| UNITED                STATES                      |
|---------------------------------------------------|
| SECURITIES                AND EXCHANGE COMMISSION |
| Washington,                D.C. 20549             |
|                                              |
| **FORM                10-K**                      |

| (Mark                One)                                       |                                                             |
|-----------------------------------------------------------------|------------------------------------------------------------------|
|                                                            |                                                             |   |
|  R                                                         | ANNUAL                REPORT PURSUANT TO SECTION 13 OR 15(d) OF  |
| THE                SECURITIES EXCHANGE ACT OF 1934              |
| **For                the fiscal year ended SEPTEMBER 30, 2006** |
| OR                                                              |
|  £                                                    | TRANSITION                REPORT PURSUANT TO SECTION 13 OR 15(d) |
| OF                THE SECURITIES EXCHANGE ACT OF 1934           |

| Commission                 | Exact                Name of Registrant as Specified in Charter, State of                Incorporation, | IRS                Employer          |
|----------------------------|---------------------------------------------------------------------------------------------------------|--------------------------------------|
| File                Number | Address                of Principal Executive Office and Telephone Number                               | Identification                Number |
| **1-5540**                 | **PEOPLES                ENERGY CORPORATION**                                                           | **36-2642766**                       |
| **2-26983**                | **THE                PEOPLES GAS LIGHT AND COKE COMPANY**                                               | **36-1613900**                       |
| **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: |
|----------------------------------------------------------------------------|
|                                                                       |   | Name                of each exchange |
| Title                of Each Class                                         |   | on                which registered |
| Peoples                Energy Corporation                                  |   | New                York Stock Exchange, |
| Common                Stock, without par value                             |   | Chicago                Stock Exchange, |
|                                                                       |   | and                Pacific Exchange |

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| Indicate                by check mark if the registrant is a well-known seasoned issuer,                as                defined in Rule 405 of the Securities Act. |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Peoples                Energy Corporation                                                                                                                            | Yes                R                No                £ |
| The                Peoples Gas Light and Coke Company                                                                                                                | Yes                £                No                R |
| North                Shore Gas Company                                                                                                                               | Yes                £                No                R |

----

| Indicate                by check mark if the registrant is not required to file reports pursuant                to Section 13 or 15(d) of the Act. |
|----------------------------------------------------------------------------------------------------------------------------------------------------|
| Peoples                Energy Corporation                                                                                                          | Yes                £                No                R |
| The                Peoples Gas Light and Coke Company                                                                                              | Yes                R                No                £ |
| North                Shore Gas Company                                                                                                             | Yes                R                No                £ |

----

| 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 R                No                £ |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| 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.                R |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| Indicate                by check mark whether the registrant is a large accelerated filer,                an                accelerated filer, or a non-accelerated filer. See definition of                "accelerated filer and large accelerated filer" in Rule 12b-2 of                the                Exchange Act. (Check one): |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                      |
| Peoples                Energy Corporation                                                                                                                                                                                                                                                                                                 |
| Large                accelerated filer R     Accelerated                filer £     Non-accelerated                filer £                                                                                                                                                    |
|                                                                                                                                                                                                                                                                                                                                      |
| The                Peoples Gas Light and Coke Company                                                                                                                                                                                                                                                                                     |
| Large                accelerated filer £  Accelerated                filer £  Non-accelerated                filer R                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                                                                      |
| North                Shore Gas Company                                                                                                                                                                                                                                                                                                    |
| Large                accelerated filer £  Accelerated                filer £  Non-accelerated                filer R                                                                                                                                                                                        |

----

| Indicate                by check mark whether the registrant is a shell company (as defined                in                Rule 12b-2 of the Act). |
|------------------------------------------------------------------------------------------------------------------------------------------------------|
| Peoples                Energy Corporation                                                                                                            | Yes                £                No                R |
| The                Peoples Gas Light and Coke Company                                                                                                | Yes                £                No                R |
| North                Shore Gas Company                                                                                                               | Yes                £                No                R |

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| 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                $1.4 billion computed on the basis of the closing market price of                $35.64                for a share of Common Stock on March 31, 2006. |
|                                                                                                                                                                                                                                                               |   |
| 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,                2006): |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                              |   |
| Peoples                Energy Corporation                                                                                                                                                                         | Common                Stock, no par value, 38,572,918 shares outstanding |
|                                                                                                                                                                                                              |   |
| The                Peoples Gas Light and Coke Company                                                                                                                                                             | Common                Stock, no par value, 25,357,566 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) |

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| 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).** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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| **Documents                Incorporated by Reference** |
|--------------------------------------------------------|
|                                                   |   |   |
|                                                   | Document | Part                of Form 10-K |
|                                                   |   |   |
| Peoples                Energy Corporation              | Company's                Notice of Annual Meeting and Proxy Statement or an amendment to this                Form                10-K filed within 120 days of the end of the Company's fiscal                year | Part                III |
|                                                   |   |   |
| The                Peoples Gas Light and Coke Company  | None |   |
|                                                   |   |   |
| North                Shore Gas Company                 | None |   |

----

| **CONTENTS**                |
|-----------------------------|
|                        |   |   | Page |
| Item                No.     |   |   | No. |
|                        | Glossary                of Terms |   | 4 |
|                        | Forward-Looking                Information |   | 7 |
|                        |   |   |   |
| **Part                I**   |
| 1.                          | Business |   | 8 |
| 1A.                         | Risk                Factors |   | 16 |
| 1B.                         | Unresolved                Staff Comments |   | 24 |
| 2.                          | Properties |   | 24 |
| 3.                          | Legal                Proceedings |   | 26 |
| 4.                          | Submission                of Matters to a                Vote of Security Holders |   | 26 |
|                        | Executive                Officers                of the Company |   | 27 |
| **Part                II**  |
| 5.                          | Market                for the Company's                Common Stock and Related Stockholder                Matters |   | 28 |
| 6.                          | Selected                Financial                Data |   | 29 |
| 7.                          | Management's                Discussion                and Analysis                of Results of                Operations and Financial Condition | 30 |
| 7A.                         | Quantitative                and Qualitative                Disclosures About Market Risk |   | 54 |
| 8.                          | Financial                Statements and Supplementary                Data |   | 59 |
| 9.                          | Changes                in and Disagreements with Accountants on Accounting                and Financial Disclosure | 130 |
| 9A.                         | Controls                and Procedures |   | 130 |
| 9B.                         | Other                Information |   | 132 |
| **Part                III** |
| 10.                         | Directors                and                Executive Officers of the Company |   | 132 |
| 11.                         | Executive                Compensation |   | 133 |
| 12.                         | Security                Ownership of Certain Beneficial Owners and Management                and Related Stockholder Matters | 133 |
| 13.                         | Certain                Relationships and Related Transactions |   | 134 |
| 14.                         | Principal Accountant                Fees and Services | 134 |
| **Part                IV**  |
| 15.                         | Exhibits                and Financial                Statement Schedules |   | 134 |
|                        |   |   |   |
|                        | Signatures |   | 136 |
|                        | Exhibit Index |   | 139 |

**WHERE      TO FIND MORE INFORMATION**

*www.PeoplesEnergy.com*

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**Peoples      Energy Corporation - Glossary of Terms**

| **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 |
| Commission                                                                                                                                  |   | Illinois                Commerce Commission |
| DD&A                                                                                                                                    |   | Depreciation,                depletion and amortization |
| DDC                Plan                                                                                                                     |   | Directors                Deferred Compensation Plan |
| DSOP                                                                                                                                        |   | Directors                Stock and Option Plan |
| EITF                                                                                                                                        |   | Emerging                Issues Task Force |
| EPA                                                                                                                                         |   | United                States Environmental Protection Agency |
| ESPP                                                                                                                                        |   | Employee                Stock Purchase Plan |
| FASB                                                                                                                                        |   | Financial                Accounting Standards Board |
| FERC                                                                                                                                        |   | Federal                Energy Regulatory Commission |
| FIN                                                                                                                                         |   | FASB                Interpretation No. |
| FSP                                                                                                                                         |   | FASB                Staff Position |
| GAAP                                                                                                                                        |   | Accounting                principles generally accepted in the United States |
| LIFO                                                                                                                                        |   | Last-in,                first-out |
| LOCOM                                                                                                                                       |   | Lower                of cost or market |
| LTIC                                                                                                                                        |   | Long-Term                Incentive Compensation |
| MD&A                                                                                                                                    |   | Management's                Discussion and Analysis of Results of Operations and Financial                Condition |
| MTM                                                                                                                                         |   | Mark-to-market |
| NYMEX                                                                                                                                       |   | New                York Mercantile Exchange |
| PRP                                                                                                                                         |   | Potentially                Responsible Party |
| RCRA                                                                                                                                        |   | Resource                Conservation and Recovery Act |
| RSA                                                                                                                                         |   | Restricted                Stock Award |
| RSU                                                                                                                                         |   | Restricted                Stock Unit |
| SAB                                                                                                                                         |   | Staff                Accounting Bulletin |
| SAR                                                                                                                                         |   | Stock                Appreciation Right |
| SCEP                                                                                                                                        |   | Southeast                Chicago Energy Project, LLC |
| SEC                                                                                                                                         |   | Securities                and Exchange Commission |
| SFAS                                                                                                                                        |   | Statement                of Financial Accounting Standards |

----

| **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 field previously found to be productive 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. |
|                                       |   |   |
| Multiple                completion         |   | The                completion of a well in more than one producing formation at multiple                depths. |
|                                       |   |   |
| Net                acreage and net wells   |   | Obtained                by multiplying gross acreage and gross wells by the Company’s working                interest percentage in the properties. |
|                                       |   |   |
| 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, natural gas liquids 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. |
|                                       |   |   |
| Weather                normalized          |   | Usage,                revenue or operating income excluding the estimated effects of deviations                from normal weather. |
|                                       |   |   |
| Working                Interest            |   | The                ownership interest under an oil and gas lease after accounting for                the                interests reserved for the lessor or landowner. |

----

| **Referenced                Accounting Standards** |
|----------------------------------------------------|
|                                               |   |   |
| APB                Opinion No. 25                  |   | Accounting                for Stock Issued to Employees |
|                                               |   |   |
| EITF                99-02                          |   | Accounting                for Weather Derivatives |
|                                               |   |   |
| FIN                47                              |   | Accounting                for Conditional Asset Retirement Obligations |
|                                               |   |   |
| FIN                48                              |   | Accounting                for Uncertainty in Income Taxes - an Interpretation of FASB Statement                No.                109 |
|                                               |   |   |
| FSP                No. 106-2                       |   | Accounting                and Disclosure Requirements Related to the Medicare Prescription                Drug                Improvement and Modernization Act of 2003 |
|                                               |   |   |
| SAB                No. 108                         |   | Considering                the Effects of Prior Year Misstatements When Quantifying Misstatements                in                Current Year Financial Statements |
|                                               |   |   |
| SFAS                No. 5                          |   | Accounting                for Contingencies |
|                                               |   |   |
| SFAS                No. 71                         |   | Accounting                for the Effects of Certain Types of Regulation |
|                                               |   |   |
| SFAS                No. 88                         |   | Employer’s                Accounting for Settlements and Curtailments of Defined Benefit Pension                Plans and for Termination Benefits |
|                                               |   |   |
| SFAS                No. 123                        |   | Accounting                for Stock-Based Compensation |
|                                               |   |   |
| SFAS                No. 123 (R)                    |   | Share-based                Payment |
|                                               |   |   |
| SFAS                No. 133                        |   | Accounting                for Derivatives and Hedging Activities (as amended and                interpreted) |
|                                               |   |   |
| SFAS                No. 141                        |   | Business                Combinations |
|                                               |   |   |
| SFAS                No. 143                        |   | Accounting                for Asset Retirement Obligations |
|                                               |   |   |
| SFAS                No. 144                        |   | Accounting                for the Impairment or Disposal of Long-Lived Assets |
|                                               |   |   |
| SFAS                No. 158                        |   | Employers’                Accounting for Defined Benefit Pension and Other Postretirement Plans—an                amendment of FASB Statements No. 87, 88, 106, and                132(R) |

----

**FORWARD-LOOKING      INFORMATION**

| ·   | The                outcome of the pending merger between the Company and WPS Resources                Corporation; |
|--------------------|--------------------------------------------------------------------------------------------------------------------|

| ·   | the                outcome of rate increase proceedings if filed with the Commission                by the                utility subsidiaries; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | adverse                decisions in proceedings before the Commission, including, but not                limited                to, proceedings concerning the prudence review of the utility                subsidiaries' gas purchases; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | adverse                changes in the Commission's approved rate mechanisms for recovery                of                environmental remediation costs at former manufactured gas sites                of the                Company's subsidiaries, or adverse decisions by the Commission with                respect to the prudence of costs actually                incurred; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | 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, interest expense and earnings from the Oil and Gas Production                segment; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | the                effectiveness of the Company's derivative instruments and hedging                activities and their impact on our future results of                operations; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | adverse                resolution of material litigation; |
|--------------------|-----------------------------------------------------------|

| ·   | effectiveness                of the Company's risk management policies and the creditworthiness                of                customers and counterparties; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | changes                in the credit ratings of the Company, Peoples Gas and North Shore                Gas; |
|--------------------|--------------------------------------------------------------------------------------------------------------|

| ·   | 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, Energy Assets and                Oil                and Gas Production segments; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | the                Company's ability to complete its divestment of its power generation                assets on advantageous terms; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------|

| ·   | drilling                and production risks and the inherent uncertainty of oil and gas                reserve                estimates; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | weather-related                energy demand; |
|--------------------|-----------------------------------------------|

| ·   | terrorist                activities; and |
|--------------------|------------------------------------------|

| ·   | the                application of, or changes in, accounting rules or interpretations,                including, but not limited to the impact of mark-to market accounting                treatment for some of the Company's derivative contracts used by                the                Company to manage commodity price basis, and other                risks. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**PART      I**

----

**ITEM      1.      Business**

**GENERAL**

**MERGER**

----

----

**1.      GAS DISTRIBUTION SEGMENT**

**Principal      Products and Markets**

----

**Competition**

**Current      Sources and Availability of Natural 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 capacity    |                                     | 320    |                           | 2008-2011  |                               | 58 |   | 2008-2017 |
| Firm                city-gate supply     |                                     | 168    |                           | 2007       |                               | 47 |   | 2007 |
| Liquefied                petroleum gas   |                                     | -      |                           |       |                               | 40 |   |   |
| Storage                gas:              |                                     |   |                           |       |                               |   |   |   |
|                                     | Contract                                 |   | 583                            |       | 2009-2017                          |   | 233 |   | 2009-2017 |
|                                     | Peoples—Manlove                    |   | 993                            |       |                               |   | - |   |   |
| Customer-owned                           |                                     | 253    |                           |       |                               | 60 |   |   |
| **Total                expected design** |                                     |   |                           |       |                               |   |   |   |
|                                     | **peak-day                availability** |   | 2,317                          |       |                               |   | 438 |   |   |

|                                                |        | Peoples                  Gas                          |        | North                  Shore Gas                      |   |
|-----------------------------------------------------|--------|-------------------------------------------------------|--------|-------------------------------------------------------|--------|
|                                                     |   | For                  Fiscal Years Ended September 30, |   | For                  Fiscal Years Ended September 30, |   |
|                                                |   | 2006                                                  |   | 2005                                                  |   | 2004 |   | 2006 |   | 2005 |   | 2004 |   |
| Gas                  purchases                      |   | 109,685                                               |   | 115,530                                               |   | 118,532 |   | 23,523 |   | 24,052 |   | 25,479 |   |
| Liquefied                  petroleum gas produced   |   | -                                                     |   | -                                                     |   | - |   | 10 |   | 6 |   | 10 |   |
| Customer-owned                  gas received        |   | 71,782                                                |   | 73,240                                                |   | 78,007 |   | 12,793 |   | 12,516 |   | 13,106 |   |
| Underground                  storage—net      |   | (3,655                                                | )      | (2,710                                                | )      | 214 |   | (883 | ) | 116 |   | (964 | ) |
| Purchased                  storage compressor fuel, |   |                                                  |   |                                                  |   |   |   |   |   |   |   |   |   |
| franchise                  requirements,            |   |                                                  |   |                                                  |   |   |   |   |   |   |   |   |   |
| and                  unaccounted-for gas            |   | (4,456                                                | )      | (4,200                                                | )      | (4,436 | ) | (517 | ) | (868 | ) | (646 | ) |
| **Total**                                           |   | 173,356                                               |   | 181,860                                               |   | 192,317 |   | 34,926 |   | 35,822 |   | 36,985 |   |

**Importance      of Regulatory Environment**

**Legislation      and Regulation at State Level.**

**Impact      on Sales and Rates.**

----

**Legislation      and Regulation at Federal Level.**

**Seasonality**

----

**Practices      Relating to Working Capital**

**Effects      of Environmental Legislation**

**2.      OIL AND GAS PRODUCTION SEGMENT**

----

**3.      ENERGY MARKETING SEGMENT**

**4.      ENERGY ASSETS SEGMENT**

----

**5**
**.      CORPORATE AND OTHER SEGMENT**

----

**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.**

**Commodity      price changes may affect the operating costs and competitive positions of the      Company’s businesses, thereby adversely impacting its liquidity and results of      operations.**

----

**The      Company’s use of derivative financial instruments could result in earnings      volatility and financial losses.**

**The      Company’s operating results may be adversely affected by mild      weather.**

----

**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.**

**The      Company’s operations are subject to operational hazards and uninsured      risks.**

**The      Company’s oil and gas producing operations involve many risks associated with      estimates and assumptions used in making capital expenditure      decisions.**

----

**The      agencies that regulate the Company’s 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.**

**An      adverse decision in proceedings before the Commission concerning the prudence      review of the Company’s gas purchases could require a significant refund      obligation.**

----

**A      change in the Commission’s approved rate mechanisms for recovery of      environmental remediation costs at former manufactured gas sites of the      Company’s subsidiaries, or adverse decisions with respect to the prudence of      costs actually incurred, could result in the Company reversing significant      amounts currently reflected as regulatory assets, resulting in a decrease to      net      income.**

**An      inability to access financial markets could affect the execution of the      Company’s business plan.**

**Adverse      changes in our credit ratings may negatively affect the      Company.**

**Risks      Relating to the Merger**

*The      merger may not be completed, which could adversely affect Peoples Energy’s      business operations and stock prices.*

----

| ·   | Peoples                Energy would not realize the benefits of the proposed merger, including                any synergies from combining the two                companies; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | the                trading price of Peoples Energy common stock may decline to the extent                that the current market prices reflect a market assumption that the                merger                will be completed; and |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Peoples                Energy would continue to be exposed to the general competitive pressures                and risks discussed in this Annual Report on Form 10-K for the year                ended                September 30, 2006, which pressures and risks may be increased if                the                merger is not completed. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Peoples      Energy will be subject to business uncertainties and contractual restrictions      while the merger is pending that could adversely affect its      business.*

*The      value of shares of WPS Resources common stock to be received by Peoples Energy      shareholders in the merger will fluctuate.*

----

| ·   | changes                in the business, operations or prospects of WPS Resources and/or                Peoples                Energy; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------|

| ·   | speculation                regarding the likelihood that the merger will be completed and the                timing                of the completion; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | general                market and economic conditions; and |
|--------------------|------------------------------------------------------------|

| ·   | litigation                and/or regulatory developments. |
|--------------------|-----------------------------------------------------------|

*The      merger is subject to receipt of consent or approval from governmental entities      that could delay or prevent the completion of the merger or impose conditions      that could have a material adverse effect on the combined company or that could      cause abandonment of the merger.*

*The      anticipated benefits of combining WPS Resources and Peoples Energy may not      be      realized.*

----

| ·   | whether                United States federal and state public utility, antitrust and other                regulatory authorities whose approval is required to complete the                merger                impose conditions on the merger or require the combined company to                share a                disproportionate amount of the expected or achieved synergies of                the                merger with customers, any of which may have an adverse effect on                the                combined company; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | resolution                of pending and future rate cases and negotiations (including the                recovery                of deferred costs) and other regulatory decisions impacting WPS Resources’                and Peoples Energy’s regulated businesses, including the rate treatment of                synergies and the cost to achieve those                synergies; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | the                ability of the two companies to combine certain of their operations                or                take advantage of expected growth opportunities; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | general                market and economic conditions; |
|--------------------|--------------------------------------------------------|

| ·   | general                competitive factors in the market place;                and |
|--------------------|------------------------------------------------------------------------------------|

| ·   | higher                than expected costs required to achieve the expected                synergies. |
|--------------------|------------------------------------------------------------------------------------------------------|

*The      integration of WPS Resources and Peoples Energy following the merger will      present significant challenges that may result in a decline in the anticipated      potential benefits of the merger.*

| ·   | combining                the best practices of two companies, including utility operations,                non-regulated marketing operations and staff                functions; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | the                necessity of coordinating geographically separated organizations,                systems                and facilities; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | integrating                personnel with diverse business backgrounds and organizational                cultures; |
|--------------------|--------------------------------------------------------------------------------------------------------------------|

| ·   | reducing                the costs associated with each company’s operations;                and |
|--------------------|-------------------------------------------------------------------------------------------------------|

| ·   | preserving                important relationships of both WPS Resources and Peoples Energy                and                resolving potential conflicts that may                arise. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

*Peoples      Energy will incur significant transaction, merger-related and restructuring      costs in connection with the merger.*

----

*The      combined company will record goodwill that could become impaired and adversely      affect the combined company’s operating results.*

----

**ITEM      1B.      Unresolved Staff Comments**

----

**ITEM      2.      Properties**

**GAS      DISTRIBUTION**

----

**OIL      AND GAS PRODUCTION**

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

----

|                                                          |        | At                September 30, 2006 |   |
|----------------------------------------------------------|--------|--------------------------------------|--------|
| Proved                reserves (Bcfe)                    |   | 232.8                                |   |
|                                                     |   |                                 |   |
| Productive                wells                          |   |                                 |   |
|    Gross                oil wells         |   | 43                                   |   |
|    Net                oil wells           |   | 22                                   |   |
|    Gross                gas wells (1)     |   | 710                                  |   |
|    Net                gas wells (1)       |   | 333                                  |   |
|                                                     |   |                                 |   |
| Acreage                                                  |   |                                 |   |
|    Gross                developed acres   |   | 162,334                              |   |
|    Net                developed acres     |   | 86,985                               |   |
|    Gross                undeveloped acres |   | 32,843                               |   |
|    Net                undeveloped acres   |   | 18,256                               |   |

|                                  |        | For                Fiscal Years Ended |
|----------------------------------|--------|---------------------------------------|
|                                  |   | September                30,          |
| Net                Wells Drilled |   | 2006                                  |   | 2005 |   | 2004 |   |
| Productive                       |   |                                  |   |   |   |   |   |
| Exploratory                      |   | -                                     |   | - |   | 2.2 |   |
| Developmental                    |   | 32.4                                  |   | 32.8 |   | 22.2 |   |
| Dry                              |   |                                  |   |   |   |   |   |
| Exploratory                      |   | 0.2                                   |   | - |   | 1.5 |   |
| Developmental                    |   | 2.8                                   |   | 1.6 |   | 0.2 |   |

----

**ITEM      3. Legal Proceedings**

----

**ITEM      4. Submission of Matters to a Vote of Security Holders**

----

**EXECUTIVE      OFFICERS OF THE COMPANY**

|                                 |   | Age                at |                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|--------------------------------------|--------|-----------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Name                                 |   | 11/30/2006            |                                                                                                                                                                                                | Position                with the Company                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|                                 |   |                  |                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| Katherine                A. Donofrio | 49     |                  | Senior                Vice President (Business Services) of the Company (2001). Ms. Donofrio                is                also Senior Vice President of Peoples Gas and North Shore Gas (2002). |
|                                 |   |                  |                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| Linda                M. Kallas       |   | 47                    |                                                                                                                                                                                                | 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).                                                                                                                                                                                                                                                    |
|                                 |   |                  |                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| Peter                H. Kauffman     |   | 60                    |                                                                                                                                                                                                | 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).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                                 |   |                  |                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| William                E. Morrow     |   | 50                    |                                                                                                                                                                                                | 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.                                                                                                                                                         |
|                                 |   |                  |                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| Thomas                A. Nardi       |   | 52                    |                                                                                                                                                                                                | Executive                Vice President and Chief Financial Officer (2005) of the Company,                Peoples                Gas and North Shore Gas and Director (2002) of Peoples Gas and North                Shore                Gas. Prior to becoming Executive Vice President, Mr. Nardi was Senior                Vice                President and Chief Financial Officer (2001) of the Company, Peoples                Gas                and North Shore Gas. 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. |
|                                 |   |                  |                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| Steven                W. Nance       |   | 50                    |                                                                                                                                                                                                | President                of Peoples Energy Production Company, the Oil and Gas Production                business                segment of the Company (2000).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                                 |   |                  |                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| Thomas                M. Patrick     |   | 60                    |                                                                                                                                                                                                | 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.                                                                                                                                                                                         |
|                                 |   |                  |                                                                                                                                                                                                |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
| Desiree                G. Rogers     |   | 47                    |                                                                                                                                                                                                | 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).                                                                                                                                                                                                                                                                                                                                  |

----

|                              |   | Age                at |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|-----------------------------------|--------|-----------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Name                              |   | 11/30/2005            |   | Position                with the Company                                                                                                                                                                                                                                                                                                                                                                                                                                                |
|                              |   |                  |   |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
| Douglas                M. Ruschau |   | 48                    |   | 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). |

**PART      II**

----

**ITEM      5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer      Purchases of Equity Securities**

|                                  |        | Stock                Price |
|----------------------------------|--------|----------------------------|
| *Fiscal                Quarters* |   |                       | High |   |   | Low |   |
| **2006**                         |   |                       |   |   |   |   |   |
| Fourth                           |   | $                          | 43.87 |   | $ | 35.71 |   |
| Third                            |   |                       | 38.66 |   |   | 35.10 |   |
| Second                           |   |                       | 37.97 |   |   | 35.11 |   |
| First                            |   |                       | 39.90 |   |   | 34.34 |   |
| **2005**                         |   |                       |   |   |   |   |   |
| Fourth                           |   | $                          | 45.52 |   | $ | 38.71 |   |
| Third                            |   |                       | 44.97 |   |   | 38.72 |   |
| Second                           |   |                       | 45.10 |   |   | 41.11 |   |
| First                            |   |                       | 45.38 |   |   | 41.05 |   |

----

|                                |        |                                                                   | **(A)** |                                                              | **(B)** |                                                                                                                                                     | **(C)** |                                                                                                                                                                           | **(D)** |
|--------------------------------|--------|------------------------------------------------------------------------|---------|-------------------------------------------------------------------|---------|----------------------------------------------------------------------------------------------------------------------------------------------------------|---------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|---------|
|    **Period**   |        |  **Total                  Number of Shares (or Units) Purchased** |         |  **Average                  Price Paid Per Share (or Unit)** |         |  **Total                  Number of Shares (or Units) Purchased as Part of Publicly Announced                  Plans                  or Programs** |         | **Maximum                  Number (or Approximate Dollar Value) of Shares (or Units) that                  May Yet Be                  Purchased Under the Plans or Programs** |
| October                  2005  |   | 10,027                  (1)                                            |    | $                  38.98                                          |    | 10,027                  (1)                                                                                                                              |    | Not                  applicable                  (2)                                                                                                                           |
| December                  2005 |   | 834                  (1)                                               |    | $                  36.30                                          |    | 834                  (1)                                                                                                                                 |    | Not                  applicable                  (2)                                                                                                                           |
| March                  2006    |   | 65                  (1)                                                |    | $                  36.09                                          |    | 65                  (1)                                                                                                                                  |    | Not                  applicable                  (2)                                                                                                                           |
| May                  2006      |   | 69                  (1)                                                |    | $                  36.46                                          |    | 69                  (1)                                                                                                                                  |    | Not                  applicable                  (2)                                                                                                                           |

| (1)    | 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.                 |
|   |                                                                                                                                                           |   |   |   |   |   |   |   |   |
| (2)    | 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,*            |   |   | 2006 |   |   |   |   | 2005 |   |   | 2004 |   |   | 2003 |   |   |   |   | 2002 |   |   |   |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating                  revenues                                |   | $ | 3,017,970 |   |   |   | $ | 2,599,585 |   | $ | 2,260,199 |   | $ | 2,138,394 |   |   |   | $ | 1,482,534 |   |   |   |
| Income                  (loss) from continuing operations          |   |   | (27,941 | ) |   |   |   | 66,848 |   |   | 74,742 |   |   | 97,162 |   |   |   |   | 83,027 |   |   |   |
| Income                  from discontinued operations, net of taxes |   |   | 10,305 |   |   |   |   | 11,285 |   |   | 6,822 |   |   | 6,772 |   |   |   |   | 6,044 |   |   |   |
| Net                  income (loss) (GAAP)                          |   | $ | (17,636 | ) |   |   | $ | 78,133 |   | $ | 81,564 |   | $ | 103,934 |   |   |   | $ | 89,071 |   |   |   |
|                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Ongoing                  income from continuing operations         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (non-GAAP)                  (1)                                    |   | $ | 44,206 |   |   |   | $ | 74,766 |   | $ | 84,985 |   | $ | 97,162 |   |   |   | $ | 83,027 |   |   |   |
| Diluted                  (loss) earnings per share:                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| From                  continuing operations                        |   |   | (0.73 | ) |   |   |   | 1.75 |   |   | 2.00 |   |   | 2.68 |   |   |   |   | 2.34 |   |   |   |
| From                  discontinued operations, net of taxes        |   |   | 0.27 |   |   |   |   | 0.30 |   |   | 0.18 |   |   | 0.19 |   |   |   |   | 0.17 |   |   |   |
| Total                                                              |   |   | (0.46 | ) |   |   |   | 2.05 |   |   | 2.18 |   |   | 2.87 |   |   |   |   | 2.51 |   |   |   |
| Total                  assets                                      |   |   | 3,822,414 |   |   |   |   | 3,537,791 |   |   | 3,094,790 |   |   | 2,928,538 |   |   |   |   | 2,723,647 |   |   |   |
| Capitalization:                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term                  debt                                    |   |   | 894,702 |   |   |   |   | 895,583 |   |   | 897,377 |   |   | 744,345 |   |   |   |   | 554,014 |   |   |   |
| Common                  equity                                     |   |   | 841,454 |   |   |   |   | 800,154 |   |   | 870,083 |   |   | 847,999 |   |   |   |   | 806,324 |   |   |   |
| Short-term                  debt                                   |   |   | 309,744 |   | (2 | ) |   | 8,148 |   |   | 55,625 |   |   | 207,949 |   | (3 | ) |   | 377,871 |   | (4 | ) |
| Cash                  dividends declared per share                 |   | $ | 2.18 |   |   |   | $ | 2.175 |   | $ | 2.15 |   | $ | 2.11 |   |   |   | $ | 2.07 |   |   |   |

| (1) | Ongoing                income from continuing operations (non-GAAP) is defined as GAAP income                from continuing operations adjusted to exclude the effects of the                amended gas charge settlement agreement and merger-related costs                of $64.7                million and $7.5 million after tax, respectively, in fiscal 2006,                and                restructuring costs for fiscal 2005 and 2004 of $7.9 million and                $10.2                million after tax, respectively. See Item 7-MD&A-Executive Summary-for                a discussion of management's use of non-GAAP financial measures and                a                reconciliation of GAAP and non-GAAP                earnings. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Represents                commercial paper at Peoples Energy as discussed in Item                7-MD&A-Financial Sources. |
|-----|--------------------------------------------------------------------------------------------------------------------------------|

| (3) | Includes                $152.0 million of long-term debt of Peoples Gas classified as short-term                debt due to bondholder tender                rights. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | 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. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

**ITEM      7. Management's Discussion and Analysis of Financial Condition and Results      of      Operations**

**INTRODUCTION**

**EXECUTIVE      SUMMARY**

| ·   | Gas                Distribution |
|--------------------|---------------------------------|

| ·   | Oil                and Gas Production |
|--------------------|---------------------------------------|

| ·   | Energy                Marketing |
|--------------------|---------------------------------|

| ·   | Energy                Assets |
|--------------------|------------------------------|

----

**Merger.      **

**Rate      Case.**

**Strategic      Restructuring.**

**Earnings      Outlook.**

**Financial      Results **

----

|                                                             |   |   |       |   |   |                            |   |   | Merger,                  Restructuring |   |   |    |   |   |    |   |
|-------------------------------------------------------------|--------|--------|------------|--------|--------|---------------------------------|--------|--------|----------------------------------------|--------|--------|---------|--------|--------|---------|--------|
|                                                             |   |   | Ongoing    |   |   | and                  Settlement |   |   | As                  Reported           |   |
| *(In                  Thousands, except per share amounts)* |   |   | (non-GAAP) |   |   | Charges                         |   |   | (GAAP)                                 |   |
| For                  Fiscal Years Ended September 30,       |   |   | 2006       |   |   | 2005                            |   |   | 2006                                   |   |   | 2005    |   |   | 2006    |   |   | 2005 |   |
| Operating                  Income (Loss):                   |   |   |       |   |   |                            |   |   |                                   |   |   |    |   |   |    |   |   |   |   |
| Gas                  Distribution                           |   | $      | 94,606     |   | $      | 137,335                         |   | $      | (107,330                               | )      | $      | -       |   | $      | (12,724 | )      | $ | 137,335 |   |
| Oil                  and Gas Production                     |   |   | 31,097     |   |   | 16,853                          |   |   | -                                      |   |   | -       |   |   | 31,097  |   |   | 16,853 |   |
| Energy                  Marketing                           |   |   | 8,959      |   |   | 13,471                          |   |   | -                                      |   |   | -       |   |   | 8,959   |   |   | 13,471 |   |
| Energy                  Assets                              |   |   | 1,766      |   |   | 1,727                           |   |   | -                                      |   |   | -       |   |   | 1,766   |   |   | 1,727 |   |
| Corporate                  and Other                        |   |   | (18,368    | )      |   | (6,828                          | )      |   | (8,944                                 | )      |   | (13,141 | )      |   | (27,312 | )      |   | (19,969 | ) |
| Total                  Operating Income (Loss)              |   | $      | 118,060    |   | $      | 162,558                         |   | $      | (116,274                               | )      | $      | (13,141 | )      | $      | 1,786   |   | $ | 149,417 |   |
|                                                        |   |   |       |   |   |                            |   |   |                                   |   |   |    |   |   |    |   |   |   |   |
| Income                  (loss) from continuing operations   |   | $      | 44,206     |   | $      | 74,766                          |   | $      | (72,147                                | )      | $      | (7,918  | )      | $      | (27,941 | )      | $ | 66,848 |   |
| Income                  from discontinued operations,       |   |   |       |   |   |                            |   |   |                                   |   |   |    |   |   |    |   |   |   |   |
| net                  of income taxes                        |   |   |       |   |   |                            |   |   |                                   |   |   |    |   |   | 10,305  |   |   | 11,285 |   |
| Net                  Income (Loss)                          |   |   |       |   |   |                            |   |   |                                   |   |   |    |   | $      | (17,636 | )      | $ | 78,133 |   |
|                                                        |   |   |       |   |   |                            |   |   |                                   |   |   |    |   |   |    |   |   |   |   |
| Per                  Diluted Share:                         |   |   |       |   |   |                            |   |   |                                   |   |   |    |   |   |    |   |   |   |   |
| Income                  (loss) from continuing operations   |   | $      | 1.14       |   | $      | 1.96                            |   | $      | (1.87                                  | )      | $      | (0.21   | )      | $      | (0.73   | )      | $ | 1.75 |   |
| Income                  from discontinued operations        |   |   |       |   |   |                            |   |   |                                   |   |   |    |   |   | 0.27    |   |   | 0.30 |   |
| Net                  Income (Loss)                          |   |   |       |   |   |                            |   |   |                                   |   |   |    |   | $      | (0.46   | )      | $ | 2.05 |   |

| ·   | Gas                Distribution deliveries for the year declined an estimated 4% from                the                prior year due to customer conservation. In addition, fiscal 2006                utility                deliveries were negatively impacted by 10% warmer than normal weather.                Gas                Distribution results were also negatively impacted by sharply higher                operating expenses. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Pursuant                to the amended gas charge settlement, Hub revenues for the Gas                Distribution segment in fiscal 2006 are being recorded as a credit                to                customers’ gas charges, negatively impacting year-over-year comparisons by                $10.7 million. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Oil                and Gas Production volumes were up 2% for fiscal 2006 compared to                a year                ago. This improvement reflects strong performance of both existing                and new                wells and the impact of the Company’s fiscal 2006 Will-Drill acquisition,                offset by the normal decline rate of existing production. Net realized                prices increased sharply in fiscal 2006, partially offset by higher                operating costs. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Energy                Marketing results were negatively impacted by an unrealized loss                of $17.6                million for the year due to LOCOM inventory adjustments and MTM accounting                of energy contracts, the impact of which was magnified by a significant                decline in the market price of natural gas during the latter half                of                September 2006. Approximately $15 million of the year-end impact                from                these adjustments is timing related and is expected to reverse over                fiscal                2007. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Year-over-year                comparisons were negatively impacted by a $6.8 million gain in last                year’s                fourth quarter associated with the sale by Trigen-Peoples District                Energy                (of which Peoples Energy owned a 50% interest) of its district heating                and                cooling plant in Chicago, which was reported in the Corporate and                Other                segment. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**RESULTS      OF OPERATIONS**

