nicor Inc. (1981– 2000) where he most recently served as Senior Vice President Business Development (1995– 2000). Prior to that, he held various executive positions at Nicor such as Controller, Treasurer and Vice President Rates and Gas Supply.
Steven W. Nance	48	President of Peoples Energy Production Company, the Oil and Gas Production business segment of the Company (2000). Prior to working for the Company, Mr. Nance was an independent consultant and investor in the oil and gas business (1999– 2000). Prior to that, Mr. Nance was an employee of XPLOR Energy Inc., an independent oil and gas company where he was Chairman, President and Chief Executive Officer (1998– 1999), President and Chief Executive Officer (1997– 1998) and Executive Vice President and Chief Operating Officer (1997).
Thomas M. Patrick	58	Chairman, President and Chief Executive Officer (2002) and a Director (1998) of the Company. Mr. Patrick is also Chairman of the Board and Chief Executive Officer of Peoples Gas and North Shore Gas (2002). Prior to becoming Chairman, Mr. Patrick was President and Chief Operating Officer (1998) of the Company and its subsidiaries and Vice Chairman (2001) of both utility subsidiaries. Mr. Patrick has been an employee of the Company and/or its subsidiaries since 1976.
Desiree G. Rogers	45	President (2004) and a Director (2004) of Peoples Gas and North Shore Gas. Ms. Rogers is also Senior Vice President (Marketing and Communications) of the Company (2001). Prior to becoming President, Ms. Rogers was Senior Vice President of Peoples Gas and North Shore Gas (2001). Prior to becoming Senior Vice President, Ms. Rogers was Chief Marketing and Communications Officer of the Company (2000). Ms. Rogers has been an employee of the Company and/or its subsidiaries since 1997. Prior to working for the Company, Ms. Rogers was the Director of the Illinois State Lottery (1991– 1997).
Douglas M. Ruschau	46	Vice President (Finance) (2002) and Treasurer of the Company (2003). Mr. Ruschau is also Vice President (2002) and Treasurer (2003) of Peoples Gas and North Shore Gas. Mr. Ruschau became an employee of the Company in 2002. Prior to working for the Company, Mr. Ruschau was employed by Nicor Inc. (1980– 2002) as Assistant Vice President Finance (1998) and Assistant Treasurer (1993) where his responsibilities included oversight of financing activities, cash management, pensions and investments, investor relations, investment analysis and financial forecasting.
Theodore R. Tetzlaff	60	General Counsel of the Company (2003). Mr. Tetzlaff is also a partner in the law firm of McGuireWoods LLP. Prior to joining McGuireWoods, Mr. Tetzlaff was a partner in the Chicago law firm of Jenner & Block (1982– 2001) and also served during part of that time as General Counsel of Tenneco Inc. (1992– 1999).

Peoples Energy 17

Part II

ITEM 5 Market for the Company’s Common Stock and Related Stockholder Matters


	The common stock of the Company is listed on the New York Stock, Chicago Stock and Pacific Exchanges (trading symbol: PGL). At November 30, 2004, there were 20,134 registered shareholders. There were no issuances of unregistered stock in the current fiscal quarter (See Notes 15 and 16 of the Notes to Consolidated Financial Statements).

	All of the outstanding shares of common stock of Peoples Gas and North Shore Gas are owned by the Company.

	The following table provides information about the Company’s purchases of its equity securities in fiscal 2004:


	(A)			(B)		(C)			(D)



									Maximum Number (or
	Total					Total Number of			approximate Dollar
	Number of			Average		Shares (or Units)			Value) of Shares (or
	Shares			Price Paid		Purchased as Part			Units) that May Yet Be
	(or Units)			Per Share		of Publicly Announced			Purchased Under the
Period	Purchased			(or Unit)		Plans or Programs			Plans or Programs



October, 2003		9,153	(2)	$	42.20		9,153	(2)		Not applicable	(3)
January, 2004		2,234	(1)	$	42.07		2,234	(1)		Not applicable	(3)
March, 2004		166	(2)	$	43.65		166	(2)		Not applicable	(3)
May, 2004		69	(2)	$	40.81		69	(2)		Not applicable	(3)


	(1)	Represents options surrendered to the Company in connection with the exercise of options by one director under the Directors Stock and Option Plan, effective December 1, 1999, as amended in December 2002.
	(2)	Represents shares of restricted stock cancelled to pay for taxes related to the vesting of restricted stock under the 1990 LTIC Plan. The 2004 Incentive Compensation Plan replaced the 1990 LTIC Plan.
	(3)	Maximum number of shares cannot be determined as amounts to be purchased vary with individual tax status and market price of Company common stock.

ITEM 6 Selected Financial Data


Peoples Energy Corporation
(In Thousands, Except Per-Share Amounts)


For Fiscal Years Ended September 30,		2004		2003			2002			2001			2000



Operating revenues		$	2,260,199	$	2,138,394		$	1,482,534		$	2,270,218		$	1,417,533
Net income		$	81,564	$	103,934		$	89,071		$	96,939		$	82,942
Diluted earnings per share		$	2.18	$	2.87		$	2.51		$	2.74		$	2.34
Total assets		$	3,094,790	$	2,928,538		$	2,723,647		$	2,976,144		$	2,488,001
Capitalization:
	Long-term debt	$	897,377	$	744,345		$	554,014		$	644,308		$	419,663
	Common equity	$	870,083	$	847,999		$	806,324		$	798,614		$	770,260
Short-term debt		$	55,625	$	207,949	(1)	$	377,871	(2)	$	607,454	(3)	$	568,215
Cash dividends declared per share		$	2.15	$	2.11		$	2.07		$	2.03		$	1.99


	(1)	Includes $152.0 million of long-term debt of Peoples Gas classified as short-term debt due to bondholder tender rights.
	(2)	Includes $90.0 million of long-term debt ($75.0 million for Peoples Gas and $15.0 million for North Shore Gas) retired in fiscal 2003 and $202.0 million of long-term debt of Peoples Gas classified as short-term debt due to bondholder tender rights.
	(3)	Includes $100.0 million of long-term debt retired in fiscal 2002 and $202.0 million of long-term debt of Peoples Gas classified as short-term due to bondholder tender rights.

Peoples Energy 18


ITEM 7	Management’s Discussion and Analysis of Results of Operations and Financial Condition


	INTRODUCTION
	In this section, management discusses the financial condition, results of operations, cash flows, and expected future performance of the Company and its five primary business segments. The discussion applies to Peoples Energy and its business segments on a consolidated basis with the exception of the section titled “Peoples Gas and North Shore Gas Discussions,” which provide information specific to the Company’s two regulated utility subsidiaries. Certain other results of operations and information specific to Peoples Gas and North Shore Gas are also found in Item 1— Business— Gas Distribution Segment and in this Item 7 under Liquidity and Capital Resources.

	Management’s discussion should be read in conjunction with the Company’s Consolidated Financial Statements and related notes. Unless otherwise noted, earnings per share are presented on a diluted basis.

	EXECUTIVE SUMMARY
	Peoples Energy is a diversified energy company comprised of five main business segments:


	•	Gas Distribution
	•	Oil and Gas Production
	•	Power Generation
	•	Midstream Services
	•	Retail Energy Services


	The Gas Distribution segment has the most significant impact on the Company’s consolidated financial results. The remaining segments represent a portfolio of complementary energy businesses that the Company has developed to diversify the sources of consolidated operating income.

	The regulated gas distribution utilities, with service territories in Chicago and its North Shore suburbs, form the core of Peoples Energy. They have historically generated reliable earnings near the rate of return on equity allowed by the Commission, approximately 11 percent, since 1994. The diversified energy businesses use a low to moderate risk approach to develop assets and services that can provide long-term growth and supplement the base of utility earnings. Since 1998, the contribution of operating income from the Company’s diversified businesses has grown from an insignificant amount to $71.1 million in fiscal 2004, up 18 percent from $60.0 million in fiscal 2003.

	The business environment in which Peoples Gas and North Shore Gas operate benefits from a fundamentally strong economic base. The service territories are mature, and natural gas has a high penetration in its markets. While these characteristics contribute to stable earnings and limited growth potential, gas usage per customer has declined steadily in recent years due to lower weather normalized demand primarily reflecting customer conservation. It is unclear how much of the load loss is permanent, but customers are reacting to higher bills by lowering their consumption.

	Peoples Energy operates in a constructive regulatory climate that recognizes the challenges of the utility business environment in the utilities’ service territories. In response to declining customer usage and other economic pressures, management is considering seeking regulatory approval of alternative rate mechanisms that address the long-term interests of the utilities’ customers and Peoples Energy’s shareholders. Management believes that such mechanisms can provide benefits to all stakeholders and provide more reliable cash flows and lower borrowing costs for the Company’s utilities.
	Strategic Restructuring. In fiscal 2004 the Company took actions to offset the decline in gas delivery margins by restructuring its utility and corporate support areas. The intent was to


	•	enhance operating efficiency and customer service;
	•	help protect utility customers from the impact of rising operating costs;
	•	maintain solid financial results.

Peoples Energy 19


	The restructuring resulted in the elimination of over 100 salaried positions, or about 10 percent of the Company’s non-union workforce. Overall, about 300 employees accepted the voluntary severance offer that accompanied the restructuring. In addition, the restructuring plan included key senior management changes affecting the Company and its utility subsidiaries, Peoples Gas and North Shore Gas. William E. Morrow was elected Executive Vice President of Operations for Peoples Energy. Desiree G. Rogers was elected President of Peoples Gas and North Shore Gas, succeeding Donald M. Field, who retired on September 30, 2004. (See Note 3 of the Notes to Consolidated Financial Statements.)

	Accounts Receivable Adjustment. The Company’s fiscal 2004 financial statements include fourth quarter adjustments to operating income of $6.9 million ($4.2 million or $0.11 per diluted share after taxes). These adjustments were identified as part of the year-end financial reporting and control processes. Operating income of Peoples Gas and North Shore Gas reflect fourth quarter adjustments of $5.8 million ($3.5 million after taxes) and $1.1 million ($0.7 million after taxes), respectively. These adjustments on an after tax basis include amounts related to prior years totaling $3.0 million (net of taxes of $2.0 million), $2.6 million (net of taxes of $1.7 million) and $0.4 million (net of taxes of $0.3 million) for the Company, Peoples Gas and North Shore Gas, respectively.

	The adjustments were identified as a result of reconciliations between the detailed customer billing records and the general ledger accounting systems of the Company’s two Gas Distribution utilities, Peoples Gas and North Shore Gas. These adjustments were made to bring the utilities’ accounting records into agreement with the customer records. They were not the result of any errors in customer bills. Differences between the two systems occurred over the past five years primarily due to certain routine billing adjustments made to detailed customer account records which were not correctly reflected in the utilities’ accounting system and resulting financial statements. (See Item 9A— Controls and Procedures for a discussion of this matter as it relates to management’s evaluation of disclosure controls and procedures).

	The Company believes that the effects of these differences are not material to the results of operations and the financial condition of Peoples Energy, Peoples Gas and North Shore Gas for each of the affected years or to the trend of earnings for each company. If the adjustments had been recorded in the years in which the differences occurred, impacts on the Company’s consolidated net income would have been 1.5 percent or less for each of the affected years.

	Fiscal 2004 Results
	Net income for fiscal 2004 on a GAAP basis was $81.6 million, or $2.18 per diluted share, and includes a fourth-quarter charge of $17 million ($0.27 per share after taxes) for expenses related to the Company’s restructuring of its utility and corporate support areas. Fiscal 2004 ongoing net income (non-GAAP), defined as GAAP net income adjusted to exclude the effects of the restructuring charge, was $91.8 million, or $2.45 per diluted share. Fiscal 2003 GAAP net income was $103.9 million, or $2.87 per diluted share. Management believes that ongoing net income (non-GAAP) and ongoing operating income (non-GAAP) are useful for year over year comparisons since restructuring-related charges of this magnitude are infrequent and affect the comparability of ongoing operating results. Ongoing net income and ongoing operating income are used internally to measure performance against budget and in reports for management and the Board of Directors. While the decline in fiscal 2004 earnings was disappointing, reflecting the decline in deliveries and cost pressures, in other respects it was a very positive year. In addition to the corporate restructuring discussed earlier, operating income from our diversified energy businesses continues to grow and we have achieved progress in reducing utility bad debt expense.

	Reconciliation of Fiscal 2004 GAAP and Non-GAAP Earnings


			Restructuring		Ongoing
(In Thousands, Except Per-Share Amounts)	GAAP		Charge		(Non-GAAP)



Operating Income	$	164,351	$	17,000	$	181,351
Net Income	$	81,564	$	10,243	$	91,807
Earnings Per Share— Diluted	$	2.18	$	0.27	$	2.45


	RESULTS OF OPERATIONS

	Income Statement Variations
	Fiscal 2004. The Company’s revenues and cost of energy sold increased $121.8 million and $138.8 million, respectively, for fiscal 2004 compared to fiscal 2003 due to:


	•	higher realized commodity prices;

Peoples Energy 20


	•	increased sales volumes in the Oil and Gas Production and Retail Energy Services segments, partially offset by a 7.6 percent decrease in Gas Distribution deliveries in fiscal 2004 resulting from warmer weather and lower normalized deliveries.


	Operation and maintenance expense for fiscal 2004, excluding the restructuring charge (non-GAAP), increased $5.8 million, or two percent, compared to fiscal 2003. Significant items to note in fiscal 2004 were:


	•	Higher pension expense of $11.6 million. Pension expense increased due to the ongoing effects of both lower pension plan returns in recent years and a lower discount rate. Pension expense for fiscal 2004 was $10.1 million.
	•	Higher outside professional services ($4.2 million) mainly related to higher legal costs associated with the utilities’ ongoing gas reconciliation cases before the Commission.
	•	Higher expense in the Oil and Gas Production segment ($5.6 million) resulting primarily from an increase in lease operating expense and exploration expense.
	•	Insurance recoveries of $2.5 million related to mercury clean-up costs incurred in prior years.
	•	Decreased provision for uncollectible accounts ($6.2 million), mainly as a result of improving credit and collection metrics in the Gas Distribution segment.
	•	Lower corporate expenses resulting from the impact of a lower Peoples Energy stock price on the value of SARs ($2.5 million).
	•	Lower utility environmental costs of $4.0 million. These costs are recovered through the utilities’ rate mechanism and a like amount is included in revenues; therefore, these costs do not affect operating income.


	Other Variances for 2004.


	•	Fiscal 2004 includes a $17.0 million restructuring charge resulting from the Company’s restructuring of its utility and corporate support areas.
	•	DD&A for fiscal 2004 increased $7.3 million compared to fiscal 2003 mainly resulting from higher production and a higher depletion rate in the Oil and Gas Production segment and from higher depreciable property in the Gas Distribution segment.
	•	Taxes, other than income taxes, which are typically directly related to the level of utility revenues, increased for fiscal 2004 by $2.8 million compared to fiscal 2003 primarily due to adjustments to reduce municipal and state utility tax accruals ($10.0 million) recorded in fiscal 2003. Absent this impact, these taxes declined due to lower levels of utility revenues. The comparison was also affected by a change in the state law for certain taxes, shifting the taxpayer liability from the Company to certain customers. This resulted in the Company recording the collected taxes only as a remittance liability where previous period amounts were recorded as both revenue and tax expense.
	•	Equity investment income increased $2.5 million, primarily driven by EnerVest activity in the Oil and Gas Production segment.
	•	Fiscal 2004 interest expense for the Company decreased $1.0 million from fiscal 2003 due primarily to lower interest rates. The reduction in rates was primarily the result of lower interest on variable rate debt and the retirement or refinancing of higher cost notes and bonds.
	•	Income tax expense for fiscal 2004 decreased $21.3 million compared to fiscal 2003 resulting primarily from lower pretax income in fiscal 2004 and a lower effective tax rate due to fiscal 2004 adjustments in accrued income taxes based on updated estimates of income tax liabilities. Also impacting the variation was the ability under recent tax legislation to realize tax benefits from dividends reinvested in Peoples Energy stock under the Company’s Employee Stock Ownership Plan.