**Statement      of Operations Variations**

**Fiscal      2006**

----

| ·   | Increased                bad debt expense at the Gas Distribution segment of $6.5 million                for                fiscal 2006 due to high natural gas prices and their corresponding                impact                on revenues. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Increased                pension expense at Corporate and the Gas Distribution segment totaling                $9.9 million due to lower discount                rates. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Increased                direct labor costs at Corporate and the Gas Distribution segment                totaling                $4.6 million for fiscal 2006, primarily due to increases in wages                and                headcount. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Increased                lease operating, exploration and general and administrative costs                at the                Oil and Gas Production segment totaling $7.5                million. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Rate                case costs of $2.0 million expensed during fiscal 2006. |
|--------------------|-----------------------------------------------------------------------------|

**Other      Variances for 2006.**

| ·   | DD&A                increased $7.5 million in total and at the Oil and Gas Production                segment                increased $6.7 million, primarily due to the impacts of higher production                and higher DD&A rates. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Taxes,                other than income taxes, increased $16.7 million primarily due to                higher                revenue taxes ($13.9 million) in the Gas Distribution segment due                to                higher revenues. Revenue taxes are recovered through the utilities’ rate                mechanism and a similar amount included in revenues; therefore, these                costs do not affect operating                income. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Equity                investment income was $7.8 million in fiscal 2006 compared to $10.3                million in fiscal 2005. Fiscal 2006 results include the $7.8 million                pretax gain associated with the first quarter sale of certain assets                at                the Company’s EnerVest Energy, L.P. (EnerVest) partnership. Fiscal 2005                results include a $6.8 million gain related to the fourth quarter                sale of                assets by the Company's equity investment, Trigen-Peoples District                Energy                (recorded in the Corporate and Other segment). Fiscal 2005 results                also                reflect a full year of equity investment income from both these                investments. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Interest                expense increased $11.0 million due primarily to higher interest                rates,                higher short-term borrowing balances, and an increase in gas costs                refundable to customers through rate                adjustments. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Income                tax expense decreased $60.8 million primarily due to the charge for                the                amended settlement agreement related to the Company's gas charge                proceedings and related tax benefit of $42.7 million. The effective                tax                rate on fiscal 2006 ongoing income (non-GAAP), excluding the impact                of the                gas charge settlement and merger costs) was about 32%, down from                36% last                year, due to the impact of lower income before taxes and federal                Medicare                subsidies excludable from taxable                income. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | Pre-tax                income from discontinued operations totaled $17.1 million for fiscal                2006                compared to $18.7 million in fiscal 2005. Fiscal 2006 results included                a                $4.1 million pre-tax gain from the sale of SCEP, a $1.8 million pre-tax                loss from the sale of the Valencia development site, and lower                depreciation expense at Elwood. Fiscal 2005 results reflect a full                year of                SCEP equity investment income. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Fiscal      2005**

| ·   | Decreased                direct labor costs primarily at Corporate and the Gas Distribution                segment                of $16.4 million as a result of the organizational                restructuring. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Exploration                costs in the Oil and Gas Production segment decreased $5.1 million,                reflecting a significant dry hole expense recognized in fiscal                2004. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Lease                operating expense and general and administrative expenses in the                Oil and                Gas Production segment increased $5.1 million in aggregate primarily                as a                result of a general increase in the cost of goods and                services. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Increased                outside service expense of $3.7 million, much of which related to                Sarbanes-Oxley compliance work. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Increased                insurance, employee group insurance and other benefit expenses totaling                $6.6 million. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------|

**Other      Variances for 2005.**

| ·   | DD&A                decreased $8.1 million mainly due to the $6.6 million impact of the                approval by the Commission in April 2005 of new depreciation rates                that                reflect longer useful lives on utility plant (Commission Depreciation                Order). The Oil and Gas Production segment also had lower DD&A expense                ($1.6 million) in fiscal 2005. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Taxes,                other than income taxes, increased $14.3 million primarily due to                higher                revenue taxes in the Gas Distribution segment. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Equity                investment income increased $5.9 million primarily due to the $6.8                million                gain related to the sale of assets by the Company's equity investment,                Trigen-Peoples District Energy. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Interest                expense increased $2.2 million due primarily to higher interest                rates. |
|--------------------|---------------------------------------------------------------------------------------------------------------|

| ·   | Income                tax expense increased $3.9 million as tax expense in fiscal 2004                was                positively impacted by several items, including adjustments to accrued                income taxes based on updated estimates of income tax liabilities                and tax                legislation which resulted in the Company realizing tax benefits                from                dividends reinvested in Peoples Energy stock under the Company's                Employee                Stock Ownership Plan. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Income                from discontinued operations, net of taxes, increased $4.5 million                primarily due to the results of the Energy Assets segment’s Elwood                facility, which included the Company’s portion ($4.1 million) of a                reduction in prior and current period expenses, primarily depreciation                on                generating equipment. |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Segment      Discussion **

|                                                             |   | For                  Fiscal Years Ended |    |   |                |    |   |   |    |
|-------------------------------------------------------------|--------|-----------------------------------------|---------|--------|---------------------|---------|--------|--------|---------|
|                                                             |   | September                  30,          |    |   | Increase/(Decrease) |    |
| *(In                  Thousands)*                           |   |                                    | 2006    |   |                | 2005    |   |   | 2004    |   |   | 2006                  vs. 2005 |  |  | 2005                  vs. 2004 |   |
| **Operating                  income:**                      |   |                                    |    |   |                |    |   |   |    |   |   |   |   |   |   |   |
| Gas                  Distribution                           |   | $                                       | (12,724 | )      | $                   | 137,335 |   | $      | 141,158 |   | $ | (150,059 | ) | $ | (3,823 | ) |
| Oil                  and Gas Production                     |   |                                    | 31,097  |   |                | 16,853  |   |   | 41,537  |   |   | 14,244 |   |   | (24,684 | ) |
| Energy                  Marketing                           |   |                                    | 8,959   |   |                | 13,471  |   |   | 9,879   |   |   | (4,512 | ) |   | 3,592 |   |
| Energy                  Assets                              |   |                                    | 1,766   |   |                | 1,727   |   |   | 1,575   |   |   | 39 |   |   | 152 |   |
| Corporate                  and Other                        |   |                                    | (27,312 | )      |                | (19,969 | )      |   | (41,120 | ) |   | (7,343 | ) |   | 21,151 |   |
| **Total                  operating income**                 |   | $                                       | 1,786   |   | $                   | 149,417 |   | $      | 153,029 |   | $ | (147,631 | ) | $ | (3,612 | ) |
|                                                        |   |                                    |    |   |                |    |   |   |    |   |   |   |   |   |   |   |
| **Income                    from discontinued operations:** |   |                                    |    |   |                |    |   |   |    |   |   |   |   |   |   |   |
| Energy                  Assets- Power generation            |   | $                                       | 17,133  |   | $                   | 18,760  |   | $      | 11,353  |   | $ | (1,627 | ) | $ | 7,407 |   |
| Corporate                  and Other                        |   |                                    | (31     | )      |                | (31     | )      |   | (31     | ) |   | - |   |   | - |   |
| Less:                  income tax expense                   |   |                                    | 6,797   |   |                | 7,444   |   |   | 4,500   |   |   | (647 | ) |   | 2,944 |   |
|                                                             |        |                                         |         |        |                     |         |        |        |         |  |  |  |  |  |  |  |
| **Income                    from discontinued operations**  |   | $                                       | 10,305  |   | $                   | 11,285  |   | $      | 6,822   |   | $ | (980 | ) | $ | 4,463 |   |

**Gas      Distribution Segment.**

----

----

| **Gas                  Distribution Statistics**         |   |
|----------------------------------------------------------|--------|
|                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                          |   | For                  Fiscal Years Ended |   | Increase/(Decrease) |   |
| **Margin                  Data**                         |   | September                  30, |   | Fiscal                  2006 vs. |  | Fiscal                  2005 vs. |   |
| *(In                  Thousands)*                        |   |   | 2006 |   |   | 2005 |   |   | 2004 |   | Fiscal                  2005 |  | Fiscal                  2004 |   |
| **Gas                  Distribution revenues:**          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                              |   | $ | 1,485,753 |   | $ | 1,290,716 |   | $ | 1,148,499 |   | $ | 195,037 |   | $ | 142,217 |   |
| Commercial                                               |   |   | 242,196 |   |   | 209,712 |   |   | 184,756 |   |   | 32,484 |   |   | 24,956 |   |
| Industrial                                               |   |   | 41,575 |   |   | 36,368 |   |   | 30,324 |   |   | 5,207 |   |   | 6,044 |   |
| **Total                  sales**                         |   |   | 1,769,524 |   |   | 1,536,796 |   |   | 1,363,579 |   |   | 232,728 |   |   | 173,217 |   |
| Transportation                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                              |   |   | 35,156 |   |   | 32,360 |   |   | 32,354 |   |   | 2,796 |   |   | 6 |   |
| Commercial                                               |   |   | 50,544 |   |   | 48,719 |   |   | 47,285 |   |   | 1,825 |   |   | 1,434 |   |
| Industrial                                               |   |   | 18,828 |   |   | 19,880 |   |   | 19,437 |   |   | (1,052 | ) |   | 443 |   |
| Contract                  pooling                        |   |   | 29,448 |   |   | 20,694 |   |   | 15,372 |   |   | 8,754 |   |   | 5,322 |   |
| **Total                  transportation**                |   |   | 133,976 |   |   | 121,653 |   |   | 114,448 |   |   | 12,323 |   |   | 7,205 |   |
| Total                  Hub revenues                      |   |   | - |   |   | 10,662 |   |   | 7,620 |   |   | (10,662 | ) |   | 3,042 |   |
| Other                  Gas Distribution revenues         |   |   | 18,380 |   |   | 19,563 |   |   | 16,436 |   |   | (1,183 | ) |   | 3,127 |   |
| **Total                  Gas Distribution revenues**     |   |   | 1,921,880 |   |   | 1,688,674 |   |   | 1,502,083 |   |   | 233,206 |   |   | 186,591 |   |
| Less:                  Gas costs                         |   |   | 1,272,633 |   |   | 1,034,376 |   |   | 868,518 |   |   | 238,257 |   |   | 165,858 |   |
| **Gross                  margin**                        |   |   | 649,247 |   |   | 654,298 |   |   | 633,565 |   |   | (5,051 | ) |   | 20,733 |   |
| Less:                  Revenue taxes and surcharges      |   |   | 164,273 |   |   | 150,325 |   |   | 138,841 |   |   | 13,948 |   |   | 11,484 |   |
|                    Environmental costs recovered    |   |   | 33,654 |   |   | 30,437 |   |   | 17,384 |   |   | 3,217 |   |   | 13,053 |   |
| **Net                  margin (1)**                      |   | $ | 451,320 |   | $ | 473,536 |   | $ | 477,340 |   | $ | (22,216 | ) | $ | (3,804 | ) |
| **Gas                  Distribution deliveries (MDth):** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gas                  sales                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                              |   |   | 103,656 |   |   | 110,429 |   |   | 116,939 |   |   | (6,773 | ) |   | (6,510 | ) |
| Commercial                                               |   |   | 18,210 |   |   | 19,349 |   |   | 20,303 |   |   | (1,139 | ) |   | (954 | ) |
| Industrial                                               |   |   | 3,293 |   |   | 3,607 |   |   | 3,597 |   |   | (314 | ) |   | 10 |   |
| **Total                  gas sales**                     |   |   | 125,159 |   |   | 133,385 |   |   | 140,839 |   |   | (8,226 | ) |   | (7,454 | ) |
| Transportation                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                              |   |   | 19,504 |   |   | 19,927 |   |   | 21,061 |   |   | (423 | ) |   | (1,134 | ) |
| Commercial                                               |   |   | 42,474 |   |   | 41,239 |   |   | 43,646 |   |   | 1,235 |   |   | (2,407 | ) |
| Industrial                                               |   |   | 21,146 |   |   | 23,131 |   |   | 23,756 |   |   | (1,985 | ) |   | (625 | ) |
| **Total                  transportation**                |   |   | 83,124 |   |   | 84,297 |   |   | 88,463 |   |   | (1,173 | ) |   | (4,166 | ) |
| **Total                  Gas Distribution deliveries**   |   |   | 208,283 |   |   | 217,682 |   |   | 229,302 |   |   | (9,399 | ) |   | (11,620 | ) |
| Total                  Hub volumes                       |   |   | - |   |   | 22,784 |   |   | 19,381 |   |   | (22,784 | ) |   | 3,403 |   |
| Gross                  margin per Dth delivered (3)      |   | $ | 3.12 |   | $ | 2.96 |   | $ | 2.73 |   | $ | 0.16 |   | $ | 0.23 |   |
| Net                  margin per Dth delivered (3)        |   | $ | 2.17 |   | $ | 2.13 |   | $ | 2.05 |   | $ | 0.04 |   | $ | 0.08 |   |
| Average                  cost per Dth of gas sold        |   | $ | 10.17 |   | $ | 7.75 |   | $ | 6.17 |   | $ | 2.42 |   | $ | 1.58 |   |
| Actual                  heating degree days              |   |   | 5,775 |   |   | 5,864 |   |   | 6,091 |   |   | (89 | ) |   | (227 | ) |
| Normal                  heating degree days (2)          |   |   | 6,408 |   |   | 6,427 |   |   | 6,427 |   |   |   |   |   |   |   |
| Actual                  heating degree days as a percent |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| of                  normal (actual/normal)               |   |   | 90 |   |   | 91 |   |   | 95 |   |   |   |   |   |   |   |

| (1) | As                used above, net margin is not a financial measure computed under                GAAP but                represents an operating performance measure. 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                heating degree days for fiscal 2004 and 2005 are based on a 30-year                average of monthly temperatures at Chicago's O'Hare Airport for the                years                1970-1999. Normal heating degree days for fiscal 2006 are based on                a                30-year average of monthly temperatures at Chicago's O'Hare Airport                for                the years 1975-2004. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Margin                per Dth is based upon gas distribution and transportation activity                and                excludes the impact of hub revenues and hub                volumes. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**Oil      and Gas Production Segment.**

|                                                                       |   | Fiscal                2007 |       |
|-----------------------------------------------------------------------|--------|----------------------------|------------|
| Gas                hedges in place (MMbtus)                           |   |                       | 12,705,000 |   |
| Gas                hedges as a percent of estimated fiscal production |   |                       | 50         | % |
| Percent                of gas hedges that are swaps                   |   |                       | 63         | % |
| Average                swap price ($/MMbtu)                           |   | $                          | 5.37       |   |
| Percent                of gas hedges that are no-cost collars         |   |                       | 37         | % |
| Weighted-average                floor price ($/MMbtu)                 |   | $                          | 5.62       |   |
| Weighted-average                ceiling price ($/MMbtu)               |   | $                          | 6.72       |   |
| Oil                hedges in place (MBbls)                            |   |                       | 182        |   |
| Oil                hedges as a percent of estimated fiscal production |   |                       | 63         | % |
| Average                hedge price ($/Bbl)                            |   | $                          | 37.50      |   |

----

|                                                                         |   | For                Fiscal Years Ended September 30, |
|-------------------------------------------------------------------------|--------|-----------------------------------------------------|
|                                                                    |   |                                                | 2006 |   |   | 2005 |   |   | 2004 |   |
| Total                production—gas equivalent (MMcfe)            |   |                                                | 24,712 |   |   | 24,319 |   |   | 27,853 |   |
| Daily                average gas production (MMcfd)                     |   |                                                | 61.9 |   |   | 59.6 |   |   | 67.0 |   |
| Daily                average oil production (MBd)                       |   |                                                | 1.0 |   |   | 1.2 |   |   | 1.5 |   |
| Daily                average production—gas equivalent (MMcfed)   |   |                                                | 67.7 |   |   | 66.6 |   |   | 76.1 |   |
| Gas                production as a percentage of total production       |   |                                                | 91 | % |   | 90 | % |   | 88 | % |
| Percent                of production hedged during the period—gas |   |                                                | 71 | % |   | 98 | % |   | 94 | % |
| Percent                of production hedged during the period—oil |   |                                                | 85 | % |   | 99 | % |   | 77 | % |
| Net                realized gas price received ($/Mcf)                  |   | $                                                   | 5.28 |   | $ | 4.15 |   | $ | 4.44 |   |
| Net                realized oil price received ($/Bbl)                  |   | $                                                   | 24.62 |   | $ | 24.10 |   | $ | 26.85 |   |
| DD&A                rate ($/Mcfe)                                   |   | $                                                   | 2.11 |   | $ | 1.87 |   | $ | 1.69 |   |
| Average                lease operating expense ($/Mcfe)                 |   | $                                                   | 0.72 |   | $ | 0.70 |   | $ | 0.48 |   |
| Average                production taxes ($/Mcfe)                        |   | $                                                   | 0.57 |   | $ | 0.50 |   | $ | 0.34 |   |

**Energy      Marketing Segment. **

----

|                                                   |   | For                Fiscal Years Ended September 30, |
|---------------------------------------------------|--------|-----------------------------------------------------|
| *(In                Thousands, Except Customers)* |   | 2006                                                |   | 2005 |   | 2004 |   |
| Wholesale                gas volumes sold (MDth)  |   | 48,160                                              |   | 56,391 |   | 52,815 |   |
| Retail                gas volumes sold (Dth)      |   | 48,289                                              |   | 49,923 |   | 47,965 |   |
| Number                of retail gas customers     |   | 37,084                                              |   | 23,389 |   | 24,744 |   |
| Retail                electric volumes sold (Mwh) |   | 1,727                                               |   | 1,397 |   | 1,113 |   |
| Number                of electric customers       |   | 3,380                                               |   | 2,268 |   | 1,901 |   |

**Energy      Assets Segment.**

**Discontinued      Operations.**

----

**Corporate      and Other Segment. **

**Critical      Accounting Policies**

**Regulated      Operations.**

----

**Environmental      Activities Relating to Former Manufactured Gas Operations. **

**Retirement      and Postretirement Benefits.**

**Derivative      Instruments and Hedging Activities.**

----

**Provision      for Uncollectible Accounts. **

**Depreciation,      depletion and amortization.**

**Recent      Accounting Pronouncements**

----

**LIQUIDITY      AND CAPITAL RESOURCES**

|                                                                    |        | For                Fiscal Years Ended September 30, |
|--------------------------------------------------------------------|--------|-----------------------------------------------------|
| *(In                Thousands)*                                    |   |                                                | 2006 |   |   | 2005 |   |   | 2004 |   |
| Net                cash provided by operating activities           |   | $                                                   | 131,162 |   | $ | 282,152 |   | $ | 202,292 |   |
| Net                cash used in investing activities               |   | $                                                   | (340,265 | ) | $ | (156,190 | ) | $ | (164,763 | ) |
| Net                cash provided by (used in) financing activities |   | $                                                   | 233,032 |   | $ | (115,004 | ) | $ | (43,949 | ) |

**Balance      Sheet Variations**

----

**Financial      Sources**

----

|                                     |  CorporateCreditRating |   Company                SeniorUnsecured                Debt | Peoples                Gas/North                Shore GasSeniorSecured                Debt |  CompanyCommercialPaper |  Peoples                GasCommercialPaper |
|------------------------------------------|-----------------------------|------------------------------------------------------------------------|--------------------------------------------------------------------------------------------|------------------------------|-------------------------------------------------|
| Moody's                                  | n/a                         | Baa2                                                                   | A1                                                                                         | P-2                          | P-1                                             |
| Standard                and Poor’s | A-                          | BBB+                                                                   | A-                                                                                         | A-2                          | A-2                                             |

**Changes      in Credit Lines and Debt Securities**

**Changes      in Equity Securities**

----

**Financial      Uses**

**Capital      Spending**

**Dividends**

**Interest      Coverage**

|                                |   | For                Fiscal Years Ended |
|--------------------------------|--------|---------------------------------------|
|                                |   | September                30,          |
|                           |   | 2006                                  |   | 2005 |   | 2004 |   |
| Peoples                Energy  |   | 0.52                                  |   | 3.23 |   | 3.29 |   |
| Peoples                Gas     |   | (1.28                                 | ) | 4.20 |   | 4.30 |   |
| North                Shore Gas |   | 3.58                                  |   | 5.87 |   | 5.83 |   |

**Commitments      and Contractual Obligations**

**Off-Balance      Sheet Arrangements.**

----

**Contractual      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 14)                  |   | $                                       | 1,204.4 |   | $ | 309.7 |   | $ | - |   | $ | 373.5 |   | $ | 521.2 |   |
| Estimated                  interest payments on debt (1)   |   |                                    | 631.5   |   |   | 46.7 |   |   | 93.4 |   |   | 79.3 |   |   | 412.1 |   |
| Operating                  leases (See Note 10C)           |   |                                    | 35.2    |   |   | 3.9 |   |   | 8.2 |   |   | 8.6 |   |   | 14.5 |   |
| Purchase                  obligations (2)                  |   |                                    | 1,108.8 |   |   | 471.9 |   |   | 407.1 |   |   | 96.9 |   |   | 132.9 |   |
| Minimum                  pension funding (3) (See Note 11) |   |                                    | 92.8    |   |   | - |   |   | 26.1 |   |   | 33.3 |   |   | 33.4 |   |
| **Total                  contractual cash obligations**    |   | $                                       | 3,072.7 |   | $ | 832.2 |   | $ | 534.8 |   | $ | 591.6 |   | $ | 1,114.1 |   |

| (1) | Includes                interest on fixed and adjustable rate debt. The adjustable rate interest                is calculated based on the indexed rate in effect at September 30,                2006. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (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, 2006. Additional contributions                may be made to fund benefits accruing after October 1, 2006, or                on                a discretionary basis. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Merger.      **

**Environmental      Matters**

**Gas      Charge Reconciliation Proceedings and Related Matters.**

----

**Indenture      Restrictions**

**PEOPLES      GAS AND NORTH SHORE GAS DISCUSSIONS**

|                                                    |        | Peoples                  Gas |              | North                  Shore Gas |   |
|----------------------------------------------------|--------|------------------------------|--------------|----------------------------------|--------|
|                                                    |   |                         |         |                             |   | Corporate |   |   |   |   |   |   |   |   | Corporate |   |   |   |   |
|                                                    |   |                         | Gas          |                             |   | and |   |   |   |   |   | Gas |   |   | and |   |   |   |   |
| *(In                  Thousands)*                  |   |                         | Distribution |                             |   | Other |   |   | Total |   |   | Distribution |   |   | Other |   |   | Total |   |
| **For                  the Fiscal Year Ended**     |   |                         |         |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| September                  30, 2006 (GAAP)         |   | $                            | (27,472      | )                                | $      | (12,662 | ) | $ | (40,134 | ) | $ | 15,022 |   | $ | (1,694 | ) | $ | 13,328 |   |
| September                  30, 2006 (non-GAAP) (1) |   |                         | 75,558       |                             |   | (12,662 | ) |   | 62,896 |   |   | 19,322 |   |   | (1,694 | ) |   | 17,628 |   |
| September                  30, 2005 (GAAP)         |   |                         | 113,669      |                             |   | (18,110 | ) |   | 95,559 |   |   | 22,909 |   |   | (1,864 | ) |   | 21,045 |   |
| September                  30, 2005 (non-GAAP) (1) |   |                         | 113,669      |                             |   | (9,320 | ) |   | 104,349 |   |   | 22,909 |   |   | (1,242 | ) |   | 21,667 |   |
| September                  30, 2004 (GAAP)         |   |                         | 118,144      |                             |   | (30,336 | ) |   | 87,808 |   |   | 24,825 |   |   | (3,493 | ) |   | 21,332 |   |
| September                  30, 2004 (non-GAAP) (1) |   |                         | 118,144      |                             |   | (20,650 | ) |   | 97,494 |   |   | 24,825 |   |   | (2,611 | ) |   | 22,214 |   |

|  (1) | Fiscal                2006 ongoing operating income (non-GAAP) is defined as GAAP operating                (loss) adjusted to exclude the effects of a charge of $103.0 million                and                $4.3 million at Peoples Gas and North Shore Gas, respectively, associated                with the settlement of gas charge proceedings. Fiscal 2005 ongoing                operating income (non-GAAP) is defined as GAAP operating income adjusted                to exclude the effects of pension expense related restructuring costs                of                $8.8 million and $0.6 million at Peoples Gas and North Shore Gas,                respectively. Fiscal 2004 ongoing operating income (non-GAAP) is                defined                as GAAP operating income adjusted to exclude the effects of pension                expense related restructuring costs of $9.7 million and $0.9 million                at                Peoples Gas and North Shore Gas, respectively. See Item 7 - MD&A -                Executive Summary for a discussion of management's use of non-GAAP                financial measures and a reconciliation of GAAP and non-GAAP                earnings.  |
|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**Peoples      Gas Discussion**

----

**North      Shore Gas Discussion**

----

----

| **The                  Peoples Gas Light and Coke Company** |   |
|-------------------------------------------------------------|--------|
| **Gas                  Distribution Statistics**            |   |
|                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                             |   | For                  Fiscal Years Ended |   |  Increase/(Decrease) |   |
| **Margin                  Data**                            |   | September                  30, |   |   | Fiscal                  2006 vs. |   |   | Fiscal                  2005 vs. |   |
| *(In                  Thousands)*                           |   |   | 2006 |   |   | 2005 |   |   | 2004 |   |   | Fiscal                  2005 |   |   | Fiscal                  2004 |   |
| **Gas                  Distribution revenues:**             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                                                       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                                 |   | $ | 1,249,993 |   | $ | 1,086,435 |   | $ | 974,143 |   | $ | 163,558 |   | $ | 112,292 |   |
| Commercial                                                  |   |   | 203,005 |   |   | 175,904 |   |   | 155,934 |   |   | 27,101 |   |   | 19,970 |   |
| Industrial                                                  |   |   | 32,936 |   |   | 28,720 |   |   | 24,112 |   |   | 4,216 |   |   | 4,608 |   |
| **Total                  sales**                            |   |   | 1,485,934 |   |   | 1,291,059 |   |   | 1,154,189 |   |   | 194,875 |   |   | 136,870 |   |
| Transportation                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                                 |   |   | 33,260 |   |   | 30,699 |   |   | 30,645 |   |   | 2,561 |   |   | 54 |   |
| Commercial                                                  |   |   | 43,734 |   |   | 42,329 |   |   | 41,131 |   |   | 1,405 |   |   | 1,198 |   |
| Industrial                                                  |   |   | 15,995 |   |   | 16,994 |   |   | 16,656 |   |   | (999 | ) |   | 338 |   |
| Contract                  pooling                           |   |   | 26,643 |   |   | 18,381 |   |   | 14,017 |   |   | 8,262 |   |   | 4,364 |   |
| **Total                  transportation**                   |   |   | 119,632 |   |   | 108,403 |   |   | 102,449 |   |   | 11,229 |   |   | 5,954 |   |
| Total                  Hub revenues                         |   |   | - |   |   | 10,662 |   |   | 7,620 |   |   | (10,662 | ) |   | 3,042 |   |
| Other                  Gas Distribution revenues            |   |   | 16,725 |   |   | 14,579 |   |   | 15,117 |   |   | 2,146 |   |   | (538 | ) |
| **Total                  Gas Distribution revenues**        |   |   | 1,622,291 |   |   | 1,424,703 |   |   | 1,279,375 |   |   | 197,588 |   |   | 145,328 |   |
| Less:                  Gas costs                            |   |   | 1,052,333 |   |   | 853,453 |   |   | 723,771 |   |   | 198,880 |   |   | 129,682 |   |
| **Gross                  margin**                           |   |   | 569,958 |   |   | 571,250 |   |   | 555,604 |   |   | (1,292 | ) |   | 15,646 |   |
| Less:                  Revenue taxes and surcharges         |   |   | 149,786 |   |   | 136,115 |   |   | 125,500 |   |   | 13,671 |   |   | 10,615 |   |
|                    Environmental costs recovered       |   |   | 31,588 |   |   | 28,574 |   |   | 16,206 |   |   | 3,014 |   |   | 12,368 |   |
| **Net                  margin (1)**                         |   | $ | 388,584 |   | $ | 406,561 |   | $ | 413,898 |   | $ | (17,977 | ) | $ | (7,337 | ) |
|                                                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Gas                  Distribution deliveries (MDth):**    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gas                  sales                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                                 |   |   | 85,381 |   |   | 91,217 |   |   | 97,035 |   |   | (5,836 | ) |   | (5,818 | ) |
| Commercial                                                  |   |   | 15,021 |   |   | 16,022 |   |   | 16,856 |   |   | (1,001 | ) |   | (834 | ) |
| Industrial                                                  |   |   | 2,571 |   |   | 2,801 |   |   | 2,790 |   |   | (230 | ) |   | 11 |   |
| **Total                  gas sales**                        |   |   | 102,973 |   |   | 110,040 |   |   | 116,681 |   |   | (7,067 | ) |   | (6,641 | ) |
| Transportation                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                                 |   |   | 18,637 |   |   | 19,134 |   |   | 20,210 |   |   | (497 | ) |   | (1,076 | ) |
| Commercial                                                  |   |   | 35,645 |   |   | 35,024 |   |   | 37,287 |   |   | 621 |   |   | (2,263 | ) |
| Industrial                                                  |   |   | 16,101 |   |   | 17,662 |   |   | 18,139 |   |   | (1,561 | ) |   | (477 | ) |
| **Total                  transportation**                   |   |   | 70,383 |   |   | 71,820 |   |   | 75,636 |   |   | (1,437 | ) |   | (3,816 | ) |
| **Total                  Gas Distribution deliveries**      |   |   | 173,356 |   |   | 181,860 |   |   | 192,317 |   |   | (8,504 | ) |   | (10,457 | ) |
| Total                  Hub volumes                          |   |   | - |   |   | 22,784 |   |   | 19,381 |   |   | (22,784 | ) |   | 3,403 |   |
| Gross                  margin per Dth delivered (3)         |   | $ | 3.29 |   | $ | 3.08 |   | $ | 2.85 |   | $ | 0.21 |   | $ | 0.23 |   |
| Net                  margin per Dth delivered (3)           |   | $ | 2.24 |   | $ | 2.18 |   | $ | 2.11 |   | $ | 0.06 |   | $ | 0.07 |   |
| Average                  cost per Dth of gas sold           |   | $ | 10.22 |   | $ | 7.76 |   | $ | 6.20 |   | $ | 2.46 |   | $ | 1.56 |   |
| Actual                  heating degree days                 |   |   | 5,775 |   |   | 5,864 |   |   | 6,091 |   |   | (89 | ) |   | (227 | ) |
| Normal                  heating degree days (2)             |   |   | 6,408 |   |   | 6,427 |   |   | 6,427 |   |   |   |   |   |   |   |
| Actual                  heating degree days as a percent    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| of                  normal (actual/normal)                  |   |   | 90 |   |   | 91 |   |   | 95 |   |   |   |   |   |   |   |

| (1) | As                used above, net margin is not a financial measure computed under                GAAP but                represents an operating performance measure. 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                heating degree days for fiscal 2004 and 2005 are based on a 30-year                average of monthly temperatures at Chicago's O'Hare Airport for the                years                1970-1999. Normal heating degree days for fiscal 2006 are based on                a                30-year average of monthly temperatures at Chicago's O'Hare Airport                for                the years 1975-2004. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Margin                per Dth is based upon gas distribution and transportation activity                and                excludes the impact of hub revenues and hub                volumes. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| **North                  Shore Gas Company**             |   |
|----------------------------------------------------------|--------|
| **Gas                  Distribution Statistics**         |   |
|                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                          |   | For                  Fiscal Years Ended |   | Increase/(Decrease) |   |
| **Margin                  Data**                         |   | September                  30, |   |   | Fiscal                  2006 vs. |   |   | Fiscal                  2005 vs. |   |
| *(In                  Thousands)*                        |   |   | 2006 |   |   | 2005 |   |   | 2004 |   |   | Fiscal                  2005 |   |   | Fiscal                  2004 |   |
| **Gas                  Distribution revenues:**          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Sales                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                              |   | $ | 235,760 |   | $ | 204,281 |   | $ | 174,356 |   | $ | 31,479 |   | $ | 29,925 |   |
| Commercial                                               |   |   | 39,191 |   |   | 33,808 |   |   | 28,822 |   |   | 5,383 |   |   | 4,986 |   |
| Industrial                                               |   |   | 8,639 |   |   | 7,648 |   |   | 6,212 |   |   | 991 |   |   | 1,436 |   |
| **Total                  sales**                         |   |   | 283,590 |   |   | 245,737 |   |   | 209,390 |   |   | 37,853 |   |   | 36,347 |   |
|                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Transportation                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                              |   |   | 1,896 |   |   | 1,661 |   |   | 1,709 |   |   | 235 |   |   | (48 | ) |
| Commercial                                               |   |   | 6,810 |   |   | 6,390 |   |   | 6,154 |   |   | 420 |   |   | 236 |   |
| Industrial                                               |   |   | 2,833 |   |   | 2,886 |   |   | 2,781 |   |   | (53 | ) |   | 105 |   |
| Contract                  pooling                        |   |   | 2,805 |   |   | 2,313 |   |   | 1,355 |   |   | 492 |   |   | 958 |   |
| **Total                  transportation**                |   |   | 14,344 |   |   | 13,250 |   |   | 11,999 |   |   | 1,094 |   |   | 1,251 |   |
|                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Other                  Gas Distribution revenues         |   |   | 1,655 |   |   | 1,474 |   |   | 1,320 |   |   | 181 |   |   | 154 |   |
|                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total                  Gas Distribution revenues**     |   |   | 299,589 |   |   | 260,461 |   |   | 222,709 |   |   | 39,128 |   |   | 37,752 |   |
| Less:                  Gas costs                         |   |   | 220,300 |   |   | 180,923 |   |   | 144,747 |   |   | 39,377 |   |   | 36,176 |   |
| **Gross                  margin**                        |   |   | 79,289 |   |   | 79,538 |   |   | 77,962 |   |   | (249 | ) |   | 1,576 |   |
| Less:                  Revenue taxes and surcharges      |   |   | 14,487 |   |   | 14,210 |   |   | 13,341 |   |   | 277 |   |   | 869 |   |
|                    Environmental costs recovered    |   |   | 2,065 |   |   | 1,863 |   |   | 1,178 |   |   | 202 |   |   | 685 |   |
| **Net                  margin (1)**                      |   | $ | 62,737 |   | $ | 63,465 |   | $ | 63,443 |   | $ | (728 | ) | $ | 22 |   |
|                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Gas                  Distribution deliveries (MDth):** |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gas                  sales                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                              |   |   | 18,275 |   |   | 19,212 |   |   | 19,904 |   |   | (937 | ) |   | (692 | ) |
| Commercial                                               |   |   | 3,188 |   |   | 3,327 |   |   | 3,447 |   |   | (139 | ) |   | (120 | ) |
| Industrial                                               |   |   | 722 |   |   | 806 |   |   | 807 |   |   | (84 | ) |   | (1 | ) |
| **Total                  gas sales**                     |   |   | 22,185 |   |   | 23,345 |   |   | 24,158 |   |   | (1,160 | ) |   | (813 | ) |
|                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Transportation                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                              |   |   | 867 |   |   | 793 |   |   | 851 |   |   | 74 |   |   | (58 | ) |
| Commercial                                               |   |   | 6,829 |   |   | 6,215 |   |   | 6,359 |   |   | 614 |   |   | (144 | ) |
| Industrial                                               |   |   | 5,045 |   |   | 5,469 |   |   | 5,617 |   |   | (424 | ) |   | (148 | ) |
| **Total                  transportation**                |   |   | 12,741 |   |   | 12,477 |   |   | 12,827 |   |   | 264 |   |   | (350 | ) |
|                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Total                  Gas Distribution deliveries**   |   |   | 34,926 |   |   | 35,822 |   |   | 36,985 |   |   | (896 | ) |   | (1,163 | ) |
| Gross                  margin per Dth delivered          |   | $ | 2.27 |   | $ | 2.22 |   | $ | 2.11 |   | $ | 0.05 |   | $ | 0.11 |   |
| Net                  margin per Dth delivered            |   | $ | 1.80 |   | $ | 1.77 |   | $ | 1.72 |   | $ | 0.03 |   | $ | 0.05 |   |
| Average                  cost per Dth of gas sold        |   | $ | 9.93 |   | $ | 7.75 |   | $ | 5.99 |   | $ | 2.18 |   | $ | 1.76 |   |
| Actual                  heating degree days              |   |   | 5,775 |   |   | 5,864 |   |   | 6,091 |   |   | (89 | ) |   | (227 | ) |
| Normal                  heating degree days (2)          |   |   | 6,408 |   |   | 6,427 |   |   | 6,427 |   |   |   |   |   |   |   |
| Actual                  heating degree days as a percent |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| of                  normal (actual/normal)               |   |   | 90 |   |   | 91 |   |   | 95 |   |   |   |   |   |   |   |

| (1) | As                used above, net margin is not a financial measure computed under                GAAP but                represents an operating performance measure. 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                heating degree days for fiscal 2004 and 2005 are based on a 30-year                average of monthly temperatures at Chicago's O'Hare Airport for the                years                1970-1999. Normal heating degree days for fiscal 2006 are based on                a                30-year average of monthly temperatures at Chicago's O'Hare Airport                for                the years 1975-2004. |
|-----|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