	Fiscal 2003. The Company’s revenues and cost of energy sold increased $655.9 million and $546.9 million, respectively, for fiscal 2003 compared to fiscal 2002 due to:


	•	higher realized commodity prices;
	•	increased volumes sold in the Gas Distribution, Retail Energy Services and Midstream Services segments due to colder weather;
	•	increased production in the Oil and Gas Production segment.


	Operation and maintenance expense for fiscal 2003 increased $44.3 million compared to fiscal 2002. Significant items to note in fiscal 2003 were:


	•	Higher pension expense ($21.7 million) due to the ongoing effects of both lower pension plan returns in recent years and a lower discount rate. Pension credits for 2003 totaled $1.5 million.

Peoples Energy 21


	•	Higher operation expense in the Oil and Gas Production segment ($6.6 million) resulting primarily from an increase in lease operating expense and exploration expense.
	•	Increased utility environmental costs of $14.7 million. These costs are recovered through the utilities’ rate mechanism and a like amount is included in revenues; therefore, these costs do not affect operating income.


	Other Variances for 2003.


	•	DD&A for fiscal 2003 increased $13.0 million compared to fiscal 2002 mainly resulting from increased production in the Oil and Gas Production segment.
	•	Taxes, other than income taxes, increased for fiscal 2003 by $31.3 million compared to fiscal 2002 due to higher revenues in the Gas Distribution segment, offset by adjustments to reduce municipal and state utility tax accruals ($10.0 million).
	•	Other income, net of other expense, for fiscal 2003 decreased $4.4 million compared to fiscal 2002 mainly due to a reduction in interest income along with the effects of a prior year insurance settlement.
	•	Equity investment income increased $6.5 million primarily from income generated from a full year of activity at SCEP and increased contributions from Elwood and EnerVest.
	•	Interest expense for fiscal 2003 decreased $7.0 million compared to fiscal 2002 due primarily to lower interest rates and reduced average borrowings outstanding.
	•	Income tax expense for fiscal 2003 increased $12.9 million compared to fiscal 2002 resulting primarily from higher pretax income along with the expiration on December 31, 2002, of Section 29 income tax credits related to the Oil and Gas Production segment.


	Segment Discussion
	A summary of the Company’s operating income by segment (GAAP), and variations between periods, is presented below.



										Increase/(Decrease)

	For Fiscal Years Ended September 30,
										Fiscal 2004 vs.			Fiscal 2003 vs.
(In Thousands)	2004			2003			2002			Fiscal 2003			Fiscal 2002



Operating income:
Gas Distribution	$	135,018		$	174,382		$	169,578		$	(39,364	)	$	4,804
Oil and Gas Production		41,537			31,853			16,142			9,684			15,711
Power Generation		11,353			11,256			10,065			97			1,191
Midstream Services		11,243			13,521			12,802			(2,278	)		719
Retail Energy Services		6,820			3,499			1,549			3,321			1,950
Other		143			(134	)		(777	)		277			643
Corporate and Adjustments		(41,763	)		(24,863	)		(24,949	)		(16,900	)		86

Total operating income	$	164,351		$	209,514		$	184,410		$	(45,163	)	$	25,104


	Gas Distribution Segment. Revenues of Peoples Gas and North Shore Gas are directly impacted by fluctuations in weather because both companies have a large number of heating customers. Fluctuations in weather have the potential to significantly impact year-to-year comparisons of operating income and cash flow.

	Revenues of Peoples Gas and North Shore Gas are also affected by changes in the unit cost of the utilities’ gas purchases and do not include the cost of gas supplies for customers who purchase gas directly from producers and marketers. In a normal gas price environment, the unit cost of gas does not have a significant direct effect on operating income because the utilities’ tariffs provide for dollar-for-dollar recovery of gas costs. (See Note 1I of the Notes to Consolidated Financial Statements.) However, significant changes in gas costs can materially affect the reserve for uncollectible accounts, customer demand and working capital needs.

	Fiscal 2004 revenues decreased $18.0 million compared to fiscal 2003. The decreases were mainly due to a decline in deliveries ($79.5 million) resulting from weather that was nine percent warmer than the previous period and lower non-weather-related delivery variations ($26.3 million). Partially offsetting these effects was higher realized gas prices ($92.4 million). Operating income decreased $39.4 million compared with the previous year due mainly to the effects of weather ($14.8 million), lower non-weather-related delivery variations ($8.6 million) and the effect of the accounts receivable adjustment ($6.9 million) described in Note 16 of the Notes to Consolidated Financial Statements. Also contributing to a lower comparative fiscal 2004 operating income were reductions in municipal and state utility tax accruals recorded in fiscal 2003 ($10.0 million) and higher pension expense ($10.4 million). Pension expense for fiscal 2004 was $8.3 million. Partially offsetting these

Peoples Energy 22


	effects was a decrease in the provision for uncollectible accounts ($6.0 million) mainly as a result of improved credit and collection experience, gains on property sales ($3.2 million) and an insurance recovery ($2.5 million) related to mercury clean-up costs incurred in prior years.

	Fiscal 2003 revenues increased $445.1 million over fiscal 2002 resulting from higher gas prices ($315.0 million) and from increased deliveries due to weather that was almost 19 percent colder ($150.0 million). Operating income in fiscal 2003 increased $4.8 million compared with fiscal 2002 due mainly to the effects of weather ($29.6 million) and a reduction in the municipal and state utility tax accrual ($10.0 million), partially offset by fiscal 2002 weather insurance revenue ($8.7 million). The revenue tax accrual adjustment resulted primarily from the effect of higher uncollectibles on the tax liabilities, which are paid based upon cash receipts. Lower pension credits ($21.7 million), an increase in group insurance expense ($2.7 million) and higher other nonlabor operating expense partially reduced operating income. The fiscal 2003 pension credits totaled $2.1 million. The decrease in pension credits was expected due to the ongoing effects of both lower pension plan returns in recent years and the effect of falling interest rates on the discount rate assumption.

	The utilities continue to improve in the collection of accounts receivable. Peoples Gas and North Shore Gas believe that their reserves are adequate given what is known at this time. The reserve for uncollectible accounts remains an estimate and could require future adjustments. The following table summarizes collection statistics for Peoples Gas and North Shore Gas combined.



	Gas Distribution
	Accounts Receivable Balance
	September 30,



(Dollars in Millions)	2004			2003			2002



Current	$	62.6		$	71.7		$	62.1
30–89 days		20.9			25.4			23.2
90–149 days		19.2			21.7			19.8
150 days— active		14.3			22.9			20.4
150 days— terminated		32.1			35.9			39.7

Total 150 days		46.4			58.8			60.1

Accounts receivable	$	149.1		$	177.6		$	165.2


Reserve balance	$	27.5		$	30.2		$	32.1
Reserve to accounts receivable ratio		18.4	%		17.0	%		19.4	%
Reserve to 90 days+		41.9	%		37.5	%		40.2	%
Days sales outstanding		36.7			43.3			58.3

Peoples Energy 23


	The following table summarizes revenue, deliveries and other statistics for the Gas Distribution segment

Gas Distribution Statistics



									Increase/(Decrease)
			For Fiscal Years Ended September 30,

									Fiscal 2004 vs.			Fiscal 2003 vs.
Margin Data (In Thousands)			2004		2003		2002		Fiscal 2003			Fiscal 2002



Gas Distribution revenues:
	Sales
		Residential	$	1,148,499	$	1,155,927	$	794,865	$	(7,428	)	$	361,062
		Commercial		184,756		178,845		109,307		5,911			69,538
		Industrial		30,324		31,462		19,385		(1,138	)		12,077

	Total sales			1,363,579		1,366,234		923,557		(2,655	)		442,677

	Transportation
		Residential		32,354		37,533		32,038		(5,179	)		5,495
		Commercial		47,285		50,820		46,051		(3,535	)		4,769
		Industrial		19,437		20,333		20,510		(896	)		(177	)
		Contract pooling		15,372		21,460		11,496		(6,088	)		9,964

	Total transportation			114,448		130,146		110,095		(15,698	)		20,051

	Other Gas Distribution revenues			16,437		16,064		33,645		373			(17,581	)

Total Gas Distribution revenues				1,494,464		1,512,444		1,067,297		(17,980	)		445,147
Less: Gas costs				868,518		847,878		463,844		20,640			384,034

Gross margin				625,946		664,566		603,453		(38,620	)		61,113
Less: Revenue taxes				138,841		136,939		112,187		1,902			24,752
Environmental costs recovered				17,384		21,338		6,620		(3,954	)		14,718

Net margin(1)			$	469,721	$	506,289	$	484,646	$	(36,568	)	$	21,643


Gas Distribution deliveries (MDth):
	Gas sales
		Residential		116,939		128,521		113,322		(11,582	)		15,199
		Commercial		20,303		21,555		17,345		(1,252	)		4,210
		Industrial		3,597		4,148		3,570		(551	)		578

	Total gas sales			140,839		154,224		134,237		(13,385	)		19,987

	Transportation
		Residential		21,061		23,969		21,605		(2,908	)		2,364
		Commercial		43,646		45,074		42,724		(1,428	)		2,350
		Industrial		23,756		24,989		26,047		(1,233	)		(1,058	)

	Total transportation			88,463		94,032		90,376		(5,569	)		3,656

Total Gas Distribution deliveries				229,302		248,256		224,613		(18,954	)		23,643


Gross margin per Dth delivered			$	2.73	$	2.68	$	2.69	$	0.05		$	(0.01	)

Net margin per Dth delivered			$	2.05	$	2.04	$	2.16	$	0.01		$	(0.12	)

Average cost per Dth of gas sold			$	6.17	$	5.50	$	3.46	$	0.67		$	2.04

Actual heating degree days				6,091		6,684		5,639		(593	)		1,045
Normal heating degree days(2)				6,427		6,427		6,427
Actual heating degree days as a percent of normal (actual/normal)				95		104		88


	(1)	As used above, net margin is not a financial measure computed under GAAP. Gross margin is the GAAP measure most closely related to net margin. Management believes net margin to be useful in understanding the Gas Distribution segment’s operations because the utility subsidiaries are allowed, under their tariffs, to recover gas costs, revenue taxes and environmental costs from their customers on a dollar-for-dollar basis.
	(2)	Normal HDD are based on a 30-year average of monthly temperatures at Chicago’s O’Hare Airport for the years 1970- 1999.

Oil and Gas Production Segment. Revenues for fiscal 2004 increased $17.4 million compared with fiscal 2003 due mainly to higher production volumes and higher realized commodity prices. On a gas equivalent basis, production increased eight percent compared to fiscal 2003 due primarily to the current and previous fiscal years’ acquisitions and successful drilling programs. Operating income for fiscal 2004 increased $9.7 million as a result of the increased revenues and higher income from the Company’s investment in EnerVest ($3.2 million), partially

Peoples Energy 24


	offset by increases in lease operating ($2.5 million), exploration ($2.2 million) and DD&A expenses ($5.4 million). Lease operating expense increased due to an increase in workover expenses and a general increase in the cost of goods and services. Exploration expenses increased due to dry hole contributions. The increase in DD&A expense resulted from both higher production in fiscal 2004 and an increase in the DD&A rate.

	Fiscal 2003 revenues increased $40.6 million over fiscal 2002. Operating income in fiscal 2003 increased $15.7 million over fiscal 2002. Fiscal 2002 results included the one-time benefit of a settlement on hedges of $5.1 million. Excluding that impact, fiscal 2003 results tripled due mainly to improved commodity prices and increased production. The increase in production was due to the impact of properties acquired and the success of the Company’s drilling program. The increase in fiscal 2003 DD&A expense of $14.6 million resulted from both higher production and an increase in the DD&A rate. The increase in the DD&A rate was caused by the inclusion of costs to develop reserves that were previously classified as proved undeveloped and the transfer of acquisition and development costs and reserves related to properties classified as unproved. These costs have been added to the depreciation, depletion and amortization pool. Fiscal 2003 production taxes increased $6.5 million primarily due to the increase in revenues before the impact of hedges.

	The following table summarizes hedges in place as of October 26, 2004, for fiscal 2005 for the Oil and Gas Production segment.


	Fiscal 2005



Gas hedges in place (MMbtus)		22,937,500
Gas hedges as a percent of estimated fiscal production(1)		80	%
Percent of gas hedges that are swaps		40	%
Average swap price ($/MMbtu)		$ 4.26
Percent of gas hedges that are no cost collars		60	%
Weighted average floor price ($/MMbtu)		$ 4.46
Weighted average ceiling price ($/MMbtu)		$ 5.43
Oil hedges in place (MBbls)		442
Oil hedges as a percent of estimated fiscal production(1)		75	%
Average hedge price ($/Bbl)		$27.98


	(1)	Assumes fiscal 2005 production increases 10 percent over fiscal 2004 levels.


	The following table summarizes operating statistics from the Oil and Gas Production segment.


For Fiscal Years Ended September 30,	2004			2003			2002



Total production— gas equivalent (MMcfe)		27,853			25,798			19,343
Daily average gas production (MMcfd)		67.0			62.7			46.1
Daily average oil production (MBd)		1.5			1.3			1.1
Daily average production— gas equivalent (MMcfed)		76.1			70.7			53.0
Gas production as a percentage of total production		88	%		89	%		87	%
Percent of production hedged during the period— gas		94	%		77	%		91	%
Percent of production hedged during the period— oil		77	%		56	%		91	%
Net realized gas price received ($/Mcf)	$	4.44		$	4.16		$	3.11
Net realized oil price received ($/Bbl)	$	26.85		$	22.90		$	19.05
DD&A rate ($/Mcfe)	$	1.69		$	1.62		$	1.40
Average lease operating expense ($/Mcfe)	$	0.48		$	0.42		$	0.40
Average production taxes ($/Mcfe)	$	0.34		$	0.37		$	0.16


	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. These credits expired on December 31, 2002. The amount recorded to income for fiscal 2003 and 2002 was $1.1 million and $4.5 million, respectively.

	On December 31, 2003, the Company acquired, through a series of transactions, certain oil and gas properties located in Texas for approximately $33.1 million. The acquired reserves, 88 percent of which are natural gas, contributed approximately 3.3 MMcfe per day of production to the Company’s fiscal 2004 production. The majority of the acquired properties are located adjacent to or in close proximity to existing holdings of the Company, and each of the acquired properties is operated by the Company.

	On July 30, 2004, the Company acquired certain oil and gas properties in east Texas from a private entity for approximately $10 million. The acquisition includes approximately 5,300 gross acres and estimated proved

Peoples Energy 25


	undeveloped reserves of approximately 10 Bcfe, with an additional 10 to 20 Bcfe of low risk, upside reserve potential. Initial development of the acquired reserves will begin in fiscal 2005 with anticipated capital spending on these properties of between $10 million to $15 million. The acquired properties, which will be operated by the Company, are located in close proximity to the existing Peoples Energy Production holdings in east Texas.

	Power Generation Segment. Results for fiscal 2004 were relatively unchanged from the prior period and primarily reflect income from the Company’s equity investments in the Elwood and Southeast Chicago natural gas-fired power generation facilities.

	Fiscal 2003 operating income increased $1.2 million due to a full year of equity investment income generated from SCEP, which began commercial operations in July 2002, and lower operating costs ($1.2 million) associated with new investment opportunities, partially offset by fiscal 2002 site-development income.

	This segment is engaged in the development of power generation sites. The costs of activities related to these sites are either expensed as incurred or are capitalized as specific site development assets, as appropriate. At September 30, 2004, $9.6 million was capitalized or deferred as investments related to this activity. The Company continues to work towards monetizing its Western power sites as described under Item 1— Business— Power Generation segment.