**ITEM      7A. Quantitative and Qualitative Disclosures About Market      Risk**

**RISK      MANAGEMENT ACTIVITIES**

**Commodity      Price Risk**

**Derivative      Summary.**

|                                                                        |   | Derivative                  Type |     |
|------------------------------------------------------------------------|--------|----------------------------------|----------|
|                                                                        |   | Cash                  Flow       |     | Fair                  Value |   |   |   |   |   |   |   |
|                                                                        |   | Hedges                           |     | Hedges |   | Mark-to-Market |   |
| *(In                  Thousands)*                                      |   |                             | 2006     |   |   | 2005 |   |   | 2006 |   |   | 2005 |   |   | 2006 |   |   | 2005 |   |
| Value                  of contracts outstanding at October 1           |   | $                                | (202,904 | ) | $ | (89,306 | ) | $ | (21,457 | ) | $ | (139 | ) | $ | 204,276 |   | $ | 27,678 |   |
| Loss                  on contracts discontinued as cash flow hedges    |   |                             | -        |   |   | 2,956 |   |   | - |   |   | - |   |   | - |   |   | (2,956 | ) |
| Less:                  Gain (loss) on contracts realized or otherwise  |   |                             |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| settled                  during the year                               |   |                             | (87,020  | ) |   | (64,841 | ) |   | 6,192 |   |   | (2 | ) |   | (19,603 | ) |   | 17,159 |   |
| Plus:                  Unrealized gain (loss) on new contracts entered |   |                             |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| into                  during the period and outstanding at year-end    |   |                             | 6,144    |   |   | (20,797 | ) |   | 10,449 |   |   | (20,790 | ) |   | (147,720 | ) |   | 199,012 |   |
| Plus:                  Other unrealized gain (loss), primarily changes |   |                             |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| in                  market prices on contracts outstanding at the      |   |                             |     |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| beginning                  of the year                                 |   |                             | 85,958   |   |   | (160,598 | ) |   | 26,101 |   |   | (530 | ) |   | (227,719 | ) |   | (2,299 | ) |
| **Value                  of contracts outstanding at September 30**    |   | $                                | (23,782  | ) | $ | (202,904 | ) | $ | 8,901 |   | $ | (21,457 | ) | $ | (151,560 | ) | $ | 204,276 |   |

----

----

| **Commodity                  Derivatives**                               |   |                                          |   |                         |   |                                        |        |                                    |
|--------------------------------------------------------------------------|--------|-----------------------------------------------|--------|------------------------------|--------|---------------------------------------------|-------------|-----------------------------------------|
| *(Fair                  Value amounts in thousands)*                     |   |                                          |   |                         |   |                                        |        |
|  ***Futures/Forwards***                                             |   |  ***Maturity***                          |   | ***Volumes******(MMbtu's)*** |   | ***Price                  Per******MMbtu*** |        |  ***Fair                  Value*** |
| *Long                  Natural Gas*                                      |   | Less                  than 1 Year             |   | 13,538,565                   |   | 3.53                  - 11.98               |        | $                  (13,787)             |
| *Short                  Natural Gas*                                     |   | Less                  than 1 Year             |   | 11,443,642                   |   | 3.50                  - 12.34               |        | 18,922                                  |
| *Long                  Natural Gas*                                      |   | 1                  -                  3 Years |   | 2,599,737                    |   | 7.27                  - 11.00               |        | (127)                                   |
| *Short                  Natural Gas*                                     |   | 1                  -                  3 Years |   | 860,000                      |   | 8.63                  - 9.99                |        | (111)                                   |
|                                                                     |   |                                          |   | **28,441,944**               |   |                                        |        | **$                  4,897**            |
|  ***Options***                                                      |   |  ***Maturity***                          |   | ***Volumes******(MMbtu's)*** |   | ***Price                  Per******MMbtu*** |        |  ***Fair                  Value*** |
| *Long                  Natural Gas*                                      |   | Less                  than 1 Year             |   | 9,394,500                    |   | 5.00                  - 15.00               |        | $                  4,702                |
| *Short                  Natural Gas*                                     |   | Less                  than 1 Year             |   | 10,434,500                   |   | 5.50                  - 15.00               |        | (17,440)                                |
| *Long                  Natural Gas*                                      |   | 1                  -                  3 Years |   | 2,852,000                    |   | 7.00                  - 9.00                |        | 3,465                                   |
| *Short                  Natural Gas*                                     |   | 1                  -                  3 Years |   | 2,852,000                    |   | 5.50                  - 12.00               |        | (2,011)                                 |
|                                                                     |   |                                          |   | **25,533,000**               |   |                                        |        | **$                  (11,284)**         |
|  ***Swaps                  (NG)***                                  |   |  ***Maturity***                          |   | ***Volumes******(MMbtu's)*** |   | ***Price                  Per******MMbtu*** |        |  ***Fair                  Value*** |
| *Long                  Natural Gas*                                      |   | Less                  than 1 Year             |   | 77,515,502                   |   | 2.83                  - 13.04               |        | $                  (151,621)            |
| *Short                  Natural Gas*                                     |   | Less                  than 1 Year             |   | 27,007,500                   |   | 0.96                  - 12.54               |        | 4,844                                   |
| *Long                  Natural Gas*                                      |   | 1                  -                  3 Years |   | 15,896,721                   |   | 6.57                  - 10.82               |        | (11,908)                                |
| *Short                  Natural Gas*                                     |   | 1                  -                  3 Years |   | 10,955,000                   |   | 3.84                  - 11.83               |        | 3,373                                   |
| *Long                  Natural Gas*                                      |   | 4                  -                  5 Years |   | 1,920,000                    |   | 6.60                  - 7.10                |        | 91                                      |
| *Short                  Natural Gas*                                     |   | 4                  -                  5 Years |   | 1,920,000                    |   | 8.99                  - 9.50                |        | 1,498                                   |
| *Long                  Natural Gas*                                      |   | More                  than 5 Years            |   | 900,000                      |   | 6.86                                        |        | 49                                      |
| *Short                  Natural Gas*                                     |   | More                  than 5 Years            |   | 2,820,000                    |   | 8.31                  - 9.15                |        | 1,180                                   |
|                                                                     |   |                                          |   | **138,934,723**              |   |                                        |        | **$                  (152,494)**        |
|  ***Total                  (NG)***                                  |   |  ***Maturity***                          |   | ***Volumes******(MMbtu's)*** |   | ***Price                  Per******MMbtu*** |        |  ***Fair                  Value*** |
| *Long                  Natural Gas*                                      |   | Less                  than 1 Year             |   | 100,448,567                  |   | 2.83                  - 15.00               |        | $                  (160,706)            |
| *Short                  Natural Gas*                                     |   | Less                  than 1 Year             |   | 48,885,642                   |   | 0.96                  - 15.00               |        | 6,326                                   |
| *Long                  Natural Gas*                                      |   | 1                  -                  3 Years |   | 21,348,458                   |   | 6.57                  - 11.00               |        | (8,570)                                 |
| *Short                  Natural Gas*                                     |   | 1                  -                  3 Years |   | 14,667,000                   |   | 3.84                  - 12.00               |        | 1,251                                   |
| *Long                  Natural Gas*                                      |   | 4                  -                  5 Years |   | 1,920,000                    |   | 6.60                  - 7.10                |        | 91                                      |
| *Short                  Natural Gas*                                     |   | 4                  -                  5 Years |   | 1,920,000                    |   | 8.99                  - 9.50                |        | 1,498                                   |
| *Long                  Natural Gas*                                      |   | More                  than 5 Years            |   | 900,000                      |   | 6.86                                        |        | 49                                      |
| *Short                  Natural Gas*                                     |   | More                  than 5 Years            |   | 2,820,000                    |   | 8.31                  - 9.15                |        | 1,180                                   |
|                                                                     |   |                                          |   | **192,909,667**              |   |                                        |        | **$                  (158,881)**        |
|  ***Swaps                  (OIL)***                                 |   |  ***Maturity***                          |   | ***Volumes******(Bbl's)***   |   | ***Price                  Per******Bbl***   |        |  ***Fair                  Value*** |
| *Short                  WTI Crude Oil*                                   |   | Less                  than 1 Year             |   | 182,500                      |   | 37.50                                       |        | $                  (5,227)              |
| *Short                  WTI Crude Oil*                                   |   | 1                  -                  3 Years |   | 73,200                       |   | 56.60                                       |        | (837)                                   |
|                                                                     |   |                                          |   | **255,700**                  |   |                                        |        | **$                  (6,064)**          |
| ***Futures/Forwards******(Megawatt-hours)***                             |   |  ***Maturity***                          |   | ***Amounts******(Mwh's)***   |   | ***Price                  Per******Mwh***   |        |  ***Fair                  Value*** |
| *Long                  Megawatt-hours*                                   |   | Less                  than 1 Year             |   | 633,938                      |   | (0.20)                  - 0.36              |        | $                  52                   |
|                                                                     |   |                                          |   | **633,938**                  |   |                                        |        | **$                  52**               |
| ***Grand                  Total - Fair Value of Commodity Derivatives*** |   |                                          |   |                         |   | **$                  (164,893)**            |
| ***Fair                  Value of Interest Rate Swap***                  |   |                                          |   |                         |   |                                        | **(1,548)** |
| ***Grand                  Total - Fair Value of all Derivatives***       |   |                                          |   |                         |   | **$                  (166,441)**            |

----

**Cash      Flow Hedges. **

**Fair      Value Hedges.**

**Mark-To-Market      Derivative Instruments. **

----

|                                                                   |   | September                  30, |     |
|-------------------------------------------------------------------|--------|--------------------------------|----------|
| *(In                  Thousands)*                                 |   |                           | 2006     |   |   | 2005 |   |
| Peoples                  Gas mark-to-market asset (liability)     |   | $                              | (128,417 | ) | $ | 172,549 |   |
| North                  Shore Gas mark-to-market asset (liability) |   |                           | (24,135  | ) |   | 33,754 |   |
| Other                  mark-to-market asset (liability)           |   |                           | 992      |   |   | (2,027 | ) |
| **Total**                                                         |   | $                              | (151,560 | ) | $ | 204,276 |   |

**Weather      Risk**

**Interest      Rate Risk**

**Credit      Risk**

----

----

**ITEM      8. Financial Statements and Supplementary Data**

|                                                                                                                                                  |   | Page   |
|-------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------|
|                                                                                                                                                  |   |   |
| Report                of Independent Registered Public Accounting Firm                                                                                |   |   |
| Peoples                Energy                                                                                                                         |   | 60     |
| Peoples                Gas                                                                                                                            |   | 61     |
| North                Shore Gas                                                                                                                        |   | 62     |
|                                                                                                                                                  |   |   |
| Consolidated                Statements of Operations for Fiscal Years Ended September 30, 2006,                2005                and 2004           |
| Peoples                Energy                                                                                                                         |   | 63     |
| Peoples                Gas                                                                                                                            |   | 68     |
| North                Shore                Gas                                                                                                         |   | 73     |
|                                                                                                                                                  |   |   |
| Consolidated                Balance Sheets at September 30, 2006 and 2005                                                                             |   |   |
| Peoples                Energy                                                                                                                         |   | 64     |
| Peoples                Gas                                                                                                                            |   | 69     |
| North                Shore Gas                                                                                                                        |   | 74     |
|                                                                                                                                                  |   |   |
| Consolidated                Capitalization Statements at September 30, 2006 and 2005                                                                  |   |   |
| Peoples                Energy                                                                                                                         |   | 65     |
| Peoples Gas                                                                                                                                      |   | 70     |
| North                Shore Gas                                                                                                                        |   | 75     |
|                                                                                                                                                  |   |   |
| Consolidated                Statements of Stockholders' Equity for Fiscal Years Ended September                30,                2006, 2005 and 2004 |
| Peoples Energy                                                                                                                                   |   | 66     |
| Peoples                Gas                                                                                                                            |   | 71     |
| North                Shore                Gas                                                                                                         |   | 76     |
|                                                                                                                                                  |   |   |
| Consolidated                Statements of Cash Flows for Fiscal Years Ended September 30, 2006,                2005                and 2004           |
| Peoples                Energy                                                                                                                         |   | 67     |
|  Peoples                Gas                                                                                                                      |   | 72     |
| North                Shore                Gas                                                                                                         |   | 77     |
|                                                                                                                                                  |   |   |
| Notes                to Consolidated Financial Statements                                                                                             |   | 78     |
|                                                                                                                                                  |   |   |
| Consolidated                Financial Statements and Notes to Consolidated Financial Statements                of                Elwood Energy LLC*   |

----

**REPORT      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

*Internal      Control—Integrated Framework*

----

**REPORT      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

----

**REPORT      OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM**

----

| **Peoples                  Energy Corporation**                                                                                               |
|-----------------------------------------------------------------------------------------------------------------------------------------------|
| **CONSOLIDATED                  STATEMENTS OF OPERATIONS**                                                                                    |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                               |   | For                  Fiscal Years Ended September 30, |   |
|                                                                                                                                          |   |   | 2006 |   |   | 2005 |   |   | 2004 |   |
| *(In                  Thousands, Except Per-Share Amounts)*                                                                                   |   |   |   |   |   |   |   |   |   |   |
| **Revenues**                                                                                                                                  |   | $ | 3,017,970 |   | $ | 2,599,585 |   | $ | 2,260,199 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Operating                  Expenses:**                                                                                                      |   |   |   |   |   |   |   |   |   |   |
| Cost                  of energy sold                                                                                                          |   |   | 2,204,313 |   |   | 1,805,369 |   |   | 1,467,777 |   |
| Gas                  charge settlement                                                                                                        |   |   | 107,330 |   |   | - |   |   | - |   |
| Operation                  and maintenance, excluding merger,                                                                                 |   |   |   |   |   |   |   |   |   |   |
| restructuring                  and environmental costs                                                                                        |   |   | 350,776 |   |   | 319,735 |   |   | 322,997 |   |
| Merger                  costs                                                                                                                 |   |   | 8,944 |   |   | - |   |   | - |   |
| Restructuring                  costs                                                                                                          |   |   | - |   |   | 13,141 |   |   | 17,000 |   |
| Environmental                  costs                                                                                                          |   |   | 33,654 |   |   | 30,437 |   |   | 17,384 |   |
| Depreciation,                  depletion and amortization                                                                                     |   |   | 118,403 |   |   | 110,888 |   |   | 118,986 |   |
| Taxes,                  other than income taxes                                                                                               |   |   | 200,918 |   |   | 184,206 |   |   | 169,934 |   |
| (Gains)                  losses on property sales and impairments, net                                                                        |   |   | (336 | ) |   | (3,320 | ) |   | (2,547 | ) |
| **Total                  Operating Expenses**                                                                                                 |   |   | 3,024,002 |   |   | 2,460,456 |   |   | 2,111,531 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| Equity                  investment income                                                                                                     |   |   | 7,818 |   |   | 10,288 |   |   | 4,361 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Operating                  Income**                                                                                                         |   |   | 1,786 |   |   | 149,417 |   |   | 153,029 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| Other                  income                                                                                                                 |   |   | 8,591 |   |   | 5,623 |   |   | 3,808 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| Other                  expense                                                                                                                |   |   | 283 |   |   | 317 |   |   | 336 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| Interest                  expense                                                                                                             |   |   | 61,583 |   |   | 50,615 |   |   | 48,426 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Income                    (Loss) from Continuing Operations Before**Income                    Taxes                                         |   |   | (51,489 | ) |   | 104,108 |   |   | 108,075 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| Income                  tax expense (benefit)                                                                                                 |   |   | (23,548 | ) |   | 37,260 |   |   | 33,333 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Income                  (Loss) from Continuing Operations**                                                                                 |   |   | (27,941 | ) |   | 66,848 |   |   | 74,742 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Income                  from discontinued operations, net of income**                                                                       |   |   |   |   |   |   |   |   |   |   |
| **tax                  expense of $6,797, $7,444 and $4,500,                  respectively**                                                  |   |   | 10,305 |   |   | 11,285 |   |   | 6,822 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Net                  Income (Loss)**                                                                                                        |   | $ | (17,636 | ) | $ | 78,133 |   | $ | 81,564 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Average                  Shares of Common Stock Outstanding**                                                                               |   |   |   |   |   |   |   |   |   |   |
| Basic                                                                                                                                         |   |   | 38,365 |   |   | 37,977 |   |   | 37,318 |   |
| Diluted                                                                                                                                       |   |   | 38,518 |   |   | 38,140 |   |   | 37,490 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Earnings                  (Loss) Per Share of Common Stock**                                                                                |   |   |   |   |   |   |   |   |   |   |
| Basic,                  continuing operations                                                                                                 |   | $ | (0.73 | ) | $ | 1.76 |   | $ | 2.01 |   |
| Basic,                  discontinued operations                                                                                               |   | $ | 0.27 |   | $ | 0.30 |   | $ | 0.18 |   |
| Total                  - basic earnings (loss) per share                                                                                      |   | $ | (0.46 | ) | $ | 2.06 |   | $ | 2.19 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| Diluted,                  continuing operations                                                                                               |   | $ | (0.73 | ) | $ | 1.75 |   | $ | 2.00 |   |
| Diluted,                  discontinued operations                                                                                             |   | $ | 0.27 |   | $ | 0.30 |   | $ | 0.18 |   |
| Total                  - diluted earnings (loss) per share                                                                                    |   | $ | (0.46 | ) | $ | 2.05 |   | $ | 2.18 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Dividends                  Declared Per Share**                                                                                             |   | $ | 2.18 |   | $ | 2.175 |   | $ | 2.15 |   |
|                                                                                                                           |   |
| *The                  Notes to Consolidated Financial Statements are an integral part                  of these                  statements.* |   |

----

| **Peoples                  Energy Corporation**                                                                                               |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                  BALANCE SHEETS**                                                                                              |   |
|                                                                                                                                          |   | At                  September 30, |   |
| *(In                  Thousands)*                                                                                                             |   |   | 2006 |   |   | 2005 |   |
| **ASSETS**                                                                                                                                    |   |   |   |   |   |   |   |
| **CAPITAL                  INVESTMENTS:**                                                                                                     |   |   |   |   |   |   |   |
| Property,                  plant and equipment                                                                                                |   |   |   |   |   |   |   |
| Utility                  plant                                                                                                                |   | $ | 2,733,008 |   | $ | 2,634,629 |   |
| Oil                  and gas                                                                                                                  |   |   | 792,862 |   |   | 555,365 |   |
| Other                                                                                                                                         |   |   | 24,522 |   |   | 22,740 |   |
| Total                  property, plant and equipment                                                                                          |   |   | 3,550,392 |   |   | 3,212,734 |   |
| Less—Accumulated                  depreciation, depletion and amortization                                                              |   |   | 1,367,503 |   |   | 1,266,351 |   |
| Net                  property, plant and equipment                                                                                            |   |   | 2,182,889 |   |   | 1,946,383 |   |
| Investment                  in equity investees                                                                                               |   |   | 250 |   |   | 20,851 |   |
| Other                  investments                                                                                                            |   |   | 12,527 |   |   | 13,796 |   |
| **Total                  Capital Investments—Net**                                                                                      |   |   | 2,195,666 |   |   | 1,981,030 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **CURRENT                  ASSETS:**                                                                                                          |   |   |   |   |   |   |   |
| Cash                  and cash equivalents                                                                                                    |   |   | 42,115 |   |   | 18,186 |   |
| Deposits                  with broker or trustee                                                                                              |   |   | 103,584 |   |   | 25,327 |   |
| Receivables—                                                                                                                            |   |   |   |   |   |   |   |
| Customers,                  net of reserve for uncollectible                                                                                  |   |   |   |   |   |   |   |
| accounts                  of $43,971 and $34,954, respectively                                                                                |   |   | 220,969 |   |   | 246,393 |   |
| Other                                                                                                                                         |   |   | 4,812 |   |   | 4,092 |   |
| Derivative                  assets, at fair value—current                                                                               |   |   | 49,116 |   |   | 247,612 |   |
| Materials                  and supplies, at average cost                                                                                      |   |   | 9,670 |   |   | 10,468 |   |
| Gas                  in storage                                                                                                               |   |   | 238,251 |   |   | 236,995 |   |
| Gas                  costs recoverable through rate adjustments                                                                               |   |   | 6,679 |   |   | 8,608 |   |
| Regulatory                  assets of utility subsidiaries                                                                                    |   |   | 193,989 |   |   | 30,062 |   |
| Other                                                                                                                                         |   |   | 46,237 |   |   | 70,887 |   |
| Assets                  of discontinued operations                                                                                            |   |   | 84,471 |   |   | 128,319 |   |
| **Total                  Current Assets**                                                                                                     |   |   | 999,893 |   |   | 1,026,949 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **OTHER                  ASSETS:**                                                                                                            |   |   |   |   |   |   |   |
| Prepaid                  pension costs                                                                                                        |   |   | 182,319 |   |   | 152,720 |   |
| Noncurrent                  regulatory assets of utility subsidiaries                                                                         |   |   | 404,713 |   |   | 322,163 |   |
| Derivative                  assets, at fair value—noncurrent                                                                            |   |   | 17,148 |   |   | 7,021 |   |
| Deferred                  charges and other                                                                                                   |   |   | 22,675 |   |   | 47,908 |   |
| **Total                  Other Assets**                                                                                                       |   |   | 626,855 |   |   | 529,812 |   |
| **Total                  Assets**                                                                                                             |   | $ | 3,822,414 |   | $ | 3,537,791 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **CAPITALIZATION                  AND LIABILITIES**                                                                                           |   |   |   |   |   |   |   |
| **Total                  Capitalization (see Consolidated Capitalization                  Statements)**                                       |   | $ | 1,736,156 |   | $ | 1,695,737 |   |
| **CURRENT                  LIABILITIES:**                                                                                                     |   |   |   |   |   |   |   |
| Commercial                  paper                                                                                                             |   |   | 309,744 |   |   | 8,148 |   |
| Accounts                  payable                                                                                                             |   |   | 211,112 |   |   | 236,212 |   |
| Regulatory                  liabilities of utility subsidiaries                                                                               |   |   | 11,250 |   |   | 198,550 |   |
| Dividends                  payable                                                                                                            |   |   | 20,974 |   |   | 20,791 |   |
| Customer                  deposits                                                                                                            |   |   | 35,168 |   |   | 29,803 |   |
| Customer                  credit balances                                                                                                     |   |   | 89,676 |   |   | 59,635 |   |
| Accrued                  taxes                                                                                                                |   |   | 3,963 |   |   | 26,096 |   |
| Gas                  deliverable to customers                                                                                                 |   |   | 87,141 |   |   | 56,129 |   |
| Derivative                  liabilities, at fair value—current                                                                          |   |   | 214,518 |   |   | 186,854 |   |
| Other                  accrued liabilities                                                                                                    |   |   | 43,904 |   |   | 67,702 |   |
| Gas                  costs refundable through rate adjustments                                                                                |   |   | 62,153 |   |   | 293 |   |
| Accrued                  interest                                                                                                             |   |   | 12,439 |   |   | 11,474 |   |
| Deferred                  credit related to discontinued operations                                                                           |   |   | - |   |   | 2,201 |   |
| **Total                  Current Liabilities**                                                                                                |   |   | 1,102,042 |   |   | 903,888 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **DEFERRED                  CREDITS AND OTHER LIABILITIES:**                                                                                  |   |   |   |   |   |   |   |
| Deferred                  income taxes                                                                                                        |   |   | 461,046 |   |   | 446,382 |   |
| Investment                  tax credits                                                                                                       |   |   | 26,148 |   |   | 26,373 |   |
| Derivative                  liabilities, at fair value—noncurrent                                                                       |   |   | 22,671 |   |   | 68,895 |   |
| Environmental                  liabilities                                                                                                    |   |   | 269,200 |   |   | 282,411 |   |
| Asset                  retirement obligations                                                                                                 |   |   | 112,331 |   |   | 1,541 |   |
| Pension,                  postretirement and other                                                                                            |   |   | 92,820 |   |   | 112,564 |   |
| **Total                  Deferred Credits and Other Liabilities**                                                                             |   |   | 984,216 |   |   | 938,166 |   |
| **Total                  Capitalization and Liabilities**                                                                                     |   | $ | 3,822,414 |   | $ | 3,537,791 |   |
|                                                                                                                                          |   |
| *The                  Notes to Consolidated Financial Statements are an integral part                  of these                  statements.* |   |

----

| **Peoples                  Energy Corporation**                                                                                               |
|-----------------------------------------------------------------------------------------------------------------------------------------------|
| **CONSOLIDATED                  CAPITALIZATION STATEMENTS**                                                                                   |
|                                                                                                                                          |   |   |   |   |   |   |   |
|                                                                                                                                               |   |  At                  September 30, |   |
|                                                                                                                                          |   |   | 2006 |   |   | 2005 |   |
| *(In                  Thousands, Except Shares)*                                                                                              |   |   |   |   |   |   |   |
| **COMMON                  STOCKHOLDERS' EQUITY:**                                                                                             |   |   |   |   |   |   |   |
| Common                  stock, without par value—                                                                                       |   |   |   |   |   |   |   |
| Authorized                  60,000,000 shares                                                                                                 |   |   |   |   |   |   |   |
| Issued                  38,731,880 and 38,400,318 shares, respectively                                                                        |   | $ | 423,085 |   | $ | 409,060 |   |
| Treasury                  stock (243,100 shares, at cost)                                                                                     |   |   | (6,677 | ) |   | (6,677 | ) |
| Retained                  earnings                                                                                                            |   |   | 444,444 |   |   | 546,237 |   |
| Accumulated                  other comprehensive income (loss)                                                                                |   |   | (19,398 | ) |   | (148,466 | ) |
| **Total                  Common Stockholders' Equity**                                                                                        |   |   | 841,454 |   |   | 800,154 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **LONG-TERM                  DEBT:**                                                                                                          |   |   |   |   |   |   |   |
| Peoples                  Energy Corporation                                                                                                   |   |   |   |   |   |   |   |
| 6.9%                  Series A, due January 15, 2011                                                                                          |   |   | 325,000 |   |   | 325,000 |   |
| Fair                  value hedge adjustment                                                                                                  |   |   | (1,548 | ) |   | (667 | ) |
|                                                                                                                                          |   |   |   |   |   |   |   |
| The                  Peoples Gas Light and Coke Company                                                                                       |   |   |   |   |   |   |   |
| First                  and Refunding Mortgage Bonds—                                                                                    |   |   |   |   |   |   |   |
| 4.75%                  Series HH, due March 1, 2030,                                                                                          |   |   |   |   |   |   |   |
| adjustable                  after July 1, 2014                                                                                                |   |   | 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 February 1, 2008                                                                                            |   |   | 50,000 |   |   | 50,000 |   |
| 4.00%                  Series MM-2, due March 1, 2010                                                                                         |   |   | 50,000 |   |   | 50,000 |   |
| 4.625%                  Series NN-2, due May 1, 2013                                                                                          |   |   | 75,000 |   |   | 75,000 |   |
| 4.875%                  Series QQ, due November 1, 2038,                                                                                      |   |   |   |   |   |   |   |
| adjustable                  after November 1, 2018                                                                                            |   |   | 75,000 |   |   | 75,000 |   |
| 4.30%                  Series RR, due June 1, 2035,                                                                                           |   |   |   |   |   |   |   |
| adjustable                  after June 1, 2016                                                                                                |   |   | 50,000 |   |   | 50,000 |   |
|                                                                                                                                          |   |   | 400,000 |   |   | 400,000 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| Adjustable                  Rate Bonds—                                                                                                 |   |   |   |   |   |   |   |
| Series                  OO, due October 1, 2037                                                                                               |   |   | 51,000 |   |   | 51,000 |   |
| Series                  PP, due October 1, 2037                                                                                               |   |   | 51,000 |   |   | 51,000 |   |
|                                                                                                                                          |   |   | 102,000 |   |   | 102,000 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| North                  Shore Gas Company                                                                                                      |   |   |   |   |   |   |   |
| First                  Mortgage Bonds—                                                                                                  |   |   |   |   |   |   |   |
| 5.00%                  Series M, due December 1, 2028                                                                                         |   |   | 29,250 |   |   | 29,250 |   |
| 4.625%                  Series N-2, due May 1, 2013                                                                                           |   |   | 40,000 |   |   | 40,000 |   |
|                                                                                                                                          |   |   | 69,250 |   |   | 69,250 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **Total                  Long-Term Debt**                                                                                                     |   |   | 894,702 |   |   | 895,583 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **Total                  Capitalization**                                                                                                     |   | $ | 1,736,156 |   | $ | 1,695,737 |   |
|                                                                                                                                          |
| *The                  Notes to Consolidated Financial Statements are an integral part                  of these                  statements.* |

----

| **Peoples                  Energy Corporation**                                                                                               |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                  STATEMENTS OF STOCKHOLDERS' EQUITY**                                                                          |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                               |   |   |   |   |   |   |   |   |   |   |   | Accumulated |   |   |   |   |
|                                                                                                                                               |   |   |   |   |   |   |   |   |   |   |   | Other |   |   |   |   |
|                                                                                                                                               |   |   | Common |   |   | Treasury |   |   | Retained |   |   | Comprehensive |   |   |   |   |
| *(In                  Thousands, Except Per-Share Amounts)*                                                                                   |   |   | Stock |   |   | Stock |   |   | Earnings |   |   | Income                  (Loss) |   |   | Total |   |
| **For                  Fiscal Year Ended September 30, 2004**                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Beginning                  Balance**                                                                                                        |   | $ | 346,545 |   | $ | (6,760 | ) | $ | 549,969 |   | $ | (41,755 | ) | $ | 847,999 |   |
| Comprehensive                  Income                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  income                                                                                                                   |   |   |   |   |   |   |   |   | 81,564 |   |   |   |   |   | 81,564 |   |
| Other                  comprehensive income                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Minimum                  pension liability adjustment                                                                                         |   |   |   |   |   |   |   |   |   |   |   | 16,047 |   |   | 16,047 |   |
| Unrealized                  hedge (loss)                                                                                                      |   |   |   |   |   |   |   |   |   |   |   | (39,599 | ) |   | (39,599 | ) |
| **Total                  Comprehensive Income**                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 58,012 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                  stock issued                                                                                                          |   |   | 44,614 |   |   |   |   |   |   |   |   |   |   |   | 44,614 |   |
| Treasury                  stock                                                                                                               |   |   |   |   |   | 83 |   |   |   |   |   |   |   |   | 83 |   |
| Dividends                  declared on common stock ($2.15)                                                                                   |   |   |   |   |   |   |   |   | (80,424 | ) |   |   |   |   | (80,424 | ) |
| Other                                                                                                                                         |   |   |   |   |   |   |   |   | (201 | ) |   |   |   |   | (201 | ) |
| **September                  30, 2004 (1) (2)**                                                                                               |   | $ | 391,159 |   | $ | (6,677 | ) | $ | 550,908 |   | $ | (65,307 | ) | $ | 870,083 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **For                  Fiscal Year Ended September 30, 2005**                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                  Income                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  income                                                                                                                   |   |   |   |   |   |   |   |   | 78,133 |   |   |   |   |   | 78,133 |   |
| Other                  comprehensive income                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Minimum                  pension liability adjustment                                                                                         |   |   |   |   |   |   |   |   |   |   |   | (17,886 | ) |   | (17,886 | ) |
| Unrealized                  hedge (loss)                                                                                                      |   |   |   |   |   |   |   |   |   |   |   | (65,273 | ) |   | (65,273 | ) |
| **Total                  Comprehensive (Loss)**                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   | (5,026 | ) |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                  stock issued                                                                                                          |   |   | 17,901 |   |   |   |   |   |   |   |   |   |   |   | 17,901 |   |
| Dividends                  declared on common stock ($2.175)                                                                                  |   |   |   |   |   |   |   |   | (82,695 | ) |   |   |   |   | (82,695 | ) |
| Other                                                                                                                                         |   |   |   |   |   |   |   |   | (109 | ) |   |   |   |   | (109 | ) |
| **September                  30, 2005 (1) (2)**                                                                                               |   | $ | 409,060 |   | $ | (6,677 | ) | $ | 546,237 |   | $ | (148,466 | ) | $ | 800,154 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **For                  Fiscal Year Ended September 30, 2006**                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                  Income                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  income (loss)                                                                                                            |   |   |   |   |   |   |   |   | (17,636 | ) |   |   |   |   | (17,636 | ) |
| Other                  comprehensive income                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Minimum                  pension liability adjustment                                                                                         |   |   |   |   |   |   |   |   |   |   |   | 25,785 |   |   | 25,785 |   |
| Unrealized                  hedge gain                                                                                                        |   |   |   |   |   |   |   |   |   |   |   | 103,283 |   |   | 103,283 |   |
| **Total                  Comprehensive Income**                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   | 111,432 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                  stock issued                                                                                                          |   |   | 14,025 |   |   |   |   |   |   |   |   |   |   |   | 14,025 |   |
| Dividends                  declared on common stock ($2.18)                                                                                   |   |   |   |   |   |   |   |   | (83,698 | ) |   |   |   |   | (83,698 | ) |
| Other                                                                                                                                         |   |   |   |   |   |   |   |   | (459 | ) |   |   |   |   | (459 | ) |
| **September                  30, 2006 (1) (2)**                                                                                               |   | $ | 423,085 |   | $ | (6,677 | ) | $ | 444,444 |   | $ | (19,398 | ) | $ | 841,454 |   |
|                                                                                                                                          |   |
| *The                  Notes to Consolidated Financial Statements are an integral part                  of these                  statements.* |   |

| (1) | Accumulated                    other comprehensive income balance is net of $17.0 million and                    $5.2                    million of deferred income tax credits related                    to minimum pension liabilities at September 30, 2005 and 2004,                    respectively. At September 30, 2006, there was no minimum                    pension liability; the related balance in accumulated other comprehensive                    income was reduced to                    zero. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Accumulated                      other comprehensive income balance is net of $12.8 million,                      $80.9 million                      and $37.9 million of deferred income                      tax credits related to unrealized hedge losses at September                      30, 2006, 2005                      and 2004,                      respectively. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| **Peoples                  Energy Corporation**                                                                                               |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                  STATEMENTS OF CASH FLOWS**                                                                                    |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                               |   | For                  Fiscal Years Ended September 30, |   |
| *(In                  Thousands)*                                                                                                             |   |   | 2006 |   |   | 2005 |   |   | 2004 |   |
| **Operating                  Activities:**                                                                                                    |   |   |   |   |   |   |   |   |   |   |
| Net                  income (loss)                                                                                                            |   | $ | (17,636 | ) | $ | 78,133 |   | $ | 81,564 |   |
| Adjustments                  to reconcile net income to cash provided by operations:                                                          |   |   |   |   |   |   |   |   |   |   |
| Depreciation,                  depletion and amortization                                                                                     |   |   | 123,812 |   |   | 116,226 |   |   | 125,212 |   |
| Deferred                  income taxes and investment tax credits—net                                                                   |   |   | (32,407 | ) |   | 19,614 |   |   | 17,003 |   |
| Change                  in undistributed earnings from equity investments                                                                     |   |   | 4,788 |   |   | (10,150 | ) |   | (8,327 | ) |
| Mark-to-market                  gain or loss included in net income                                                                           |   |   | (5,577 | ) |   | 11,100 |   |   | 625 |   |
| Pension                  funding (greater) less than expense                                                                                  |   |   | 170 |   |   | (4,536 | ) |   | 10,741 |   |
| Other                  adjustments                                                                                                            |   |   | (25,872 | ) |   | 7,490 |   |   | (20,133 | ) |
| Net                  changes in:                                                                                                              |   |   |   |   |   |   |   |   |   |   |
| Receivables—net                                                                                                                         |   |   | 24,704 |   |   | (56,956 | ) |   | 22,734 |   |
| Gas                  in storage, excluding fair value adjustments                                                                             |   |   | (17,924 | ) |   | (28,344 | ) |   | (25,210 | ) |
| Gas                  costs recoverable/refundable through rate adjustments                                                                    |   |   | 63,789 |   |   | 12,268 |   |   | (2,957 | ) |
| Accounts                  payable                                                                                                             |   |   | (30,048 | ) |   | 88,900 |   |   | (14,025 | ) |
| Gas                  deliverable to customers                                                                                                 |   |   | 31,012 |   |   | 20,206 |   |   | 12,431 |   |
| Other                  accrued liabilities                                                                                                    |   |   | (12,548 | ) |   | 6,239 |   |   | 20,992 |   |
| Accrued                  interest                                                                                                             |   |   | 965 |   |   | 167 |   |   | 308 |   |
| Accrued                  taxes                                                                                                                |   |   | (13,650 | ) |   | 8,813 |   |   | (18,676 | ) |
| Customer                  credit balances and deposits                                                                                        |   |   | 35,405 |   |   | 9,030 |   |   | 5,325 |   |
| Other                                                                                                                                         |   |   | 2,179 |   |   | 3,952 |   |   | (5,315 | ) |
| **Net                  Cash Provided by (Used in) Operating Activities**                                                                      |   |   | 131,162 |   |   | 282,152 |   |   | 202,292 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Investing                  Activities:**                                                                                                    |   |   |   |   |   |   |   |   |   |   |
| Capital                  spending                                                                                                             |   |   | (344,017 | ) |   | (162,758 | ) |   | (189,389 | ) |
| Return                  of capital investments                                                                                                |   |   | 59,343 |   |   | 10,359 |   |   | 14,692 |   |
| Decrease                  (increase) in deposits with broker or trustee                                                                       |   |   | (59,862 | ) |   | (11,436 | ) |   | 5,470 |   |
| Proceeds                  from sale of assets                                                                                                 |   |   | 2,567 |   |   | 4,934 |   |   | 3,727 |   |
| Other                                                                                                                                         |   |   | 1,704 |   |   | 2,711 |   |   | 737 |   |
| **Net                  Cash Provided By (Used in) Investing Activities**                                                                      |   |   | (340,265 | ) |   | (156,190 | ) |   | (164,763 | ) |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Financing                  Activities:**                                                                                                    |   |   |   |   |   |   |   |   |   |   |
| Proceeds                  from (payment of) overdraft facility                                                                                |   |   | 4,948 |   |   | 2,604 |   |   | (597 | ) |
| Issuance                  (retirement) of commercial paper                                                                                    |   |   | 301,596 |   |   | (47,477 | ) |   | (325 | ) |
| Retirement                  of short-term debt                                                                                                |   |   | - |   |   | - |   |   | (152,000 | ) |
| Issuance                  of long-term debt                                                                                                   |   |   | - |   |   | 47,947 |   |   | 223,608 |   |
| Retirement                  of long-term debt                                                                                                 |   |   | - |   |   | (51,794 | ) |   | (76,515 | ) |
| Proceeds                  from issuance of common stock                                                                                       |   |   | 10,002 |   |   | 15,988 |   |   | 41,383 |   |
| Dividends                  paid on common stock                                                                                               |   |   | (83,514 | ) |   | (82,272 | ) |   | (79,503 | ) |
| **Net                  Cash Provided by (Used in) Financing Activities**                                                                      |   |   | 233,032 |   |   | (115,004 | ) |   | (43,949 | ) |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Net                  Increase (Decrease) in Cash and Cash Equivalents**                                                                     |   |   | 23,929 |   |   | 10,958 |   |   | (6,420 | ) |
| **Cash                  and Cash Equivalents at Beginning of Period**                                                                         |   |   | 18,186 |   |   | 7,228 |   |   | 13,648 |   |
| **Cash                  and Cash Equivalents at End of Period**                                                                               |   | $ | 42,115 |   | $ | 18,186 |   | $ | 7,228 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Supplemental                  information:**                                                                                                |   |   |   |   |   |   |   |   |   |   |
| Income                  taxes paid, net of refunds                                                                                            |   | $ | 36,015 |   | $ | 15,334 |   | $ | 37,264 |   |
| Interest                  paid, net of amounts capitalized                                                                                    |   | $ | 57,444 |   | $ | 49,295 |   | $ | 46,363 |   |
|                                                                                                                                          |   |
| *The                  Notes to Consolidated Financial Statements are an integral part                  of these                  statements.* |   |