	The electric capacity of Elwood has been sold through long-term contracts with Exelon, Engage and Aquila. In August 2004, Standard & Poor’s Rating Services (S&P) upgraded Aquila’s senior unsecured debt rating to B- with a negative outlook. In September 2004, Moody’s Investor Services (Moody’s) upgraded Aquila’s senior unsecured debt rating to B2 with a stable outlook. S&P and Moody’s ratings on Elwood’s bonds remain at B+ with a negative outlook and Ba2 with a stable outlook, respectively. As a result of earlier downgrading in Aquila’s credit ratings, Aquila provided Elwood with security in the form of letters of credit and a cash escrow equal to one year of capacity payments of approximately $37.7 million. In the event Aquila does not fulfill its payment obligations or terminates its PSAs 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 PSAs, 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.

	Midstream Services Segment. Revenues for fiscal 2004 increased $56.0 million compared with the previous period due to higher commodity prices and increased volumes. Operating income decreased $2.3 million due primarily to lower results from the hub ($3.7 million). The decreased hub results were primarily due to lower storage-related margins. Partially offsetting this effect was higher contributions from wholesale marketing activities and services associated with the Company’s propane-based peaking facility.

	Revenues for fiscal 2003 increased $113.8 million as compared to fiscal 2002. The Company has been expanding its wholesale marketing activities. These activities were performed in a wholly-owned subsidiary in fiscal 2003 and therefore revenues and expenses increased versus fiscal 2002 when such activities were performed by enovate L.L.C. (enovate), an equity investment for a portion of the year. Fiscal 2003 operating income increased $0.7 million versus 2002 due to increased wholesale marketing activities ($2.9 million), partially offset by income in the prior year associated with enovate ($1.9 million).

	The following table summarizes operating statistics for the Midstream Services segment.


For Fiscal Years Ended September 30,	2004		2003		2002



Wholesale volumes sold (MDth)		64,100		57,100		42,200
Hub volumes delivered (MDth)		19,381		19,501		24,551
Number of hub customers		32		28		31



	Retail Energy Services Segment. Revenues for fiscal 2004 increased from last year by $72.3 million primarily due to continued customer and volume growth and higher gas and electric prices. Operating income increased by $3.3 million due to customer growth and enhanced gas margin, partially offset by a write-down of $1.1 million in assets related to exiting the distributed generation market.

Peoples Energy 26


	Revenues for fiscal 2003 increased $83.3 million primarily due to increased deliveries associated with customer growth and colder weather, and higher natural gas commodity prices. Operating income increased $2.0 million, reflecting the benefits of the increased margins offset partially by increased operating expenses.

	The following table summarizes operating statistics for Peoples Energy Services.



	For Fiscal Years Ended
	September 30,



(In Thousands, Except Customers)	2004		2003			2002



Gas sales usage sendout (Dth)		47,965		41,722			36,182
Number of gas customers		24,744		19,081	(*)		11,912	(*)
Electric sales usage sendout (Mwh)		1,113		924			854
Number of electric customers		1,901		1,463			1,005


	*	Revised from previous year to align with industry practice.


	Corporate and Other Segment. The operating loss for fiscal 2004 increased $16.6 million due primarily to the corporate restructuring plan resulting in aggregate charges of $17.0 million recorded in this segment.

	Critical Accounting Policies
	In preparing the Company’s financial statements using GAAP, management exercises judgment in the selection and application of accounting principles, including making estimates and assumptions. Management considers its critical accounting policies to be those that are important to the representation of the Company’s financial condition and results of operations. They require management’s most difficult and subjective or complex judgments, including those that could result in materially different amounts if the Company reported under different conditions or using different assumptions. The Company discusses its critical accounting policies, in addition to certain less significant accounting policies, with senior members of management and the Audit Committee, as appropriate. There were no material changes in the application of each of the critical accounting policies listed below during fiscal 2004.

	Regulated Operations. Due to the regulation of the Company’s utility subsidiaries, certain transactions are recorded based on the accounting prescribed in SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation.” Under this statement certain costs or revenues are deferred on the balance sheet until recovered or refunded through rates. Accordingly, actions of the Commission could have an effect on the amount recovered from or refunded to customers. Any differences between recoverable and refundable amounts and the amounts deferred would be recorded as income or expense at the time of any Commission action. If all or a reportable portion of the utility operations becomes no longer subject to the provision of SFAS No. 71, a write-off of related regulatory assets or liabilities would be required, unless some form of transition cost recovery continued through rates established and collected for the remaining regulated operations. No such change is foreseen by management. (See Note 1I of the Notes to Consolidated Financial Statements for a summary of regulatory assets and liabilities recorded under this policy.)

	Environmental Activities Relating to Former Manufactured Gas Operations. The Company’s utility subsidiaries, their predecessors, and certain former affiliates operated facilities in the past at multiple sites for the purpose of manufacturing gas and storing manufactured gas (manufactured gas sites). The utility subsidiaries are accruing and deferring the costs they incur in connection with environmental activities at the manufactured gas sites pending recovery through rates or other entities. The amounts deferred include costs incurred but not yet recovered through rates and management’s best estimates of the costs that the utilities will incur in investigating and remediating the manufactured gas sites. Management’s estimates are based upon an ongoing review by management and its outside consultants of future investigative and remedial costs.

	Management considers this policy critical due to the substantial uncertainty in the estimation of future costs with respect to the amount and timing of costs, and the extent of recovery from other PRPs. (See Notes 1I and 6 of the Notes to Consolidated Financial Statements for deferred environmental costs recorded as regulatory assets and a discussion of environmental matters.)

Peoples Energy 27


	Retirement and Postretirement Benefits. The calculation of pension expense (credits) relies on actuarial assumptions including discount rate, long-term rate of return on assets and assumed future increases in compensation. These assumptions are determined annually and changes to the assumptions can have a material effect on the amounts recorded from year to year. The Company bases its discount rate assumption on yields of high quality long-term, fixed-income bonds. A decrease in the assumed discount rate of 25 basis points would have increased fiscal 2004 pension expense by $1.0 million.

	Additionally, when an employee retires and takes his/her retirement benefit as a lump sum, a settlement amount under SFAS No. 88, “Employer’s Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits,” is calculated representing a portion of unrecognized gains and losses. The Company has chosen to record this amount in the current period instead of amortizing the difference over the expected average service life of the remaining participants. Both methods are acceptable under GAAP. Therefore, the timing of retirements can have an effect on the amount recorded in any given year. (See Note 9 of the Notes to Consolidated Financial Statements for current year assumptions.)

	In addition, the Company and its subsidiaries currently provide certain health care and life insurance benefits for retired employees. Substantially all employees may become eligible for such benefit coverage if they reach retirement age while working for the Company. Through the use of an independent actuary, the Company accrues the expected costs of such benefits during a portion of the employees’ years of service. This accrual is based on assumptions regarding discount rates, rate of return on assets and health care cost trend rates. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rate by one percentage point for each future year would have increased the accumulated postretirement benefit obligation at September 30, 2004, by $16.1 million and the aggregate of service and interest cost components of the net periodic postretirement benefit cost by $2.0 million annually. Decreasing the assumed health care cost trend rate by one percentage point for each future year would have decreased the accumulated postretirement benefit obligation at September 30, 2004, by $13.9 million and the aggregate of service and interest cost components of the net periodic postretirement benefit cost by $1.7 million annually. A decrease in the assumed discount rate of 25 basis points would have increased postretirement benefit cost expense by $0.4 million. (See Note 9 of the Notes to Consolidated Financial Statements for current year assumptions.)
	Derivative Instruments and Hedging Activities. The Company enters into financial derivative contracts to hedge price risk on natural gas and oil purchases and sales. For each contract, management must determine whether the underlying transaction qualifies as a hedge under derivative accounting rules. If contracts do qualify as hedges, they will have a minimal effect on income until settled. Otherwise the change in the fair value of these contracts would be recorded in income monthly and result in potentially significant impacts, both positive and negative. Additionally, due to the nature of the Company’s businesses, most of the Company’s contracts for physical purchases and sales of gas, oil or power meet the definition of a derivative, but are exempt from derivative accounting requirements under the normal purchases and sales exemption. Under this exemption, if the transactions are clearly intended to meet the requirements of the customers, mark-to-market accounting is not required. Management judgment is required to make this determination. The Company manages its interest rate risk by maintaining the levels of floating and fixed rate interest payments within a specified range. (See Note 1J of the Notes to Consolidated Financial Statements for further discussion of the Company’s cash flow and fair value hedging strategies and the mark-to-market derivative instruments.)
	Provision for Uncollectible Accounts. The Company’s subsidiaries accrue for estimated uncollectible accounts as revenues are recorded. The accrual rates are established based upon historical experience and projections of future charge-offs resulting from various factors, including the impacts of natural gas prices and weather. Each quarter, the Company’s subsidiaries update the projection of future charge-offs based upon the most current information available, and adjust the reserve for uncollectible accounts, if necessary.

	Other Matters
	The American Jobs Creation Act of 2004 (the Act) was signed into law on October 22, 2004. Given what is known currently, management believes that the Act will not have any significant adverse effect on the financial condition or results of operations of the Company.

Peoples Energy 28


	LIQUIDITY AND CAPITAL RESOURCES
	The following is a summary of cash flows for the Company:



	For Fiscal Years Ended September 30,



(In Thousands)	2004			2003			2002



Net cash provided by operating activities	$	202,292		$	205,779		$	328,092
Net cash used in investing activities	$	(164,763	)	$	(169,499	)	$	(14,512	)
Net cash provided by (used in) financing activities	$	(43,949	)	$	(28,065	)	$	(373,313	)


	Cash provided by operating activities decreased for fiscal 2004 as compared to fiscal 2003 primarily due to lower net income partially offset by favorable net changes to working capital. The decrease in net cash used in investing activities in fiscal 2004 compared to 2003 was due primarily to an increase in the return of capital from the Company’s equity method investments, partially offset by increased capital spending in the Oil and Gas Production segment. The increase in net cash used in financing activities in fiscal 2004 compared to 2003 was primarily due to a decrease in the issuance of long-term debt in 2004, partially offset by a decrease in the retirement of the Company’s short-term and long-term debt.

	Cash provided by operating activities decreased in fiscal 2003 compared to fiscal 2002 primarily due to working capital needs related to higher gas prices and increased storage for Peoples Gas and the Midstream Services segment. The increase in net cash used in investing activities in fiscal 2003 compared to 2002 was primarily due to the distribution by Elwood in fiscal 2002 of cash proceeds from Elwood’s project financing to reimburse the Company for previous advances made to Elwood. The net cash used in financing activities decreased in fiscal 2003 compared to 2002 primarily due to the retirement in fiscal 2002 of $300.3 million of debt and to increased proceeds of $44.8 million from the issuance of common stock in fiscal 2003.

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

	Balance Sheet Variations
	Total assets at September 30, 2004, increased $166.3 million as compared to September 30, 2003, primarily due to additional capital investment in the Oil and Gas Production segment, increases in receivables from hedges, increases in regulatory assets and increased gas inventory levels. These items were offset, in part, by a reduction in customer receivables. The Company’s decrease in current liabilities was driven primarily by refinancing short-term debt with long-term debt, partially offset by increases related to hedging and regulatory liabilities. The Company’s capitalization increased as a result of the refinancing of a portion of short-term debt with long-term debt, fiscal year-to-date earnings, net of dividends declared, and common stock issued through the continuous equity program, dividend reinvestments and LTIC plans.

	Changes in Debt Securities
	During fiscal 2004, the Company took advantage of the low interest rate environment to refinance existing debt to term-up adjustable rate debt. In general, debt classified as short-term due to the technical tender provisions was replaced by long-term debt. (See Note 12A of the Notes to Consolidated Financial Statements for details of fiscal 2004’s refinancing activity.)

	In January, 2005 Peoples Gas expects to execute an agreement to issue bonds in the amount of $50 million in June, 2005 for the purpose of refinancing the outstanding, 6.10% Series FF bonds due June 1, 2025.

	Financial Sources
	The Company and Peoples Gas have access to outside capital markets, commercial paper markets and internal sources of funds that together provide sufficient resources to meet their working capital and long-term capital requirements. North Shore Gas has access to outside capital markets and uses internal sources of funds and loans from the Company to meet working capital and long-term capital requirements. The Company does not anticipate any changes that would materially alter its current liquidity position.

	Due to the seasonal nature of gas usage, a major portion of the utilities’ cash collections occurs between January and June. Because of timing differences in the receipt and disbursement of cash and the level of construction requirements, the utility subsidiaries borrow from time to time on a short-term basis. Short-term borrowings are

Peoples Energy 29


	repaid with cash from operations or other short-term borrowings or are refinanced on a permanent basis with debt or equity, depending on market conditions and capital structure considerations.

	In addition to cash generated internally by operations, as of September 30, 2004, the Company has credit facilities of $425.0 million (Peoples Energy, $225.0 million; Peoples Gas, $200.0 million). These various facilities primarily support the Company’s and Peoples Gas’ ability to borrow using commercial paper. As of September 30, 2004, $200.4 million of Peoples Energy’s $225.0 million line was available and $169.0 million of Peoples Gas’ $200.0 million facilities were available. The Company’s credit facilities generally contain debt triggers that permit the lenders to terminate the credit commitments to the borrowing company and declare any outstanding amounts due and payable if the borrowing company’s debt-to-total capital ratio exceeds 65 percent. The credit facilities 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. As of September 30, 2004, North Shore Gas had $3.8 million of loans from Peoples Energy. Peoples Gas had no such loans outstanding at September 30, 2004.

	The current credit ratings for the Company, Peoples Gas and North Shore Gas are summarized on the table below.

Peoples Gas/

Corporate

North Shore

Company

Peoples Gas

Credit

Company Senior

Gas Senior

Commercial

Rating

Unsecured Debt

Secured Debt

Paper

Moody’s

Aa3

P-2

P-1

Standard and Poor’s

A-

BBB+

A-

A-2

Fitch Ratings

AA-


	Moody’s describes double-A rated debt (Aa1, Aa2 and Aa3) as high-grade and single-A rated debt (A1, A2 and A3) as upper-medium grade. S&P describes A-rated debt (A+, A and A-) as strong and triple-B rated debt (BBB+, BBB and BBB-) as adequate. Fitch Ratings (Fitch) describes double-A rated debt (AA+, AA and AA-) as having a very high credit quality and single-A rated debt (A+, A and A-) as having high credit quality. The lowest investment grade credit ratings for Moody’s is Baa3, for S&P is BBB- and for Fitch is BBB-. Thus, all three credit rating agencies give the Company, Peoples Gas and North Shore Gas investment grade ratings.

	Regarding short-term ratings applicable to commercial paper, Moody’s describes the P-1 rating as indicating a superior repayment ability and P-2 as indicating a strong repayment ability. S&P describes an A-2 rating as satisfactory. Fitch describes the F1 ratings (F1+ and F1) as indicating the highest credit quality.

	During the month of July 2004, North Shore Gas’ external credit facilities were allowed to expire and the commercial paper ratings for North Shore will not be renewed upon expiration. Short-term credit needs will be met through internal resources or borrowings from the Company.

	Changes in Equity Securities
	The Company has filed a universal shelf registration statement on Form S-3 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. As of September 30, 2004, a total of 1,235,700 shares of common stock had been issued through the continuous equity offering, 377,400 shares in fiscal 2004 and 858,300 shares in fiscal 2003. Proceeds, net of issuance costs, totaled $15.5 million in fiscal 2004 and $32.4 million in fiscal 2003. Subsequent to September 30, 2004, and through the date of filing the Company’s Form 10-K with the SEC, the Company has not issued any additional shares under this registration statement. In addition, the Company issues common stock through various plans such as its Direct Purchase and Investment Plan and its ESPP. (See Note 15 of the Notes to Consolidated Financial Statements.)