----

| **The                  Peoples Gas Light and Coke Company**                                                                                   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                  STATEMENTS OF OPERATIONS**                                                                                    |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                               |   | For                  Fiscal Years Ended September 30, |   |
|                                                                                                                                          |   |   | 2006 |   |   | 2005 |   |   | 2004 |   |
| *(In                  Thousands)*                                                                                                             |   |   |   |   |   |   |   |   |   |   |
| **Revenues**                                                                                                                                  |   | $ | 1,622,291 |   | $ | 1,424,703 |   | $ | 1,279,375 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Operating                  Expenses:**                                                                                                      |   |   |   |   |   |   |   |   |   |   |
| Gas                  costs                                                                                                                    |   |   | 1,052,333 |   |   | 853,453 |   |   | 723,771 |   |
| Gas                  charge settlement                                                                                                        |   |   | 103,030 |   |   | - |   |   | - |   |
| Operation                  and maintenance, excluding                                                                                         |   |   |   |   |   |   |   |   |   |   |
| restructuring                  and environmental costs                                                                                        |   |   | 252,663 |   |   | 231,709 |   |   | 242,023 |   |
| Restructuring                  costs                                                                                                          |   |   | - |   |   | 8,790 |   |   | 9,686 |   |
| Environmental                  costs                                                                                                          |   |   | 31,588 |   |   | 28,574 |   |   | 16,206 |   |
| Depreciation                  and amortization                                                                                                |   |   | 56,850 |   |   | 56,178 |   |   | 61,872 |   |
| Taxes,                  other than income taxes                                                                                               |   |   | 166,821 |   |   | 152,533 |   |   | 140,348 |   |
| (Gains)                  losses on property sales                                                                                             |   |   | (860 | ) |   | (2,093 | ) |   | (2,339 | ) |
| **Total                  Operating Expenses**                                                                                                 |   |   | 1,662,425 |   |   | 1,329,144 |   |   | 1,191,567 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Operating                  Income (Loss)**                                                                                                  |   |   | (40,134 | ) |   | 95,559 |   |   | 87,808 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| Other                  income                                                                                                                 |   |   | 5,698 |   |   | 4,350 |   |   | 3,123 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| Other                  expense                                                                                                                |   |   | 137 |   |   | 105 |   |   | 44 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| Interest                  expense                                                                                                             |   |   | 26,987 |   |   | 23,781 |   |   | 21,114 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Income                  (Loss) Before Income Taxes**                                                                                        |   |   | (61,560 | ) |   | 76,023 |   |   | 69,773 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| Income                  tax expense (benefit)                                                                                                 |   |   | (26,116 | ) |   | 26,690 |   |   | 24,397 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Net                  Income (Loss)**                                                                                                        |   | $ | (35,444 | ) | $ | 49,333 |   | $ | 45,376 |   |
|                                                                                                                                          |
| *The                  Notes to Consolidated Financial Statements are an integral part                  of these                  statements.* |

----

| **The                  Peoples Gas Light and Coke Company**                                                                                   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|
| **CONSOLIDATED                  BALANCE SHEETS**                                                                                              |
|                                                                                                                                          |   |   |   |   |   |   |   |
|                                                                                                                                               |   | At                  September 30, |   |
|                                                                                                                                          |   |   | 2006 |   |   | 2005 |   |
| *(In                  Thousands)*                                                                                                             |   |   |   |   |   |   |   |
| **ASSETS**                                                                                                                                    |   |   |   |   |   |   |   |
| **CAPITAL                  INVESTMENTS:**                                                                                                     |   |   |   |   |   |   |   |
| Property,                  plant and equipment                                                                                                |   | $ | 2,358,448 |   | $ | 2,271,716 |   |
| Less—Accumulated                  depreciation and amortization                                                                         |   |   | 946,227 |   |   | 904,200 |   |
| Net                  property, plant and equipment                                                                                            |   |   | 1,412,221 |   |   | 1,367,516 |   |
| Other                  investments                                                                                                            |   |   | 1,361 |   |   | 1,548 |   |
| **Total                  Capital Investments—Net**                                                                                      |   |   | 1,413,582 |   |   | 1,369,064 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **CURRENT                  ASSETS:**                                                                                                          |   |   |   |   |   |   |   |
| Cash                  and cash equivalents                                                                                                    |   |   | 30,770 |   |   | - |   |
| Deposits                  with broker or trustee                                                                                              |   |   | 5,107 |   |   | 38 |   |
| Receivables—                                                                                                                            |   |   |   |   |   |   |   |
| Customers,                  net of reserve for uncollectible                                                                                  |   |   |   |   |   |   |   |
| accounts                  of $40,631 and $31,947, respectively                                                                                |   |   | 99,955 |   |   | 113,946 |   |
| Intercompany                  receivables                                                                                                     |   |   | 6,285 |   |   | 189,794 |   |
| Other                                                                                                                                         |   |   | 211 |   |   | 2 |   |
| Materials                  and supplies, at average cost                                                                                      |   |   | 8,575 |   |   | 9,238 |   |
| Gas                  in storage, at last-in, first-out cost                                                                                   |   |   | 127,745 |   |   | 106,242 |   |
| Gas                  costs recoverable through rate adjustments                                                                               |   |   | 4,514 |   |   | 6,889 |   |
| Regulatory                  assets                                                                                                            |   |   | 169,077 |   |   | 28,061 |   |
| Other                                                                                                                                         |   |   | 26,218 |   |   | 9,127 |   |
| **Total                  Current Assets**                                                                                                     |   |   | 478,457 |   |   | 463,337 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **OTHER                  ASSETS:**                                                                                                            |   |   |   |   |   |   |   |
| Prepaid                  pension costs                                                                                                        |   |   | 184,660 |   |   | 153,110 |   |
| Noncurrent                  regulatory assets                                                                                                 |   |   | 317,898 |   |   | 256,180 |   |
| Deferred                  charges and other                                                                                                   |   |   | 18,257 |   |   | 35,490 |   |
| **Total                  Other Assets**                                                                                                       |   |   | 520,815 |   |   | 444,780 |   |
| **Total                  Assets**                                                                                                             |   | $ | 2,412,854 |   | $ | 2,277,181 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **CAPITALIZATION                  AND LIABILITIES**                                                                                           |   |   |   |   |   |   |   |
| **Total                  Capitalization (see Consolidated Capitalization                  Statements)**                                       |   | $ | 1,138,105 |   | $ | 1,115,272 |   |
| **CURRENT                  LIABILITIES:**                                                                                                     |   |   |   |   |   |   |   |
| Other                  short-term debt—intercompany                                                                                     |   |   | - |   |   | 360 |   |
| Accounts                  payable                                                                                                             |   |   | 81,385 |   |   | 98,069 |   |
| Intercompany                  payables                                                                                                        |   |   | 167,391 |   |   | 22,573 |   |
| Regulatory                  liabilities                                                                                                       |   |   | 11,249 |   |   | 166,745 |   |
| Customer                  deposits                                                                                                            |   |   | 32,123 |   |   | 27,314 |   |
| Customer                  credit balances                                                                                                     |   |   | 76,416 |   |   | 49,873 |   |
| Accrued                  taxes                                                                                                                |   |   | 17,457 |   |   | 24,089 |   |
| Gas                  deliverable to customers                                                                                                 |   |   | 80,840 |   |   | 51,456 |   |
| Other                  accrued liabilities                                                                                                    |   |   | 17,481 |   |   | 30,647 |   |
| Gas                  costs refundable through rate adjustments                                                                                |   |   | 49,726 |   |   | 29 |   |
| Accrued                  interest                                                                                                             |   |   | 5,993 |   |   | 5,559 |   |
| **Total                  Current Liabilities**                                                                                                |   |   | 540,061 |   |   | 476,714 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **DEFERRED                  CREDITS AND OTHER LIABILITIES:**                                                                                  |   |   |   |   |   |   |   |
| Deferred                  income taxes                                                                                                        |   |   | 353,245 |   |   | 365,016 |   |
| Investment                  tax credits                                                                                                       |   |   | 23,284 |   |   | 23,514 |   |
| Environmental                  liabilities                                                                                                    |   |   | 201,300 |   |   | 217,611 |   |
| Asset                  retirement obligations                                                                                                 |   |   | 91,071 |   |   | - |   |
| Pension,                  postretirement and other                                                                                            |   |   | 65,788 |   |   | 79,054 |   |
| **Total                  Deferred Credits and Other Liabilities**                                                                             |   |   | 734,688 |   |   | 685,195 |   |
| **Total                  Capitalization and Liabilities**                                                                                     |   | $ | 2,412,854 |   | $ | 2,277,181 |   |
|                                                                                                                                          |
| *The                  Notes to Consolidated Financial Statements are an integral part                  of these                  statements.* |

----

| **The                  Peoples Gas Light and Coke Company**                                                                                   |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                  CAPITALIZATION STATEMENTS**                                                                                   |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
|                                                                                                                                               |   | At                  September 30, |   |
|                                                                                                                                          |   |   | 2006 |   |   | 2005 |   |
| *(In                  Thousands, Except Shares)*                                                                                              |   |   |   |   |   |   |   |
| **COMMON                  STOCKHOLDER'S EQUITY:**                                                                                             |   |   |   |   |   |   |   |
| Common                  stock, without par value—                                                                                       |   |   |   |   |   |   |   |
| Authorized                  40,000,000 shares                                                                                                 |   |   |   |   |   |   |   |
| Outstanding                  25,357,566 and 24,817,566 shares, respectively                                                                   |   | $ | 219,242 |   | $ | 165,307 |   |
| Retained                  earnings                                                                                                            |   |   | 418,291 |   |   | 469,447 |   |
| Accumulated                  other comprehensive income (loss)                                                                                |   |   | (1,428 | ) |   | (21,482 | ) |
| **Total                  Common Stockholder's Equity**                                                                                        |   |   | 636,105 |   |   | 613,272 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **LONG-TERM                  DEBT:**                                                                                                          |   |   |   |   |   |   |   |
| First                  and Refunding Mortgage Bonds—                                                                                    |   |   |   |   |   |   |   |
| 4.75%                  Series HH, due March 1, 2030,                                                                                          |   |   |   |   |   |   |   |
| adjustable                  after July 1, 2014                                                                                                |   |   | 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 February 1, 2008                                                                                            |   |   | 50,000 |   |   | 50,000 |   |
| 4.00%                  Series MM-2, due March 1, 2010                                                                                         |   |   | 50,000 |   |   | 50,000 |   |
| 4.625%                  Series NN-2, due May 1, 2013                                                                                          |   |   | 75,000 |   |   | 75,000 |   |
| 4.875%                  Series QQ, due November 1, 2038,                                                                                      |   |   |   |   |   |   |   |
| adjustable                  after November 1, 2018                                                                                            |   |   | 75,000 |   |   | 75,000 |   |
| 4.30%                  Series RR, due June 1, 2035,                                                                                           |   |   |   |   |   |   |   |
| adjustable                  after June 1, 2016                                                                                                |   |   | 50,000 |   |   | 50,000 |   |
|                                                                                                                                          |   |   | 400,000 |   |   | 400,000 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| Adjustable                  Rate Bonds—                                                                                                 |   |   |   |   |   |   |   |
| Series                  OO, due October 1, 2037                                                                                               |   |   | 51,000 |   |   | 51,000 |   |
| Series                  PP, due October 1, 2037                                                                                               |   |   | 51,000 |   |   | 51,000 |   |
|                                                                                                                                          |   |   | 102,000 |   |   | 102,000 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **Total                  Long-Term Debt**                                                                                                     |   |   | 502,000 |   |   | 502,000 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **Total                  Capitalization**                                                                                                     |   | $ | 1,138,105 |   | $ | 1,115,272 |   |
|                                                                                                                                          |
| *The                  Notes to Consolidated Financial Statements are an integral part                  of these                  statements.* |

----

| **The                Peoples Gas Light and Coke Company**                                                                               |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                STATEMENTS OF STOCKHOLDER'S EQUITY**                                                                      |   |
|                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                         |   |   |   |   |   |   |   |   | Accumulated |   |   |   |   |
|                                                                                                                                         |   |   |   |   |   |   |   |   | Other |   |   |   |   |
|                                                                                                                                         |   |   | Common |   |   | Retained |   |   | Comprehensive |   |   |   |   |
| *(In                Thousands)*                                                                                                         |   |   | Stock |   |   | Earnings |   |   | Income                (Loss) |   |   | Total |   |
| **For                Fiscal Year Ended September 30, 2004**                                                                             |   | $ | 165,307 |   | $ | 482,228 |   | $ | (21,052 | ) | $ | 626,483 |   |
| **Beginning                Balance**                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                Income                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                income                                                                                                               |   |   |   |   |   | 45,376 |   |   |   |   |   | 45,376 |   |
| Other                comprehensive income                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Minimum                pension liability adjustment                                                                                     |   |   |   |   |   |   |   |   | 13,929 |   |   | 13,929 |   |
| Unrealized                hedge gain                                                                                                    |   |   |   |   |   |   |   |   | 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 |   |
|                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **For                Fiscal Year Ended September 30, 2005**                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                Income                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                income                                                                                                               |   |   |   |   |   | 49,333 |   |   |   |   |   | 49,333 |   |
| Other                comprehensive income                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Minimum                pension liability adjustment                                                                                     |   |   |   |   |   |   |   |   | (14,444 | ) |   | (14,444 | ) |
| Unrealized                hedge gain                                                                                                    |   |   |   |   |   |   |   |   | 42 |   |   | 42 |   |
| **Total                Comprehensive Income**                                                                                           |   |   |   |   |   |   |   |   |   |   |   | 34,931 |   |
|                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends                declared on common stock                                                                                       |   |   |   |   |   | (51,300 | ) |   |   |   |   | (51,300 | ) |
| Other                                                                                                                                   |   |   |   |   |   | 121 |   |   |   |   |   | 121 |   |
| **September                30, 2005 (1) (2)**                                                                                           |   | $ | 165,307 |   | $ | 469,447 |   | $ | (21,482 | ) | $ | 613,272 |   |
|                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **For                Fiscal Year Ended September 30, 2006**                                                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                Income                                                                                                     |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                income (loss)                                                                                                        |   |   |   |   |   | (35,444 | ) |   |   |   |   | (35,444 | ) |
| Other                comprehensive income                                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Minimum                pension liability adjustment                                                                                     |   |   |   |   |   |   |   |   | 21,158 |   |   | 21,158 |   |
| Unrealized                hedge (loss)                                                                                                  |   |   |   |   |   |   |   |   | (1,104 | ) |   | (1,104 | ) |
| **Total                Comprehensive (Loss)**                                                                                           |   |   |   |   |   |   |   |   |   |   |   | (15,390 | ) |
|                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Common                stock issued                                                                                                      |   |   | 53,935 |   |   |   |   |   |   |   |   | 53,935 |   |
|                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends                declared on common stock                                                                                       |   |   |   |   |   | (15,400 | ) |   |   |   |   | (15,400 | ) |
| Other                                                                                                                                   |   |   |   |   |   | (312 | ) |   |   |   |   | (312 | ) |
| **September                30, 2006 (1) (2)**                                                                                           |   | $ | 219,242 |   | $ | 418,291 |   | $ | (1,428 | ) | $ | 636,105 |   |
|                                                                                                                                    |   |
| *The                Notes to Consolidated Financial Statements are an integral part of                these                statements.* |   |

| (1) | Accumulated                  other comprehensive income balance is net of $14.0 million and                  $4.4                  million of deferred income                  tax credits related to minimum pension liabilities at September                  30, 2005                  and 2004, respectively. At September 30, 2006, there                  was no minimum pension liability; the related balance in accumulated                  other                  comprehensive income was reduced to                  zero. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Accumulated                    other comprehensive income balance is net of $0.9 million, $0.2                    million                    and $0.2 million of deferred income                    tax credits related to unrealized hedge losses at September 30,                    2006, 2005                    and 2004,                    respectively. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| **The                Peoples Gas Light and Coke Company**                                                                               |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                STATEMENTS OF CASH FLOWS**                                                                                |   |
|                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                         |   | For                Fiscal Years Ended September 30, |   |
|                                                                                                                                    |   |   | 2006 |   |   | 2005 |   |   | 2004 |   |
| *(In                Thousands)*                                                                                                         |   |   |   |   |   |   |   |   |   |   |
| **Operating                Activities:**                                                                                                |   |   |   |   |   |   |   |   |   |   |
| Net                Income (Loss)                                                                                                        |   | $ | (35,444 | ) | $ | 49,333 |   | $ | 45,376 |   |
| Adjustments                to reconcile net income to cash provided by operations:                                                      |   |   |   |   |   |   |   |   |   |   |
| Depreciation                and amortization                                                                                            |   |   | 61,323 |   |   | 60,652 |   |   | 66,599 |   |
| Deferred                income taxes and investment tax credits—net                                                               |   |   | (37,540 | ) |   | (3,271 | ) |   | 2,917 |   |
| Pension                funding (greater) less than expense                                                                              |   |   | (4,700 | ) |   | (4,016 | ) |   | 2,977 |   |
| Other                adjustments                                                                                                        |   |   | (4,888 | ) |   | 17,197 |   |   | (10,911 | ) |
| Net                changes in:                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| Receivables—net                                                                                                                   |   |   | 13,782 |   |   | (3,249 | ) |   | 23,519 |   |
| Intercompany                receivables                                                                                                 |   |   | 10,301 |   |   | (11,480 | ) |   | 25,391 |   |
| Gas                in storage                                                                                                           |   |   | (21,503 | ) |   | 1,033 |   |   | 4,717 |   |
| Gas                costs recoverable/refundable through rate adjustments                                                                |   |   | 52,072 |   |   | 11,061 |   |   | 4,392 |   |
| Accounts                payable                                                                                                         |   |   | (17,569 | ) |   | 25,610 |   |   | (10,453 | ) |
| Intercompany                payables                                                                                                    |   |   | 8,138 |   |   | (14,103 | ) |   | (9,044 | ) |
| Gas                deliverable to customers                                                                                             |   |   | 29,384 |   |   | 18,993 |   |   | 11,267 |   |
| Other                accrued liabilities                                                                                                |   |   | (1,917 | ) |   | (7,329 | ) |   | 6,379 |   |
| Accrued                interest                                                                                                         |   |   | 434 |   |   | 27 |   |   | 471 |   |
| Accrued                taxes                                                                                                            |   |   | (3,016 | ) |   | 29 |   |   | (3,633 | ) |
| Customer                credit balances and deposits                                                                                    |   |   | 31,351 |   |   | 7,665 |   |   | 5,325 |   |
| Other                                                                                                                                   |   |   | 326 |   |   | 288 |   |   | (952 | ) |
| **Net                Cash Provided by (Used in) Operating Activities**                                                                  |   |   | 80,534 |   |   | 148,440 |   |   | 164,337 |   |
|                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |
| **Investing                Activities:**                                                                                                |   |   |   |   |   |   |   |   |   |   |
| Capital                spending                                                                                                         |   |   | (92,202 | ) |   | (73,021 | ) |   | (67,750 | ) |
| Decrease                (increase) in deposits with broker or trustee                                                                   |   |   | 451 |   |   | (38 | ) |   | 11,080 |   |
| Proceeds                from sale of assets                                                                                             |   |   | 1,350 |   |   | 3,431 |   |   | 2,478 |   |
| Other                                                                                                                                   |   |   | 1,577 |   |   | 2,938 |   |   | 669 |   |
| **Net                Cash Provided by (Used in) Investing Activities**                                                                  |   |   | (88,824 | ) |   | (66,690 | ) |   | (53,523 | ) |
|                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |
| **Financing                Activities:**                                                                                                |   |   |   |   |   |   |   |   |   |   |
| Proceeds                from overdraft facility                                                                                         |   |   | 885 |   |   | 2,237 |   |   | 666 |   |
| Retirement                of commercial paper                                                                                           |   |   | - |   |   | (31,000 | ) |   | (24,949 | ) |
| Retirement                of short-term debt intercompany                                                                               |   |   | (360 | ) |   | - |   |   | (176,400 | ) |
| Issuance                of short-term debt                                                                                              |   |   | - |   |   | 360 |   |   | - |   |
| Issuance                of long-term debt                                                                                               |   |   | - |   |   | 47,947 |   |   | 222,575 |   |
| Retirement                of long-term debt                                                                                             |   |   | - |   |   | (50,000 | ) |   | (76,500 | ) |
| Dividends                paid on common stock                                                                                           |   |   | (15,400 | ) |   | (51,300 | ) |   | (56,200 | ) |
| Proceeds                from issuance of common stock                                                                                   |   |   | 53,935 |   |   | - |   |   | - |   |
| **Net                Cash Provided by (Used in) Financing Activities**                                                                  |   |   | 39,060 |   |   | (81,756 | ) |   | (110,808 | ) |
|                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |
| **Net                Increase (Decrease) in Cash and Cash Equivalents**                                                                 |   |   | 30,770 |   |   | (6 | ) |   | 6 |   |
| **Cash                and Cash Equivalents at Beginning of Period**                                                                     |   |   | - |   |   | 6 |   |   | - |   |
| **Cash                and Cash Equivalents at End of Period**                                                                           |   | $ | 30,770 |   | $ | - |   | $ | 6 |   |
|                                                                                                                                    |   |   |   |   |   |   |   |   |   |   |
| **Supplemental                information:**                                                                                            |   |   |   |   |   |   |   |   |   |   |
| Income                taxes paid, net of refunds                                                                                        |   | $ | 11,531 |   | $ | 28,321 |   | $ | 29,933 |   |
| Interest                paid, net of amounts capitalized                                                                                |   | $ | 23,797 |   | $ | 22,391 |   | $ | 19,572 |   |
|                                                                                                                                    |   |
| *The                Notes to Consolidated Financial Statements are an integral part of                these                statements.* |   |

----

| **North                  Shore Gas Company**                                                                                                  |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                  STATEMENTS OF INCOME**                                                                                        |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                               |   |  For                  Fiscal Years Ended September 30, |   |
|                                                                                                                                          |   |   | 2006 |   |   | 2005 |   |   | 2004 |   |
| *(In                  Thousands)*                                                                                                             |   |   |   |   |   |   |   |   |   |   |
| **Revenues**                                                                                                                                  |   | $ | 299,589 |   | $ | 260,461 |   | $ | 222,711 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Operating                  Expenses:**                                                                                                      |   |   |   |   |   |   |   |   |   |   |
| Gas                  costs                                                                                                                    |   |   | 220,300 |   |   | 180,923 |   |   | 144,747 |   |
| Gas                  charge settlement                                                                                                        |   |   | 4,300 |   |   | - |   |   | - |   |
| Operation                  and maintenance, excluding                                                                                         |   |   |   |   |   |   |   |   |   |   |
| restructuring                  and environmental costs                                                                                        |   |   | 37,364 |   |   | 33,713 |   |   | 32,663 |   |
| Restructuring                  costs                                                                                                          |   |   | - |   |   | 622 |   |   | 882 |   |
| Environmental                  costs                                                                                                          |   |   | 2,065 |   |   | 1,863 |   |   | 1,178 |   |
| Depreciation                                                                                                                                  |   |   | 5,724 |   |   | 5,716 |   |   | 7,066 |   |
| Taxes,                  other than income taxes                                                                                               |   |   | 16,508 |   |   | 16,578 |   |   | 16,003 |   |
| Losses                  (gains) on property sales                                                                                             |   |   | - |   |   | 1 |   |   | (1,160 | ) |
| **Total                  Operating Expenses**                                                                                                 |   |   | 286,261 |   |   | 239,416 |   |   | 201,379 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Operating                  Income**                                                                                                         |   |   | 13,328 |   |   | 21,045 |   |   | 21,332 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| Other                  income                                                                                                                 |   |   | 1,263 |   |   | 826 |   |   | 392 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| Other                  expense                                                                                                                |   |   | 16 |   |   | 112 |   |   | 217 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| Interest                  expense                                                                                                             |   |   | 4,071 |   |   | 3,706 |   |   | 3,688 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Income                  Before Income Taxes**                                                                                               |   |   | 10,504 |   |   | 18,053 |   |   | 17,819 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| Income                  tax expense                                                                                                           |   |   | 3,797 |   |   | 6,656 |   |   | 6,743 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Net                  Income**                                                                                                               |   | $ | 6,707 |   | $ | 11,397 |   | $ | 11,076 |   |
|                                                                                                                                          |   |
| *The                  Notes to Consolidated Financial Statements are an integral part                  of these                  statements.* |

----

| **North                  Shore Gas Company**                                                                                                  |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                  BALANCE SHEETS**                                                                                              |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
|                                                                                                                                               |   | At                  September 30, |   |
|                                                                                                                                          |   |   | 2006 |   |   | 2005 |   |
| *(In                  Thousands)*                                                                                                             |   |   |   |   |   |   |   |
| **ASSETS**                                                                                                                                    |   |   |   |   |   |   |   |
| **CAPITAL                  INVESTMENTS:**                                                                                                     |   |   |   |   |   |   |   |
| Property,                  plant and equipment                                                                                                |   | $ | 374,560 |   | $ | 362,912 |   |
| Less—Accumulated                  depreciation                                                                                          |   |   | 149,832 |   |   | 144,504 |   |
| Net                  property, plant and equipment                                                                                            |   |   | 224,728 |   |   | 218,408 |   |
| **Total                  Capital Investments—Net**                                                                                      |   |   | 224,728 |   |   | 218,408 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **CURRENT                  ASSETS:**                                                                                                          |   |   |   |   |   |   |   |
| Cash                  and cash equivalents                                                                                                    |   |   | 12,815 |   |   | 10,545 |   |
| Deposits                  with broker or trustee                                                                                              |   |   | 1,930 |   |   | - |   |
| Receivables—                                                                                                                            |   |   |   |   |   |   |   |
| Customers,                  net of reserve for uncollectible                                                                                  |   |   |   |   |   |   |   |
| accounts                  of $2,127 and $1,455, respectively                                                                                  |   |   | 12,858 |   |   | 14,209 |   |
| Intercompany                  receivables                                                                                                     |   |   | 3,625 |   |   | 39,815 |   |
| Materials                  and supplies, at average cost                                                                                      |   |   | 1,095 |   |   | 1,230 |   |
| Gas                  in storage, at last-in, first-out cost                                                                                   |   |   | 21,744 |   |   | 14,231 |   |
| Gas                  costs recoverable through rate adjustments                                                                               |   |   | 2,165 |   |   | 1,719 |   |
| Regulatory                  assets                                                                                                            |   |   | 24,912 |   |   | 2,001 |   |
| Other                                                                                                                                         |   |   | 2,929 |   |   | 371 |   |
| **Total                  Current Assets**                                                                                                     |   |   | 84,073 |   |   | 84,121 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **OTHER                  ASSETS:**                                                                                                            |   |   |   |   |   |   |   |
| Prepaid                  pension costs                                                                                                        |   |   | 2,725 |   |   | - |   |
| Noncurrent                  regulatory assets                                                                                                 |   |   | 86,815 |   |   | 65,983 |   |
| Deferred                  charges and other                                                                                                   |   |   | 1,648 |   |   | 2,677 |   |
| **Total                  Other Assets**                                                                                                       |   |   | 91,188 |   |   | 68,660 |   |
| **Total                  Assets**                                                                                                             |   | $ | 399,989 |   | $ | 371,189 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **CAPITALIZATION                  AND LIABILITIES**                                                                                           |   |   |   |   |   |   |   |
| **Total                  Capitalization (see Consolidated Capitalization                  Statements)**                                       |   | $ | 170,119 |   | $ | 172,186 |   |
| **CURRENT                  LIABILITIES:**                                                                                                     |   |   |   |   |   |   |   |
| Accounts                  payable                                                                                                             |   |   | 14,776 |   |   | 21,879 |   |
| Intercompany                  payables                                                                                                        |   |   | 29,620 |   |   | 2,722 |   |
| Regulatory                  liabilities                                                                                                       |   |   | 1 |   |   | 32,485 |   |
| Customer                  deposits                                                                                                            |   |   | 2,860 |   |   | 2,489 |   |
| Customer                  credit balances                                                                                                     |   |   | 11,808 |   |   | 8,761 |   |
| Accrued                  taxes                                                                                                                |   |   | 1,271 |   |   | 2,904 |   |
| Gas                  deliverable to customers                                                                                                 |   |   | 6,301 |   |   | 4,673 |   |
| Other                  accrued liabilities                                                                                                    |   |   | 1,746 |   |   | 3,504 |   |
| Gas                  costs refundable through rate adjustments                                                                                |   |   | 12,427 |   |   | 264 |   |
| Accrued                  interest                                                                                                             |   |   | 1,317 |   |   | 1,284 |   |
| **Total                  Current Liabilities**                                                                                                |   |   | 82,127 |   |   | 80,965 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **DEFERRED                  CREDITS AND OTHER LIABILITIES:**                                                                                  |   |   |   |   |   |   |   |
| Deferred                  income taxes                                                                                                        |   |   | 45,745 |   |   | 39,061 |   |
| Investment                  tax credits                                                                                                       |   |   | 2,864 |   |   | 2,859 |   |
| Environmental                  liabilities                                                                                                    |   |   | 67,900 |   |   | 64,800 |   |
| Asset                  retirement obligations                                                                                                 |   |   | 19,257 |   |   | - |   |
| Pension,                  postretirement and other                                                                                            |   |   | 11,977 |   |   | 11,318 |   |
| **Total                  Deferred Credits and Other Liabilities**                                                                             |   |   | 147,743 |   |   | 118,038 |   |
| **Total                  Capitalization and Liabilities**                                                                                     |   | $ | 399,989 |   | $ | 371,189 |   |
|                                                                                                                                          |   |
| *The                  Notes to Consolidated Financial Statements are an integral part                  of these                  statements.* |   |

----

| **North                  Shore Gas Company**                                                                                                  |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                  CAPITALIZATION STATEMENTS**                                                                                   |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
|                                                                                                                                               |   | At                  September 30, |   |
|                                                                                                                                          |   |   | 2006 |   |   | 2005 |   |
| *(In                  Thousands, Except Shares)*                                                                                              |   |   |   |   |   |   |   |
| **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                                                                                                            |   |   | 76,262 |   |   | 80,555 |   |
| Accumulated                  other comprehensive income (loss)                                                                                |   |   | (150 | ) |   | (2,376 | ) |
| **Total                  Common Stockholder's Equity**                                                                                        |   |   | 100,869 |   |   | 102,936 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **LONG-TERM                  DEBT:**                                                                                                          |   |   |   |   |   |   |   |
| First                  Mortgage Bonds—                                                                                                  |   |   |   |   |   |   |   |
| 5.00%                  Series M, due December 1, 2028                                                                                         |   |   | 29,250 |   |   | 29,250 |   |
| 4.625%                  Series N-2, due May 1, 2013                                                                                           |   |   | 40,000 |   |   | 40,000 |   |
| **Total                  Long-Term Debt**                                                                                                     |   |   | 69,250 |   |   | 69,250 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |
| **Total                  Capitalization**                                                                                                     |   | $ | 170,119 |   | $ | 172,186 |   |
|                                                                                                                                          |   |
| *The                  Notes to Consolidated Financial Statements are an integral part                  of these                  statements.* |   |