	Financial Uses
	Capital Spending. In fiscal 2004, the Company spent $189.4 million on capital projects. The Gas Distribution segment spent $78.3 million on property, plant and equipment, of which $67.7 million was spent by Peoples Gas and $10.6 million was spent by North Shore Gas. The majority of the remaining $111.1 million was spent by the Oil and Gas Production segment, which spent $102.4 million on the acquisition of reserves, drilling projects and the exploitation of the acquired and existing assets. Management currently estimates that capital spending for fiscal 2005 will total approximately $160 million.

Peoples Energy 30


	Working Capital Credit Facility. Elwood, the Company and Dominion have entered into a revolving working capital credit facility under which the Company and Dominion will fund Elwood’s working capital requirements up to a maximum aggregate amount of $10.0 million. The facility is dated June 28, 2002, and commenced July 1, 2002. The outstanding loans would earn interest at the A-2/ P-2 commercial paper rate plus 50 basis points. At September 30, 2004, the entire amount was available.

	Dividends. On February 4, 2004, the Company’s Board of Directors voted to increase the regular quarterly dividend on the Company’s common stock from 53 cents per share to 54 cents per share. The first payment at this new level was made on April 15, 2004, to shareholders of record at the close of business on March 22, 2004.

	Interest Coverage
	The fixed charges coverage ratios for the Company, Peoples Gas and North Shore Gas are as follows:


For Fiscal Years Ended September 30,	2004		2003		2002



Peoples Energy		3.29		4.40		3.62
Peoples Gas		4.30		6.62		6.31
North Shore Gas		5.83		7.45		5.13


	The decrease in the ratio for the Company in fiscal 2004 reflects lower pretax income partially mitigated by lower interest expense. The increase in the ratio for the Company in fiscal 2003 reflects higher pretax income and lower interest expense due to lower interest rates and lower average borrowing requirements.

	The decrease in the ratio for Peoples Gas in fiscal 2004 reflects lower pretax income partially mitigated by lower interest rates. The slight increase in the ratio for Peoples Gas in fiscal 2003 reflects higher pretax income and slightly lower interest expense due to lower interest rates on variable rate debt and to the retirement or refinancing of higher cost notes and bonds.

	The decrease in the ratio for North Shore Gas in fiscal 2004 reflects lower pretax income while interest expense was flat. The increase in the ratio for North Shore Gas in fiscal 2003 reflects higher pretax income and lower interest expense due to lower interest rates.

	Commitments and Contractual Obligations
	Off-Balance Sheet Arrangements. Off-balance sheet debt at September 30, 2004 and 2003, consists of the Company’s pro rata share of nonrecourse debt of various equity investments, including Trigen-Peoples ($15.0 million and $15.4 million), EnerVest ($2.5 million and $2.7 million) and Elwood ($182.7 million and $190.0 million). The Company believes this off-balance sheet financing will not have a material effect on the Company’s future financial condition. The Company also has commercial obligations of $70.4 million in guarantees, $7.4 million in letters of credit and $37.5 million in operating leases at September 30, 2004. (See Notes 4 and 8 of the Notes to Consolidated Financial Statements for further descriptions and details of the Company’s off-balance sheet arrangements.)
	Contractual Obligations. The Company has certain contractual obligations directly related to the Company’s operations and unconsolidated equity investees. The majority of these are guarantees of debt service and performance (related to unconsolidated equity investees), as well as substantial commitments for gas supply, transportation and storage. (See Note 8 of the Notes to the Consolidated Financial Statements.)

Peoples Energy 31


	The following table summarizes the Company’s long-term minimum contractual cash obligations.



	Payments Due by Period



			Less than		1 to 3		4 to 5		More than
(In Millions)	Total		1 Year		Years		Years		5 Years



Total debt (See Note 12)	$	953.0	$	55.6	$	—	$	—	$	897.4
Estimate of interest payments on debt(1)		794.4		47.6		149.8		98.8		498.2
Operating leases (See Note 8C)		37.5		3.8		9.8		6.7		17.2
Purchase obligations(2)		505.8		279.1		161.8		50.8		14.1
Minimum pension funding(3) (See Note 9)		52.3		3.8		44.0		4.5		—

Total contractual cash obligations	$	2,343.0	$	389.9	$	365.4	$	160.8	$	1,426.9


	(1)	Includes interest on fixed and adjustable rate debt. The adjustable rate interest is calculated based on the indexed rate in effect at 9/30/04.
	(2)	Includes gas purchases, storage, transportation, information technology-related and miscellaneous long-term and short-term capital purchase commitments.
	(3)	Minimum pension funding is an estimate of the contributions that would be required pursuant to the Employee Retirement Income Security Act to fund benefits earned as of October 1, 2004. Additional contributions may be made to fund benefits accruing after October 1, 2004, or on a discretionary basis.


	Environmental Matters. Peoples Gas and North Shore Gas are conducting environmental investigations and remedial work at certain sites that were the locations of former manufactured gas operations. (See Note 6A of the Notes to Consolidated Financial Statements.)

	In 1994, North Shore Gas received a demand from a responsible party under CERCLA for environmental costs associated with the Denver Site. 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 6B of the Notes to Consolidated Financial Statements.)

	Gas Charge Reconciliation Proceedings. For each utility subsidiary, the 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. Proceedings regarding Peoples Gas and North Shore Gas for fiscal 2004, 2003, 2002 and 2001 costs are currently pending before the Commission. In February 2004, a purported class action was filed against the Company and Peoples Gas by a Peoples Gas customer alleging, among other things, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act related to matters at issue in Peoples Gas’ gas reconciliation proceedings. On September 22, 2004, the Court granted a motion to dismiss all counts against Peoples Gas. On October 21, 2004, the plaintiffs filed an amended complaint against the Company. On November 22, 2004, the Company filed a motion to dismiss the amended complaint. (See Note 7 of the Notes to Consolidated Financial Statements.)

	Indenture Restrictions
	North Shore Gas’ indenture 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 September 30, 2004, such restrictions amounted to $6.9 million of North Shore Gas’ total retained earnings of $80.3 million.

	Peoples District Energy owns a 50 percent equity interest in Trigen-Peoples. The Construction and Term Loan Agreement between Trigen-Peoples and The Prudential Insurance Company of America related to Trigen-Peoples’ project financing prohibits any distribution that would result in the partners’ total capital account in Trigen-Peoples being less than $7.0 million. At September 30, 2004, the partners’ capital account was $7.3 million. The Construction and Term Loan Agreement also prohibits any distribution unless the partnership’s debt service coverage ratio for the four fiscal quarters prior to the distribution was at least 1.25 to 1.0. Trigen-Peoples’ debt service coverage ratios for the last four fiscal quarters starting with the most recent quarter were 1.97 to 1.0, 1.85 to 1.0, 2.09 to 1.0, and 1.72 to 1.0.

	Peoples Energy Resources owns a 50 percent equity interest in Elwood. 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 ratios. At July 6, 2004, the most recent

Peoples Energy 32


	semi-annual distribution date, a minimum debt service coverage ratio of 1.2 to 1.0 was required and Elwood’s actual debt service coverage ratio exceeded 1.5 to 1.0.

	BUSINESS RISK FACTORS
	Investors should consider carefully the following factors that could cause the Company’s operating results and financial condition to be materially adversely affected. New risks may emerge at any time, and management cannot predict those risks or estimate the extent to which they may affect the Company’s financial performance.

	Peoples Energy is a holding company and its assets consist primarily of investments in its subsidiaries; covenants in certain of the Company’s financial instruments may limit its ability to pay dividends, thereby adversely impacting the valuation of the Company’s common stock and access to capital.
	The Company’s assets consist primarily of investments in subsidiaries. Dividends on its common stock depend on the earnings, financial condition and capital requirements of the Company’s subsidiaries, principally Peoples Gas and North Shore Gas and the distribution or other payment of earnings from the subsidiaries to the Company in the form of dividends, loans, advances or repayment of loans and advances. The subsidiaries are distinct legal entities and have no obligation to pay any dividends or make advances or loans to the Company. Peoples Energy’s ability to pay dividends on its common stock may also be limited by existing or future regulatory restrictions or agreement covenants limiting the right of its subsidiaries to pay dividends on their common stock.

	Commodity price changes may affect the operating costs and competitive positions of the Company’s businesses, thereby adversely impacting its results of operations.
	The Company’s energy businesses are sensitive to changes in natural gas, oil, electricity and other commodity prices. Any changes could affect the prices these businesses charge, their operating costs and the competitive position of their products and services. In the case of the Gas Distribution operations, costs for purchased gas and pipeline capacity are recovered through retail customers’ bills, but increases in gas costs affect total retail prices and, therefore, the competitive position of the Company’s Gas Distribution businesses relative to electricity and other forms of energy. In addition, the timing and extent of high natural gas prices can materially adversely affect the Gas Distribution segment’s accounts receivable, provision for uncollectible accounts, fuel cost and interest expense. To control this risk, the Company hedges approximately 60 percent of normal weather purchase volumes each year. All gains, losses and costs from this program flow to the Gas Charge.

	The Company’s earnings growth and the carrying value of the Company’s oil and gas producing properties depends in part upon the prices received for its natural gas and oil production. Natural gas and oil prices historically have been volatile and are likely to continue to be volatile in the future. The prices for natural gas and oil are subject to a variety of additional factors that are beyond the Company’s control. These factors include, but are not limited to, the level of consumer demand for, and the supply of, natural gas and oil, commodity processing, gathering and transportation availability, the level of imports of, and the price of, foreign natural gas and oil, the price and availability of alternative fuel sources, weather conditions, political conditions or hostilities in natural gas and oil producing regions. Further, because approximately 92 percent of the Company’s proved reserves at September 30, 2004, were natural gas reserves, the Company is substantially more sensitive to changes in natural gas prices than to changes in oil prices. Declines in natural gas and oil prices would not only reduce revenue, but could reduce the amount of natural gas and oil that can be produced economically and, as a result, could adversely affect the financial results of the Oil and Gas Production segment.

	A significant decline in natural gas and oil prices could result in a downward revision of the Company’s reserves and a write-down of the carrying value of natural gas and oil properties, that would negatively impact the Company’s net income and stockholders’ equity.

	The Company has a risk management policy that governs the use of financial derivatives and commodity transactions to manage (hedge) price risk. The policy does not allow speculative trading in any business segment. A hedge strategy is designed to capture and manage the underlying price risk for each business. The Company purchases and sells fixed-price swaps, futures, options and collars to hedge the price impact for itself and its customers, protect margins and control investment return.

Peoples Energy 33


	The Company’s operating results may be adversely affected by abnormal weather.
	The Company’s Gas Distribution businesses have historically delivered less natural gas, and consequently earned less income, when weather conditions are milder than normal. Mild weather in the future could diminish the Company’s revenues and results of operations and harm its financial condition. (See Item 7A— Quantitative and Qualitative Disclosures about Market Risk— Weather Risk for a discussion on the use of insurance to manage this risk.)

	The Company’s Gas Distribution subsidiaries depend on storage and transportation services purchased from interstate pipelines and on a storage field owned by Peoples Gas to meet their customers’ gas requirements.
	Peoples Gas and North Shore Gas meet a significant percentage of their customers’ peak day, seasonal and annual gas requirements through withdrawals, pursuant to contracts, from storage facilities owned and operated by interstate pipelines and through deliveries of gas transported on interstate pipelines with which they or their gas suppliers have contracts. Peoples Gas and North Shore Gas each contracts with multiple pipelines for these services, and it has gas supply contracts with multiple suppliers. If a pipeline were to fail to perform storage or transportation service, including for reasons of force majeure, on a peak day or other day with high volume gas requirements, Peoples Gas’ and North Shore Gas’ ability to meet all their customers’ gas requirements may be impaired unless or until alternative supply arrangements were put in place. Likewise, Peoples Gas plans on meeting approximately 40 percent of its peak day requirements from its own storage field. If that storage field, or the Peoples Gas-owned transmission pipeline used to transport storage gas to the market, were to be out of service for any reason, this could impair Peoples Gas’ ability to meet its customers’ full requirements on a peak day. Also, North Shore Gas purchases a storage service from Peoples Gas, and its ability to serve its customers could be adversely affected by failures at Peoples Gas’ storage field.

	The Company’s operations are subject to operational hazards and uninsured risks.
	The Company’s Gas Distribution, Oil and Gas Production, Power Generation and Midstream Services operations are subject to the inherent risks normally associated with those operations, including pipeline ruptures, damage caused by excavators, explosions, release of toxic substances, fires, adverse weather conditions, and other hazards, each of which could result in damage to or destruction of the Company’s facilities or damages to persons and property. In addition, the Company’s operations face possible risks associated with acts of intentional harm on these assets. The nature of the risks is such that some liabilities could exceed the Company’s insurance policy limits, or, as in the case of environmental fines and penalties, cannot be insured. As a result, we could incur substantial costs that could adversely affect our future results of operations, cash flows or financial condition. A substantial portion of the Company’s oil and gas production is transported on or processed by third party pipelines and processing plants. Those pipelines and processing plants are subject to the same risks.

	The Company’s oil and gas producing operations involve many risks associated with estimates and assumptions used in making capital expenditure decisions.
	In addition to the operational risks described above, the Company’s oil and gas drilling operations are also subject to the risk of not encountering commercially productive reservoirs and the Company may not recover all or any portion of its investment in those wells. Drilling for natural gas and oil can be unprofitable, not only because of dry holes but also due to wells that are productive but do not produce sufficient net reserves to return a profit at then realized prices after deducting drilling, operating, production taxes and other costs.

	In addition, estimating quantities of proved natural gas and oil reserves is a complex process that involves significant interpretations of technical data and assumptions that result in reserve estimates being inherently imprecise. The Company utilizes a 10 percent discount factor when estimating the value of its reserves, as prescribed by the SEC, and this may not necessarily represent the most appropriate discount factor, given actual interest rates and risks to which the Company’s production business or the natural gas and oil industry, in general, are subject. Any significant variations from the interpretations or assumptions used in the estimates or changes of conditions could cause the estimated quantities and net present value of the Company’s reserves to differ materially from amounts disclosed in this document.

	The natural gas and oil reserve data included in this document represent the Company’s best estimates. The Company uses outside reservoir engineers to provide an unbiased analysis of reserves and future production. These analyses are the basis for the Company’s reserve estimates. Investors should not assume that the present values referred to in this document represent the current market value of the Company’s estimated natural gas

Peoples Energy 34


	and oil reserves. The timing of the production and the expenses from development and production of natural gas and oil properties will affect both the timing of actual future net cash flows from proved reserves and their present value.

	The agencies that regulate the Company’s utility businesses and their customers affect profitability and potential regulatory changes may adversely affect the Company’s businesses due to reductions in revenues or increased capital expenditures.
	The Company’s utility subsidiaries are subject to the jurisdiction of and regulation by the Commission, which has general supervisory and regulatory powers over practically all phases of the public utility business in Illinois, including rates and charges, issuance of securities, services and facilities, systems of accounts, investments, safety standards, transactions with affiliated interests and other matters. If the utilities’ tariff rates were reduced in a future proceeding, the profitability of the utilities’ businesses could be reduced. The utility subsidiaries and Peoples Energy Resources are also subject to U.S. Department of Transportation rules applicable to owners and operators of certain pipeline facilities. Regulatory requirements relating to the integrity of these pipelines require capital spending in order to maintain compliance with these requirements. Any additional laws or regulations that are enacted could significantly increase the amount of these expenditures.

	Peoples Gas’ and Peoples Energy Resources’ midstream gas services that are reflected in the Midstream Services segment are regulated by the FERC. Additional or different regulations imposed by the FERC could affect the profitability of the Midstream Services segment.

	The Company’s Gas Distribution and Power Generation businesses are also subject to costly and increasingly stringent environmental regulations. The cost of future environmental compliance, such as compliance with clean air laws affecting the Company’s Power Generation segment, could be significant.