----

| **North                  Shore Gas Company**                                                                                                  |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                  STATEMENTS OF STOCKHOLDER'S EQUITY**                                                                          |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                               |   |   |   |   |   |   |   |   | Accumulated |   |   |   |   |
|                                                                                                                                               |   |   |   |   |   |   |   |   | Other |   |   |   |   |
|                                                                                                                                               |   |   | Common |   |   | Retained |   |   | Comprehensive |   |   |   |   |
| *(In                  Thousands)*                                                                                                             |   |   | Stock |   |   | Earnings |   |   | Income                  (Loss) |   |   | Total |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **For                  Fiscal Year Ended September 30, 2004**                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Beginning                  Balance**                                                                                                        |   | $ | 24,757 |   | $ | 80,882 |   | $ | (2,278 | ) | $ | 103,361 |   |
| Comprehensive                  Income                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  income                                                                                                                   |   |   |   |   |   | 11,076 |   |   |   |   |   | 11,076 |   |
| Other                  comprehensive income                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Minimum                  pension liability adjustment                                                                                         |   |   |   |   |   |   |   |   | 919 |   |   | 919 |   |
| Unrealized                  hedge gain                                                                                                        |   |   |   |   |   |   |   |   | 23 |   |   | 23 |   |
| **Total                  Comprehensive Income**                                                                                               |   |   |   |   |   |   |   |   |   |   |   | 12,018 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends                  declared on common stock                                                                                           |   |   |   |   |   | (11,700 | ) |   |   |   |   | (11,700 | ) |
| **September                  30, 2004 (1)(2)**                                                                                                |   | $ | 24,757 |   | $ | 80,258 |   | $ | (1,336 | ) | $ | 103,679 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **For                  Fiscal Year Ended September 30, 2005**                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                  Income                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  income                                                                                                                   |   |   |   |   |   | 11,397 |   |   |   |   |   | 11,397 |   |
| Other                  comprehensive income                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Minimum                  pension liability adjustment                                                                                         |   |   |   |   |   |   |   |   | (1,063 | ) |   | (1,063 | ) |
| Unrealized                  hedge gain                                                                                                        |   |   |   |   |   |   |   |   | 23 |   |   | 23 |   |
| **Total                  Comprehensive Income**                                                                                               |   |   |   |   |   |   |   |   |   |   |   | 10,357 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends                  declared on common stock                                                                                           |   |   |   |   |   | (11,100 | ) |   |   |   |   | (11,100 | ) |
| **September                  30, 2005 (1)(2)**                                                                                                |   | $ | 24,757 |   | $ | 80,555 |   | $ | (2,376 | ) | $ | 102,936 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **For                  Fiscal Year Ended September 30, 2006**                                                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Comprehensive                  Income                                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  income                                                                                                                   |   |   |   |   |   | 6,707 |   |   |   |   |   | 6,707 |   |
| Other                  comprehensive income                                                                                                   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Minimum                  pension liability adjustment                                                                                         |   |   |   |   |   |   |   |   | 2,203 |   |   | 2,203 |   |
| Unrealized                  hedge gain                                                                                                        |   |   |   |   |   |   |   |   | 23 |   |   | 23 |   |
| **Total                  Comprehensive Income**                                                                                               |   |   |   |   |   |   |   |   |   |   |   | 8,933 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends                  declared on common stock                                                                                           |   |   |   |   |   | (11,000 | ) |   |   |   |   | (11,000 | ) |
| **September                  30, 2006 (1)(2)**                                                                                                |   | $ | 24,757 |   | $ | 76,262 |   | $ | (150 | ) | $ | 100,869 |   |
|                                                                                                                                          |   |
| *The                  Notes to Consolidated Financial Statements are an integral part                  of these                  statements.* |   |

| (1) | Accumulated                          other comprehensive income balance is net of $1.5 million                          and $0.8 million                          of deferred income tax credits related to                          minimum pension liabilities at September 30, 2005 and 2004,                          respectively.                          At September 30, 2006, there was no minimum pension                          liability; the related balance in accumulated other comprehensive                          income                          was reduced to zero. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Accumulated                          other comprehensive income balance is net of $0.1 million,                          $0.1 million                          and $0.1 million of deferred income tax credits                          related to unrealized hedge losses at September 30, 2006,                          2005 and 2004,                          respectively. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| **North                  Shore Gas Company**                                                                                                  |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|
| **CONSOLIDATED                  STATEMENTS OF CASH FLOWS**                                                                                    |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
|                                                                                                                                               |   | For                  Fiscal Years Ended September 30, |   |
|                                                                                                                                          |   |   | 2006 |   |   | 2005 |   |   | 2004 |   |
| *(In                  Thousands)*                                                                                                             |   |   |   |   |   |   |   |   |   |   |
| **Operating                  Activities:**                                                                                                    |   |   |   |   |   |   |   |   |   |   |
| Net                  Income                                                                                                                   |   | $ | 6,707 |   | $ | 11,397 |   | $ | 11,076 |   |
| Adjustments                  to reconcile net income to cash provided by operations:                                                          |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                                                                                                  |   |   | 6,594 |   |   | 6,548 |   |   | 8,403 |   |
| Deferred                  income taxes and investment tax credits—net                                                                   |   |   | 3,420 |   |   | 6,015 |   |   | 3,095 |   |
| Pension                  funding (greater) less than expense                                                                                  |   |   | 1,495 |   |   | (6,949 | ) |   | 2,801 |   |
| Other                  adjustments                                                                                                            |   |   | 5,815 |   |   | (1,671 | ) |   | (270 | ) |
| Net                  changes in:                                                                                                              |   |   |   |   |   |   |   |   |   |   |
| Receivables—net                                                                                                                         |   |   | 1,351 |   |   | (717 | ) |   | 3,398 |   |
| Intercompany                  receivables                                                                                                     |   |   | 2,075 |   |   | 9,207 |   |   | (12,471 | ) |
| Gas                  in storage                                                                                                               |   |   | (7,513 | ) |   | 690 |   |   | (5,478 | ) |
| Gas                  costs recoverable/refundable through rate adjustments                                                                    |   |   | 11,717 |   |   | 1,207 |   |   | (7,349 | ) |
| Accounts                  payable                                                                                                             |   |   | (6,732 | ) |   | 8,968 |   |   | (348 | ) |
| Intercompany                  payables                                                                                                        |   |   | (64 | ) |   | (3,498 | ) |   | (3,840 | ) |
| Gas                  deliverable to customers                                                                                                 |   |   | 1,628 |   |   | 1,213 |   |   | 1,164 |   |
| Other                  accrued liabilities                                                                                                    |   |   | (1,757 | ) |   | 1,253 |   |   | 680 |   |
| Accrued                  interest                                                                                                             |   |   | 33 |   |   | 14 |   |   | (6 | ) |
| Accrued                  taxes                                                                                                                |   |   | (4,224 | ) |   | 1,776 |   |   | 1,871 |   |
| Customer                  credit balances and deposits                                                                                        |   |   | 3,418 |   |   | 1,979 |   |   | 409 |   |
| Other                                                                                                                                         |   |   | (1,867 | ) |   | (1,934 | ) |   | 90 |   |
| **Net                  Cash Provided by (Used in) Operating Activities**                                                                      |   |   | 22,096 |   |   | 35,498 |   |   | 3,225 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Investing                  Activities:**                                                                                                    |   |   |   |   |   |   |   |   |   |   |
| Capital                  spending                                                                                                             |   |   | (9,418 | ) |   | (9,815 | ) |   | (10,592 | ) |
| Decrease                  in deposits with broker or trustee                                                                                  |   |   | 613 |   |   | - |   |   | 2,766 |   |
| Intercompany                  note receivable                                                                                                 |   |   | 360 |   |   | (360 | ) |   | - |   |
| Proceeds                  from sale of assets                                                                                                 |   |   | - |   |   | - |   |   | 1,250 |   |
| Other                                                                                                                                         |   |   | (10 | ) |   | (4 | ) |   | (693 | ) |
| **Net                  Cash Provided by (Used in) Investing Activities**                                                                      |   |   | (8,455 | ) |   | (10,179 | ) |   | (7,269 | ) |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Financing                  Activities:**                                                                                                    |   |   |   |   |   |   |   |   |   |   |
| Proceeds                  from (payment of) overdraft facility                                                                                |   |   | (371 | ) |   | 214 |   |   | (157 | ) |
| Issuance                  of short-term debt                                                                                                  |   |   | - |   |   | - |   |   | 3,810 |   |
| Retirement                  of short-term debt                                                                                                |   |   | - |   |   | (3,810 | ) |   | - |   |
| Retirement                  of long-term debt                                                                                                 |   |   | - |   |   | (80 | ) |   | (15 | ) |
| Dividends                  paid on common stock                                                                                               |   |   | (11,000 | ) |   | (11,100 | ) |   | (11,700 | ) |
| **Net                  Cash Provided by (Used in) Financing Activities**                                                                      |   |   | (11,371 | ) |   | (14,776 | ) |   | (8,062 | ) |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Net                  Increase (Decrease) in Cash and Cash Equivalents**                                                                     |   |   | 2,270 |   |   | 10,543 |   |   | (12,106 | ) |
| **Cash                  and Cash Equivalents at Beginning of Period**                                                                         |   |   | 10,545 |   |   | 2 |   |   | 12,108 |   |
| **Cash                  and Cash Equivalents at End of Period**                                                                               |   | $ | 12,815 |   | $ | 10,545 |   | $ | 2 |   |
|                                                                                                                                          |   |   |   |   |   |   |   |   |   |   |
| **Supplemental                  information:**                                                                                                |   |   |   |   |   |   |   |   |   |   |
| Income                  taxes paid, net of refunds                                                                                            |   | $ | 3,947 |   | $ | (1,150 | ) | $ | 3,295 |   |
| Interest                  paid, net of amounts capitalized                                                                                    |   | $ | 3,621 |   | $ | 3,531 |   | $ | 3,456 |   |
|                                                                                                                                          |
| *The                  Notes to Consolidated Financial Statements are an integral part                  of these                  statements.* |

----

**NOTES      TO CONSOLIDATED FINANCIAL STATEMENTS**

----

**1:      MERGER**

----

----

----

**2:      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES**

**A.      General**

**B.      Discontinued Operations**

----

|                                                      |   | September                  30, |   |
|-----------------------------------------------------------|--------|--------------------------------|--------|
|                                                      |   |                           | 2006   |   |   | 2005 |   |
| *(In                  Thousands)*                         |   |                           |   |   |   |   |   |
| Investments                  in unconsolidated affiliates |   | $                              | 74,071 |   | $ | 115,168 |   |
| Other                  investments                        |   |                           | 10,400 |   |   | 12,245 |   |
| Property,                  plant and equipment, net       |   |                           | -      |   |   | 906 |   |
| Total                  assets                             |   | $                              | 84,471 |   | $ | 128,319 |   |
|                                                      |   |                           |   |   |   |   |   |
| Deferred                  credit                          |   | $                              | -      |   | $ | 2,201 |   |

| Fiscal              Year Ended September 30,             |   |   | 2006    |   |   | 2005    |   |   | 2004    |   |
|----------------------------------------------------------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|
| *(In              Thousands)*                            |   |   |    |   |   |    |   |   |    |   |
| Operation              and maintenance                   |   | $      | (3,600) |   | $      | (2,009) |   | $      | (4,055) |   |
| Taxes,              other than income taxes              |   |   | (84)    |   |   | (63)    |   |   | (104)   |   |
| Gains              on property sales                     |   |   | 4,139   |   |   | -       |   |   | -       |   |
| Impairments              and losses on property sales    |   |   | (2,156) |   |   | (143)   |   |   | -       |   |
| Equity              investment income                    |   |   | 18,803  |   |   | 20,944  |   |   | 15,481  |   |
| Income              before income taxes                  |   |   | 17,102  |   |   | 18,729  |   |   | 11,322  |   |
| Income              tax expense                          |   |   | 6,797   |   |   | 7,444   |   |   | 4,500   |   |
| Income              from discontinued operations, net of |   |   |    |   |   |    |   |   |    |   |
| income                taxes                              |   | $      | 10,305  |   | $      | 11,285  |   | $      | 6,822   |   |

**C.      Gas Charge Settlement**

----

|                                                                                                   |   | Total  |    | Peoples                  Gas |   | North                  Shore Gas |   |
|---------------------------------------------------------------------------------------------------|--------|--------|---------|------------------------------|--------|----------------------------------|--------|
| *(Dollars                  in Thousands)*                                                         |   |   |    |                         |   |                             |   |   |   |   |
| Refund                                                                                            |   | $      | 100,000 |                         | $      | 96,000                           |   | $ | 4,000 |   |
| Payment                  to Illinois Attorney General and City of Chicago                         |   |   | 5,000   |                         |   | 4,800                            |   |   | 200 |   |
| Hub                  fiscal 2005 revenues                                                         |   |   | 10,662  |                         |   | 10,662                           |   |   | - |   |
| Bad                  debt expense                                                                 |   |   | 5,000   |                         |   | 4,900                            |   |   | 100 |   |
| Amounts                  recognized prior to fiscal 2006                                          |   |   | (13,332 | )                            |   | (13,332                          | )      |   | - |   |
| Gas                  charge settlement per consolidated statements of                  operations |   |   |    |                         |   |                             |   |   |   |   |
| for                  fiscal 2006                                                             |   | $      | 107,330 |                         | $      | 103,030                          |   | $ | 4,300 |   |
| Add:                                                                                         |   |   |    |                         |   |                             |   |   |   |   |
|  Amounts                  recognized prior to fiscal 2006                                    |   |   | 13,332  |                         |   | 13,332                           |   |   | - |   |
|  Interest                  on Hub fiscal 2005 revenues refundable                            |   |   |    |                         |   |                             |   |   |   |   |
|  and                  other minor amounts refundable                                         |   |   | 588     |                         |   | 587                              |   |   | 1 |   |
| Less:                                                                                        |   |   |    |                         |   |                             |   |   |   |   |
|  Addition                  to reserve for uncollectible accounts                             |   |   | 5,000   |                         |   | 4,900                            |   |   | 100 |   |
| Less                  payments in fiscal 2006:                                               |   |   |    |                         |   |                             |   |   |   |   |
|  Refund                  credited to customer accounts                                       |   |   | 100,000 |                         |   | 96,000                           |   |   | 4,000 |   |
|  Payment                  to Illinois Attorney General and City of Chicago                   |   |   | 5,000   |                         |   | 4,800                            |   |   | 200 |   |
| Gas                  charge settlement liability per consolidated balance                  sheets |   |   |    |                         |   |                             |   |   |   |   |
| at                  September 30, 2006 (1)                                                   |   | $      | 11,250  |                         | $      | 11,249                           |   | $ | 1 |   |

| (1) | Represents                    2005 Hub Revenue and related interest that will be refunded to                    customers                    pending close of the                    Commission's review of 2005 gas charge reconciliation and minor                    amounts to                    be refunded to customers through                    the monthly gas charge filings in early fiscal                    2007. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**D.      Use of Fair Value Measurements**

----

| *(In                Millions)*                                                |   | Peoples                Energy |   | Peoples                Gas         |   | North                Shore Gas |   |
|-------------------------------------------------------------------------------|--------|-------------------------------|--------|------------------------------------|--------|--------------------------------|--------|
| **Long-term                debt including****current                portion** |   | CarryingAmount                |   | EstimatedFair                Value |   | CarryingAmount                 |   | EstimatedFair                Value |   | CarryingAmount |   | EstimatedFair                Value |   |
| At                September 30, 2006                                          |   | $894.7                        |   | $907.1                             |   | $502.0                         |   | $499.6 |   | $69.3 |   | $67.4 |   |
| At                September 30, 2005                                          |   | $895.6                        |   | $912.8                             |   | $502.0                         |   | $499.9 |   | $69.3 |   | $67.4 |   |

**E.      Revenue Recognition**

|                                                |   | September                30, |
|------------------------------------------------|--------|------------------------------|
| *(In                Thousands)*                |   |                         | 2006 |   |   | 2005 |   |
| Peoples                Gas                     |   | $                            | 31,247 |   | $ | 32,282 |   |
| North                Shore Gas                 |   |                         | 5,933 |   |   | 6,136 |   |
| Peoples                Energy Services         |   |                         | 21,269 |   |   | 19,362 |   |
| **Consolidated                Peoples Energy** |   | $                            | 58,449 |   | $ | 57,780 |   |

|                                                |   | For                Fiscal Years Ended September 30, |
|------------------------------------------------|--------|-----------------------------------------------------|
| *(In                Thousands)*                |   |                                                | 2006 |   |   | 2005 |   |   | 2004 |   |
| Peoples                Gas                     |   | $                                                   | 148,462 |   | $ | 133,987 |   | $ | 124,797 |   |
| North                Shore Gas                 |   |                                                | 13,339 |   |   | 13,119 |   |   | 12,125 |   |
| **Consolidated                Peoples Energy** |   | $                                                   | 161,801 |   | $ | 147,106 |   | $ | 136,922 |   |

----

**F.      Weather Insurance**

**G.      Income Taxes**

**H.      Asset Retirement Obligations**

**SFAS      No. 143**

**Adoption      of FIN 47**

----

| ·   | Pipe                Removal - Distribution (including asbestos and PCBs in pipes) - $109.0                million |
|--------------------|-------------------------------------------------------------------------------------------------------------------|

| ·   | Asbestos                and PCBs in Property - $0.5 million |
|--------------------|-------------------------------------------------------------|

| ·   | Above                Ground Storage Tanks - $0.8 million |
|--------------------|----------------------------------------------------------|

|                                                                    |   |                         |   |                             |   |                            |   | Total  |   |
|--------------------------------------------------------------------|--------|------------------------------|--------|----------------------------------|--------|---------------------------------|--------|--------|--------|
| *(Millions)*                                                       |   | Peoples                  Gas |   | North                  Shore Gas |   | Peoples                  Energy |   |
| Property,                  plant and equipment                     |   | $                            | 22.2   |                             | $      | 5.1                             |   | $      | 27.3   |   |
| Accumulated                  depreciation                          |   |                         | (7.9   | )                                |   | (1.7                            | )      |   | (9.6   | ) |
| Property,                  plant and equipment, net                |   |                         | 14.3   |                             |   | 3.4                             |   |   | 17.7   |   |
| Regulatory                  assets                                 |   |                         | 76.8   |                             |   | 15.8                            |   |   | 92.6   |   |
| Asset                  retirement obligations - adoption of FIN 47 |   | $                            | 91.1   |                             | $      | 19.2                            |   | $      | 110.3  |   |

|                                     |   | Gas                  Distribution |      | Total                            |   |
|-------------------------------------|--------|-----------------------------------|------|----------------------------------|--------|
| *(Millions)*                        |        | Peoples                  Gas      |      | North                  Shore Gas |        | Peoples                Energy |   |
| September                  30, 2005 |   | $                                 | 86.2 |                             | $      | 18.1 |   | $ | 104.3 |   |
| September                  30, 2004 |   |                              | 81.1 |                             |   | 17.0 |   |   | 98.1 |   |
| October                  1, 2003    |   |                              | 77.4 |                             |   | 15.9 |   |   | 93.3 |   |

**Changes      to Asset Retirement Obligation Liabilities**

|                                                                         |   | Gas                  Distribution |   |                             |   |                                    |   |   |   |
|-------------------------------------------------------------------------|--------|-----------------------------------|--------|----------------------------------|--------|-----------------------------------------|--------|--------|--------|
| *(Millions)*                                                            |   | Peoples                  Gas      |        | North                  Shore Gas |        | Oil                  and Gas Production |        | Total  |        |
| Asset                  retirement obligations at October 1, 2003        |   | $                                 | -      |                             | $      | -                                       |   | $      | 0.7    |   | $ | 0.7 |   |
| Accretion                  expense                                      |   |                              | -      |                             |   | -                                       |   |   | 0.1    |   |   | 0.1 |   |
| Liabilities                  incurred                                   |   |                              | -      |                             |   | -                                       |   |   | 0.4    |   |   | 0.4 |   |
| Asset                  retirement obligations at September 30, 2004     |   |                              | -      |                             |   | -                                       |   |   | 1.2    |   |   | 1.2 |   |
| Accretion                  expense                                      |   |                              | -      |                             |   | -                                       |   |   | 0.1    |   |   | 0.1 |   |
| Liabilities                  incurred                                   |   |                              | -      |                             |   | -                                       |   |   | 0.3    |   |   | 0.3 |   |
| Asset                  retirement obligations at September 30, 2005     |   |                              | -      |                             |   | -                                       |   |   | 1.6    |   |   | 1.6 |   |
| Accretion                  expense                                      |   |                              | -      |                             |   | -                                       |   |   | 0.1    |   |   | 0.1 |   |
| Liabilities                  incurred                                   |   |                              | -      |                             |   | -                                       |   |   | 0.4    |   |   | 0.4 |   |
| Liabilities                  settled                                    |   |                              | -      |                             |   | -                                       |   |   | (0.1   | ) |   | (0.1 | ) |
| Adoption                  of FIN 47                                     |   |                              | 91.1   |                             |   | 19.2                                    |   |   | -      |   |   | 110.3 |   |
| **Asset                  retirement obligations at September 30, 2006** |   | $                                 | 91.1   |                             | $      | 19.2                                    |   | $      | 2.0    |   | $ | 112.3 |   |

----

**I.      Property, Plant and Equipment**

**J.      Gas in Storage**

----

**K.      Regulated Operations**

|                                                                            |   | Peoples                  Gas   |         | North                  Shore Gas |   |
|----------------------------------------------------------------------------|--------|--------------------------------|---------|----------------------------------|--------|
|                                                                            |   | September                  30, |         | September                  30,   |   |
|                                                                       |   |                           | 2006    |                             |   | 2005 |   |   | 2006 |   |   | 2005 |   |
| *(In                  Thousands)*                                          |   |                           |    |                             |   |   |   |   |   |   |   |   |   |
| **Regulatory                  assets of subsidiaries**                     |   |                           |    |                             |   |   |   |   |   |   |   |   |   |
| Environmental                  costs, net of recoveries (see Note 7A)      |   | $                              | 243,990 |                             | $      | 248,520 |   | $ | 69,225 |   | $ | 65,834 |   |
| Asset                  retirement obligations (Note 2H)                    |   |                           | 76,804  |                             |   | - |   |   | 15,771 |   |   | - |   |
| Income                  tax (see Note 2G)                                  |   |                           | 22,550  |                             |   | 23,120 |   |   | - |   |   | - |   |
| Gas                  costs recoverable through rate adjustments            |   |                           | 4,514   |                             |   | 6,889 |   |   | 2,165 |   |   | 1,719 |   |
| Discount,                  premium, expenses and loss on reacquired bonds  |   |                           | 11,755  |                             |   | 12,208 |   |   | 2,039 |   |   | 2,150 |   |
| Gas                  costs hedging program (see Note 2L)                   |   |                           | 131,410 |                             |   | - |   |   | 24,692 |   |   | - |   |
| Other                                                                      |   |                           | 466     |                             |   | 393 |   |   | - |   |   | - |   |
| **Total                  regulatory assets of subsidiaries**               |   |                           | 491,489 |                             |   | 291,130 |   |   | 113,892 |   |   | 69,703 |   |
|                                                                       |   |                           |    |                             |   |   |   |   |   |   |   |   |   |
| **Regulatory                  liabilities of subsidiaries**                |   |                           |    |                             |   |   |   |   |   |   |   |   |   |
| Income                  tax (see Note 2G)                                  |   |                           | -       |                             |   | - |   |   | 2,117 |   |   | 2,001 |   |
| Gas                  costs hedging program (see Note 2L)                   |   |                           | -       |                             |   | 167,125 |   |   | - |   |   | 32,563 |   |
| Gas                  charge settlement (see Note 2C)                       |   |                           | 11,249  |                             |   | - |   |   | 1 |   |   | - |   |
| Gas                  costs refundable through rate adjustments             |   |                           | 49,726  |                             |   | 29 |   |   | 12,427 |   |   | 264 |   |
| **Total                  regulatory liabilities of subsidiaries**          |   |                           | 60,975  |                             |   | 167,154 |   |   | 14,545 |   |   | 34,828 |   |
|                                                                       |   |                           |    |                             |   |   |   |   |   |   |   |   |   |
| **Net                  regulatory assets and liabilities of subsidiaries** |   | $                              | 430,514 |                             | $      | 123,976 |   | $ | 99,347 |   | $ | 34,875 |   |

----

**L.      Derivative Instruments and Hedging Activities**

**Cash      Flow Hedges. **

----

|                                                                             |   |        |                       |        | Interest |                            | Partnership |   |   |   |   |
|-----------------------------------------------------------------------------|--------|-------------|----------------------------|--------|----------|----------------------------|-------------|--------|--------|--------|--------|
| *(In                  Thousands)*                                           |   | Commodities |                            | Rate   |          | Transactions               |             | Total  |   |
| **2006**                                                                    |   |        |                       |   |     |                       |        |   |   |   |   |   |   |
| Portion                  of after-tax gains (losses) on hedging instruments |   |        |                       |   |     |                       |        |   |   |   |   |   |   |
| determined                  to be ineffective and included in net income    |   | $           | 4,481                      |   | $        | -                          |        |   | N/A    |   | $      | 4,481 |   |
| Accumulated                  other comprehensive income (loss) after tax at |   |        |                       |   |     |                       |        |   |   |   |   |   |   |
| September                  30, 2006                                         |   | $           | (15,928                    | )      | $        | (431                       | )           | $      | (3,039 | )      | $      | (19,398 | ) |
| Portion                  of accumulated other comprehensive income (loss)   |   |        |                       |   |     |                       |        |   |   |   |   |   |   |
| expected                  to be reclassified to earnings during the next    |   |        |                       |   |     |                       |        |   |   |   |   |   |   |
| 12                  months based on prices at September 30, 2006            |   | $           | (14,794                    | )      | $        | (65                        | )           |   | N/A    |   | $      | (14,859 | ) |
| Maximum                  term                                               |   |        | 78                  months |   |     | 79                  months |        |   |   |   |   |   |   |
|                                                                        |   |        |                       |   |     |                       |        |   |   |   |   |   |   |
| **2005**                                                                    |   |        |                       |   |     |                       |        |   |   |   |   |   |   |
| Portion                  of after-tax gains (losses) on hedging instruments |   |        |                       |   |     |                       |        |   |   |   |   |   |   |
| determined                  to be ineffective and included in net income    |   | $           | (4,967                     | )      | $        | -                          |        |   | N/A    |   | $      | (4,967 | ) |
| After-tax                  gains (losses) resulting from discontinuance of  |   |        |                       |   |     |                       |        |   |   |   |   |   |   |
| cash                  flow hedges                                           |   | $           | (196                       | )      | $        | -                          |        | $      | -      |   | $      | (196 | ) |
| Accumulated                  other comprehensive income (loss) after tax at |   |        |                       |   |     |                       |        |   |   |   |   |   |   |
| September                  30, 2005                                         |   | $           | (117,542                   | )      | $        | (497                       | )           | $      | (4,643 | )      | $      | (122,682 | ) |
|                                                                        |   |        |                       |   |     |                       |        |   |   |   |   |   |   |
| **2004**                                                                    |   |        |                       |   |     |                       |        |   |   |   |   |   |   |
| Portion                  of after-tax gains (losses) on hedging instruments |   |        |                       |   |     |                       |        |   |   |   |   |   |   |
| determined                  to be ineffective and included in net income    |   | $           | (987                       | )      | $        | -                          |        |   | N/A    |   | $      | (987 | ) |
| Accumulated                  other comprehensive income (loss) after tax at |   |        |                       |   |     |                       |        |   |   |   |   |   |   |
| September                  30, 2004                                         |   | $           | (52,603                    | )      | $        | (562                       | )           | $      | (4,244 | )      | $      | (57,409 | ) |

**Mark-to-Market      Derivative Instruments. **

**Fair      Value Hedges.**

----

**M.      Related Party Transactions**

**N.      Statement of Cash Flows**

----

**O.      **
**Recent      Accounting Pronouncements **

**P.      Contingencies, Indemnities and Commitments **

----

----

**3:      BUSINESS SEGMENTS**

**Change      in Segment Reporting**

----

|                                                                                  |        |              |           |                              |        |           |        |        |         |        |        |             |        | Corporate |         |        |        |        |        |        |      |
|----------------------------------------------------------------------------------|--------|--------------|-----------|------------------------------|--------|-----------|--------|--------|---------|--------|--------|-------------|--------|-----------|---------|--------|--------|--------|--------|--------|-----------|
|                                                                                  |        | Gas          |           | Oil                  and Gas |        | Energy    |        | Energy |         | and    |        |             |        |           |         |        |   |
| *(In                  Thousands)*                                                |        | Distribution |           | Production                   |        | Marketing |        | Assets |         | Other  |        | Adjustments |        | Total     |    |
| **12                  Months Ended September 30, 2006**                          |   |         |      |                         |   |      |   |   |    |   |   |        |   |      |    |   |   |   |   |   |      |   |
| Revenues                  (1)                                                    |   | $            | 1,921,880 |                         | $      | 126,750   |   | $      | 960,693 |   | $      | 13,540      |   | $         | -       |   | $      | (4,893 | )      | $      | 3,017,970 |   |
| Cost                  of energy sold                                             |   |         | 1,272,633 |                         |   | -         |   |   | 928,640 |   |   | 9,032       |   |      | -       |   |   | (5,992 | )      |   | 2,204,313 |   |
| Gas                  charge settlement                                           |   |         | 107,330   |                         |   | -         |   |   | -       |   |   | -           |   |      | -       |   |   | -      |   |   | 107,330   |   |
| Operation                  and maintenance, excluding merger,                    |   |         |      |                         |   |      |   |   |    |   |   |        |   |      |    |   |   |   |   |   |      |   |
| gas                  charge settlement and environmental costs                   |   |         | 275,944   |                         |   | 36,362    |   |   | 20,916  |   |   | 1,902       |   |      | 14,553  |   |   | 1,099  |   |   | 350,776   |   |
| Merger                  costs                                                    |   |         | -         |                         |   | -         |   |   | -       |   |   | -           |   |      | 8,944   |   |   | -      |   |   | 8,944     |   |
| Environmental                  costs                                             |   |         | 33,654    |                         |   | -         |   |   | -       |   |   | -           |   |      | -       |   |   | -      |   |   | 33,654    |   |
| Depreciation,                  depletion and amortization                        |   |         | 62,574    |                         |   | 52,479    |   |   | 1,606   |   |   | 356         |   |      | 1,388   |   |   | -      |   |   | 118,403   |   |
| Taxes,                  other than income taxes                                  |   |         | 183,329   |                         |   | 14,553    |   |   | 560     |   |   | 119         |   |      | 2,357   |   |   | -      |   |   | 200,918   |   |
| (Gains)                  losses on property sales and impairments, net           |   |         | (860      | )                            |   | 10        |   |   | 12      |   |   | 365         |   |      | 137     |   |   | -      |   |   | (336      | ) |
| Equity                  investment income (2)                                    |   |         | -         |                         |   | 7,751     |   |   | -       |   |   | -           |   |      | 67      |   |   | -      |   |   | 7,818     |   |
| Operating                  income (loss)                                         |   | $            | (12,724   | )                            | $      | 31,097    |   | $      | 8,959   |   | $      | 1,766       |   | $         | (27,312 | )      | $      | -      |   | $      | 1,786     |   |
| Income                  (loss) from discontinued operations, net of income taxes |   | $            | -         |                         | $      | -         |   | $      | -       |   | $      | 10,324      |   | $         | (19     | )      | $      | -      |   | $      | 10,305    |   |
| Segment                  capital assets of continuing operations, net (3)        |   | $            | 1,637,198 |                         | $      | 532,742   |   | $      | 3,596   |   | $      | 5,176       |   | $         | 8,127   |   | $      | -      |   | $      | 2,186,839 |   |
| Investments                  in equity investees (4)                             |   | $            | -         |                         | $      | -         |   | $      | -       |   | $      | 250         |   | $         | -       |   | $      | -      |   | $      | 250       |   |
| Capital                  spending (5)                                            |   | $            | 101,620   |                         | $      | 238,169   |   | $      | 31      |   | $      | 315         |   | $         | 3,316   |   | $      | -      |   | $      | 343,451   |   |
| **12                  Months Ended September 30, 2005**                          |   |         |      |                         |   |      |   |   |    |   |   |        |   |      |    |   |   |   |   |   |      |   |
| Revenues                  (1)                                                    |   | $            | 1,688,674 |                         | $      | 100,602   |   | $      | 805,515 |   | $      | 9,482       |   | $         | -       |   | $      | (4,688 | )      | $      | 2,599,585 |   |
| Cost                  of energy sold                                             |   |         | 1,034,376 |                         |   | -         |   |   | 773,565 |   |   | 4,480       |   |      | -       |   |   | (7,052 | )      |   | 1,805,369 |   |
| Operation                  and maintenance, excluding                            |   |         |      |                         |   |      |   |   |    |   |   |        |   |      |    |   |   |   |   |   |      |   |
| restructuring                  and environmental costs                           |   |         | 257,652   |                         |   | 28,972    |   |   | 16,012  |   |   | 2,926       |   |      | 11,809  |   |   | 2,364  |   |   | 319,735   |   |
| Restructuring                  costs                                             |   |         | -         |                         |   | -         |   |   | -       |   |   | -           |   |      | 13,141  |   |   | -      |   |   | 13,141    |   |
| Environmental                  costs                                             |   |         | 30,437    |                         |   | -         |   |   | -       |   |   | -           |   |      | -       |   |   | -      |   |   | 30,437    |   |
| Depreciation,                  depletion and amortization                        |   |         | 61,894    |                         |   | 45,764    |   |   | 1,797   |   |   | 485         |   |      | 948     |   |   | -      |   |   | 110,888   |   |
| Taxes,                  other than income taxes                                  |   |         | 169,072   |                         |   | 12,399    |   |   | 648     |   |   | 139         |   |      | 1,948   |   |   | -      |   |   | 184,206   |   |
| (Gains)                  losses on property sales and impairments, net           |   |         | (2,092    | )                            |   | (983      | )      |   | 22      |   |   | (275        | )      |      | 8       |   |   | -      |   |   | (3,320    | ) |
| Equity                  investment income (2)                                    |   |         | -         |                         |   | 2,403     |   |   | -       |   |   | -           |   |      | 7,885   |   |   | -      |   |   | 10,288    |   |
| Operating                  income (loss)                                         |   | $            | 137,335   |                         | $      | 16,853    |   | $      | 13,471  |   | $      | 1,727       |   | $         | (19,969 | )      | $      | -      |   | $      | 149,417   |   |
| Income                  (loss) from discontinued operations, net of income taxes |   | $            | -         |                         | $      | -         |   | $      | -       |   | $      | 11,304      |   | $         | (19     | )      | $      | -      |   | $      | 11,285    |   |
| Segment                  capital assets of continuing operations, net (3)        |   | $            | 1,586,174 |                         | $      | 347,606   |   | $      | 5,495   |   | $      | 5,525       |   | $         | 6,244   |   | $      | -      |   | $      | 1,951,044 |   |
| Investments                  in equity investees (4)                             |   | $            | -         |                         | $      | 10,317    |   | $      | -       |   | $      | -           |   | $         | 10,534  |   | $      | -      |   | $      | 20,851    |   |
| Capital                  spending (5)                                            |   | $            | 82,836    |                         | $      | 74,155    |   | $      | 148     |   | $      | 956         |   | $         | 2,827   |   | $      | -      |   | $      | 160,922   |   |
| **12                  Months Ended September 30, 2004**                          |   |         |      |                         |   |      |   |   |    |   |   |        |   |      |    |   |   |   |   |   |      |   |
| Revenues                  (1)                                                    |   | $            | 1,502,083 |                         | $      | 123,777   |   | $      | 631,774 |   | $      | 6,432       |   | $         | 178     |   | $      | (4,045 | )      | $      | 2,260,199 |   |
| Cost                  of energy sold                                             |   |         | 868,518   |                         |   | -         |   |   | 601,098 |   |   | 3,749       |   |      | 94      |   |   | (5,682 | )      |   | 1,467,777 |   |
| Operation                  and maintenance, excluding                            |   |         |      |                         |   |      |   |   |    |   |   |        |   |      |    |   |   |   |   |   |      |   |
| restructuring                  and environmental costs                           |   |         | 253,233   |                         |   | 28,846    |   |   | 17,201  |   |   | 861         |   |      | 21,219  |   |   | 1,637  |   |   | 322,997   |   |
| Restructuring                  costs                                             |   |         | -         |                         |   | -         |   |   | -       |   |   | -           |   |      | 17,000  |   |   | -      |   |   | 17,000    |   |
| Environmental                  costs                                             |   |         | 17,384    |                         |   | -         |   |   | -       |   |   | -           |   |      | -       |   |   | -      |   |   | 17,384    |   |
| Depreciation,                  depletion and amortization                        |   |         | 68,939    |                         |   | 47,338    |   |   | 1,914   |   |   | 315         |   |      | 480     |   |   | -      |   |   | 118,986   |   |
| Taxes,                  other than income taxes                                  |   |         | 156,350   |                         |   | 9,884     |   |   | 517     |   |   | 53          |   |      | 3,130   |   |   | -      |   |   | 169,934   |   |
| (Gains)                  losses on property sales and impairments, net           |   |         | (3,499    | )                            |   | (99       | )      |   | 1,165   |   |   | (121        | )      |      | 7       |   |   | -      |   |   | (2,547    | ) |
| Equity                  investment income (2)                                    |   |         | -         |                         |   | 3,729     |   |   | -       |   |   | -           |   |      | 632     |   |   | -      |   |   | 4,361     |   |
| Operating                  income (loss)                                         |   | $            | 141,158   |                         | $      | 41,537    |   | $      | 9,879   |   | $      | 1,575       |   | $         | (41,120 | )      | $      | -      |   | $      | 153,029   |   |
| Income                  (loss) from discontinued operations, net of income taxes |   | $            | -         |                         | $      | -         |   | $      | -       |   | $      | 6,841       |   | $         | (19     | )      | $      | -      |   | $      | 6,822     |   |
| Segment                  capital assets of continuing operations, net (3)        |   | $            | 1,571,966 |                         | $      | 319,099   |   | $      | 7,227   |   | $      | 5,718       |   | $         | 4,374   |   | $      | -      |   | $      | 1,908,384 |   |
| Investments                  in equity investees (4)                             |   | $            | -         |                         | $      | 19,150    |   | $      | -       |   | $      | -           |   | $         | 3,674   |   | $      | -      |   | $      | 22,824    |   |
| Capital                  spending (5)                                            |   | $            | 78,245    |                         | $      | 102,376   |   | $      | 1,818   |   | $      | 964         |   | $         | 3,440   |   | $      | -      |   | $      | 186,843   |   |

| (1) | Oil                    and Gas Production revenues are net of gains and losses from                    hedging                    activities. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Excludes                      equity investment income from discontinued operations. See                      Note                      5. |
|-----|--------------------------------------------------------------------------------------------------------------------------------------------|

| (3) | Excludes                        segment assets of discontinued operations at September 30,                        2006, 2005 and                        2004 of $9,490, $12,209 and $10,783,                        respectively. |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4) | Excludes                          investments in equity investees of discontinued operations                          at September                          30, 2006, 2005 and 2004 of $74,071, $115,168 and $112,995,                          respectively. |
|-----|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (5) | Excludes                            capital spending relating to assets of discontinued operations                            at                            September 30, 2006, 2005 and 2004 of $566, $1,836 and                            $2,546                            respectively. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                     |   | For                  Fiscal Years Ended September 30, |      |
|----------------------------------------------------------|--------|-------------------------------------------------------|-----------|
|                                                     |   |                                                  | 2006      |   |   | 2005 |   |   | 2004 |   |
| *(In                  Thousands)*                        |   |                                                  |      |   |   |   |   |   |   |   |
| **Capital                  investments**                 |   |                                                  |      |   |   |   |   |   |   |   |
| Segment                  capital assets of               |   |                                                  |      |   |   |   |   |   |   |   |
| continuing                  operations, net              |   | $                                                     | 2,186,839 |   | $ | 1,951,044 |   | $ | 1,908,384 |   |
| Investments                  in equity investees         |   |                                                  | 250       |   |   | 20,851 |   |   | 22,824 |   |
| Other                  investments not included in       |   |                                                  |      |   |   |   |   |   |   |   |
| above                  categories                        |   |                                                  | 8,577     |   |   | 9,135 |   |   | 7,966 |   |
| **Total                  capital investments—net** |   | $                                                     | 2,195,666 |   | $ | 1,981,030 |   | $ | 1,939,174 |   |