	An adverse decision in proceedings before the Commission concerning the prudence review of the Company’s gas purchases could require a significant refund obligation.
	For each utility subsidiary, the 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. Proceedings regarding Peoples Gas and North Shore Gas for fiscal 2001 costs are currently pending before the Commission. The outcome of this proceeding cannot be predicted. Three intervenors and the Commission Staff have filed testimony requesting disallowances in the Peoples Gas proceeding and one intervenor and the Commission Staff have filed testimony requesting disallowances in the North Shore Gas proceeding. For more information regarding the Gas Charge reconciliation proceedings, see Note 7 of the Notes to Consolidated Financial Statements.

	The Company’s use of derivative financial instruments could result in financial losses.
	Some of the Company’s subsidiaries use futures, swaps, collars and option contracts either traded on exchanges or executed over-the-counter with natural gas and power merchants as well as financial institutions. To the extent that the Company has unhedged positions or hedging procedures that do not work as planned, fluctuating commodity prices or interest rates could cause revenues, net income and cash requirements of the Company to be volatile. The Company may incur financial losses if counterparties fail to perform under these contracts. Also, to the extent the Company hedges commodity price or interest rate exposure, it forgoes the benefits it would otherwise experience if commodity prices or interest rates change in the Company’s favor. For additional information concerning the use of derivatives, see Note 1J of the Notes to Consolidated Financial Statements.

	An inability to access financial markets could affect the execution of the Company’s business plan.
	The Company relies on access to both short-term money markets and longer-term capital markets as a significant source of liquidity for capital requirements not satisfied by the cash flows from its operations. Management believes that the Company and its subsidiaries will maintain sufficient access to these financial markets based upon current credit ratings. However, certain disruptions outside of Company’s control may increase its cost of borrowing or restrict its ability to access one or more financial markets. Such disruptions could include an economic downturn, the bankruptcy of an unrelated energy company or changes to the Company’s credit ratings.

Peoples Energy 35


	Restrictions on the Company’s ability to access financial markets may affect its ability to execute its business plan as scheduled.

	PEOPLES GAS AND NORTH SHORE GAS DISCUSSIONS
	The financial results of Peoples Gas and North Shore Gas are reported primarily within the Gas Distribution segment. Operating income (GAAP) and ongoing operating income (non-GAAP) by business segment for Peoples Gas and North Shore Gas is presented below.



	Peoples Gas									North Shore Gas



					Corporate							Corporate
	Gas		Midstream		and					Gas		and
(In Thousands)	Distribution		Services		Adjustments			Total		Distribution		Adjustments			Total



For the Fiscal Year Ended
September 30, 2004 (GAAP)	$	111,791	$	6,353	$	(30,336	)	$	87,808	$	24,825	$	(3,493	)	$	21,332
September 30, 2004 (non-GAAP)(1)	$	111,791	$	6,353	$	(20,650	)	$	97,494	$	24,825	$	(2,611	)	$	22,214
September 30, 2003		147,419		10,096		(12,720	)		144,795		28,563		(1,652	)		26,911
September 30, 2002		138,199		11,004		(5,414	)		143,789		24,248		(1,031	)		23,217


	(1)	Fiscal 2004 ongoing operating income (non-GAAP) is defined as GAAP operating income adjusted to exclude the effects of a restructuring charge of $9.7 million and $0.9 million at Peoples Gas and North Shore Gas, respectively. See Item 7— MD&A— Executive Summary— Fiscal 2004 Results for a discussion of management’s use of non-GAAP financial measures and a reconciliation of fiscal 2004 GAAP and non-GAAP earnings.


	The following discussions supplement Peoples Gas’ and North Shore Gas’ information included in Liquidity and Capital Resources and in the Company’s Gas Distribution segment discussion within this MD&A.

	Peoples Gas Discussion
	Revenues for Peoples Gas for fiscal 2004 decreased approximately $12.3 million from the previous period. The decrease was mainly due to a decline in deliveries resulting from weather ($68.8 million) that was 8.9 percent warmer than the previous period, lower non-weather-related delivery variations ($27.8 million) and lower hub results ($3.6 million). Partially offsetting these effects were higher gas prices ($91.8 million). Operating income decreased $57.0 million due mainly to the effects of weather ($13.0 million), lower non-weather-related deliveries ($7.7 million), the effect of the accounts receivable adjustment ($5.8 million) described in Note 16 of the Notes to Consolidated Financial Statements and Item 9A, and lower hub results ($3.7 million). Also negatively impacting operating income were reductions in municipal and state utility tax accruals recorded in the previous period ($10.0 million), a restructuring charge ($9.7 million), and increases in pension expense ($9.7 million) and other non-labor operating costs. Partially offsetting these effects was a decrease in the provision for uncollectible accounts ($5.5 million). Pension expense for fiscal 2004 was $5.9 million.

	Interest expense for Peoples Gas for fiscal 2004 decreased $1.2 million from fiscal 2003 due to lower interest rates on variable rate debt and to the retirement or refinancing of higher cost notes and bonds.

	Fiscal 2003 revenues for Peoples Gas increased $378.1 million over fiscal 2002 resulting primarily from higher gas prices ($235.0 million), from increased deliveries due to weather that was almost 19 percent colder ($130.0 million) and higher revenue taxes. Operating income in fiscal 2003 increased $1.0 million compared with fiscal 2002 due mainly to the effects of weather ($26.0 million) partially offset by lower pension credits ($20.8 million) and higher non-labor operating expense. Pension credits for fiscal 2003 totaled $3.8 million.

	Fiscal 2003 interest expense for Peoples Gas decreased $1.4 million from fiscal 2002 due to lower rates on variable rate debt and to the retirement or refinancing of higher cost notes and bonds. These impacts were partially offset by higher average borrowing requirements resulting from colder weather and higher natural gas prices.

	North Shore Gas Discussion
	Revenues for North Shore Gas for fiscal 2004 decreased $9.3 million over the previous period resulting from a decrease in deliveries ($10.8 million) due primarily to warmer weather. Operating income decreased $5.6 million due mainly to the effects of weather ($1.9 million), lower non-weather-related deliveries ($1.0 million) and the

Peoples Energy 36


	effect of the accounts receivable adjustment ($1.1 million) described in Note 16 of the Notes to Consolidated Financial Statements and Item 9A. Also contributing to lower operating income was the restructuring charge of $0.9 million and increases in pension expense ($0.7 million), group insurance expense ($0.5 million), and outside services expense ($0.1 million), partially offset by a decrease in the provision for uncollectible accounts ($0.5 million). Pension expense for fiscal 2004 was $2.4 million.

	Fiscal 2003 revenues for North Shore Gas increased $75.3 million over fiscal 2002 resulting primarily from higher gas prices ($45.0 million) and from increased deliveries due to weather that was almost 19 percent colder ($25.0 million) and higher revenue taxes. Operating income increased $3.7 million due mainly to the effects of weather ($3.7 million), partially offset by an increase in pension expense of $0.9 million. The fiscal 2003 pension expense totaled $1.7 million.

	North Shore Gas’ fiscal 2003 interest expense decreased $1.4 million from fiscal 2002 primarily due to lower interest rates.

Peoples Energy 37


	The Peoples Gas Light and Coke Company
	Gas Distribution Statistics



									Increase/(Decrease)
			For Fiscal Years Ended September 30,
									Fiscal 2004 vs.			Fiscal 2003 vs.
Margin Data (In Thousands)			2004		2003		2002		Fiscal 2003			Fiscal 2002



Gas Distribution revenues:
	Sales
		Residential	$	974,143	$	974,453	$	672,942	$	(310	)	$	301,511
		Commercial		155,934		148,785		90,109		7,149			58,676
		Industrial		24,112		24,923		15,363		(811	)		9,560

	Total sales			1,154,189		1,148,161		778,414		6,028			369,747

	Transportation
		Residential		30,645		36,076		30,807		(5,431	)		5,269
		Commercial		41,131		45,043		40,839		(3,912	)		4,204
		Industrial		16,656		17,402		17,773		(746	)		(371	)
		Contract pooling		14,017		19,037		10,635		(5,020	)		8,402

	Total transportation			102,449		117,558		100,054		(15,109	)		17,504

	Other Gas Distribution revenues			15,117		14,721		23,365		396			(8,644	)

Total Gas Distribution revenues				1,271,755		1,280,440		901,833		(8,685	)		378,607
Less: Gas costs				723,771		697,824		380,376		25,947			317,448

Gross margin				547,984		582,616		521,457		(34,632	)		61,159
Less: Revenue taxes				125,500		122,849		101,145		2,651			21,704
Environmental costs recovered				16,206		20,534		5,888		(4,328	)		14,646

Net margin(1)			$	406,278	$	439,233	$	414,424	$	(32,955	)	$	24,809


Gas Distribution deliveries (MDth):
	Gas sales
		Residential		97,035		106,488		94,435		(9,453	)		12,053
		Commercial		16,856		17,704		14,144		(848	)		3,560
		Industrial		2,790		3,243		2,840		(453	)		403

	Total gas sales			116,681		127,435		111,419		(10,754	)		16,016

	Transportation
		Residential		20,210		23,209		20,941		(2,999	)		2,268
		Commercial		37,287		39,495		37,596		(2,208	)		1,899
		Industrial		18,139		19,669		21,192		(1,530	)		(1,523	)

	Total transportation			75,636		82,373		79,729		(6,737	)		2,644

Total Gas Distribution deliveries				192,317		209,808		191,148		(17,491	)		18,660


Gross margin per Dth delivered			$	2.85	$	2.78	$	2.73	$	0.07		$	0.05

Net margin per Dth delivered			$	2.11	$	2.09	$	2.17	$	0.02		$	(0.08	)

Average cost per Dth of gas sold			$	6.20	$	5.48	$	3.41	$	0.72		$	2.07

Actual heating degree days				6,091		6,684		5,639		(593	)		1,045
Normal heating degree days(2)				6,427		6,427		6,427
Actual heating degree days as a percent of normal (actual/normal)				95		104		88


	(1)	As used above, net margin is not a financial measure computed under GAAP. Gross margin is the GAAP measure most closely related to net margin. Management believes net margin to be useful in understanding Peoples Gas’ operations because the utility subsidiaries are allowed, under their tariffs, to recover gas costs, revenue taxes and environmental costs from their customers on a dollar-for-dollar basis.
	(2)	Normal HDD are based on a 30-year average of monthly temperatures at Chicago’s O’Hare Airport for the years 1970-1999.

Peoples Energy 38


	North Shore Gas Company
	Gas Distribution Statistics



									Increase/(Decrease)
			For Fiscal Years Ended September 30,
									Fiscal 2004 vs.			Fiscal 2003 vs.
Margin Data (In Thousands)			2004		2003		2002		Fiscal 2003			Fiscal 2002



Gas Distribution revenues:
	Sales
		Residential	$	174,356	$	181,474	$	121,923	$	(7,118	)	$	59,551
		Commercial		28,822		30,060		19,198		(1,238	)		10,862
		Industrial		6,212		6,539		4,022		(327	)		2,517

	Total sales			209,390		218,073		145,143		(8,683	)		72,930

	Transportation
		Residential		1,709		1,457		1,231		252			226
		Commercial		6,154		5,777		5,212		377			565
		Industrial		2,781		2,931		2,737		(150	)		194
		Contract pooling		1,355		2,423		861		(1,068	)		1,562

	Total transportation			11,999		12,588		10,041		(589	)		2,547

	Other Gas Distribution revenues			1,320		1,343		1,550		(23	)		(207	)

Total Gas Distribution revenues				222,709		232,004		156,734		(9,295	)		75,270
Less: Gas costs				144,747		150,054		83,468		(5,307	)		66,586

Gross margin				77,962		81,950		73,266		(3,988	)		8,684
Less: Revenue taxes				13,341		14,090		11,042		(749	)		3,048
Environmental costs recovered				1,178		804		732		374			72

Net margin(1)			$	63,443	$	67,056	$	61,492	$	(3,613	)	$	5,564


Gas Distribution deliveries (MDth):
	Gas sales
		Residential		19,904		22,033		18,887		(2,129	)		3,146
		Commercial		3,447		3,851		3,201		(404	)		650
		Industrial		807		905		730		(98	)		175

	Total gas sales			24,158		26,789		22,818		(2,631	)		3,971

	Transportation
		Residential		851		760		664		91			96
		Commercial		6,359		5,579		5,128		780			451
		Industrial		5,617		5,320		4,855		297			465

	Total transportation			12,827		11,659		10,647		1,168			1,012

Total Gas Distribution deliveries				36,985		38,448		33,465		(1,463	)		4,983


Gross margin per Dth delivered			$	2.11	$	2.13	$	2.19	$	(0.02	)	$	(0.06	)

Net margin per Dth delivered			$	1.72	$	1.74	$	1.84	$	(0.02	)	$	(0.10	)

Average cost per Dth of gas sold			$	5.99	$	5.60	$	3.66	$	0.39		$	1.94

Actual heating degree days				6,091		6,684		5,639		(593	)		1,045
Normal heating degree days(2)				6,427		6,427		6,427
Actual heating degree days as a percent of normal (actual/normal)				95		104		88


	(1)	As used above, net margin is not a financial measure computed under GAAP. Gross margin is the GAAP measure most closely related to net margin. Management believes net margin to be useful in understanding North Shore Gas’ operations because the utility subsidiaries are allowed, under their tariffs, to recover gas costs, revenue taxes and environmental costs from their customers on a dollar-for-dollar basis.
	(2)	Normal HDD are based on a 30-year average of monthly temperatures at Chicago’s O’Hare Airport for the years 1970-1999.

Peoples Energy 39

ITEM 7A Quantitative and Qualitative Disclosures About Market Risk


	The Company is exposed to various business risks associated with commodity prices, weather, interest rates, and credit. These financial exposures are monitored and managed by the Company as an integral part of its overall risk management program. The Company’s risk management program includes, among other things, the use of derivatives.

	Quantitative and qualitative disclosures about market risk are reported in Business Risk Factors under Item 7— MD&A and below under Risk Management Activities.

	RISK MANAGEMENT ACTIVITIES

	Commodity Price Risk
	The Company’s earnings may vary due to changes in commodity prices (market risk) that affect its subsidiaries’ operations and investments. To manage this market risk, the Company uses forward contracts and financial instruments, including commodity futures contracts, swaps and options. It is the policy of the Company to use these instruments solely for the purpose of managing risk and not for any speculative purpose.
	Derivative Summary. The following table summarizes the changes in valuation of all outstanding derivative contracts during fiscal 2004 and 2003.



	Derivative Type




	Cash Flow Hedges						Fair Value Hedges						Mark-to-Market



(In Thousands)	2004			2003			2004			2003			2004			2003



Value of contracts outstanding at October 1	$	(24,164	)	$	(13,720	)	$	(65	)	$	(201	)	$	(13,734	)	$	31,042
Less: Gain (loss) on contracts realized or otherwise settled during the period		(24,958	)		(27,470	)		660			(2,701	)		9,557			136,240
Plus: Gain (loss) on new contracts entered into during the period and outstanding at end of period		(50,731	)		(4,646	)		(139	)		(65	)		33,652			(16,647	)
Plus: Other gain (loss)		(39,369	)		(33,268	)		725			(2,500	)		17,317			108,111

Value of contracts outstanding at September 30	$	(89,306	)	$	(24,164	)	$	(139	)	$	(65	)	$	27,678		$	(13,734	)


	Cash Flow Hedges. The Company has positions in oil and gas reserves, natural gas, and transportation as part of its Oil and Gas Production, Midstream Services and Retail Energy Services businesses. The Company uses derivative financial instruments to protect against loss of value of future anticipated cash transactions caused by changes in the marketplace. These instruments are designated cash flow hedges, which allow for the unrealized changes in value during the life of the hedge to be recorded in other comprehensive income. Realized gains and losses from cash flow hedges are recorded in the income statement in the same month the related physical sales and purchases and interest expense is recorded.

	The maturities of the open cash flow hedges are summarized in the table below. All valuations are based on NYMEX closing prices at September 30, 2004.

	Cash Flow Hedges
	Value by Year of Maturity


				Less than			1 to 2			2 to 3			3 to 4			4 to 5
(In Thousands)	Total			1 Year			Years			Years			Years			Years



Loss at September 30, 2004	$	(89,306	)	$	(57,374	)	$	(26,628	)	$	(5,253	)	$	(51	)	$	—
Loss at September 30, 2003	$	(24,164	)	$	(10,913	)	$	(8,499	)	$	(4,058	)	$	(694	)	$	—
Loss at September 30, 2002	$	(13,720	)	$	(7,549	)	$	(3,843	)	$	(853	)	$	(1,090	)	$	(385	)

Peoples Energy 40


	Fair Value Hedges. A small portion of the Company’s financial hedges are used to protect the value of gas in storage and are accounted for as fair value hedges. The change in value of these hedges along with the change in value of the inventory hedged are recorded in the income statement.
	Mark-To-Market Derivative Instruments. Peoples Gas and North Shore Gas use derivative instruments to manage each utility’s cost of gas supply and mitigate price volatility. The regulated utilities’ tariffs allow for full recovery from their customers of prudently incurred gas supply cost. Since the utilities do not bear the price risk associated with future gas supply purchases, any associated derivative activity will not qualify for hedge accounting and therefore must be marked-to-market. SFAS No. 71 allows any of these derivative gains or losses to be recorded as regulatory assets or regulatory liabilities. Realized gains or losses are recorded as an adjustment to the cost of gas supply in the period that the underlying gas purchase transaction takes place. The costs and benefits of this activity are passed through to customers under the tariffs of Peoples Gas and North Shore Gas. The following table summarizes this activity and other derivative instruments that are not hedges and are recorded on a mark-to-market basis.



		September 30,



(In Thousands)		2004		2003



Peoples Gas mark-to-market asset (liability)		$	22,768	$	(10,792	)
North Shore Gas mark-to-market asset (liability)			4,653		(2,914	)
Other mark-to-market asset (liability)			257		(28	)

	Total	$	27,678	$	(13,734	)


	Weather Risk
	The Company’s Gas Distribution earnings vary due to the warmth or severity of the weather. The Company manages this risk through the purchase of weather insurance and the use of block rates in utility rate design. Block rates help mitigate the effect of warm weather by allowing greater cost recovery on the first volumes through the meter and less on the last volumes. The insurance currently in place for fiscal 2005 is provided by a subsidiary of X.L. America, Inc. and protects the Company for a portion of lost revenue incurred if weather is more than five percent warmer than normal. Under this policy, the Company will receive $20,000 for each heating degree day in fiscal year 2005 below 6,100 (i.e., approximately five percent warmer than normal), up to a maximum of $10 million. If total heating degree days during fiscal year 2005 exceed 6,800 (i.e., approximately six percent colder than normal), the Company will pay an additional premium to the insurer of $10,000 for each heating degree day above 6,800. The insurance accrual is recorded using the prescribed intrinsic method of accounting and settles annually based on the Company’s fiscal year.

	The Retail Energy Services and Midstream Services business segments can also be affected by weather variations. Storage, swing supply and weather derivatives are used or are available to protect earnings and ensure performance.

	Interest Rate Risk
	The Company periodically utilizes derivative instruments as cash flow hedges to reduce interest rate risk associated with the issuance of debt. During fiscal 2003, the Company entered into treasury lock agreements
	totaling $115.0 million that hedged the 10-year treasury component of a portion of the total anticipated fiscal 2003 debt financings. On April 24, 2003, in connection with the issuance of the utility subsidiaries’ new debt, the Company unwound all of its treasury lock positions resulting in a $0.7 million loss charged by Peoples Gas and a $0.4 million loss charged by North Shore Gas to other comprehensive income. These amounts are amortized over the 10-year term of the new debt.

	In addition to periodically utilizing derivative instruments to hedge debt issuance, the Company uses interest rate derivatives to adjust the portfolio composition of fixed-rate and floating rate debt. In August 2004, the Company entered into a six-month LIBOR-based interest rate swap agreement on $50.0 million of its $325.0 million 6.90% Series A Notes, due January 15, 2011. Under this agreement, the Company will receive the fixed price of 6.90% and pay six-month LIBOR plus a defined spread on the notional amount of $50.0 million. The payments will reset on the 15th day of each January and July until maturity of the Series A Notes.

Peoples Energy 41


	Credit Risk
	The Company has established a credit policy to mitigate the effect of nonperformance on wholesale transactions. Pursuant to this policy, a credit limit is established for all counterparties based on a review of their financial condition. The Company reviews, and changes when necessary, its credit underwriting and monitoring procedures. The Company has adequate financial assurance provisions in its commercial agreements that permit the Company to call for credit support when warranted. Action may include the calling of collateral, adjusting credit lines, changing payment terms or reducing future business. In addition, netting arrangements and margining is used to further reduce credit exposure.

	Credit risk for the utility companies is spread over a diversified base of residential, commercial and industrial customers. Customers’ payment records are continually monitored and credit deposits are required, when appropriate.

	The Company is closely monitoring the creditworthiness of Aquila, one of three companies contracting with Elwood for plant capacity and output. Aquila’s senior unsecured debt rating was upgraded to B2 with a stable outlook by Moody’s in September 2004 and to B- with a negative outlook by S&P in August 2004. Aquila has provided Elwood with security in the form of letters of credit and a cash escrow equal to one year of capacity payments of approximately $37.7 million.

Peoples Energy 42


ITEM 8	Financial Statements and Supplementary Data


		Page


Report of Independent Registered Public Accounting Firm
	Peoples Energy		44
	Peoples Gas		45
	North Shore Gas		46
Consolidated Statements of Income for Fiscal Years Ended September 30, 2004, 2003 and 2002
	Peoples Energy		47
	Peoples Gas		52
	North Shore Gas		57
Consolidated Balance Sheets at September 30, 2004 and 2003
	Peoples Energy		48
	Peoples Gas		53
	North Shore Gas		58
Consolidated Capitalization Statements at September 30, 2004 and 2003
	Peoples Energy		49
	Peoples Gas		54
	North Shore Gas		59
Consolidated Statements of Stockholders’ Equity for Fiscal Years Ended September 30, 2004, 2003 and 2002
	Peoples Energy		50
	Peoples Gas		55
	North Shore Gas		60
Consolidated Statements of Cash Flows for Fiscal Years Ended September 30, 2004, 2003 and 2002
	Peoples Energy		51
	Peoples Gas		56
	North Shore Gas		61
Notes to Consolidated Financial Statements			62

Peoples Energy 43

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To Shareholders of Peoples Energy Corporation:

We have audited the accompanying consolidated balance sheets and consolidated capitalization statements of Peoples Energy Corporation and subsidiary companies (the Company) as of September 30, 2004 and 2003, and the related consolidated statements of income, stockholders’ equity, and cash flows for each of the three years in the period ended September 30, 2004. Our audits also included the financial statement schedules listed in the Index at Item 15(a)2. These consolidated financial statements and financial statement schedules are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

We conducted our audits in accordance with standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Peoples Energy Corporation and subsidiary companies at September 30, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

DELOITTE & TOUCHE LLP

Chicago, Illinois

December 14, 2004

Peoples Energy 44

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To The Peoples Gas Light and Coke Company:

We have audited the accompanying consolidated balance sheets and consolidated capitalization statements of The Peoples Gas Light and Coke Company and subsidiary companies (hereinafter referred to as Peoples Gas, a wholly owned subsidiary of Peoples Energy Corporation) as of September 30, 2004 and 2003, and the related consolidated statements of income, stockholder’s equity, and cash flows for each of the three years in the period ended September 30, 2004. Our audits also included the financial statement schedules listed in the Index at Item 15(a)2. These consolidated financial statements and financial statement schedules are the responsibility of the management of Peoples Gas. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Peoples Gas at September 30, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

DELOITTE & TOUCHE LLP

Chicago, Illinois

December 14, 2004

Peoples Energy 45

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To North Shore Gas Company:

We have audited the accompanying consolidated balance sheets and consolidated capitalization statements of North Shore Gas Company and subsidiary companies (hereinafter referred to as North Shore Gas, a wholly owned subsidiary of Peoples Energy Corporation) as of September 30, 2004 and 2003, and the related consolidated statements of income, stockholder’s equity, and cash flows for each of the three years in the period ended September 30, 2004. Our audits also included the financial statement schedules listed in the Index at Item 15(a)2. These consolidated financial statements and financial statement schedules are the responsibility of the management of North Shore Gas. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of North Shore Gas at September 30, 2004 and 2003, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2004, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.

DELOITTE & TOUCHE LLP

Chicago, Illinois

December 14, 2004

Peoples Energy 46

CONSOLIDATED STATEMENTS OF INCOME



Peoples Energy Corporation


(In Thousands, Except Per-Share Amounts) For Fiscal Years Ended September 30,		2004			2003			2002



Revenues		$	2,260,199		$	2,138,394		$	1,482,534

Operating Expenses:
Cost of energy sold			1,467,777			1,329,023			782,157
Operation and maintenance			344,278			338,491			294,219
Depreciation, depletion and amortization			119,145			111,825			98,852
Taxes, other than income taxes			170,037			167,217			135,957
Property sale (gains)/impairment losses			(2,547	)		(339	)		(2,265	)
Restructuring charge			17,000			—			—

Total Operating Expenses			2,115,690			1,946,217			1,308,920

Equity investment income			19,842			17,337			10,796

Operating Income			164,351			209,514			184,410
Other income			3,808			3,832			12,398
Other expense			336			789			4,977
Interest expense			48,426			49,441			56,439

Income Before Income Taxes			119,397			163,116			135,392
Income tax expense			37,833			59,182			46,321

Net Income		$	81,564		$	103,934		$	89,071


Average Shares of Common Stock Outstanding
	Basic		37,318			36,054			35,454
	Diluted		37,490			36,196			35,492
Earnings Per Share of Common Stock
	Basic	$	2.19		$	2.88		$	2.51
	Diluted	$	2.18		$	2.87		$	2.51


	The Notes to Consolidated Financial Statements are an integral part of these statements.

Peoples Energy 47

CONSOLIDATED BALANCE SHEETS



Peoples Energy Corporation


(In Thousands) At September 30,			2004		2003



Assets
	Capital Investments:
		Property, plant and equipment
		Utility plant	$	2,615,002	$	2,552,464
		Oil and gas		488,275		391,135
		Other		21,010		18,357

	Total property, plant and equipment			3,124,287		2,961,956
	Less—Accumulated depreciation, depletion and amortization			1,220,102		1,123,783

	Net property, plant and equipment			1,904,185		1,838,173
	Investment in equity investees			135,819		142,142
	Other investments			23,921		21,768

	Total Capital Investments—Net			2,063,925		2,002,083

	Current Assets:
	Cash and cash equivalents			7,228		13,648
	Deposits with broker or trustee			13,891		19,361
	Receivables—
		Customers, net of reserve for uncollectible accounts of $29,138 and $33,124, respectively		190,379		216,041
		Other		55,769		5,896
	Materials and supplies, at average cost			10,444		9,754
	Gas in storage			191,052		165,583
	Gas costs recoverable through rate adjustments			20,612		22,665
	Regulatory assets of utility subsidiaries			37,076		27,279
	Other			25,910		9,917

	Total Current Assets			552,361		490,144

	Other Assets:
	Prepaid pension costs			176,329		186,961
	Noncurrent regulatory assets of utility subsidiaries			228,186		181,223
	Deferred charges and other			73,989		68,127

	Total Other Assets			478,504		436,311

	Total Assets		$	3,094,790	$	2,928,538


Capitalization and Liabilities
	Total Capitalization (see Consolidated Capitalization Statements)		$	1,767,460	$	1,592,344

	Current Liabilities:
	Commercial paper			55,625		55,949
	Other short-term debt			—		152,000
	Accounts payable			144,709		148,769
	Regulatory liabilities of utility subsidiaries			33,575		—
	Dividends payable			20,367		19,446
	Customer deposits			27,833		26,369
	Customer credit balances			52,576		48,402
	Accrued taxes			26,056		45,730
	Other accrued liabilities			164,039		87,871
	Gas costs refundable through rate adjustments			29		5,039
	Accrued interest			11,307		10,999

	Total Current Liabilities			536,116		600,574

	Deferred Credits and Other Liabilities:
	Deferred income taxes			423,356		407,835
	Investment tax credits			26,597		27,642
	Environmental, pension and other			341,261		300,143

	Total Deferred Credits and Other Liabilities			791,214		735,620

	Total Capitalization and Liabilities		$	3,094,790	$	2,928,538


	The Notes to Consolidated Financial Statements are an integral part of these statements.

Peoples Energy 48

CONSOLIDATED CAPITALIZATION STATEMENTS



Peoples Energy Corporation


(In Thousands, Except Shares) At September 30,			2004			2003



Common Stockholders’ Equity:
Common stock, without par value—
	Authorized 60,000,000 shares
	Issued 37,976,994 and 36,936,068 shares, respectively		$	387,845		$	346,545
Treasury stock (243,100 and 246,100 shares, respectively, at cost)				(6,677	)		(6,760	)
Retained earnings				554,222			549,969
Accumulated other comprehensive income (loss)				(65,307	)		(41,755	)

Total Common Stockholders’ Equity				870,083			847,999

Long-Term Debt:
Peoples Energy Corporation
		6.9% Series A, due January 15, 2011		325,000			325,000
		Fair value hedge adjustment		1,047			—
The Peoples Gas Light and Coke Company
	First and Refunding Mortgage Bonds—
		5 3/4% Series DD, due December 1, 2023		—			75,000
		6.10% Series FF, due June 1, 2025		50,000			50,000
		5.00% Series KK, due February 1, 2033		50,000			50,000
		3.05% Series LL, due February 1, 2033, adjustable after 5 years		50,000			50,000
		4.00% Series MM, due March 1, 2010		50,000			50,000
		4.625% Series NN, due May 1, 2013		75,000			75,000

				275,000			350,000
	Adjustable Rate Bonds—
		Series EE, due December 1, 2023		—			27,000
		Series HH, due March 1, 2030		50,000			50,000
		Series II, due March 1, 2030		—			37,500
		Series JJ, due March 1, 2030		—			37,500
		Series OO, due October 1, 2037		51,000			—
		Series PP, due October 1, 2037		51,000			—
		Series QQ, due November 1, 2038		75,000			—

				227,000			152,000
North Shore Gas Company
	First Mortgage Bonds—
		5.00% Series M, due December 1, 2028		29,330			29,345
		4.625% Series N-1, due May 1, 2013		40,000			40,000

				69,330			69,345

Subtotal				897,377			896,345

Less adjustable rate bonds classified as short-term debt				—			152,000

Total Long-Term Debt				897,377			744,345

Total Capitalization			$	1,767,460		$	1,592,344


	The Notes to Consolidated Financial Statements are an integral part of these statements.

Peoples Energy 49

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY



Peoples Energy Corporation


											Accumulated
											Other
			Common		Treasury			Retained			Comprehensive
(In Thousands, Except Per-Share Amounts)			Stock		Stock			Earnings			Income (Loss)			Total



For Fiscal Year Ended September 30, 2002
Beginning Balance			$	299,327	$	(6,793	)	$	506,589		$	(509	)	$	798,614
Comprehensive Income
	Net income								89,071						89,071
	Other comprehensive income
		Minimum pension liability adjustment										2,524			2,524
		Unrealized hedge gain or (loss)										(13,011	)		(13,011	)

Total Comprehensive Income															78,584
Common stock issued				2,372											2,372
Treasury stock						33									33
Dividends declared on common stock ($2.07)									(73,279	)					(73,279	)

September 30, 2002(1)			$	301,699	$	(6,760	)	$	522,381		$	(10,996	)	$	806,324

For Fiscal Year Ended September 30, 2003
Comprehensive Income
	Net income								103,934						103,934
	Other comprehensive income
		Minimum pension liability adjustment										(23,454	)		(23,454	)
		Unrealized hedge gain or (loss)										(7,305	)		(7,305	)

Total Comprehensive Income															73,175
Common stock issued				44,846											44,846
Dividends declared on common stock ($2.11)									(76,346	)					(76,346	)

September 30, 2003(2)			$	346,545	$	(6,760	)	$	549,969		$	(41,755	)	$	847,999

For Fiscal Year Ended September 30, 2004
Comprehensive Income
	Net income								81,564						81,564
	Other comprehensive income
		Minimum pension liability adjustment										16,047			16,047
		Unrealized hedge gain or (loss)										(39,599	)		(39,599	)

Total Comprehensive Income															58,012
Common stock issued				41,300											41,300
Treasury stock						83									83
Dividends declared on common stock ($2.15)									(80,424	)					(80,424	)
Other									3,113						3,113

September 30, 2004(3)			$	387,845	$	(6,677	)	$	554,222		$	(65,307	)	$	870,083


	The Notes to Consolidated Financial Statements are an integral part of these statements.