----

**4:      RESTRUCTURING CHARGE**

| *(In                Thousands)*                                 |   |    |
|-----------------------------------------------------------------|--------|---------|
| Severance                payments including payroll taxes       |   | $15,490 |
| Enhanced                educational and outplacement assistance |   | 1,050   |
| Medical                costs due to reduced COBRA rates         |   | 400     |
| Legal                fees                                       |   | 60      |
| Total                                                           |   | $17,000 |

----

----

**5:      EQUITY      INVESTMENTS**

|                                       |        | For                Fiscal Years Ended |
|---------------------------------------|--------|---------------------------------------|
|                                       |   | September                30,          |
| *(In                Thousands)*       |   |                                  | 2006 |   |   | 2005 |   |   | 2004 |   |
| Revenues                              |   | $                                     | 103,212 |   | $ | 212,774 |   | $ | 175,284 |   |
| Operating                income       |   |                                  | 59,409 |   |   | 105,141 |   |   | 86,664 |   |
| Interest                expense       |   |                                  | 28,847 |   |   | 37,302 |   |   | 38,594 |   |
| Net                income             |   |                                  | 32,016 |   |   | 74,646 |   |   | 47,288 |   |
|                                  |   |                                  |   |   |   |   |   |   |   |   |
| Current                assets         |   |                                  | 58,643 |   |   | 107,927 |   |   | 72,103 |   |
| Noncurrent                assets      |   |                                  | 439,490 |   |   | 666,527 |   |   | 745,485 |   |
| Current                liabilities    |   |                                  | 29,647 |   |   | 57,923 |   |   | 47,962 |   |
| Noncurrent                liabilities |   |                                  | 322,081 |   |   | 397,826 |   |   | 448,973 |   |

----

|                                                                            |   |   |                                 |   | Ownership                  Percentage |   | Equity                  Investment Income |   |
|----------------------------------------------------------------------------|--------|--------|--------------------------------------|--------|---------------------------------------|--------|-------------------------------------------|--------|
|                                                                            |   |   |                                 |   |                                  |   |                                      |   |   |   | For                  Fiscal Years Ended |   |
| *(In                  Thousands)*                                          |   |   |                                 |   | At                  September 30,     |   | September                  30,            |   |
| Investment                                                                 |   |   | Segment                              |   | 2006                                  |   | 2005                                      |   | 2004 |   |   | 2006 |   |   | 2005 |   |   | 2004 |   |
| EnerVest                                                                   |   |   | Oil                  and Gas         |   | 23                                    | %      | 30                                        | %      | 30 | % | $ | 7,751 |   | $ | 2,403 |   | $ | 3,729 |   |
| Trigen-Peoples                                                             |   |   | Corporate                  and Other |   | N/A                                   |   | 50                                        |   | 50 |   |   | 67 |   |   | 7,885 |   |   | 632 |   |
| Equity                  investment income from                             |   |   |                                 |   |                                  |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |
| continuing                  operations                                     |   |   |                                 |   |                                  |   |                                      |   |   |   |   | 7,818 |   |   | 10,288 |   |   | 4,361 |   |
| Elwood                                                                     |   |   | Energy                  Assets       |   | 50                                    |   | 50                                        |   | 50 |   |   | 15,782 |   |   | 15,528 |   |   | 9,768 |   |
| SCEP                                                                       |   |   | Energy                  Assets       |   | N/A                                   |   | 28                                        |   | 29 |   |   | 3,021 |   |   | 5,416 |   |   | 5,713 |   |
| Equity                  investment income from                             |   |   |                                 |   |                                  |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |
| discontinued                  operations                                   |   |   |                                 |   |                                  |   |                                      |   |   |   |   | 18,803 |   |   | 20,944 |   |   | 15,481 |   |
| **Total                  equity investment income**                        |   |   |                                 |   |                                  |   |                                      |   |   |   | $ | 26,621 |   | $ | 31,232 |   | $ | 19,842 |   |
|                                                                       |   |   |                                 |   |                                  |   |                                      |   |   |   |   |   |   |   |   |   |   |   |   |
| **Undistributed                  partnership income included in the**      |   |   |                                 |   |                                  |   |                                      |   |   |   |   |   |   |   |   |   |
| **Company's                  retained earnings at the end of each period** |   |   |                                 |   |                                  |   |                                      | $      | 25,461 |   | $ | 30,249 |   | $ | 20,099 |   |

----

**6:      CONCENTRATION OF CREDIT RISK**

----

----

**7:      ENVIRONMENTAL MATTERS**

**A.      Former Manufactured Gas Plant**

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**B.      Former Mineral Processing Site in Denver, Colorado**

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**C.      Other**

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**8:      GAS      CHARGE RECONCILIATION PROCEEDINGS AND RELATED MATTERS**

**A.      Illinois Commerce Commission Proceedings**

| (i)                   | Peoples                Gas and North Shore Gas agreed to refund the total sum of $100 million                to                their customers (the Refund). In its orders approving the Agreement,                the                Commission determined that $96 million should be refunded to customers                of                Peoples Gas and $4 million should be refunded to customers of North                Shore                Gas. Pursuant to the orders, on April 6, 2006, Peoples Gas and North                Shore                Gas filed informational statements with the Commission showing the                amount                of the refund to various customer classes. In April 2006, the refund                was                credited to customer accounts. |
|-------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (ii)                  | Peoples                Energy agreed to pay to the City and the AG, jointly $5 million.                The                Company also agrees to pay up to $5 million per year over the next                five                years towards the funding of conservation and weatherization programs                for                low and moderate-income residential dwellings (Conservation Programs).                The                five subsequent payments of up to $5 million shall be paid based                upon                Conservation Programs to be developed by the City of Chicago and/or                the                Illinois Attorney General. The Conservation Programs will have the                purpose                of providing energy and natural gas conservation programs for residents                within Peoples Gas’ and North Shore Gas’ |
|--------------------------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|         | service                areas and will have the goal of reducing those residents’ energy usage and                costs. Peoples Gas and North Shore Gas will not seek recovery in                any                future rate or reconciliation cases of any amounts associated with                the                Conservation Programs. |
|--------------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (iii)  | Peoples                Gas and North Shore Gas agreed to forgive all outstanding bad debt                from                fiscal years 2000-2005 existing as of March 6, 2006, estimated at                $207                million, remove the bad debt from customers’ records and to not use any                forgiven indebtedness as a reason to deny gas service. Peoples Gas                and                North Shore Gas have written off the estimated $207 million in prior                periods. The Agreement does not affect the ability of Peoples Gas                and                North Shore Gas to recover any future bad debts as specifically authorized                by the Commission now or in the future. |
|-------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (iv)  | Peoples                Gas and North Shore Gas will cooperate with Chicago and the AG to                identify                those customers of Peoples Gas and North Shore Gas who were not receiving                gas as of the date of the Agreement (approximately 12,000 customers)                that                are financial hardship cases. The hardship cases may be identified                by                either the utilities or the AG and Chicago. Following identification,                Peoples Gas and North Shore Gas will reconnect the hardship cases.                Peoples                Gas and North Shore Gas will also forgive all outstanding debt for                such                customers, as described in paragraph (iii) above. |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (v)   | Peoples                Gas and North Shore Gas agree to credit fiscal 2005 and fiscal 2006                revenues derived from the provision of gas Hub services as an offset                to                utility customers’ gas charges and to account for such revenues received                from gas Hub services in the same manner in all future gas charge                reconciliation cases. The fiscal 2006 revenues are being credited                in                fiscal 2006. The fiscal 2005 revenues are expected to be credited                to                customers following an order in the fiscal 2005 gas charge reconciliation                case. For fiscal 2005 and 2006, only Peoples Gas had Hub revenues. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (vi)  | Peoples                Gas and North Shore Gas agreed to implement recommendations proposed                by                the Commission’s staff and the intervenors to conduct internal and                external audits of their gas procurement practices. |
|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**B.      Class Action**

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**9:      OTHER      LITIGATION**

**A.      Corrosion Control Inspection Proceeding**

**B**

**.      Builders Class Action**

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**10:      OTHER COMMITMENTS AND CONTINGENCIES**

**A.      Guarantees and Letters of Credit**

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| **Unconsolidated****Equity                Investee** |  **Nature                of Guarantee** | **Amount***(In                millions)* | **Expected****Expiration                Date** |
|------------------------------------------------------|----------------------------------------------|------------------------------------------|------------------------------------------------|
|                                                 |                                         |                                     |                                           |
| Elwood                                               | Operational                                  | $                20.9                    | August                31, 2017                 |
| Elwood                                               | Debt                service                  | 13.7                (1)                  | July                5, 2026                    |
| Total                                                |                                         | $                34.6                    |                                           |

| (1)  | Based                on the amount of the next semi-annual debt service payment as of                September                30, 2006. The amount of guarantee varies throughout the life of the                loan,                but cannot exceed $16.5 million. |
|-----------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

**B.      Purchase Commitments**

**C.      Operating Leases**

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**D.      Contractual Obligations**

|                                                            |        | Payments                  Due by Period |
|------------------------------------------------------------|--------|-----------------------------------------|
| *(In                  Millions)*                           |   |                                    |   |   |   | Less                  than |   |   | 1                  to 3 |   |   | 4                  to 5 |   |   | More                  than |   |
| **Peoples                  Energy (consolidated)**         |   |                                    | Total |   |   | 1                  Year |   |   | Years |   |   | Years |   |   | 5                  Years |   |
| Total                  debt (See Note 14)                  |   | $                                       | 1,204.4 |   | $ | 309.7 |   | $ | - |   | $ | 373.5 |   | $ | 521.2 |   |
| Estimated                  interest payments on debt (1)   |   |                                    | 631.5 |   |   | 46.7 |   |   | 93.4 |   |   | 79.3 |   |   | 412.1 |   |
| Operating                  leases (See Note 10C)           |   |                                    | 35.2 |   |   | 3.9 |   |   | 8.2 |   |   | 8.6 |   |   | 14.5 |   |
| Purchase                  obligations (2)                  |   |                                    | 1,108.8 |   |   | 471.9 |   |   | 407.1 |   |   | 96.9 |   |   | 132.9 |   |
| Minimum                  pension funding (3) (See Note 11) |   |                                    | 92.8 |   |   | - |   |   | 26.1 |   |   | 33.3 |   |   | 33.4 |   |
| Total                  contractual cash obligations        |   | $                                       | 3,072.7 |   | $ | 832.2 |   | $ | 534.8 |   | $ | 591.6 |   | $ | 1,114.1 |   |
|                                                       |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Peoples                  Gas**                           |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                  debt (See Note 14)                  |   | $                                       | 502.0 |   | $ | - |   | $ | - |   | $ | 50.0 |   | $ | 452.0 |   |
| Estimated                  interest payments on debt (1)   |   |                                    | 485.9 |   |   | 21.2 |   |   | 42.5 |   |   | 39.5 |   |   | 382.7 |   |
| Operating                  leases (See Note 10C)           |   |                                    | 26.3 |   |   | 3.2 |   |   | 6.5 |   |   | 6.9 |   |   | 9.7 |   |
| Purchase                  obligations (2)                  |   |                                    | 353.0 |   |   | 76.4 |   |   | 109.9 |   |   | 68.0 |   |   | 98.7 |   |
| Total                  contractual cash obligations        |   | $                                       | 1,367.2 |   | $ | 100.8 |   | $ | 158.9 |   | $ | 164.4 |   | $ | 943.1 |   |
|                                                       |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **North                  Shore Gas**                       |   |                                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total                  debt (See Note 14)                  |   | $                                       | 69.3 |   | $ | - |   | $ | - |   | $ | - |   | $ | 69.3 |   |
| Estimated                  interest payments on debt (1)   |   |                                    | 45.8 |   |   | 3.3 |   |   | 6.6 |   |   | 6.6 |   |   | 29.3 |   |
| Operating                  leases (See Note 10C)           |   |                                    | - |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Purchase                  obligations (2)                  |   |                                    | 79.2 |   |   | 17.7 |   |   | 28.6 |   |   | 9.9 |   |   | 23.0 |   |
| Total                  contractual cash obligations        |   | $                                       | 194.3 |   | $ | 21.0 |   | $ | 35.2 |   | $ | 16.5 |   | $ | 121.6 |   |

| (1)  | Includes                interest on fixed and adjustable rate debt. The adjustable rate interest                is calculated based on the indexed rate in effect at September 30,                2006. |
|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (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, 2006. Additional contributions may be made                to fund                benefits accruing after October 1, 2006, or on a discretionary                basis. |
|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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**11:      RETIREMENT AND POSTRETIREMENT BENEFITS**

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**A.      Benefit Obligations**

|                                                                                        |   |                              |   |     |   |   |   | Other                  Postretirement |   |
|----------------------------------------------------------------------------------------|--------|-----------------------------------|--------|----------|--------|--------|--------|---------------------------------------|--------|
|                                                                                        |        | Pension                  Benefits |        | Benefits |   |
| Fiscal                  Years Ended September 30                                       |   |                              | 2006   |     |   | 2005   |   |                                  | 2006   |   |   | 2005 |   |
| *(In                  Millions)*                                                       |   |                              |   |     |   |   |   |                                  |   |   |   |   |   |
| **Change                  in benefit obligation**                                      |   |                              |   |     |   |   |   |                                  |   |   |   |   |   |
| Benefit                  obligation at beginning of measurement period                 |   | $                                 | 508.6  |     | $      | 458.3  |   | $                                     | 133.1  |   | $ | 147.1 |   |
| Service                  cost                                                          |   |                              | 21.0   |     |   | 15.9   |   |                                  | 7.1    |   |   | 6.1 |   |
| Interest                  cost                                                         |   |                              | 25.5   |     |   | 27.2   |   |                                  | 6.4    |   |   | 7.9 |   |
| Participant                  contributions                                             |   |                              | -      |     |   | -      |   |                                  | 6.8    |   |   | 5.9 |   |
| Curtailment                                                                            |   |                              | -      |     |   | (1.6   | )      |                                  | -      |   |   | (0.6 | ) |
| Plan                  amendments                                                       |   |                              | -      |     |   | -      |   |                                  | -      |   |   | (7.3 | ) |
| Actuarial                  (gain)/loss                                                 |   |                              | (69.7  | )        |   | 88.5   |   |                                  | (7.5   | ) |   | (11.3 | ) |
| Benefits                  paid                                                         |   |                              | (46.5  | )        |   | (79.7  | )      |                                  | (15.8  | ) |   | (14.7 | ) |
| **Benefit                  obligation at end of measurement period (June 30)**         |   | $                                 | 438.9  |     | $      | 508.6  |   | $                                     | 130.1  |   | $ | 133.1 |   |
|                                                                                   |   |                              |   |     |   |   |   |                                  |   |   |   |   |   |
| Accumulated                  benefit obligation at end of measurement period (June 30) |   | $                                 | 361.1  |     | $      | 402.6  |   |                                  |   |   |   |   |   |

**B.      Plan Assets**

|                                                                                                           |   |                              |   |     |   |   |   | Other                  Postretirement |   |
|-----------------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|----------|--------|--------|--------|---------------------------------------|--------|
|                                                                                                           |   | Pension                  Benefits |        | Benefits |   |
| Fiscal                  Years Ended September 30                                                          |   |                              | 2006   |     |   | 2005   |   |                                  | 2006   |   |   | 2005 |   |
| *(In                  Millions)*                                                                          |   |                              |   |     |   |   |   |                                  |   |   |   |   |   |
| **Change                  in plan assets**                                                                |   |                              |   |     |   |   |   |                                  |   |   |   |   |   |
| Fair                  value of plan assets at beginning of measurement period                             |   | $                                 | 480.6  |     | $      | 495.1  |   | $                                     | 39.8   |   | $ | 46.9 |   |
| Actual                  return on plan assets                                                             |   |                              | 38.1   |     |   | 33.3   |   |                                  | 1.1    |   |   | 1.7 |   |
| Employer                  contributions (including non-qualified plans)                                   |   |                              | 23.2   |     |   | 31.9   |   |                                  | 0.2    |   |   | - |   |
| Participant                  contributions                                                                |   |                              | -      |     |   | -      |   |                                  | 6.8    |   |   | 5.9 |   |
| Benefits                  paid                                                                            |   |                              | (46.5  | )        |   | (79.7  | )      |                                  | (15.8  | ) |   | (14.7 | ) |
| **Fair                  value of plan assets at end of measurement****period                  (June 30)** |   | $                                 | 495.4  |     | $      | 480.6  |   | $                                     | 32.1   |   | $ | 39.8 |   |

----

|                                          |   | Target     |   | Percentage                of Plan Assets |
|-----------------------------------------------|--------|------------|--------|------------------------------------------|
|                                          |   | Allocation |   | at                June 30,               |
|                                          |   | 2006       |   | 2006                                     |   | 2005 |
| Pension                Benefits:              |   |       |   |                                     |   |   |
| Equity                securities              |   | 70%        |   | 69%                                      |   | 69% |
| Debt                securities                |   | 30%        |   | 30%                                      |   | 30% |
| Other                                         |   | 0%         |   | 1%                                       |   | 1% |
| Total                                         |   | 100%       |   | 100%                                     |   | 100% |
|                                          |   |       |   |                                     |   |   |
| Other                Postretirement Benefits: |   |       |   |                                     |   |   |
| Equity                securities              |   | 60%        |   | 57%                                      |   | 58% |
| Debt                securities                |   | 40%        |   | 38%                                      |   | 40% |
| Other                                         |   | 0%         |   | 5%                                       |   | 2% |
| Total                                         |   | 100%       |   | 100%                                     |   | 100% |

**C.      Funded Status**

|                                                                                |   |                              |   |     |   |   |        | Other                  Postretirement |   |
|--------------------------------------------------------------------------------|--------|-----------------------------------|--------|----------|--------|--------|--------|---------------------------------------|--------|
|                                                                                |        | Pension                  Benefits |   | Benefits |   |
| Fiscal                  Years Ended September 30                               |   |                              | 2006   |     |   | 2005   |   |                                  | 2006   |   |   | 2005 |   |
| *(In                  Millions)*                                               |   |                              |   |     |   |   |   |                                  |   |   |   |   |   |
| **Funded                  status**                                             |   |                              |   |     |   |   |   |                                  |   |   |   |   |   |
| Fair                  value of plan assets                                     |   | $                                 | 495.4  |     | $      | 480.6  |   | $                                     | 32.1   |   | $ | 39.8 |   |
| Benefit                  obligations                                           |   |                              | 438.9  |     |   | 508.6  |   |                                  | 130.1  |   |   | 133.1 |   |
| Over                  (under) funded status                                    |   |                              | 56.5   |     |   | (28.0  | )      |                                  | (98.0  | ) |   | (93.3 | ) |
| Unrecognized                  net transition obligation (asset)                |   |                              | -      |     |   | (0.1   | )      |                                  | 8.6    |   |   | 9.8 |   |
| Unrecognized                  prior service cost                               |   |                              | 32.8   |     |   | 35.4   |   |                                  | -      |   |   | - |   |
| Unrecognized                  net actuarial (gain)/loss                        |   |                              | 85.0   |     |   | 167.1  |   |                                  | 21.6   |   |   | 28.4 |   |
| Adjustment                  for Medicare Part D receivable                     |   |                              | -      |     |   | -      |   |                                  | (0.7   | ) |   | - |   |
| **Recognized                  prepaid (accrued) benefit cost at September 30** |   | $                                 | 174.3  |     | $      | 174.4  |   | $                                     | (68.5  | ) | $ | (55.1 | ) |
|                                                                           |   |                              |   |     |   |   |   |                                  |   |   |   |   |   |
| **Amounts                  recognized in the statement of financial**          |   |                              |   |     |   |   |   |                                  |   |   |   |   |   |
| **position                  consist of:**                                      |   |                              |   |     |   |   |   |                                  |   |   |   |   |   |
| Prepaid                  pension cost                                          |   | $                                 | 182.3  |     | $      | 152.7  |   | $                                     | -      |   | $ | - |   |
| Accrued                  benefit liability                                     |   |                              | (8.0   | )        |   | (42.6  | )      |                                  | (68.5  | ) |   | (55.1 | ) |
| Intangible                  asset                                              |   |                              | -      |     |   | 21.5   |   |                                  | -      |   |   | - |   |
| Accumulated                  other comprehensive income, pretax                |   |                              | -      |     |   | 42.8   |   |                                  | -      |   |   | - |   |
| **Net                  amount recognized**                                     |   | $                                 | 174.3  |     | $      | 174.4  |   | $                                     | (68.5  | ) | $ | (55.1 | ) |

----

|                                                    |   | Retirement                Plan |        | Supplemental                Plan |   |
|---------------------------------------------------------|--------|--------------------------------|--------|----------------------------------|--------|
| *(In                Millions)*                          |   |                           | 2006   |                             |   | 2005 |   |   | 2006 |   |   | 2005 |   |
| Benefit                obligation                       |   | $                              | 211.4  |                             | $      | 270.0 |   | $ | 7.1 |   | $ | 6.9 |   |
|                                                    |   |                           |   |                             |   |   |   |   |   |   |   |   |   |
| Accumulated                benefit obligation (ABO)     |   | $                              | 173.7  |                             | $      | 223.3 |   | $ | 6.2 |   | $ | 6.2 |   |
| Fair                value of plan assets                |   |                           | 195.6  |                             |   | 188.6 |   |   | - |   |   | - |   |
| ABO                in excess of (less than) plan assets |   | $                              | (21.9  | )                                | $      | 34.7 |   | $ | 6.2 |   | $ | 6.2 |   |

|                                                                       |   |  Pension                Benefits |   | Other                PostretirementBenefits |
|----------------------------------------------------------------------------|--------|---------------------------------------|--------|---------------------------------------------|
| Fiscal                years ended September 30,                            |   | 2006                                  |   | 2005                                        |   | 2006 |   | 2005 |
| *(In                Millions)*                                             |   |                                  |   |                                        |   |   |   |   |
| Change                in minimum liability included                        |   |                                  |   |                                        |   |   |   |   |
|                   in other comprehensive income as a loss (gain) |   | $(42.8)                               |   | $29.7                                       |   | N/A |   | N/A |

**D.      Expected Cash Flow**

| *(In                Millions)*                | Pension                Benefits |   | Other                Postretirement Benefits |
|-----------------------------------------------|---------------------------------|--------|----------------------------------------------|
| **Employer                contributions:**    |                            |   |                                         |
| 2007                (expected)                | $                3.7            |   | $                -                           |
|                                          |                            |   |                                         |
| **Expected                benefit payments:** |                            |   |                                         |
| 2007                                          | $                35.5           |   | $                8.5                         |
| 2008                                          | 31.5                            |   | 8.7                                          |
| 2009                                          | 34.3                            |   | 9.0                                          |
| 2010                                          | 34.7                            |   | 9.2                                          |
| 2011                                          | 42.0                            |   | 9.8                                          |
| Years                2012-2016                | 259.3                           |   | 58.9                                         |

| *(In                Millions)*               | 2007 | 2008 | 2009 | 2010 | 2011 | 2012-2016 |
|----------------------------------------------|------|------|------|------|------|-----------|
| Other                postretirement benefits | $0.8 | $0.9 | $0.9 | $1.0 | $1.0 | $5.8      |

----

**E.      Net Benefit Cost**

|                                                                  |   | Pension                  Benefits |   |   | Other                  Postretirement Benefits |   |
|------------------------------------------------------------------|--------|-----------------------------------|--------|--------|------------------------------------------------|--------|
| Fiscal                  Years Ended September 30                 |   |                              | 2006   |   |                                           | 2005   |   |   | 2004 |   |   | 2006 |   |   | 2005 |   |   | 2004 |   |
| *(In                  Millions)*                                 |   |                              |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service                  cost                                    |   | $                                 | 21.0   |   | $                                              | 15.9   |   | $ | 17.8 |   | $ | 7.1 |   | $ | 6.1 |   | $ | 5.3 |   |
| Interest                  cost                                   |   |                              | 25.5   |   |                                           | 27.2   |   |   | 27.7 |   |   | 6.4 |   |   | 7.9 |   |   | 7.3 |   |
| Expected                  return on plan assets                  |   |                              | (40.8  | )      |                                           | (43.0  | ) |   | (46.6 | ) |   | (2.9 | ) |   | (3.3 | ) |   | (3.8 | ) |
| Amortization                  of:                                |   |                              |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net                  transition (asset)/obligation               |   |                              | (0.1   | )      |                                           | (0.8   | ) |   | (1.1 | ) |   | 1.2 |   |   | 1.8 |   |   | 1.9 |   |
| Prior                  service cost                              |   |                              | 2.6    |   |                                           | 2.7    |   |   | 3.0 |   |   | - |   |   | - |   |   | - |   |
| Net                  actuarial (gain)/loss                       |   |                              | 6.1    |   |                                           | 2.0    |   |   | 1.6 |   |   | 1.1 |   |   | 1.4 |   |   | 0.9 |   |
| **Net                  periodic benefit cost**                   |   |                              | 14.3   |   |                                           | 4.0    |   |   | 2.4 |   |   | 12.9 |   |   | 13.9 |   |   | 11.6 |   |
|                                                             |   |                              |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Curtailment                  recognition                         |   |                              | -      |   |                                           | 5.1    |   |   | - |   |   | - |   |   | 0.4 |   |   | - |   |
| Contribution                  shortfall recognition              |   |                              | -      |   |                                           | -      |   |   | - |   |   | - |   |   | - |   |   | 0.7 |   |
| One-time                  recognition for EDC                    |   |                              | -      |   |                                           | 2.2    |   |   | - |   |   | - |   |   | - |   |   | - |   |
| Effects                  of lump sum settlements upon retirement |   |                              | 9.0    |   |                                           | 15.5   |   |   | 9.4 |   |   | - |   |   | - |   |   | - |   |
| **Net                  benefit cost**                            |   | $                                 | 23.3   |   | $                                              | 26.8   |   | $ | 11.8 |   | $ | 12.9 |   | $ | 14.3 |   | $ | 12.3 |   |
|                                                             |   |                              |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Net                  benefit cost by company**                 |   |                              |   |   |                                           |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Peoples                  Gas                                     |   | $                                 | 11.5   |   | $                                              | 12.6   |   | $ | 3.0 |   | $ | 10.0 |   | $ | 11.3 |   | $ | 10.0 |   |
| North                  Shore Gas                                 |   |                              | 3.4    |   |                                           | 3.8    |   |   | 2.8 |   |   | 1.4 |   |   | 1.4 |   |   | 1.2 |   |
| All                  other companies                             |   |                              | 8.4    |   |                                           | 10.4   |   |   | 6.0 |   |   | 1.5 |   |   | 1.6 |   |   | 1.1 |   |
|                                                             |   | $                                 | 23.3   |   | $                                              | 26.8   |   | $ | 11.8 |   | $ | 12.9 |   | $ | 14.3 |   | $ | 12.3 |   |

----

| *(In                millions)*                              |   |   | 2006 |   |   | 2005 |   |
|-------------------------------------------------------------|--------|--------|------|--------|--------|------|--------|
| Service                Cost                                 |   | $      | 1.8  |   | $      | 0.5  |   |
| Interest                Cost                                |   |   | 2.0  |   |   | 0.7  |   |
| Amortization                of actuarial gain               |   |   | 2.5  |   |   | 0.6  |   |
| Total                reduction in net periodic benefit cost |   | $      | 6.3  |   | $      | 1.8  |   |

**F.      Primary Actuarial Assumptions**

|                                                                                                                                   |   |  Pension                Benefits |   | Other                PostretirementBenefits |
|----------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------------|--------|---------------------------------------------|
|                                                                                                                                   |   | 2006                                  |   | 2005                                        |   | 2006 |   | 2005 |
| **Weighted-average                assumptions used to determine benefit obligations, June                30:**                         |   |                                  |   |                                        |   |   |   |   |
|   Discount                rate                                                                                               |   | 6.50%                                 |   | 5.25%                                       |   | 6.25% |   | 5.00% |
|   Future                compensation increases                                                                               |   | 3.75%                                 |   | 3.75%                                       |   |   |   |   |
|   Health                care cost trend rate assumed for next year                                                           |   |                                  |   |                                        |   | 8.00% |   | 9.00% |
|   Rate                to which the cost trend rate is assumed   to                decline (the ultimate rate) |   |                                  |   |                                        |   |  5.00% |   |  5.00% |
|   Year                that the rate reaches the ultimate trend rate                                                          |   |                                  |   |                                        |   | 2010 |   | 2010 |

|                                                                                                                                     |   | Pension                Benefits |   | Other                Postretirement Benefits |
|------------------------------------------------------------------------------------------------------------------------------------------|--------|---------------------------------|--------|----------------------------------------------|
|                                                                                                                                     |   | 2006                            |   | 2005                                         |   | 2004 |   | 2006 |   | 2005 |   | 2004 |
| **Weighted-average                assumptions used to determine****net                periodic benefit cost:**                           |   |                            |   |                                         |   |   |   |   |   |   |   |   |
|   Discount                rate                                                                                                 |   | 5.25%                           |   | 6.13%                                        |   | 6.00% |   | 5.00% |   | 6.02% |   | 6.00% |
|   Expected                return on assets                                                                                     |   | 8.75%                           |   | 8.75%                                        |   | 8.75% |   | 8.75% |   | 8.75% |   | 8.75% |
|   Future                compensation increases                                                                                 |   | 3.75%                           |   | 3.75%                                        |   | 3.75% |   |   |   |   |   |   |
|   Health                care cost trend rate assumed for next                year                                         |        |                                 |        |                                              |  |  |  | 9.00% |  | 10.00% |  | 8.00% |
|   Rate                to which the cost trend rate is assumed                todecline                (the ultimate rate) |   |                            |   |                                         |   |   |   |  5.00% |   |  5.00% |   |  5.00% |
|   Year                that the rate reaches the ultimate trend                rate                                        |        |                                 |        |                                              |  |  |  | 2010 |  | 2010 |  | 2007 |

----

|                                                             |   | 1-Percentage-Point |
|-------------------------------------------------------------|--------|--------------------|
| *(In                Millions)*                              |   |               | Increase |   |   | Decrease |   |
| Effect                on total of service and interest cost |   | $                  | 2.1 |   | $ | (1.7 | ) |
| Effect                on postretirement benefit obligation  |   | $                  | 12.9 |   | $ | (11.2 | ) |

**G.      Defined Contribution Plans**

----

**12:      TAX MATTERS**

**A.      Income Tax Expense**

|                                                                      |   | For                  Fiscal Years Ended September 30, |    |
|----------------------------------------------------------------------|--------|-------------------------------------------------------|---------|
|                                                                 |   |                                                  | 2006    |   |   | 2005 |   |   | 2004 |   |
| *(In                  Thousands)*                                    |   |                                                  |    |   |   |   |   |   |   |   |
| **Current:**                                                         |   |                                                  |    |   |   |   |   |   |   |   |
| Federal                                                              |   | $                                                     | 8,594   |   | $ | 18,579 |   | $ | 21,051 |   |
| State                                                                |   |                                                  | (3,167  | ) |   | 1,112 |   |   | (1,216 | ) |
| **Total                  current income taxes**                      |   |                                                  | 5,427   |   |   | 19,691 |   |   | 19,835 |   |
|                                                                 |   |                                                  |    |   |   |   |   |   |   |   |
| **Deferred:**                                                        |   |                                                  |    |   |   |   |   |   |   |   |
| Federal                                                              |   |                                                  | (23,441 | ) |   | 16,529 |   |   | 13,086 |   |
| State                                                                |   |                                                  | (5,093  | ) |   | 1,653 |   |   | 1,531 |   |
| **Total                  deferred income taxes**                     |   |                                                  | (28,534 | ) |   | 18,182 |   |   | 14,617 |   |
|                                                                 |   |                                                  |    |   |   |   |   |   |   |   |
| **Investment                  tax credits—net:**               |   |                                                  |    |   |   |   |   |   |   |   |
| Federal                  amortization                                |   |                                                  | (708    | ) |   | (712 | ) |   | (903 | ) |
| State                  ITC provision                                 |   |                                                  | 471     |   |   | 286 |   |   | - |   |
| State                  ITC amortization                              |   |                                                  | (204    | ) |   | (187 | ) |   | (216 | ) |
| **Total                  investment tax credits—net**          |   |                                                  | (441    | ) |   | (613 | ) |   | (1,119 | ) |
|                                                                 |   |                                                  |    |   |   |   |   |   |   |   |
| **Net                  income tax expense (benefit)**                |   |                                                  |    |   |   |   |   |   |   |   |
| **from                  continuing operations**                      |   |                                                  | (23,548 | ) |   | 37,260 |   |   | 33,333 |   |
|                                                                 |   |                                                  |    |   |   |   |   |   |   |   |
| **Income                  tax expense from discontinued operations** |   |                                                  | 6,797   |   |   | 7,444 |   |   | 4,500 |   |
|                                                                 |   |                                                  |    |   |   |   |   |   |   |   |
| **Net                  income tax expense (benefit)**                |   | $                                                     | (16,751 | ) | $ | 44,704 |   | $ | 37,833 |   |

----

|                                                             |   | Peoples                  Gas |         | North                  Shore Gas |   |
|-------------------------------------------------------------|--------|------------------------------|---------|----------------------------------|--------|
| For                  Fiscal Years Ended September 30,       |   |                         | 2006    |                             |   | 2005 |   |   | 2004 |   |   | 2006 |   |   | 2005 |   |   | 2004 |   |
| *(In                  Thousands)*                           |   |                         |    |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Current:**                                                |   |                         |    |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal                                                     |   | $                            | 12,343  |                             | $      | 24,479 |   | $ | 17,565 |   | $ | 702 |   | $ | 575 |   | $ | 2,976 |   |
| State                                                       |   |                         | (920    | )                                |   | 5,482 |   |   | 3,915 |   |   | (325 | ) |   | 66 |   |   | 672 |   |
| **Total                  current income taxes**             |   |                         | 11,423  |                             |   | 29,961 |   |   | 21,480 |   |   | 377 |   |   | 641 |   |   | 3,648 |   |
| **Deferred:**                                               |   |                         |    |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal                                                     |   |                         | (33,391 | )                                |   | (2,964 | ) |   | 2,721 |   |   | 2,389 |   |   | 4,816 |   |   | 2,655 |   |
| State                                                       |   |                         | (3,732  | )                                |   | 257 |   |   | 1,199 |   |   | 1,057 |   |   | 1,248 |   |   | 555 |   |
| **Total                  deferred income taxes**            |   |                         | (37,123 | )                                |   | (2,707 | ) |   | 3,920 |   |   | 3,446 |   |   | 6,064 |   |   | 3,210 |   |
| **Investment                  tax credits—net:**      |   |                         |    |                             |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Federal                  amortization                       |   |                         | (647    | )                                |   | (649 | ) |   | (812 | ) |   | (61 | ) |   | (63 | ) |   | (90 | ) |
| State                  ITC provision                        |   |                         | 412     |                             |   | 253 |   |   | - |   |   | 58 |   |   | 33 |   |   | - |   |
| State                  ITC amortization                     |   |                         | (181    | )                                |   | (168 | ) |   | (191 | ) |   | (23 | ) |   | (19 | ) |   | (25 | ) |
| **Total                  investment tax credits—net** |   |                         | (416    | )                                |   | (564 | ) |   | (1,003 | ) |   | (26 | ) |   | (49 | ) |   | (115 | ) |
| **Net                  income tax expense (benefit)**       |   | $                            | (26,116 | )                                | $      | 26,690 |   | $ | 24,397 |   | $ | 3,797 |   | $ | 6,656 |   | $ | 6,743 |   |

**B.      Tax Rate Reconciliation**

|                                                                              |   | Percent                    of Pretax Income/Loss |   |
|------------------------------------------------------------------------------|--------|--------------------------------------------------|--------|
| For                    Fiscal Years Ended September 30,                      |   | 2006                                             |   | 2005 |   | 2004 |   |
|                                                                         |   |                                             |   |   |   |   |   |
| Federal                    statutory income tax rate                         |   | 35.00                                            |   | 35.00 |   | 35.00 |   |
| Increase                    (decrease) due to:                               |   |                                             |   |   |   |   |   |
| State                    income taxes—net                              |   | 10.09                                            |   | 1.79 |   | 0.06 |   |
| Federal                    medicare subsidy                                  |   | 3.20                                             |   | (0.57 | ) | - |   |
| Merger                    costs—non-deductible                         |   | (3.16                                            | )      | - |   | - |   |
| Other—net                                                              |   | 0.60                                             |   | (0.43 | ) | (4.22 | ) |
| **Effective                    income tax rate for continuing operations**   |   | 45.73                                            |   | 35.79 |   | 30.84 |   |
|                                                                         |   |                                             |   |   |   |   |   |
| **Effective                    income tax rate for discontinued operations** |   | 39.74                                            |   | 39.75 |   | 39.75 |   |
|                                                                         |   |                                             |   |   |   |   |   |
| **Total                    effective income tax rate**                       |   | 48.71                                            |   | 36.39 |   | 31.69 |   |

----

|                                                         |   | Peoples                    Gas                   |   |
|---------------------------------------------------------|--------|--------------------------------------------------|--------|
|                                                         |   | Percent                    of Pretax Income/Loss |   |
| For                    Fiscal Years Ended September 30, |   | 2006                                             |   | 2005 |   | 2004 |   |
| Federal                    statutory income tax rate    |   | 35.00                                            |   | 35.00 |   | 35.00 |   |
| Increase                    (decrease) due to:          |   |                                             |   |   |   |   |   |
| State                    income taxes—net         |   | 4.67                                             |   | 4.98 |   | 4.59 |   |
| Federal                    medicare subsidy             |   | 2.16                                             |   | (0.63 | ) | - |   |
| Federal                    accrual adjustments          |   | 1.42                                             |   | (4.03 | ) | (1.28 | ) |
| Other—net                                         |   | (0.83                                            | )      | (0.21 | ) | (3.34 | ) |
| **Total                    effective income tax rate**  |   | 42.42                                            |   | 35.11 |   | 34.97 |   |

|                                                         |   | North                    Shore Gas          |   |
|---------------------------------------------------------|--------|---------------------------------------------|--------|
|                                                         |   | Percent                    of Pretax Income |   |
| For                    Fiscal Years Ended September 30, |   | 2006                                        |   | 2005 |   | 2004 |   |
| Federal                    statutory income tax rate    |   | 35.00                                       |   | 35.00 |   | 35.00 |   |
| Increase                    (decrease) due to:          |   |                                        |   |   |   |   |   |
| State                    income taxes—net         |   | 4.74                                        |   | 4.78 |   | 4.38 |   |
| Other—net                                         |   | (3.59                                       | )      | (2.91 | ) | (1.45 | ) |
| **Total                    effective income tax rate**  |   | 36.15                                       |   | 36.87 |   | 37.93 |   |

**C.      Deferred Income Taxes**

|                                                            |   | September                  30, |     |
|------------------------------------------------------------|--------|--------------------------------|----------|
|                                                       |   |                           | 2006     |   |   |   | 2005 |   |
| *(In                  Thousands)*                          |   |                           |     |   |   |   |   |   |
| **Deferred                  tax liabilities:**             |   |                           |     |   |   |   |   |   |
| Property—accelerated                  depreciation   |   |                           |     |   |   |   |   |   |
| and                  other property-related items          |   | $                              | 434,073  |   |   | $ | 409,553 |   |
| Pension                                                    |   |                           | 72,880   |   |   |   | 63,659 |   |
| Partnership                  items                         |   |                           | 28,512   |   |   |   | 26,323 |   |
| Other                                                      |   |                           | 30,632   |   |   |   | 40,364 |   |
| **Total                  deferred income tax liabilities** |   |                           | 566,097  |   |   |   | 539,899 |   |
| **Deferred                  tax assets:**                  |   |                           |     |   |   |   |   |   |
| Derivative                  instruments                    |   |                           | (21,962  | ) |   |   | (85,496 | ) |
| Alternative                  minimum tax                   |   |                           | (23,626  | ) |   |   | (8,517 | ) |
| Group                  insurance                           |   |                           | (29,559  | ) |   |   | (21,103 | ) |
| Other                                                      |   |                           | (65,184  | ) |   |   | (42,872 | ) |
| **Total                  deferred income tax assets**      |   |                           | (140,331 | ) |   |   | (157,988 | ) |
| **Net                  deferred income tax liabilities**   |   | $                              | 425,766  |  (1) |   | $ | 381,911 |  (2) |

| (1)  | Includes                $35.3 million of net current deferred tax assets that are classified                in                Other Current Assets and Other Accrued Liabilities on the balance                sheet. |
|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)  | Includes                $64.4 million of net current deferred tax assets that are classified                in                Other Current Assets and Other Accrued Liabilities on the balance                sheet. |
|-----------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| *(In                  Thousands)*                            |   | Peoples                  Gas |    |
|--------------------------------------------------------------|--------|------------------------------|---------|
| September                  30,                               |   |                         | 2006    |   |   |   | 2005 |   |
|                                                         |   |                         |    |   |   |   |   |   |
| **Deferred                  tax liabilities:**               |   |                         |    |   |   |   |   |   |
| Property—accelerated                  depreciation and |   |                         |    |   |   |   |   |   |
| other                  property-related items                |   | $                            | 323,254 |   |   | $ | 317,020 |   |
| Pension                                                      |   |                         | 73,393  |   |   |   | 60,818 |   |
| Other                                                        |   |                         | 24,040  |   |   |   | 30,905 |   |
| **Total                  deferred income tax liabilities**   |   |                         | 420,687 |   |   |   | 408,743 |   |
| **Deferred                  tax assets:**                    |   |                         |    |   |   |   |   |   |
| Alternative                  minimum tax                     |   |                         | (18,101 | ) |   |   | (4,318 | ) |
| Group                  insurance                             |   |                         | (24,083 | ) |   |   | (17,399 | ) |
| Other                                                        |   |                         | (49,635 | ) |   |   | (30,458 | ) |
| **Total                  deferred income tax assets**        |   |                         | (91,819 | ) |   |   | (52,175 | ) |
| **Net                  deferred income tax liabilities**     |   | $                            | 328,868 |  (1) |   | $ | 356,568 |  (2) |

| (1)  | Includes                    $24.3 million of net current deferred taxes that is classified                    in Other                    Current Assets on the balance                    sheet. |
|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)  | Includes                    $7.6 million of net current deferred taxes that is classified                    in Other                    Current Assets on the balance                    sheet. |
|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| *(In                  Thousands)*                            |   | North                  Shore Gas |   |
|--------------------------------------------------------------|--------|----------------------------------|--------|
| September                  30,                               |   |                             | 2006   |   |   |   | 2005 |   |
|                                                         |   |                             |   |   |   |   |   |   |
| **Deferred                  tax liabilities:**               |   |                             |   |   |   |   |   |   |
| Property—accelerated                  depreciation and |   |                             |   |   |   |   |   |   |
| other                  property-related items                |   | $                                | 43,881 |   |   | $ | 42,050 |   |
| Gas                  cost reconciliation                     |   |                             | -      |   |   |   | 2,571 |   |
| Other                                                        |   |                             | 8,569  |   |   |   | 2,642 |   |
| **Total                  deferred income tax liabilities**   |   |                             | 52,450 |   |   |   | 47,263 |   |
| **Deferred                  tax assets:**                    |   |                             |   |   |   |   |   |   |
| Group                  insurance                             |   |                             | (3,019 | ) |   |   | (2,217 | ) |
| Gas                  cost reconciliation                     |   |                             | (1,142 | ) |   |   | - |   |
| Other                                                        |   |                             | (5,050 | ) |   |   | (4,035 | ) |
| **Total                  deferred income tax assets**        |   |                             | (9,211 | ) |   |   | (6,252 | ) |
| **Net                  deferred income tax liabilities**     |   | $                                | 43,239 |  (1) |   | $ | 41,011 |  (2) |

| (1)  | Includes                $2.5 million of net current deferred taxes that is classified in                Other                Current Assets on the balance                sheet. |
|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)  | Includes                $1.9 million of net current deferred taxes that is classified in                Other                Accrued Liabilities on the balance                sheet. |
|-----------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

**13:      DEBT COVENANTS **

----

**14:      LONG-TERM DEBT AND SHORT-TERM DEBT**

**A.      Changes in Debt Securities**

----

| *(Dollars                  In Millions)* |   | Issuances                  (tax exempt) |        | Retirements                  (tax exempt) |                                        |
|------------------------------------------|--------|-----------------------------------------|--------|-------------------------------------------|---------------------------------------------|
| **Fiscal                  2005**         |   |                                    |   |                                      |                                        |   |   |   |   |   |   |   |   |
| Peoples                  Gas             |   | $                                       | 50.0   |                                      |                                        | Adjustable                  rate, Series RR |   | $ | 50.0 |   |   | 6.10%                  Series FF, |   |
|                                          |        |                                         |        |                                           |                                             | due                  June 1, 2035 |  |  |  |  |  | Due                  June 1, 2025 |  |
|                                          |        |                                    |        |                                           | (4.30%                  fixed for 11 years) |  |   |  |  |  |   |
| **Total                  Fiscal 2005**   |        | $                                       | 50.0   |                                           |                                             |  |  | $ | 50.0 |  |  |  |   |
|                                     |   |                                    |   |                                      |                                        |   |   |   |   |   |   |   |   |
| **Fiscal                  2004**         |        |                                         |        |                                           |                                             |  |   |   |   |   |   |   |   |
| Peoples                  Gas             |        | $                                       | 51.0   |                                           |                                             | Adjustable                  rate, Series OO |  | $ | 27.0 |  |  | Variable                  rate, Series EE |   |
|                                          |   |                                    |   |                                      |                                             | due                  Oct. 1, 2037 (1) |  |   |   |   |   |   |   |
|                                     |   |                                    | 51.0   |                                      |                                             | Adjustable                  rate, Series PP, |  |  | 37.5 |  |  | Variable                  rate, Series II |   |
|                                          |   |                                    |   |                                           |                                             | due                  Oct. 1, 2037 (1) |   |   |   |   |   |   |   |
|                                     |   |                                    | 75.0   |                                           |                                             | Adjustable                  rate, Series QQ, |  |  | 37.5 |  |  | Variable                  rate, Series JJ |   |
|                                          |   |                                    |   |                                           |                                             | due                  Nov. 1, 2038 |   |   |   |   |   |   |   |
|                                          |   |                                    |   |                                           |                                             | (4.875%                  fixed for 15 years) |   |   | 75.0 |  |  | 5.75%,                  Series DD |   |
| **Total                  Fiscal 2004**   |   | $                                       | 177.0  |                                      |                                        |   |   | $ | 177.0 |   |   |   |   |

**B.      Short-Term Debt**

|                                                           |   | Fiscal                  2006     |        | Balance                  At    |         | Fiscal                  2005     |        | Balance                  At    |   |
|-----------------------------------------------------------|--------|----------------------------------|--------|--------------------------------|---------|----------------------------------|--------|--------------------------------|--------|
|                                                           |        | Weighted-Average                 |        | September                  30, |         | Weighted-Average                 |        | September                  30, |   |
| *(In                  Thousands)*                         |        | Interest                  Rate % |        | 2006                           |         | Interest                  Rate % |        | 2005                           |   |
| **Commercial                  Paper:**                    |   |                             |   |                           |    |                             |   |                           |   |   |   |
| Peoples                  Energy                           |   | 5.08                             |   | $                              | 309,744 |                             | 2.41   |                           | $      | 8,148 |   |
| Peoples                  Gas                              |   | 4.41                             |   |                           | -       |                             | 2.07   |                           |   | - |   |
|                                                      |   |                             |   |                           |    |                             |   |                           |   |   |   |
| **Bank                  Loans:**                          |   |                             |   |                           |    |                             |   |                           |   |   |   |
| Peoples                  Energy                           |   | 5.16                             |   | $                              | -       |                             | 2.56   |                           | $      | - |   |
|                                                      |   |                             |   |                           |    |                             |   |                           |   |   |   |
| **Total                  short-term debt - Company**      |   |                             |   | $                              | 309,744 |                             |   |                           | $      | 8,148 |   |
|                                                      |   |                             |   |                           |    |                             |   |                           |   |   |   |
| **Company                  loans to Peoples Gas**         |   | 4.07                             |   | $                              | -       |                             | -      |                           | $      | - |   |
|                                                      |   |                             |   |                           |    |                             |   |                           |   |   |   |
| **North                  Shore Gas loans to Peoples Gas** |   | 4.48                             |   | $                              | -       |                             | 2.63   |                           | $      | 360 |   |
|                                                      |   |                             |   |                           |    |                             |   |                           |   |   |   |
| **Company                  loans to North Shore Gas**     |   | 4.09                             |   | $                              | -       |                             | 2.13   |                           | $      | - |   |
|                                                      |   |                             |   |                           |    |                             |   |                           |   |   |   |
| **Peoples                  Gas loans to North Shore Gas** |   | 4.23                             |   | $                              | -       |                             | 2.38   |                           | $      | - |   |

----

----

**15:      EARNINGS PER SHARE**

|                                                           |   | For                Fiscal Years EndedSeptember                30, |
|-----------------------------------------------------------|--------|-------------------------------------------------------------------|
|                                                      |   | 2006                                                              |   | 2005 |   | 2004 |   |
| *(In                Thousands)*                           |   |                                                              |   |   |   |   |   |
| Average                shares of common stock outstanding |   | 38,365                                                            |   | 37,977 |   | 37,318 |   |
| Effects                of options and performance shares  |   | 153                                                               |   | 163 |   | 172 |   |
| **Diluted                shares**                         |   | 38,518                                                            |   | 38,140 |   | 37,490 |   |

----

**16:      PREFERRED STOCK**

----

----

**17:      COMMON STOCK AND STOCK COMPENSATION PLANS**

**Common      Stock**

|                                                       |        | For                  Fiscal Years Ended September 30, |   |
|-------------------------------------------------------|--------|-------------------------------------------------------|--------|
|                                                  |        | 2006                                                  |        | 2005 |  | 2004 |   |
| *(Dollars                  in Thousands)*             |        | Shares                                                |   | Dollars |  | Shares |  | Dollars |  | Shares |   |  | Dollars |   |
| **Beginning                  of period**              |   | 38,157,218                                            |   | $ | 402,383 |   | 37,733,894 |   | $ | 384,482 |   | 36,689,968 |   |   | $ | 339,785 |   |
| **Shares                  issued:**                   |   |                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Employee                  Stock Purchase Plan         |   | 15,590                                                |   |   | 510 |   | 12,228 |   |   | 479 |   | 13,244 |   |   |   | 487 |   |
| Long-Term                  Incentive Compensation     |   |                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Plan—net                                        |   | 62,330                                                |   |   | 3,374 |   | 176,601 |   |   | 6,602 |   | 390,302 |   |   |   | 14,451 |   |
| Shares                  issued through continuous     |   |                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| equity                  offerings                     |   | -                                                     |   |   | - |   | - |   |   | - |   | 377,400 |   |   |   | 15,458 |   |
| Directors                  Deferred Compensation Plan |   | 3,056                                                 |   |   | 879 |   | 2,879 |   |   | 1,019 |   | - |   |   |   | - |   |
| Directors                  Stock and Option Plan      |   | -                                                     |   |   | - |   | 1,092 |   |   | 43 |   | 766 |  (1) |   |   | 3,347 |   |
| Direct                  Purchase and Investment Plan  |   | 250,586                                               |   |   | 9,262 |   | 230,524 |   |   | 9,758 |   | 262,214 |   |   |   | 10,954 |   |
| **Total                  activity for the period**    |   | 331,562                                               |   |   | 14,025 |   | 423,324 |   |   | 17,901 |   | 1,043,926 |   |   |   | 44,697 |   |
|                                                  |   |                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **End                  of period**                    |   | 38,488,780                                            |   | $ | 416,408 |   | 38,157,218 |   | $ | 402,383 |   | 37,733,894 |   |   | $ | 384,482 |   |

| (1)  | During                    2004 Treasury Shares were reduced by 3,000, of which 766 were                    re-issued in                    accordance with the DSOP. |
|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

| *For                the Fiscal Year Ended September 30, 2006* |      |
|---------------------------------------------------------------|-----------|
| Expected                volatility                            | 17%-19%   |
| Weighted-average                volatility                    | 17.76%    |
| Expected                dividends                             | 5.4%      |
| Expected                term (in years)                       | 0-5       |
| Risk-free                rate                                 | 4.6%-4.9% |

----

|                                                    |   |    |   |                              |                       |        |                                   | Weighted-Average |                                  | Aggregate |   |
|----------------------------------------------------|--------|---------|--------|-----------------------------------|----------------------------|--------|-----------------------------------|------------------|----------------------------------|-----------|--------|
|                                                    |   |         |        | Weighted-Average                  |                            |        | Remaining                         |                  | Intrinsic                  Value |      |
| **Options**                                        |   | Shares  |        | Exercise                  Price   |                            |        | Contractual                  Term |                  | (000's)                          |      |
|                                               |   |    |   |                              |                       |   |                              |             |                             |      |   |   |   |
| Outstanding                  at September 30, 2005 |   | 593,400 |   | $                                 | 38.37                      |   |                              |             |                             |      |   |   |   |
| Granted                                            |   | -       |   |                              | -                          |   |                              |             |                             |      |   |   |   |
| Exercised                                          |   | (47,300 | )      |                              | 35.25                      |   |                              |             |                             |      |   |   |   |
| Forfeited                  or expired              |   | (11,200 | )      |                              | 37.69                      |   |                              |             |                             |      |   |   |   |
| Outstanding                  at September 30, 2006 |   | 534,900 |   | $                                 | 38.66                      |   |                              |             | 5.1                  years       |      | $      | 1,065 |   |
| Exercisable                  at September 30, 2006 |   | 534,900 |   | $                                 | 38.66                      |   |                              |             | 5.1                  years       |      | $      | 1,065 |   |
|                                               |   |    |   |                              |                       |   |                              |             |                             |      |   |   |   |
|                                               |   |    |   |                              |                       |   |                              |             |                             |      |   |   |   |
|                                                    |   |    |   |                              |                       |   |                              | Weighted-Average |                                  | Aggregate |   |
|                                                    |   |         |        | Weighted-Average                  |                            |        | Remaining                         |                  | Intrinsic                  Value |      |
| **SARs**                                           |        | Shares  |        | Exercise                  Price   |                            |        | Contractual                  Term |                  | (000's)                          |      |
|                                               |   |    |   |                              |                       |   |                              |             |                             |      |   |   |   |
| Outstanding                  at September 30, 2005 |   | 35,700  |   | $                                 | 36.45                      |   |                              |             |                             |      |   |   |   |
| Granted                                            |   | -       |   |                              | -                          |   |                              |             |                             |      |   |   |   |
| Exercised                                          |   | (7,800  | )      |                              | 36.84                      |   |                              |             |                             |      |   |   |   |
| Forfeited                  or expired              |   | (2,300  | )      |                              | 35.10                      |   |                              |             |                             |      |   |   |   |
| Outstanding                  at September 30, 2006 |   | 25,600  |   | $                                 | 36.46                      |   |                              |             | 2.7                  years       |      | $      | 107 |   |
| Exercisable                  at September 30, 2006 |   | 25,600  |   | $                                 | 36.46                      |   |                              |             | 2.7                  years       |      | $      | 107 |   |
|                                               |   |    |   |                              |                       |   |                              |             |                             |      |   |   |   |
|                                               |   |    |   |                              |                       |   |                              |             |                             |      |   |   |   |
|                                                    |   |    |   | Weighted-Average                  |                            |        | Aggregate                         |                  |                             |      |   |
|                                                    |   |         |        | Remaining                         |                            |        | Intrinsic                  Value  |             |                             |      |   |
| **RSAs**                                           |        | Shares  |        | Contractual                  Term |                            |        | (000's)                           |             |                             |      |   |
|                                               |   |    |   |                              |                       |   |                              |             |                             |      |   |   |   |
| Outstanding                  at September 30, 2005 |   | 114,220 |   |                              |                       |   |                              |             |                             |      |   |   |   |
| Granted                                            |   | 65,550  |   |                              |                       |   |                              |             |                             |      |   |   |   |
| Converted                                          |   | (33,715 | )      |                              |                       |   |                              |             |                             |      |   |   |   |
| Forfeited                  or expired              |   | (5,125  | )      |                              |                       |   |                              |             |                             |      |   |   |   |
| Outstanding                  at September 30, 2006 |   | 140,930 |   |                              | 3.0                  years |   |                              | $                | 5,729                            |      |   |   |   |
|                                               |   |    |   |                              |                       |   |                              |             |                             |      |   |   |   |
|                                               |   |    |   |                              |                       |   |                              |             |                             |      |   |   |   |
|                                                    |   |    |   | Weighted-Average                  |                            |        | Aggregate                         |             |                             |      |   |
|                                                    |   |         |        | Remaining                         |                            |        | Intrinsic                  Value  |             |                             |      |   |
| **Performance                  Shares**            |        | Shares  |        | Contractual                  Term |                            |        | (000's)                           |             |                             |      |   |
|                                               |   |    |   |                              |                       |   |                              |             |                             |      |   |   |   |
| Outstanding                  at September 30, 2005 |   | 81,575  |   |                              |                       |   |                              |             |                             |      |   |   |   |
| Granted                                            |   | 55,900  |   |                              |                       |   |                              |             |                             |      |   |   |   |
| Converted                                          |   | -       |   |                              |                       |   |                              |             |                             |      |   |   |   |
| Forfeited                  or expired              |   | (3,400  | )      |                              |                       |   |                              |             |                             |      |   |   |   |
| Outstanding                  at September 30, 2006 |   | 134,075 |   |                              | 1.1                  years |   |                              | $                | 5,450                            |      |   |   |   |

----

|                                                    |   |         |        | Aggregate                        |
|----------------------------------------------------|--------|---------|--------|----------------------------------|
|                                                    |   |    |        | Intrinsic                  Value |
| **Director                  Plans**                |   | Shares  |   | (000's)                          |
|                                               |   |    |   |                             |   |
| Outstanding                  at September 30, 2005 |   | 114,424 |   |                             |   |
| Granted                                            |   | 27,972  |   |                             |   |
| Converted                                          |   | (6,659  | )      |                             |   |
| Forfeited                  or expired              |   | -       |   |                             |   |
| Outstanding                  at September 30, 2006 |   | 135,737 |   | $                                | 5,518 |

|                                                                                                                           |   | Non-Qualified                |   |   |   |   |   |   |   | Performance                   |   |   |   |
|---------------------------------------------------------------------------------------------------------------------------|--------|------------------------------|--------|--------|--------|--------|--------|--------|--------|-------------------------------|--------|--------|--------|
| *(In                Thousands, Except Per-Share Amounts)*                                                                 |   | Stock                Options |   | SARs   |        | RSAs   |   | Shares |        | Director                Plans |
| **2006**                                                                                                                  |   |                         |   |   |   |   |   |   |   |                          |   |   |   |   |   |
| Weighted-average                grant-date fair value  of                options or shares granted              |   | $                            | -      |   | $      | -      |   | $      | 36.49  |                          | $      | 18.37  |   | $ | 36.73 |
| Total                intrinsic value of options exercised,  liabilities                paid or shares converted |   |                         | 266    |   |   | 28     |   |   | 1,295  |                          |   | -      |   |   | 1,027 |
| Total                fair value of options or shares vested                                                               |   |                         | -      |   |   | -      |   |   | 1,310  |                          |   | -      |   |   | - |
| Total                cash received from options exercised  or                shares converted                   |   |                         | 1,667  |   |   | -      |   |   | -      |                          |   | -      |   |   | - |
| Total                cash used to settle equity instruments  granted                                            |   |                         | -      |   |   | 28     |   |   | -      |                          |   | -      |   |   | - |
| Actual                tax benefit realized from options  exercised                or shares converted           |   | $                            | 106    |   | $      | 11     |   | $      | 515    |                          | $      | -      |   | $ | 408 |
|                                                                                                                      |   |                         |   |   |   |   |   |   |   |                          |   |   |   |   |   |
| **2005**                                                                                                                  |   |                         |   |   |   |   |   |   |   |                          |   |   |   |   |   |
| Weighted-average                grant-date fair value  of                options or shares granted              |   | $                            | -      |   | $      | -      |   | $      | 42.30  |                          | $      | 1.02   |   | $ | 37.89 |
| Total                intrinsic value of options exercised,  liabilities                paid or shares converted |   |                         | 817    |   |   | 499    |   |   | 1,221  |                          |   | -      |   |   | 983 |
| Total                fair value of options or shares vested                                                               |   |                         | -      |   |   | -      |   |   | 1,067  |                          |   | -      |   |   | - |
| Total                cash received from options exercised or  shares                converted                   |   |                         | 5,607  |   |   | -      |   |   | -      |                          |   | -      |   |   | - |
| Total                cash used to settle equity instruments  granted                                            |   |                         | -      |   |   | 499    |   |   | -      |                          |   | -      |   |   | - |
| Actual                tax benefit realized from options  exercised                or shares converted           |   | $                            | 325    |   | $      | 198    |   | $      | 485    |                          | $      | -      |   | $ | 391 |
|                                                                                                                      |   |                         |   |   |   |   |   |   |   |                          |   |   |   |   |   |
| **2004**                                                                                                                  |   |                         |   |   |   |   |   |   |   |                          |   |   |   |   |   |
| Weighted-average                grant-date fair value  of                options or shares granted              |   | $                            | -      |   | $      | -      |   | $      | 41.47  |                          | $      | -      |   | $ | 41.76 |
| Total                intrinsic value of options exercised,  liabilities                paid or shares converted |   |                         | 2,810  |   |   | 743    |   |   | 1,094  |                          |   | -      |   |   | 837 |
| Total                fair value of options or shares vested                                                               |   |                         | -      |   |   | -      |   |   | 922    |                          |   | -      |   |   | - |
| Total                cash received from options exercised or  shares                converted                   |   |                         | -      |   |   | -      |   |   | -      |                          |   | -      |   |   | - |
| Total                cash used to settle equity instruments  granted                                            |   |                         | 12,960 |   |   | 743    |   |   | -      |                          |   | -      |   |   | - |
| Actual                tax benefit realized from options  exercised                or shares converted           |   | $                            | 1,117  |   | $      | 295    |   | $      | 435    |                          | $      | -      |   | $ | 333 |

----

|                                                  |   |    |   |   |                        |   |        |    |   |                        | Performance |
|--------------------------------------------------|--------|---------|--------|--------|-----------------------------|--------|-------------|---------|--------|-----------------------------|-------------|
|                                                  |   |    |   |   | RSA                         |   |        |    |   | Shares                      |
|                                                  |   |    |   |   | Weighted-Average            |   |        |    |   | Weighted-Average            |
|                                                  |   | RSA     |   |   | Grant-Date                  |        | Performance |    |   | Grant-Date                  |
|                                                  |   | Shares  |   |   | Fair                  Value |   | Shares      |    |   | Fair                  Value |
| Nonvested                  at September 30, 2005 |   | 114,220 |   |   | $                           | 39.95  |        | 81,575  |   |                        | $           | 0.55 |
| Granted                                          |   | 65,550  |   |   |                        | 36.49  |        | 55,900  |   |                        |        | 18.37 |
| Vested                                           |   | (33,715 | )      |   |                        | 38.85  |        | -       |   |                        |        | - |
| Forfeited                                        |   | (5,125  | )      |   |                        | 36.56  |        | (3,400  | )      |                        |        | 6.22 |
| Nonvested                  at September 30, 2006 |   | 140,930 |   |   | $                           | 38.63  |        | 134,075 |   |                        | $           | 7.83 |

----

**18:      QUARTERLY FINANCIAL DATA (UNAUDITED)**

----

|                                                           |   |        | First              |   |   | Second             |   |   | Third              |   |   | Fourth             |   |   | Fiscal             |   |
|-----------------------------------------------------------|--------|--------|--------------------|--------|--------|--------------------|--------|--------|--------------------|--------|--------|--------------------|--------|--------|--------------------|--------|
|                                                           |   |   | Quarter            |   |   | Quarter            |   |   | Quarter            |   |   | Quarter            |   |   | Year               |   |
| **Fiscal                  2006**                          |   |   |               |   |   |               |   |   |               |   |   |               |   |   |               |   |
| Operating                  revenue                        |   | $      | 1,052,386          |   | $      | 1,180,028          |   | $      | 400,445            |   | $      | 385,111            |   | $      | 3,017,970          |   |
| Operating                  income (loss)                  |   |   | (22,512            | )      |   | 59,432             |   |   | (6,359             | )      |   | (28,775            | )      |   | 1,786              |   |
| Income                  (loss) from continuing operations |   |   | (18,325            | )      |   | 33,591             |   |   | (13,714            | )      |   | (29,493            | )      |   | (27,941            | )      |
| Income                  (loss) from discontinued          |   |   |               |   |   |               |   |   |               |   |   |               |   |   |               |   |
| operations,                  net of tax                   |   |   | (1,156             | )      |   | (421               | )      |   | 3,603              |   |   | 8,279              |   |   | 10,305             |   |
| Net                  income (loss)                        |   |   | (19,481            | )      |   | 33,170             |   |   | (10,111            | )      |   | (21,214            | )      |   | (17,636            | )      |
|                                                      |   |   |               |   |   |               |   |   |               |   |   |               |   |   |               |   |
| Basic                  EPS:                               |   |   |               |   |   |               |   |   |               |   |   |               |   |   |               |   |
| Income                  (loss) from continuing operations |   | $      | (0.48              | )      | $      | 0.88               |   | $      | (0.35              | )      | $      | (0.77              | )      | $      | (0.73              | )      |
| Income                  (loss) from discontinued          |   |   |               |   |   |               |   |   |               |   |   |               |   |   |               |   |
| operations,                  net of tax                   |   | $      | (0.03              | )      | $      | (0.01              | )      | $      | 0.09               |   | $      | 0.22               |   | $      | 0.27               |   |
| Net                  income (loss)                        |   | $      | (0.51              | )      | $      | 0.87               |   | $      | (0.26              | )      | $      | (0.55              | )      | $      | (0.46              | )      |
|                                                      |   |   |               |   |   |               |   |   |               |   |   |               |   |   |               |   |
| Diluted                  EPS:                             |   |   |               |   |   |               |   |   |               |   |   |               |   |   |               |   |
| Income                  (loss) from continuing operations |   | $      | (0.48              | )      | $      | 0.87               |   | $      | (0.35              | )      | $      | (0.76              | )      | $      | (0.73              | )      |
| Income                  (loss) from discontinued          |   |   |               |   |   |               |   |   |               |   |   |               |   |   |               |   |
| operations,                  net of tax                   |   | $      | (0.03              | )      | $      | (0.01              | )      | $      | 0.09               |   | $      | 0.21               |   | $      | 0.27               |   |
| Net                  income (loss)                        |   | $      | (0.51              | )      | $      | 0.86               |   | $      | (0.26              | )      | $      | (0.55              | )      | $      | (0.46              | )      |
|                                                      |   |   |               |   |   |               |   |   |               |   |   |               |   |   |               |   |
| Dividends                  declared per share             |   | $      | 0.545              |   | $      | 0.545              |   | $      | 0.545              |   | $      | 0.545              |   | $      | 2.18               |   |
| Common                  stock prices (high-low)           |   | $      | 39.90–$34.34 |   | $      | 37.97–$35.11 |   | $      | 38.66–$35.10 |   | $      | 43.87–$35.71 |   | $      | 43.87–$34.34 |   |
| **Fiscal                  2005**                          |   |   |               |   |   |               |   |   |               |   |   |               |   |   |               |   |
| Operating                  revenue                        |   | $      | 737,411            |   | $      | 1,026,906          |   | $      | 455,931            |   | $      | 379,337            |   | $      | 2,599,585          |   |
| Operating                  income (loss)                  |   |   | 47,386             |   |   | 88,520             |   |   | 19,858             |   |   | (6,347             | )      |   | 149,417            |   |
| Income                  (loss) from continuing operations |   |   | 23,062             |   |   | 49,831             |   |   | 4,835              |   |   | (10,880            | )      |   | 66,848             |   |
| Income                  (loss) from discontinued          |   |   |               |   |   |               |   |   |               |   |   |               |   |   |               |   |
| operations,                  net of tax                   |   |   | (586               | )      |   | 1,341              |   |   | 1,964              |   |   | 8,566              |   |   | 11,285             |   |
| Net                  income (loss)                        |   |   | 22,476             |   |   | 51,172             |   |   | 6,799              |   |   | (2,314             | )      |   | 78,133             |   |
|                                                      |   |   |               |   |   |               |   |   |               |   |   |               |   |   |               |   |
| Basic                  EPS:                               |   |   |               |   |   |               |   |   |               |   |   |               |   |   |               |   |
| Income                  (loss) from continuing operations |   | $      | 0.61               |   | $      | 1.31               |   | $      | 0.13               |   | $      | (0.29              | )      | $      | 1.76               |   |
| Income                  (loss) from discontinued          |   |   |               |   |   |               |   |   |               |   |   |               |   |   |               |   |
| operations,                  net of tax                   |   | $      | (0.02              | )      | $      | 0.04               |   | $      | 0.05               |   | $      | 0.23               |   | $      | 0.30               |   |
| Net                  income (loss)                        |   | $      | 0.59               |   | $      | 1.35               |   | $      | 0.18               |   | $      | (0.06              | )      | $      | 2.06               |   |
|                                                      |   |   |               |   |   |               |   |   |               |   |   |               |   |   |               |   |
| Diluted                  EPS:                             |   |   |               |   |   |               |   |   |               |   |   |               |   |   |               |   |
| Income                  (loss) from continuing operations |   | $      | 0.61               |   | $      | 1.31               |   | $      | 0.13               |   | $      | (0.28              | )      | $      | 1.75               |   |
| Income                  (loss) from discontinued          |   |   |               |   |   |               |   |   |               |   |   |               |   |   |               |   |
| operations,                  net of tax                   |   | $      | (0.02              | )      | $      | 0.03               |   | $      | 0.05               |   | $      | 0.22               |   | $      | 0.30               |   |
| Net                  income (loss)                        |   | $      | 0.59               |   | $      | 1.34               |   | $      | 0.18               |   | $      | (0.06              | )      | $      | 2.05               |   |
|                                                      |   |   |               |   |   |               |   |   |               |   |   |               |   |   |               |   |
| Dividends                  declared per share             |   | $      | 0.54               |   | $      | 0.545              |   | $      | 0.545              |   | $      | 0.545              |   | $      | 2.175              |   |
| Common                  stock prices (high-low)           |   | $      | 45.38–$41.05 |   | $      | 45.10–$41.11 |   | $      | 44.97–$38.72 |   | $      | 45.52–$38.71 |   | $      | 45.52–$38.71 |   |

----

|                                          |   |        | First   |   |   | Second  |   |   | Third   |   |   | Fourth  |   |   | Fiscal    |   |
|------------------------------------------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|-----------|--------|
|                                          |   |   | Quarter |   |   | Quarter |   |   | Quarter |   |   | Quarter |   |   | Year      |   |
|                                     |   |   |    |   |   |    |   |   |    |   |   |    |   |   |      |   |
| **Fiscal                  2006**         |   |   |    |   |   |    |   |   |    |   |   |    |   |   |      |   |
| Operating                  revenue       |   | $      | 613,525 |   | $      | 694,163 |   | $      | 190,587 |   | $      | 124,016 |   | $      | 1,622,291 |   |
| Operating                  income (loss) |   |   | (35,807 | )      |   | 16,561  |   |   | (1,371  | )      |   | (19,517 | )      |   | (40,134   | )      |
| Net                  income (loss)       |   |   | (24,240 | )      |   | 7,608   |   |   | (3,374  | )      |   | (15,438 | )      |   | (35,444   | )      |
|                                     |   |   |    |   |   |    |   |   |    |   |   |    |   |   |      |   |
| **Fiscal                  2005**         |   |   |    |   |   |    |   |   |    |   |   |    |   |   |      |   |
| Operating                  revenue       |   | $      | 438,852 |   | $      | 627,485 |   | $      | 219,275 |   | $      | 139,091 |   | $      | 1,424,703 |   |
| Operating                  income (loss) |   |   | 32,364  |   |   | 62,794  |   |   | 11,037  |   |   | (10,636 | )      |   | 95,559    |   |
| Net                  income (loss)       |   |   | 17,269  |   |   | 35,640  |   |   | 3,947   |   |   | (7,523  | )      |   | 49,333    |   |

|                                          |   |   | First   |   |   | Second  |   |   | Third   |   |   | Fourth  |   |   | Fiscal  |   |
|------------------------------------------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|
|                                          |   |   | Quarter |   |   | Quarter |   |   | Quarter |   |   | Quarter |   |   | Year    |   |
|                                     |   |   |    |   |   |    |   |   |    |   |   |    |   |   |    |   |
| **Fiscal                  2006**         |   |   |    |   |   |    |   |   |    |   |   |    |   |   |    |   |
| Operating                  revenue       |   | $      | 115,464 |   | $      | 127,194 |   | $      | 33,239  |   | $      | 23,692  |   | $      | 299,589 |   |
| Operating                  income (loss) |   |   | (8,791  | )      |   | 23,276  |   |   | 464     |   |   | (1,621  | )      |   | 13,328  |   |
| Net                  income (loss)       |   |   | (5,659  | )      |   | 13,829  |   |   | (20     | )      |   | (1,443  | )      |   | 6,707   |   |
|                                     |   |   |    |   |   |    |   |   |    |   |   |    |   |   |    |   |
| **Fiscal                  2005**         |   |   |    |   |   |    |   |   |    |   |   |    |   |   |    |   |
| Operating                  revenue       |   | $      | 80,096  |   | $      | 115,147 |   | $      | 38,957  |   | $      | 26,261  |   | $      | 260,461 |   |
| Operating                  income (loss) |   |   | 7,354   |   |   | 12,346  |   |   | 2,601   |   |   | (1,256  | )      |   | 21,045  |   |
| Net                  income (loss)       |   |   | 4,093   |   |   | 7,125   |   |   | 1,195   |   |   | (1,016  | )      |   | 11,397  |   |