	(1)	Accumulated other comprehensive income balance is net of $0.3 million deferred income tax credits related to the minimum pension liabilities and $8.6 million deferred income tax credits related to unrealized hedge losses.
	(2)	Accumulated other comprehensive income balance is net of $15.8 million deferred income tax credits related to the minimum pension liabilities and $11.7 million deferred income tax credits related to unrealized hedge losses.
	(3)	Accumulated other comprehensive income balance is net of $5.2 million deferred income tax credits related to the minimum pension liabilities and $37.9 million deferred income tax credits related to unrealized hedge losses.

Peoples Energy 50

CONSOLIDATED STATEMENTS OF CASH FLOWS



Peoples Energy Corporation


(In Thousands) For Fiscal Years Ended September 30,			2004			2003			2002



Operating Activities:
Net income			$	81,564		$	103,934		$	89,071
Adjustments to reconcile net income to cash provided by operations:
	Depreciation, depletion and amortization			125,212			116,773			103,305
	Deferred income taxes and investment tax credits—net			17,003			25,404			42,680
	Change in environmental, pension and other liabilities			38,590			96,409			69,229
	Change in undistributed earnings from equity investments			(8,327	)		4,740			12,216
	Other changes in noncurrent operating activities			(54,623	)		(73,078	)		(72,381	)
	Changes in current assets and liabilities
		Receivables—net		(24,212	)		1,643			177,433
		Gas in storage		(25,469	)		(76,015	)		(321	)
		Gas costs recoverable/refundable through rate adjustments		(2,957	)		(7,436	)		(50,688	)
		Net regulatory assets/liabilities of utility subsidiaries		23,778			(38,981	)		15,583
		Accounts payable		(14,025	)		33,091			39,735
		Other accrued liabilities		76,169			20,821			(139,961	)
		Accrued interest		308			(583	)		(988	)
		Accrued taxes		(19,674	)		(1,553	)		16,083
		Other		(11,045	)		610			27,096

Net Cash Provided by (Used in) Operating Activities				202,292			205,779			328,092

Investing Activities:
Capital spending				(189,389	)		(187,151	)		(200,748	)
Net change in advances to joint venture partnerships				—			—			147,616
Return of capital investments				14,692			7,930			62,922
Decrease (increase) in deposits with broker or trustee				5,470			9,284			(25,320	)
Proceeds from sale of assets				3,727			347			1,871
Other				737			91			(853	)

Net Cash Provided By (Used in) Investing Activities				(164,763	)		(169,499	)		(14,512	)

Financing Activities:
Proceeds from (payment of) overdraft facility				(597	)		(11,494	)		17,148
Retirement of commercial paper				(325	)		(29,922	)		(19,583	)
Retirement of short-term debt				(152,000	)		(50,000	)		(200,000	)
Issuance of long-term debt				223,608			259,319			—
Retirement of long-term debt				(76,515	)		(165,419	)		(100,294	)
Proceeds from issuance of common stock				41,383			44,846			2,372
Dividends paid on common stock				(79,503	)		(75,395	)		(72,956	)

Net Cash Provided by (Used in) Financing Activities				(43,949	)		(28,065	)		(373,313	)

Net Increase (Decrease) in Cash and Cash Equivalents				(6,420	)		8,215			(59,733	)
Cash and Cash Equivalents at Beginning of Period				13,648			5,433			65,166

Cash and Cash Equivalents at End of Period			$	7,228		$	13,648		$	5,433


Supplemental information:

Income taxes paid, net of refunds			$	37,264		$	16,376		$	(1,306	)

Interest paid, net of amounts capitalized			$	46,363		$	46,525		$	56,507


	The Notes to Consolidated Financial Statements are an integral part of these statements.

Peoples Energy 51

CONSOLIDATED STATEMENTS OF INCOME



The Peoples Gas Light and Coke Company


(In Thousands) For Fiscal Years Ended September 30,	2004			2003			2002



Revenues	$	1,279,375		$	1,291,669		$	913,523

Operating Expenses:
Gas costs		723,771			697,824			380,376
Operation and maintenance		258,229			250,741			211,156
Depreciation and amortization		61,872			60,508			62,125
Taxes, other than income taxes		140,348			138,140			118,342
Property sale (gains)		(2,339	)		(339	)		(2,265	)
Restructuring charge		9,686			—			—

Total Operating Expenses		1,191,567			1,146,874			769,734

Operating Income		87,808			144,795			143,789
Other income		3,123			3,178			5,925
Other expense		44			325			391
Interest expense		21,114			22,314			23,673

Income Before Income Taxes		69,773			125,334			125,650
Income tax expense		24,397			45,752			47,832

Net Income	$	45,376		$	79,582		$	77,818


	The Notes to Consolidated Financial Statements are an integral part of these statements.

Peoples Energy 52

CONSOLIDATED BALANCE SHEETS



The Peoples Gas Light and Coke Company


(In Thousands) At September 30,			2004		2003



Assets
	Capital Investments:
		Property, plant and equipment	$	2,258,516	$	2,203,842
		Less—Accumulated depreciation and amortization		901,938		858,838

	Net property, plant and equipment			1,356,578		1,345,004
	Other investments			1,776		1,968

	Total Capital Investments—Net			1,358,354		1,346,972

	Current Assets:
	Cash and cash equivalents			6		—
	Deposits with broker or trustee			—		11,080
	Receivables—
		Customers, net of reserve for uncollectible accounts of $26,536 and $29,207, respectively		109,506		134,041
		Intercompany receivables		33,388		27,094
		Other		1,193		178
	Materials and supplies, at average cost			9,169		8,404
	Gas in storage, at last-in, first-out cost			107,275		111,992
	Gas costs recoverable through rate adjustments			17,950		22,341
	Regulatory assets			34,522		23,223
	Other			6,865		3,456

	Total Current Assets			319,874		341,809

	Other Assets:
	Prepaid pension costs			175,279		178,003
	Noncurrent regulatory assets			180,690		141,987
	Deferred charges and other			52,161		47,074

	Total Other Assets			408,130		367,064

	Total Assets		$	2,086,358	$	2,055,845


Capitalization and Liabilities
	Total Capitalization (see Consolidated Capitalization Statements)		$	1,131,520	$	976,483

	Current Liabilities:
	Commercial paper			31,000		55,949
	Other short-term debt			—		176,400
	Accounts payable			70,222		83,409
	Intercompany payables			36,676		45,720
	Regulatory liabilities			27,923		—
	Customer deposits			25,692		24,470
	Customer credit balances			43,831		39,728
	Accrued taxes			22,544		29,421
	Other accrued liabilities			70,439		38,831
	Gas costs refundable through rate adjustments			29		28
	Accrued interest			5,532		5,061

	Total Current Liabilities			333,888		499,017

	Deferred Credits and Other Liabilities:
	Deferred income taxes			376,745		355,160
	Investment tax credits			23,735		24,634
	Environmental, pension and other			220,470		200,551

	Total Deferred Credits and Other Liabilities			620,950		580,345

	Total Capitalization and Liabilities		$	2,086,358	$	2,055,845


	The Notes to Consolidated Financial Statements are an integral part of these statements.

Peoples Energy 53

CONSOLIDATED CAPITALIZATION STATEMENTS



The Peoples Gas Light and Coke Company


(In Thousands, Except Shares) At September 30,			2004			2003



Common Stockholder’s Equity:
Common stock, without par value—
	Authorized 40,000,000 shares
	Outstanding 24,817,566 shares		$	165,307		$	165,307
Retained earnings				471,293			482,228
Accumulated other comprehensive income (loss)				(7,080	)		(21,052	)

Total Common Stockholder’s Equity				629,520			626,483

Long-Term Debt:
	First and Refunding Mortgage Bonds—
		5 3/4% Series DD, due December 1, 2023		—			75,000
		6.10% Series FF, due June 1, 2025		50,000			50,000
		5.00% Series KK, due February 1, 2033		50,000			50,000
		3.05% Series LL, due February 1, 2033, adjustable after 5 years		50,000			50,000
		4.00% Series MM, due March 1, 2010		50,000			50,000
		4.625% Series NN, due May 1, 2013		75,000			75,000

				275,000			350,000
	Adjustable Rate Bonds—
		Series EE, due December 1, 2023		—			27,000
		Series HH, due March 1, 2030		50,000			50,000
		Series II, due March 1, 2030		—			37,500
		Series JJ, due March 1, 2030		—			37,500
		Series OO, due October 1, 2037		51,000			—
		Series PP, due October 1, 2037		51,000			—
		Series QQ, due November 1, 2038		75,000			—

				227,000			152,000

Subtotal				502,000			502,000

Less adjustable rate bonds classified as short-term debt				—			152,000

Total Long-Term Debt				502,000			350,000

Total Capitalization			$	1,131,520		$	976,483


	The Notes to Consolidated Financial Statements are an integral part of these statements.

Peoples Energy 54

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY



The Peoples Gas Light and Coke Company


								Accumulated
								Other
			Common		Retained			Comprehensive
(In Thousands)			Stock		Earnings			Income (Loss)			Total



For Fiscal Year Ended September 30, 2002
Beginning Balance			$	165,307	$	458,338		$	(3,015	)	$	620,630
Comprehensive Income
	Net income					77,818						77,818
	Other comprehensive income
		Minimum pension liability adjustment							2,524			2,524

Total Comprehensive Income												80,342
Other						(312	)					(312	)
Dividends declared on common stock						(64,774	)					(64,774	)

September 30, 2002(1)			$	165,307	$	471,070		$	(491	)	$	635,886

For Fiscal Year Ended September 30, 2003
Comprehensive Income
	Net income					79,582						79,582
	Other comprehensive income
		Minimum pension liability adjustment							(20,151	)		(20,151	)
		Unrealized hedge gain or (loss)							(410	)		(410	)

Total Comprehensive Income												59,021
Dividends declared on common stock						(68,424	)					(68,424	)

September 30, 2003(1)(2)			$	165,307	$	482,228		$	(21,052	)	$	626,483

For Fiscal Year Ended September 30, 2004
Comprehensive Income
	Net income					45,376						45,376
	Other comprehensive income
		Minimum pension liability adjustment							13,929			13,929
		Unrealized hedge gain or (loss)							43			43

Total Comprehensive Income												59,348
Dividends declared on common stock						(56,200	)					(56,200	)
Other						(111	)					(111	)

September 30, 2004(1)(2)			$	165,307	$	471,293		$	(7,080	)	$	629,520


	The Notes to Consolidated Financial Statements are an integral part of these statements.


	(1)	Accumulated other comprehensive income balance is net of $4.4 million, $13.6 million and $0.3 million of deferred income tax credits related to minimum pension liabilities at September 30, 2004, 2003 and 2002, respectively.
	(2)	Accumulated other comprehensive income balance is net of $0.2 million and $0.3 million of deferred income tax credits related to unrealized hedge losses at September 30, 2004 and 2003, respectively.

Peoples Energy 55

CONSOLIDATED STATEMENTS OF CASH FLOWS



The Peoples Gas Light and Coke Company


(In Thousands) For Fiscal Years Ended September 30,			2004			2003			2002



Operating Activities:
Net Income			$	45,376		$	79,582		$	77,818
Adjustments to reconcile net income to cash provided by operations:
	Depreciation and amortization			66,599			64,897			66,105
	Deferred income taxes and investment tax credits—net			2,917			17,126			34,503
	Change in environmental, pension and other liabilities			37,689			42,208			62,496
	Other changes in noncurrent operating activities			(24,096	)		(35,497	)		(68,691	)
	Change in current assets and liabilities:
		Receivables—net		17,225			(8,529	)		130,816
		Gas in storage		4,717			(46,628	)		1,788
		Gas costs recoverable/refundable through rate adjustments		4,392			(15,283	)		(38,199	)
		Net regulatory assets/liabilities		16,624			(30,239	)		(14,689	)
		Accounts payable		(10,453	)		71,822			30,314
		Other accrued liabilities		8,602			(6,030	)		(122,592	)
		Accrued interest		471			(147	)		53
		Accrued taxes		(6,877	)		(8,389	)		(6,455	)
		Other		1,151			2,278			25,688

Net Cash Provided by (Used in) Operating Activities				164,337			127,171			178,955

Investing Activities:
Capital spending				(67,750	)		(73,007	)		(81,343	)
Decrease (increase) in deposits with broker or trustee				11,080			10,722			(21,802	)
Proceeds from sale of assets				2,478			347			1,871
Other				669			96			(519	)

Net Cash Provided by (Used in) Investing Activities				(53,523	)		(61,842	)		(101,793	)

Financing Activities:
Proceeds from (payment of) overdraft facility				666			(11,188	)		16,733
Issuance (retirement) of commercial paper				(24,949	)		(26,722	)		82,671
Retirement of short-term debt				(176,400	)		(41,075	)		(184,525	)
Issuance of long-term debt				222,575			219,743			—
Retirement of long-term debt				(76,500	)		(125,750	)		—
Dividends paid on common stock				(56,200	)		(80,337	)		(52,862	)

Net Cash Provided by (Used in) Financing Activities				(110,808	)		(65,329	)		(137,983	)

Net Increase (Decrease) in Cash and Cash Equivalents				6			—			(60,821	)
Cash and Cash Equivalents at Beginning of Period				—			—			60,821

Cash and Cash Equivalents at End of Period			$	6		$	—		$	—


Supplemental information:

Income taxes paid, net of refunds			$	29,933		$	28,539		$	11,993

Interest paid, net of amounts capitalized			$	19,572		$	19,897		$	22,987


	The Notes to Consolidated Financial Statements are an integral part of these statements.

Peoples Energy 56

CONSOLIDATED STATEMENTS OF INCOME



North Shore Gas Company


(In Thousands) For Fiscal Years Ended September 30,	2004			2003		2002



Revenues	$	222,711		$	232,005	$	156,734

Operating Expenses:
Gas costs		144,747			150,054		83,468
Operation and maintenance		33,841			31,478		29,972
Depreciation		7,066			7,071		6,654
Taxes, other than income taxes		16,003			16,491		13,423
Property sale (gains)		(1,160	)		—		—
Restructuring charge		882			—		—

Total Operating Expenses		201,379			205,094		133,517

Operating Income		21,332			26,911		23,217
Other income		392			383		2,761
Other expense		217			434		96
Interest expense		3,688			3,603		5,045

Income Before Income Taxes		17,819			23,257		20,837
Income tax expense		6,743			8,712		7,916

Net Income	$	11,076		$	14,545	$	12,921


	The Notes to Consolidated Financial Statements are an integral part of these statements.

Peoples Energy 57

CONSOLIDATED BALANCE SHEETS



North Shore Gas Company


(In Thousands) At September 30,			2004		2003



Assets
	Capital Investments:
		Property, plant and equipment	$	356,486	$	348,622
		Less—Accumulated depreciation		141,346		136,299

	Net property, plant and equipment			215,140		212,323

	Total Capital Investments—Net			215,140		212,323

	Current Assets:
	Cash and cash equivalents			2		12,108
	Deposits with broker or trustee			—		2,766
	Receivables—
		Customers, net of reserve for uncollectible accounts of $943 and $1,012, respectively		12,157		16,437
		Intercompany receivables		20,629		1,466
		Other		1,335		453
	Materials and supplies, at average cost			1,275		1,351
	Gas in storage, at last-in, first-out cost			14,921		9,442
	Gas costs recoverable through rate adjustments			2,662		323
	Regulatory assets			2,553		4,055
	Other			1,458		202

	Total Current Assets			56,992		48,603

	Other Assets:
	Noncurrent regulatory assets			47,496		39,236
	Deferred charges and other			3,358		3,980

	Total Other Assets			50,854		43,216

	Total Assets		$	322,986	$	304,142


Capitalization and Liabilities
	Total Capitalization (see Consolidated Capitalization Statements)		$	173,009	$	172,706

	Current Liabilities:
	Other short-term debt—intercompany			3,810		—
	Accounts payable			12,697		13,202
	Intercompany payables			6,220		10,060
	Regulatory liabilities			5,652		—
	Customer deposits			2,141		1,899
	Customer credit balances			7,130		6,963
	Accrued taxes			1,679		315
	Other accrued liabilities			5,711		3,867
	Gas costs refundable through rate adjustments			—		5,011
	Accrued interest			1,270		1,276

	Total Current Liabilities			46,310		42,593

	Deferred Credits and Other Liabilities:
	Deferred income taxes			35,652		31,126
	Investment tax credits			2,862		3,008
	Environmental, pension and other			65,153		54,709

	Total Deferred Credits and Other Liabilities			103,667		88,843

	Total Capitalization and Liabilities		$	322,986	$	304,142


	The Notes to Consolidated Financial Statements are an integral part of these statements.

Peoples Energy 58

CONSOLIDATED CAPITALIZATION STATEMENTS



North Shore Gas Company


(In Thousands, Except Shares) At September 30,			2004			2003



Common Stockholder’s Equity:
Common stock, without par value—
	Authorized 5,000,000 shares
	Outstanding 3,625,887 shares		$	24,757		$	24,757
Retained earnings				80,258			80,882
Accumulated other comprehensive income (loss)				(1,336	)		(2,278	)

Total Common Stockholder’s Equity				103,679			103,361

Long-Term Debt:
	First Mortgage Bonds—
		5.00% Series M, due December 1, 2028		29,330			29,345
		4.625% Series N, due May 1, 2013		40,000			40,000

Total Long-Term Debt				69,330			69,345

Total Capitalization			$	173,009		$	172,706


	The Notes to Consolidated Financial Statements are an integral part of these statements.

Peoples Energy 59

CONSOLIDATED STATEMENTS OF STOCKHOLDER’S EQUITY



North Shore Gas Company


								Accumulated
								Other
			Common		Retained			Comprehensive
(In Thousands, Except Per-Share Amounts)			Stock		Earnings			Income (Loss)			Total



For Fiscal Year Ended September 30, 2002
Beginning Balance			$	24,757	$	75,937		$	—		$	100,694
Net income						12,921						12,921
Dividends declared on common stock						(11,132	)					(11,132	)

September 30, 2002			$	24,757	$	77,726		$	—		$	102,483

For Fiscal Year Ended September 30, 2003
Comprehensive Income
	Net income					14,545						14,545
	Other comprehensive income
		Minimum pension liability adjustment							(2,059	)		(2,059	)
		Unrealized hedge gain or (loss)							(219	)		(219	)

Total Comprehensive Income												(2,278	)
Dividends declared on common stock						(11,389	)					(11,389	)

September 30, 2003(1)			$	24,757	$	80,882		$	(2,278	)	$	103,361

For Fiscal Year Ended September 30, 2004
Comprehensive Income
	Net income					11,076						11,076
	Other comprehensive income
		Minimum pension liability adjustment							919			919
		Unrealized hedge gain or (loss)							23			23

Total Comprehensive Income												942
Dividends declared on common stock						(11,700	)					(11,700	)

September 30, 2004(1)			$	24,757	$	80,258		$	(1,336	)	$	103,679


	The Notes to Consolidated Financial Statements are an integral part of these statements.


	(1)	Accumulated other comprehensive income balance is net of $0.8 million and $1.4 million deferred income tax credits related to the minimum pension liabilities and $0.1 million and $0.1 million deferred income tax credits related to unrealized hedge losses at September 30, 2004 and 2003, respectively.

Peoples Energy 60

CONSOLIDATED STATEMENTS OF CASH FLOWS



North Shore Gas Company


(In Thousands) For Fiscal Years Ended September 30,			2004			2003			2002



Operating Activities:
Net Income			$	11,076		$	14,545		$	12,921
Adjustments to reconcile net income to cash provided by operations:
	Depreciation			8,403			7,631			7,120
	Deferred income taxes and investment tax credits—net			3,095			1,452			3,993
	Change in environmental, pension and other liabilities			11,729			16,284			6,287
	Other changes in noncurrent operating activities			(7,881	)		(13,202	)		(3,553	)
	Change in current assets and liabilities:
		Receivables—net		(15,766	)		1,401			2,334
		Gas in storage		(5,478	)		87			(22	)
		Gas costs recoverable/refundable through rate adjustments		(7,349	)		7,848			(12,491	)
		Net regulatory assets/liabilities		7,154			(8,741	)		5,509
		Accounts payable		(348	)		7,492			5,302
		Other accrued liabilities		(1,996	)		2,118			(12,625	)
		Accrued interest		(6	)		(428	)		(8	)
		Accrued taxes		1,364			(1,886	)		1,288
		Other		(772	)		(1,704	)		5,667

Net Cash Provided by (Used in) Operating Activities				3,225			32,897			21,722

Investing Activities:
Capital spending				(10,592	)		(8,992	)		(11,334	)
Decrease (increase) in deposits with broker or trustee				2,766			2,296			(5,062	)
Proceeds from sale of assets				1,250			—			—
Other				(693	)		13			—

Net Cash Provided By (Used in) Investing Activities				(7,269	)		(6,683	)		(16,396	)

Financing Activities:
Proceeds from (payment of) overdraft facility				(157	)		(415	)		415
Issuance of short-term debt				3,810			—			2,210
Retirement of short-term debt				—			(2,210	)		—
Issuance of long-term debt				—			39,577			—
Retirement of long-term debt				(15	)		(39,669	)		(294	)
Dividends paid on common stock				(11,700	)		(11,389	)		(11,132	)

Net Cash Provided by (Used in) Financing Activities				(8,062	)		(14,106	)		(8,801	)

Net Increase (Decrease) in Cash and Cash Equivalents				(12,106	)		12,108			(3,475	)
Cash and Cash Equivalents at Beginning of Period				12,108			—			3,475

Cash and Cash Equivalents at End of Period			$	2		$	12,108		$	—


Supplemental information:

Income taxes paid, net of refunds			$	3,295		$	7,805		$	5,206

Interest paid, net of amounts capitalized			$	3,456		$	3,753		$	4,549


	The Notes to Consolidated Financial Statements are an integral part of these statements.

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Notes to Consolidated Financial Statements


1:	Summary of Significant Accounting Policies


	A.	General


	Peoples Energy Corporation (the Company or Peoples Energy) is solely a holding company whose income is derived principally from its regulated utility subsidiaries, The Peoples Gas Light and Coke Company (Peoples Gas) and North Shore Gas Company (North Shore Gas). The utilities are primarily engaged in the sale and transportation of natural gas to residential, commercial and industrial customers in Chicago and the northeast section of Illinois. Other businesses of the Company include Oil and Gas Production, Power Generation, Midstream Services and Retail Energy Services.

	The Company makes certain estimates and assumptions in preparing its consolidated financial statements in accordance with GAAP. These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from those estimates.

	All subsidiaries are included in the consolidated financial statements. All significant intercompany transactions have been eliminated in consolidation. Investments for which the Company’s subsidiaries have at least a 20 percent interest, but less than a majority ownership, and partnerships in which the Company has less than a majority interest are accounted for under the equity method, as the Company has the ability to exercise significant influence, but not control, over the investee’s operating and financial policies. Certain items previously reported for years prior to fiscal 2004 have been reclassified to conform to the current-year presentation.

	The Company was a 50 percent partner with Enron Midwest in enovate until March 29, 2002, when Enron’s interest in the partnership was purchased by the Company. From late March and until its dissolution in September 2002, enovate was reported as a wholly owned subsidiary instead of an investment accounted for under the equity method.


	B.	Use of Fair Value Measurements


	The Company reports certain contracts and instruments at fair value in accordance with GAAP. Fair value is based on actively quoted market prices, if available. In the absence of actively quoted market prices, the Company seeks indicative price information from external sources, including broker quotes and industry publications. If pricing information from external sources is not available, the Company must estimate prices based on available historical and near-term future price information and certain statistical methods, including regression analysis.

	For options and contracts with option-like characteristics where pricing information is not available from external sources, the Company uses a modified Black-Scholes model and considers time value, the volatility of the underlying commodities and other relevant assumptions when estimating fair value. For contracts with unique characteristics, the Company estimates fair value using a discounted cash flow approach deemed appropriate in the circumstances and applied consistently from period to period. If pricing information is not available from external sources, judgment is required to develop the estimates of fair value. For individual contracts, the use of different assumptions could have a material effect on the contract’s estimated fair value.

	The following table summarizes the carrying amounts and fair values of financial instruments included in the Consolidated Balance Sheets of the Company, Peoples Gas and North Shore Gas.



	Peoples Energy				Peoples Gas				North Shore Gas



	Carrying		Estimated		Carrying		Estimated		Carrying		Estimated
(In Millions)	Amount		Fair Value		Amount		Fair Value		Amount		Fair Value



Long-term debt including current portion
At September 30, 2004	$	897.4	$	930.7	$	502.0	$	502.9	$	69.3	$	69.3
At September 30, 2003	$	744.3	$	780.5	$	350.0	$	348.4	$	69.3	$	67.7

Peoples Energy 62


	The estimated fair values are determined based on the long-term debt interest rates that are currently available for issuance of debt with similar terms, call dates and remaining maturities. The carrying amount of all other financial instruments approximate fair value.

	Considerable judgment is required to develop the fair value estimates; therefore, the values are not necessarily indicative of the amounts that could be realized in a current market exchange. The fair value estimates are based on information available to management as of each fiscal year-end. Management is not aware of any subsequent factors that would affect significantly the estimated fair value amounts.


	C.	Revenue Recognition


	Gas and electricity sales and transportation revenues are recorded on the accrual basis for all gas and electricity delivered during the month, including an estimate for gas and electricity delivered but unbilled at the end of each month. The amount of accrued unbilled revenue included in gross receivables from customers is summarized below.



	For Fiscal Years
	Ended September 30,



(In Thousands)	2004		2003



Peoples Gas	$	21,632	$	28,250
North Shore Gas		5,196		5,658
Peoples Energy Services		13,829		11,097

Consolidated Peoples Energy	$	40,657	$	45,005

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 Utility Act provides that the tax may be recovered from utility customers by adding an additional charge to customers’ bills. These taxes are due only to the extent they are collected as cash receipts as opposed to amounts billed. As a result, most revenue taxes are reported on a gross basis. The billed amounts for the recovery of these taxes are included in revenues and an offsetting expense amount representing the expected cash payment of the taxes is included in taxes, other than income taxes on the income statement. Revenue tax amounts included in utility revenues are as follows:



	For Fiscal Years Ended September 30,



(In Thousands)	2004		2003		2002



Peoples Gas	$	124,797	$	129,424	$	95,998
North Shore Gas		12,125		12,860		9,736

Consolidated Peoples Energy	$	136,922	$	142,284	$	105,734

Natural gas and crude oil production revenues are recorded on the entitlement method. Under the entitlement method, revenue is recorded when title is transferred based on the Company’s net interest. The Company records its entitled share of revenues based on estimated production volumes. Subsequently, these estimated volumes are adjusted to reflect actual volumes that are supported by third party statements and/or cash receipts.


	D.	Weather Insurance

The Company is partially protected from the impact of unusually mild weather by a weather insurance program that protects earnings with payments limited to certain maximums per year and over the life of the policy. The contract settles annually at the fiscal year-end. The insurance proceeds are reported as revenue and the premium is charged to operating expense based on the guidance of EITF 99-02, “Accounting for Weather Derivatives.” The Company recorded $8.7 million in weather insurance recovery as revenue in 2002 and no revenue was recorded in 2003 or 2004.


	E.	Income Taxes


	The Company follows the asset and liability method of accounting for deferred income taxes. Under this method, deferred income taxes have been recorded using currently enacted tax rates for the differences between the tax

Peoples Energy 63


	basis of assets and liabilities and the basis reported in the financial statements. Due to the effects of regulation on Peoples Gas and North Shore Gas, certain adjustments made to deferred income taxes are, in turn, recorded as regulatory assets (liabilities). (See Note 10C.)

	Income taxes allocated to Peoples Gas and North Shore Gas are included in the consolidated tax return of the Company. The separate return method has not been used, but the principles of that method are generally followed. Deferred taxes exist at Peoples Gas and North Shore Gas only if the temporary differences that generate those deferred taxes are derived from assets and liabilities of Peoples Gas and North Shore Gas. Additionally, the taxable income of Peoples Gas and North Shore Gas is the basis for recording current income tax expense and cash payments by each utility. Finally, tax benefits of loss companies, or tax credits such as Section 29 credits from nonutility subsidiaries of the Company, are not allocated to Peoples Gas and North Shore Gas.

	There are specific deviations from the separate return method. North Shore Gas could be an alternative minimum tax (AMT) taxpayer if it were a stand-alone company but only records a deferred tax asset and pays amounts to the Company if the entire group is an AMT taxpayer. North Shore Gas uses the federal income tax marginal rate of 35 percent, but on a stand-alone basis, it would use a marginal rate between 34 and 35 percent. Finally, if Peoples Gas or North Shore Gas were to have a capital loss, and another member of the group had capital gains to offset that loss, no deferred tax asset or increase to income tax expense would result.

	Each utility subsidiary within the consolidated group nets its income tax-related regulatory assets and liabilities. At September 30, 2004 and 2003, net regulatory income tax assets for the Company and Peoples Gas amounted to $23.7 million and $21.8 million, respectively. At September 30, 2004 and 2003, net regulatory income tax liabilities for the Company and North Shore Gas recorded in other liabilities equaled $2.6 million and $1.5 million, respectively.

	Investment tax credits have been deferred and are being amortized to income over the remaining book lives of related property.

	As a result of qualified production from oil and gas reserves that were acquired in December 1999, the Company recognized $1.1 million and $4.5 million of Section 29 tax credits in fiscal 2003 and 2002, respectively. Section 29 tax credits expired on December 31, 2002.


	F.	Stock Compensation Plans


	A new compensation plan, the 2004 Incentive Compensation Plan (2004 Plan) was approved by shareholders at the Company’s annual meeting held on February 27, 2004. The 2004 Plan is comprised of two sub-plans, the Long-Term Plan and the Short-Term Plan. The 2004 Plan effectively replaced the Company’s LTIC Plan and Short-Term Incentive Compensation Plan. The 2004 Plan does not provide for the grant of stock options, but instead provides for the issuance of restricted stock, RSUs and performance shares. No expense has been accrued with respect to performance shares awarded under the 2004 Plan based upon current estimates of Company performance.

	As allowed under SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure, an amendment of FASB Statement No. 123,” the Company has chosen to continue accounting for stock-based compensation using the intrinsic value method under Accounting Principles Board Opinion No. 25. Therefore, no compensation cost has been recognized for non-qualified stock options (under the superceded LTIC Plan and the DSOP with exercise prices equal to or greater than market prices at the date of grant) and shares issued under the ESPP.

PEOPLES GAS LIGHT & COKE CO 10-K