----

----

**19:      SUPPLEMENTAL OIL AND GAS DISCLOSURES (UNAUDITED)**

**A.      Results of Operations for Exploration and Production      Activities**

|                                                                     |   | For                  Fiscal Years Ended September 30, |    |
|---------------------------------------------------------------------|--------|-------------------------------------------------------|---------|
|                                                                |   |                                                  | 2006    |   |   | 2005 |   |   | 2004 |   |
| *(In                  Thousands)*                                   |   |                                                  |    |   |   |   |   |   |   |   |
| Oil                  and gas production revenues (1)                |   | $                                                     | 126,750 |   | $ | 100,602 |   | $ | 123,777 |   |
| Operating                  costs:                                   |   |                                                  |    |   |   |   |   |   |   |   |
| DD &A                  and impairments                     |   |                                                  | 52,049  |   |   | 45,485 |   |   | 47,078 |   |
| Lease                  operating expenses                           |   |                                                  | 17,769  |   |   | 16,994 |   |   | 13,326 |   |
| Exploration                  expense                                |   |                                                  | 1,072   |   |   | 403 |   |   | 5,479 |   |
| Production                  taxes                                   |   |                                                  | 14,133  |   |   | 12,064 |   |   | 9,565 |   |
| Income                  tax                                         |   |                                                  | 14,876  |   |   | 9,146 |   |   | 17,229 |   |
|                                                                |   |                                                  | 99,899  |   |   | 84,092 |   |   | 92,677 |   |
| **Results                  of operations for producing activities** |   |                                                  |    |   |   |   |   |   |   |   |
| **(excluding                  corporate overhead, general**         |   |                                                  |    |   |   |   |   |   |   |   |
| **and                  administrative costs and financing costs)**  |   | $                                                     | 26,851  |   | $ | 16,510 |   | $ | 31,100 |   |
| Lease                  operating expense per Mcfe                   |   | $                                                     | 0.72    |   | $ | 0.70 |   | $ | 0.48 |   |
| Production                  taxes per Mcfe                          |   | $                                                     | 0.57    |   | $ | 0.50 |   | $ | 0.34 |   |
| Amortization                  rate per Mcfe (2)                     |   | $                                                     | 2.11    |   | $ | 1.87 |   | $ | 1.69 |   |

| (1)  | Includes                hedge losses of $62.6 million, $65.9 million and $25.8 million for                fiscal                2006, 2005 and 2004, respectively. |
|-----------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)  | Amortization                rate per Mcfe reflects only DD&A of capitalized costs of proved oil                and gas properties. |
|-----------|----------------------------------------------------------------------------------------------------------------------------------------|

**B.      Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development      Activities**

|                                                   |   | For                Fiscal Years Ended September 30, |
|---------------------------------------------------|--------|-----------------------------------------------------|
|                                              |   |                                                | 2006 |   |   | 2005 |   |   | 2004 |   |
| *(In                Thousands)*                   |   |                                                |   |   |   |   |   |   |   |   |
| Acquisition                of proved properties   |   | $                                                   | 103,794 |   | $ | 2,451 |   | $ | 32,288 |   |
| Acquisition                of unproved properties |   |                                                | 37,975 |   |   | 3,890 |   |   | 10,700 |   |
| Exploration                                       |   |                                                | 797 |   |   | 681 |   |   | 6,439 |   |
| Development                                       |   |                                                | 93,840 |   |   | 66,992 |   |   | 52,615 |   |
|                                              |   |                                                |   |   |   |   |   |   |   |   |
| **Total**                                         |   | $                                                   | 236,406 |   | $ | 74,014 |   | $ | 102,042 |   |

----

**C.      Capitalized Costs Relating to Oil and Gas Producing      Activities**

|                                                           |   | For                  Fiscal Years Ended September                  30, |     |
|-----------------------------------------------------------|--------|-----------------------------------------------------------------------------|----------|
|                                                      |   |                                                                        | 2006     |   |   | 2005 |   |   | 2004 |   |
| *(In                  Thousands)*                         |   |                                                                        |     |   |   |   |   |   |   |   |
| Proved                  properties                        |   | $                                                                           | 738,432  |   | $ | 537,995 |   | $ | 471,008 |   |
| Unproved                  properties                      |   |                                                                        | 51,001   |   |   | 15,581 |   |   | 15,582 |   |
| **Total                  proved and unproved properties** |   |                                                                        | 789,433  |   |   | 553,576 |   |   | 486,590 |   |
|                                                      |   |                                                                        |     |   |   |   |   |   |   |   |
| Accumulated                  DD&A and impairments     |   |                                                                        | (258,869 | ) |   | (206,820 | ) |   | (168,482 | ) |
|                                                      |   |                                                                        |     |   |   |   |   |   |   |   |
| **Net                  capitalized costs**                |   | $                                                                           | 530,564  |   | $ | 346,756 |   | $ | 318,108 |   |

**D.      Costs Not Being Amortized**

|                                            |   | For                Fiscal Years Ended September 30, |   |   |   |   |   |   |
|--------------------------------------------|--------|-----------------------------------------------------|--------|--------|--------|--------|--------|--------|
|                                       |   |                                                | 2006   |   |   | 2005   |   |   | 2004 |   |   | Prior                Years |   |   | Total |   |
| *(In                Thousands)*            |   |                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Property                acquisition costs  |   | $                                                   | 37,975 |   | $      | 3,740  |   | $      | 5,348 |   | $ | 3,938 |   | $ | 51,001 |   |
| Exploration                and development |   |                                                | -      |   |   | -      |   |   | - |   |   | - |   |   | - |   |
| Total                                      |   | $                                                   | 37,975 |   | $      | 3,740  |   | $      | 5,348 |   | $ | 3,938 |   | $ | 51,001 |   |

**E.      Reserve Quantity Information**

----

|                                                               |   |    |   |   |   | Gas        |   |
|---------------------------------------------------------------|--------|---------|--------|--------|--------|------------|--------|
|                                                               |   | Gas     |        | Oil    |        | Equivalent |   |
|                                                               |   | MMcf    |        | MBbls  |        | MMcfe      |   |
| *(In                  Thousands)*                             |   |    |   |   |   |       |   |
| **Ending                  Reserves—September 30, 2003** |   | 167,101 |   | 2,393  |   | 181,457    |   |
|                                                          |   |    |   |   |   |       |   |
| Extensions,                  discoveries and other additions  |   | 14,952  |   | 218    |   | 16,260     |   |
| Production                                                    |   | (24,515 | )      | (556   | )      | (27,853    | )      |
| Purchases                  of reserves in place               |   | 22,170  |   | 393    |   | 24,526     |   |
| Revisions                  of previous estimates              |   | (5,663  | )      | 121    |   | (4,931     | )      |
| Sales                  of reserves in place                   |   | -       |   | -      |   | -          |   |
|                                                          |   |    |   |   |   |       |   |
| **Ending                  Reserves—September 30, 2004** |   | 174,045 |   | 2,569  |   | 189,459    |   |
|                                                          |   |    |   |   |   |       |   |
| Extensions,                  discoveries and other additions  |   | 19,038  |   | 146    |   | 19,914     |   |
| Production                                                    |   | (22,115 | )      | (406   | )      | (24,551    | )      |
| Purchases                  of reserves in place               |   | 812     |   | 103    |   | 1,430      |   |
| Revisions                  of previous estimates              |   | (3,235  | )      | (168   | )      | (4,243     | )      |
| Sales                  of reserves in place                   |   | (129    | )      | (41    | )      | (375       | )      |
|                                                          |   |    |   |   |   |       |   |
| **Ending                  Reserves—September 30, 2005** |   | 168,416 |   | 2,203  |   | 181,634    |   |
|                                                          |   |    |   |   |   |       |   |
| Extensions,                  discoveries and other additions  |   | 27,843  |   | 269    |   | 29,455     |   |
| Production                                                    |   | (22,599 | )      | (352   | )      | (24,713    | )      |
| Purchases                  of reserves in place               |   | 60,009  |   | 558    |   | 63,356     |   |
| Revisions                  of previous estimates (1)          |   | (15,198 | )      | (283   | )      | (16,893    | )      |
| Sales                  of reserves in place                   |   | -       |   | -      |   | -          |   |
|                                                          |   |    |   |   |   |       |   |
| **Ending                  Reserves—September 30, 2006** |   | 218,471 |   | 2,395  |   | 232,839    |   |
|                                                          |   |    |   |   |   |       |   |
| Proved                  Developed Reserves                    |   |    |   |   |   |       |   |
| End                  of year—September 30, 2004         |   | 135,088 |   | 2,059  |   | 147,442    |   |
| End                  of year—September 30, 2005         |   | 132,742 |   | 1,569  |   | 142,156    |   |
| End                  of year—September 30, 2006         |   | 137,976 |   | 1,706  |   | 148,212    |   |

| (1)  | A                    substantial portion of the revisions at year end 2006 are a function                    of                    the gas pricing on September                    30, 2006. The index cash price used as of September 30, 2006                    was                    $4.18/MMBtu as compared                    to $14.71/MMBtu at September 30, 2005. This decreased gas price                    resulted                    in a downward revision                    of approximately 13.0 Bcfe of gas and associated                    liquids. |
|-----------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

**F.      Standardized Measure of Discounted Future Net Cash Flows and Changes Therein      Relating to Proved Oil and Gas Reserves**

|                                                                            |   | For                  Fiscal Years Ended September                  30, |    |
|----------------------------------------------------------------------------|--------|-----------------------------------------------------------------------------|---------|
|                                                                       |   |                                                                        | 2006    |   |   | 2005 |   |   | 2004 |   |
| *(In                  Thousands)*                                          |   |                                                                        |    |   |   |   |   |   |   |   |
| Future                  cash flows                                         |   | $                                                                           | 965,716 |   | $ | 2,081,286 |   | $ | 1,169,106 |   |
| Future                  production and development costs                   |   |                                                                        | 492,145 |   |   | 483,653 |   |   | 346,920 |   |
| Future                  income tax expense                                 |   |                                                                        | 169,027 |   |   | 568,625 |   |   | 292,388 |   |
|                                                                       |   |                                                                        |    |   |   |   |   |   |   |   |
| **Future                  net cash flows**                                 |   |                                                                        | 304,544 |   |   | 1,029,008 |   |   | 529,798 |   |
|                                                                       |   |                                                                        |    |   |   |   |   |   |   |   |
| Ten                  percent annual discount for estimated                 |   |                                                                        |    |   |   |   |   |   |   |   |
| timing                  of cash flows                                      |   |                                                                        | 153,566 |   |   | 439,640 |   |   | 207,299 |   |
|                                                                       |   |                                                                        |    |   |   |   |   |   |   |   |
| **Standardized                  measure of discounted future net cash**    |   |                                                                        |    |   |   |   |   |   |   |   |
| **flows                  relating to proved oil and natural gas reserves** |   | $                                                                           | 150,978 |   | $ | 589,368 |   | $ | 322,499 |   |

----

|                                                                          |        | For                  Fiscal Years Ended  September                    30, |     |
|--------------------------------------------------------------------------|--------|--------------------------------------------------------------------------------|----------|
|                                                                     |   |                                                                           | 2006     |   |   | 2005 |   |
| *(In                  Thousands)*                                        |   |                                                                           |     |   |   |   |   |
| **Beginning                  of year**                                   |   | $                                                                              | 589,368  |   | $ | 322,499 |   |
|                                                                     |   |                                                                           |     |   |   |   |   |
| Revisions                  of previous estimates                         |   |                                                                           |     |   |   |   |   |
| Changes                  in prices and costs                             |   |                                                                           | (594,122 | ) |   | 426,833 |   |
| Changes                  in quantities                                   |   |                                                                           | (91,819  | ) |   | (25,294 | ) |
| Additions                  to proved reserves resulting from extensions, |   |                                                                           |     |   |   |   |   |
| discoveries                  and improved recovery, less related costs   |   |                                                                           | 27,341   |   |   | 90,106 |   |
| Purchases                  of reserves in place                          |   |                                                                           | 35,455   |   |   | 6,727 |   |
| Sales                  of reserves in place                              |   |                                                                           | -        |   |   | (1,713 | ) |
| Previously                  estimated development costs incurred         |   |                                                                           |     |   |   |   |   |
| during                  the period                                       |   |                                                                           | 34,479   |   |   | 37,880 |   |
| Changes                  in estimated future development costs           |   |                                                                           | (14,008  | ) |   | (25,933 | ) |
| Accretion                  of discount                                   |   |                                                                           | 91,750   |   |   | 50,245 |   |
| Sales                  of oil and gas, net of production costs           |   |                                                                           | (158,808 | ) |   | (137,422 | ) |
| Net                  change in income taxes                              |   |                                                                           | 238,597  |   |   | (148,181 | ) |
| Timing                  and other                                        |   |                                                                           | (7,255   | ) |   | (6,379 | ) |
|                                                                     |   |                                                                           |     |   |   |   |   |
| **Net                  change**                                          |   |                                                                           | (438,390 | ) |   | 266,869 |   |
|                                                                     |   |                                                                           |     |   |   |   |   |
| **End                  of year**                                         |   | $                                                                              | 150,978  |   | $ | 589,368 |   |

----

**ITEM      9. Changes in and Disagreements with Accountants on Accounting and Financial      Disclosure**

----

**ITEM      9A. Controls and Procedures**

**Disclosure      Controls and Procedures**

----

**Management’s      Report on Internal Control Over Financial Reporting**

*Internal      Control—Integrated Framework*

**Changes      In Internal Control Over Financial Reporting**

**Report      of Independent Registered Public Accounting Firm**

*Internal      Control—Integrated Framework*

----

*Internal      Control—Integrated Framework*
*Internal      Control—Integrated Framework*

----

**ITEM      9B. Other Information**

**PART      III**

----

**ITEM      10. Directors, Executive Officers and Corporate Governance**

----

*www.PeoplesEnergy.com*

----

**ITEM      11. Executive Compensation**

----

**ITEM      12. Security Ownership of Certain Beneficial Owners and Management and Related      Stockholder Matters**

**EQUITY      COMPENSATION PLAN INFORMATION **

|      Plan                Category                    | (A)  Number                of Securities to be Issued Upon Exercise of Outstanding Options,                Warrants                and Rights | (B)  Weighted-Average                Exercise Price of Outstanding Options, Warrants and Rights | (C) Number                of Securities Remaining Available for Future Issuance under Equity                Compensation Plans (Excluding Securities Reflected in Column A) |
|-------------------------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------|-----------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                          |                                                                                                                                                    |                                                                                                      |                                                                                                                                                                             |
| Equity                compensation plans approved by security holders         | 563,006                (1) (2)                                                                                                                          | $38.91                                                                                                    | 651,717                (3)                                                                                                                                                       |
| Equity                compensation plans not approved by security holders (4) | 107,632                (4)                                                                                                                              | $36.89                                                                                                    | 82,468                                                                                                                                                                           |
| Total                                                                         | 670,638                                                                                                                                                 | --                                                                                                        | 734,185                                                                                                                                                                          |

| (1)   | Excludes                25,600 SARs outstanding and exercisable under the Company's LTIC                Plan. The                grant of a SAR enables the recipient to receive, for each SAR granted,                cash in an amount equal to the excess of the fair market value of                one                share of Company common stock on the date the SAR is exercised over                the                fair market value of one share on the date the SAR was granted. No                security is issued upon the exercise of a                SAR. |
|-----------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2)   | Includes                94,106 shares equivalent held for the account of participants in                the                Company's DDC Plan. |
|-----------------|------------------------------------------------------------------------------------------------------------------------------------------------|

| (3)   | Includes                600,360 shares remaining available for issuance under the Company's                2004                Incentive Compensation Plan for awards of performance shares, restricted                stock and RSUs, of which no more than 250,900 shares may be used                for                awards of restricted stock or RSUs that vest solely upon continued                service. Includes 51,357 share equivalents remaining available for                future                issuance under the DDC Plan. |
|-----------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (4)   | Includes                41,632 deferred shares held for the account of participants in the                Company's DSOP. |
|-----------------|---------------------------------------------------------------------------------------------------------------------------|

----

----

**ITEM      13. Certain Relationships, Related Transactions, and Director      Independence**

----

**ITEM      14. Principal Accounting Fees and Services**

**PART      IV**

----

**ITEM      15. Exhibits and Financial Statement Schedules**

|   |   |                                                    |   |   | Page   |   |   |
|--------|--------|---------------------------------------------------------|--------|--------|--------|--------|--------|
| (a)    | 1.     | Financial                Statements:                    |   |   |   |   |
|   |   | See                Part II, Item                8. |   | 59     |   |   |

|   | 2.     | Financial                Statement Schedules: |                                             |   |   |   |
|--------|--------|-----------------------------------------------|--------------------------------------------------|--------|--------|--------|
|   |   |                                          |                                             |   |   |   |   |
|   |   | Schedule                                      |                                             |   |   |   |
|   |   |  Number                                  |                                             |   |   |   |
|   |   | II                                            | Valuation                and Qualifying Accounts |   | 135    |   |   |
|   |   |                                          |                                             |   |   |   |
|   | 3.     | Exhibits                                      |                                             |   |   |   |
|   |   | See                Exhibit Index              |                                             | 139    |   |   |

----

| **Schedule                  II**                                                                      |   |
|-------------------------------------------------------------------------------------------------------|--------|
| VALUATION                  AND QUALIFYING ACCOUNTS *(In                  Thousands)*                  |   |   |   |   |   |   |   |   |   |   |
| **Peoples                  Energy Corporation and Subsidiary Companies**                              |   |   |   |   |   |   |   |   |   |   |
| Column                  A                                                                             |   |   | Column                  B |   |   | Column                  C |   |   | Column                  D |   |   | Column                  E |   |
|                                                                                                       |   |   |   |   |   | Additions |   |   | Deductions |   |   |   |   |
|                                                                                                       |   |   |   |   |   |   |   |   | Charges                  for the |   |   |   |   |
|                                                                                                       |   |   | Balance                  at |   |   | Charged |   |   | purpose                  for which the |   |   |   |   |
|                                                                                                       |   |   | beginning |   |   | to                  costs and |   |   | reserves                  or deferred |   |   | Balance                  at end |   |
| Description                                                                                           |   |   | of                  period |   |   | expenses |   |   | credits                  were created |   |   | of                  period |   |
| Fiscal                  Year Ended September 30, 2006                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| RESERVES                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (deducted                  from assets in balance sheet):                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reserve                  for uncollectible accounts                                                   |   | $ | 34,954 |   | $ | 48,574 |   | $ | 39,557 |   | $ | 43,971 |   |
| Fiscal                  Year Ended September 30, 2005                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| RESERVES                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (deducted                  from assets in balance sheet):                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reserve                  for uncollectible accounts                                                   |   | $ | 29,138 |   | $ | 37,110 |   | $ | 31,294 |   | $ | 34,954 |   |
| Fiscal                  Year Ended September 30, 2004                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| RESERVES                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (deducted                  from assets in balance sheet):                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reserve                  for uncollectible accounts                                                   |   | $ | 33,124 |   | $ | 37,274 |   | $ | 41,260 |   | $ | 29,138 |   |
| **The                  Peoples Gas Light and Coke Company and Subsidiary                  Companies** |   |   |   |   |   |   |   |   |   |   |
| Column                  A                                                                             |   |   | Column                  B |   |   | Column                  C |   |   | Column                  D |   |   | Column                  E |   |
|                                                                                                       |   |   |   |   |   | Additions |   |   | Deductions |   |   |   |   |
|                                                                                                       |   |   |   |   |   |   |   |   | Charges                  for the |   |   |   |   |
|                                                                                                       |   |   | Balance                  at |   |   | Charged |   |   | purpose                  for which the |   |   |   |   |
|                                                                                                       |   |   | beginning |   |   | to                  costs and |   |   | reserves                  or deferred |   |   | Balance                  at end |   |
| Description                                                                                           |   |   | of                  period |   |   | expenses |   |   | credits                  were created |   |   | of                  period |   |
| Fiscal                  Year Ended September 30, 2006                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| RESERVES                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (deducted                  from assets in balance sheet):                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reserve                  for uncollectible accounts                                                   |   | $ | 31,947 |   | $ | 45,681 |   | $ | 36,997 |   | $ | 40,631 |   |
| Fiscal                  Year Ended September 30, 2005                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| RESERVES                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (deducted                  from assets in balance sheet):                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reserve                  for uncollectible accounts                                                   |   | $ | 26,536 |   | $ | 34,796 |   | $ | 29,385 |   | $ | 31,947 |   |
| Fiscal                  Year Ended September 30, 2004                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| RESERVES                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (deducted                  from assets in balance sheet):                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reserve                  for uncollectible accounts                                                   |   | $ | 29,207 |   | $ | 35,306 |   | $ | 37,977 |   | $ | 26,536 |   |
| **North                  Shore Gas Company and Subsidiary Companies**                                 |   |   |   |   |   |   |   |   |   |   |
| Column                  A                                                                             |   |   | Column                  B |   |   | Column                  C |   |   | Column                  D |   |   | Column                  E |   |
|                                                                                                       |   |   |   |   |   | Additions |   |   | Deductions |   |   |   |   |
|                                                                                                       |   |   |   |   |   |   |   |   | Charges                  for the |   |   |   |   |
|                                                                                                       |   |   | Balance                  at |   |   | Charged |   |   | purpose                  for which the |   |   |   |   |
|                                                                                                       |   |   | beginning |   |   | to                  costs and |   |   | reserves                  or deferred |   |   | Balance                  at end |   |
| Description                                                                                           |   |   | of                  period |   |   | expenses |   |   | credits                  were created |   |   | of                  period |   |
| Fiscal                  Year Ended September 30, 2006                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| RESERVES                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (deducted                  from assets in balance sheet):                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reserve                  for uncollectible accounts                                                   |   | $ | 1,455 |   | $ | 2,185 |   | $ | 1,513 |   | $ | 2,127 |   |
| Fiscal                  Year Ended September 30, 2005                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| RESERVES                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (deducted                  from assets in balance sheet):                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reserve                  for uncollectible accounts                                                   |   | $ | 943 |   | $ | 1,563 |   | $ | 1,051 |   | $ | 1,455 |   |
| Fiscal                  Year Ended September 30, 2004                                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |
| RESERVES                                                                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (deducted                  from assets in balance sheet):                                             |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reserve                  for uncollectible accounts                                                   |   | $ | 1,012 |   | $ | 1,177 |   | $ | 1,246 |   | $ | 943 |   |

----

**SIGNATURES**

|                                                        |   |   | PEOPLES                ENERGY CORPORATION                     |
|-------------------------------------------------------------|--------|--------|---------------------------------------------------------------|
|                                                        |   |   |                                                          |
| Date:                 December                14, 2006 |   |   | By:                 /s/                THOMAS M. PATRICK |
|                                                        |   |   | Thomas                M. Patrick                              |
|                                                        |   |   | Chairman                of the Board, President and           |
|                                                        |   |   | Chief                Executive Officer                        |

| /s/                THOMAS M. PATRICK         | Chairman                of the Board, President and Chief Executive |
|----------------------------------------------|---------------------------------------------------------------------|
| Thomas                M. Patrick             | Officer                and Director (Principal Executive Officer)   |
|                                         |                                                                |
| /s/                THOMAS A. NARDI           | Executive                Vice President and Chief Financial Officer |
| Thomas                A. Nardi               | (Principal                Financial Officer)                        |
|                                         |                                                                |
| /s/                LINDA M. KALLAS           | Vice                President and Controller                        |
| Linda                M. Kallas               | (Principal                Accounting Officer)                       |
|                                         |                                                                |
| /s/                KEITH E. BAILEY           | Director                                                            |
| Keith                E. Bailey               |                                                                |
|                                         |                                                                |
| /s/                JAMES R. BORIS            | Director                                                            |
| James                R. Boris                |                                                                |
|                                         |                                                                |
| /s/                WILLIAM J. BRODSKY        | Director                                                            |
| William                J. Brodsky            |                                                                |
|                                         |                                                                |
| /s/                PASTORA SAN JUAN CAFFERTY | Director                                                            |
| Pastora                San Juan Cafferty     |                                                                |
|                                         |                                                                |
| /s/                DIANA S. FERGUSON         | Director                                                            |
| Diana                S. Ferguson             |                                                                |
|                                         |                                                                |
| /s/                JOHN W. HIGGINS           | Director                                                            |
| John                W. Higgins               |                                                                |
|                                         |                                                                |
| /s/                DIPAK C. JAIN             | Director                                                            |
| Dipak                C. Jain                 |                                                                |
|                                         |                                                                |
| /s/                MICHAEL E. LAVIN          | Director                                                            |
| Michael                E. Lavin              |                                                                |
|                                         |                                                                |
| /s/                HOMER J. LIVINGSTON, JR.  | Director                                                            |
| Homer                J. Livingston, Jr.      |                                                                |
|                                         |                                                                |
| /s/                RICHARD P. TOFT           | Director                                                            |
| Richard                P. Toft               |                                                                |

----

**SIGNATURES**

|                                                        |   | THE                PEOPLES GAS LIGHT AND COKE COMPANY         |
|-------------------------------------------------------------|--------|---------------------------------------------------------------|
|                                                        |   |                                                          |
| Date:                 December                14, 2006 |   | By:                 /s/                THOMAS M. PATRICK |
|                                                        |   | Thomas                M. Patrick                              |
|                                                        |   | Chairman                of the Board                          |
|                                                        |   | and                Chief Executive Officer                    |

| /s/                THOMAS M. PATRICK     | Chairman                of the Board and Chief Executive                      |
|------------------------------------------|-------------------------------------------------------------------------------|
| Thomas                M. Patrick         | Officer                and Director (Principal Executive Officer)             |
|                                     |                                                                          |
| /s/                THOMAS A. NARDI       | Executive                Vice President, Chief Financial Officer and Director |
| Thomas                A. Nardi           | (Principal                Financial Officer)                                  |
|                                     |                                                                          |
|  /s/                LINDA M. KALLAS | Vice                President and Controller                                  |
| Linda                M. Kallas           | (Principal                Accounting Officer)                                 |
|                                     |                                                                          |
| /s/                DESIREE G. ROGERS     | Director                                                                      |
| Desiree                G. Rogers         |                                                                          |
|                                     |                                                                          |
| /s/                WILLIAM E. MORROW     | Director                                                                      |
| William                E. Morrow         |                                                                          |

----

**SIGNATURES**

|                                                        |   |   | NORTH                SHORE GAS COMPANY                        |
|-------------------------------------------------------------|--------|--------|---------------------------------------------------------------|
|                                                        |   |   |                                                          |
| Date:                 December                14, 2006 |   |   | By:                 /s/                THOMAS M. PATRICK |
|                                                        |   |   | Thomas                M. Patrick                              |
|                                                        |   |   | Chairman                of the Board                          |
|                                                        |   |   | and                Chief Executive Officer                    |

| /s/                THOMAS M. PATRICK     | Chairman                of the Board and Chief Executive                      |
|------------------------------------------|-------------------------------------------------------------------------------|
| Thomas                M. Patrick         | Officer                and Director (Principal Executive Officer)             |
|                                     |                                                                          |
| /s/                THOMAS A. NARDI       | Executive                Vice President, Chief Financial Officer and Director |
| Thomas                A. Nardi           | (Principal                Financial Officer)                                  |
|                                     |                                                                          |
|  /s/                LINDA M. KALLAS | Vice                President and Controller                                  |
| Linda                M. Kallas           | (Principal                Accounting Officer)                                 |
|                                     |                                                                          |
| /s/                DESIREE G. ROGERS     | Director                                                                      |
| Desiree                G. Rogers         |                                                                          |
|                                     |                                                                          |
| /s/                WILLIAM E. MORROW     | Director                                                                      |
| William                E. Morrow         |                                                                          |

----

**Peoples      Energy Corporation and Subsidiary Companies**

**EXHIBIT      INDEX**

| (a) | The                exhibits listed below are filed herewith and made a part                hereof: |
|-----|----------------------------------------------------------------------------------------------------|

| ExhibitNumber |  Description                of Document                                                                                                                                                                                                                                                                                                          |
|---------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|          |                                                                                                                                                                                                                                                                                                                                                  |
| 10(a)         | Employment                and Retention Agreement dated August 31, 2006 between the Company                and                Thomas M. Patrick.                                                                                                                                                                                                      |
|          |                                                                                                                                                                                                                                                                                                                                                  |
| 10(b)         | Seasonal                Credit Agreement dated as of October 20, 2006 between the Company                and ABN                AMRO Bank N.V.                                                                                                                                                                                                        |
|          |                                                                                                                                                                                                                                                                                                                                                  |
| 10(c)         | Seasonal                Credit Agreement dated as of October 20, 2006 between the Company                and Bank                of America, N.A.                                                                                                                                                                                                     |
|          |                                                                                                                                                                                                                                                                                                                                                  |
| 10(d)         | Seasonal                Credit Agreement dated as of October 20, 2006 between the Company                and                JPMorgan Chase Bank.                                                                                                                                                                                                      |
|          |                                                                                                                                                                                                                                                                                                                                                  |
| 10(e)         | Amendment                Number One to the Amended and Restated Trust under the Company's                Directors                Deferred Compensation Plan, Directors Stock and Option Plan, Executive                Deferred Compensation Plan and Supplemental Retirement Benefit Plan,                dated                as of July 24, 2006. |
|          |                                                                                                                                                                                                                                                                                                                                                  |
| 12            | Statement                re: Computation of Ratio of Earnings to Fixed charges for the Company,                Peoples Gas and North Shore Gas.                                                                                                                                                                                                       |
|          |                                                                                                                                                                                                                                                                                                                                                  |
| 21            | Subsidiaries                of the Company.                                                                                                                                                                                                                                                                                                           |
|          |                                                                                                                                                                                                                                                                                                                                                  |
| 23(a)         | Consent                of Deloitte & Touche LLP to incorporate by reference in Registration                Statement File Nos. 333-84594, 333-70702, 2-82760, 33-6369, 33-63193,                333-62070, 333-113204, 333-116192, and 333-17701.                                                                                                 |
|          |                                                                                                                                                                                                                                                                                                                                                  |
| 23(b)         | Consent                of Netherland, Sewell and Associates, Inc. to incorporate by reference                in                Registration Statement File Nos. 333-84594, 333-70702, 2-82760, 33-6369,                033-63193, 333-62070, 333-113204, 333-116192, and                333-17701.                                                    |
|          |                                                                                                                                                                                                                                                                                                                                                  |
| 23(c)         | Consent                of Miller and Lents, Ltd. to incorporate by reference in Registration                Statement File Nos. 333-84594, 333-70702, 2-82760, 33-6369, 033-63193,                333-62070, 333-113204, 333-116192, and 333-17701.                                                                                                   |
|          |                                                                                                                                                                                                                                                                                                                                                  |
| 23(d)         | Prator                Bett, L.L.C. consent to incorporate by reference in Registration                Statement                File Nos. 333-84594, 333-70702, 2-82760, 33-6369, 033-63193, 333-62070,                333-113204, 333-116192, and 333-17701.                                                                                          |
|          |                                                                                                                                                                                                                                                                                                                                                  |
| 31(a)         | Certification                of Thomas M. Patrick on behalf of the Company, Peoples Gas and North                Shore                Gas pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as                adopted                pursuant to Section 302 of the Sarbanes-Oxley Act of                2002.                                |
|          |                                                                                                                                                                                                                                                                                                                                                  |
| 31(b)         | Certification                of Thomas A. Nardi on behalf of the Company, Peoples Gas and North                Shore                Gas pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as                adopted                pursuant to Section 302 of the Sarbanes-Oxley Act of                2002.                                  |
|          |                                                                                                                                                                                                                                                                                                                                                  |
| 32(a)         | Certification                of Thomas M. Patrick on behalf of the Company, Peoples Gas and North                Shore                Gas pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section                906                of the Sarbanes-Oxley Act of 2002.                                                                     |
|          |                                                                                                                                                                                                                                                                                                                                                  |
| 32(b)         | Certification                of Thomas A. Nardi on behalf of the Company, Peoples Gas and North                Shore                Gas pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section                906                of the Sarbanes-Oxley Act of 2002.                                                                       |
|          |                                                                                                                                                                                                                                                                                                                                                  |
| 99            | Form                11-K for the Employee Stock Purchase Plan of the Company for the                fiscal                year ended September 30, 2006.                                                                                                                                                                                              |

----

**Peoples      Energy Corporation and Subsidiary Companies**

**EXHIBIT      INDEX**

|   | ExhibitNumber                                                                                                                                                                                                                                                                                                                                                                                                                        |  Description                of Document                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
| (b)    | Exhibits                listed below have been filed heretofore with the SEC pursuant to                the                Securities Act of 1933, as amended, and/or the Securities Exchange                Act of                1934, as amended, and are incorporated herein by reference. The file                number and exhibit number of each such exhibit are stated in the                description of such exhibits. |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 3(a)                                                                                                                                                                                                                                                                                                                                                                                                                                 | Articles                of Incorporation of the Company, as amended on March 3, 1995 (The                Company—Form 10-K for the fiscal year ended September 30, 1995, Exhibit                3(b)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 3(b)                                                                                                                                                                                                                                                                                                                                                                                                                                 | Articles                of Incorporation of Peoples Gas, as amended on April 24, 1995 (Peoples                Gas—Form 10-K for fiscal year ended 1995, Exhibit                3(b)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 3(c)                                                                                                                                                                                                                                                                                                                                                                                                                                 | Articles                of Incorporation of North Shore Gas, as amended on April 24, 1995                (North                Shore Gas—Form 10-K for fiscal year ended 1995, Exhibit                3(b)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 3(d)                                                                                                                                                                                                                                                                                                                                                                                                                                 | By-Laws                of the Company, as amended December 2, 2005 (The Company—Form 10-Q for the                quarter ended March 31, 2006, Exhibit 3).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 3(e)                                                                                                                                                                                                                                                                                                                                                                                                                                 | By-Laws                of Peoples Gas, as amended August 10, 2004, (Peoples Gas—Form 10-K for the                fiscal year ended 2004, Exhibit 3(b)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 3(f)                                                                                                                                                                                                                                                                                                                                                                                                                                 | By-Laws                of North Shore Gas, as amended August 10, 2004, (North Shore Gas—Form 10-K                for the fiscal year ended 2004, Exhibit 3(d)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 4(a)                                                                                                                                                                                                                                                                                                                                                                                                                                 | Indenture                dated as of January 18, 2001, from the Company to Bank One Trust                Company                National Association (The Company—Form 10-Q for the quarter ended March                31, 2001, Exhibit 4(a)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                          |
|   |                                                                                                                                                                                                                                                                                                                                                                                                                                 |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|   | 4(b)                                                                                                                                                                                                                                                                                                                                                                                                                                 | The                Peoples Gas Light and Coke Company First and Refunding Mortgage,                dated                January 2, 1926, from Chicago By-Product Coke Company to Illinois                Merchants Trust Company, Trustee, assumed by The Peoples Gas Light                and                Coke Company (Peoples Gas) by Indenture dated March 1, 1928 (Peoples                Gas—May 17, 1935, Exhibit B-6a, Exhibit B-6b A-2 File No. 2-2151, 1936);                Supplemental Indenture dated as of May 20, 1936, (Peoples Gas—Form                8-K for the year 1936, Exhibit B-6f); Supplemental Indenture dated                as of                March 10, 1950 (Peoples Gas—Form 8-K for the month of March 1950, Exhibit                B-6i); Supplemental Indenture dated as of June 1, 1951 (Peoples Gas—File                No. 2-8989, Post-Effective, Exhibit 7-4(b)); Supplemental Indenture                dated                as of August 15, 1967 (Peoples Gas—File No. 2-26983, Post-Effective,                Exhibit 2-4); Supplemental Indenture dated as of                September 15, 1970 (Peoples Gas—File No. 2-38168, Post-Effective                Exhibit 2-2); Supplemental Indenture dated June 1, 1995 (Peoples                Gas—Form                10-K for fiscal year ended September 30, 1995); Supplemental Indenture,                First and Refunding Mortgage Multi-Modal Bonds, Series HH of Peoples                Gas,                effective March 1, 2000 (Peoples Gas—Form 10-K for fiscal year ended                September 30, 2000, Exhibit 4(b)); Supplemental Indenture dated as                of                February 1, 2003, First and Refunding Mortgage 5% Bonds, Series KK                (The                Company and Peoples Gas—Form 10-Q for the quarter ended March 31, 2003,                Exhibit 4(a)); Supplemental Indenture dated as of February 1, 2003,                First                and Refunding Mortgage Multi-Modal Bonds, Series LL (The Company                and                Peoples Gas—Form 10-Q for the quarter ended March 31, 2003, Exhibit 4(b));                Supplemental Indenture dated as of |

----

**Peoples      Energy Corporation and Subsidiary Companies**

**EXHIBIT      INDEX**

|   | ExhibitNumber |  Description                of Document                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|--------|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |          | February                15, 2003, First and Refunding Mortgage 4.00% Bonds, Series MM-1 and                Series                MM-2 (The Company and Peoples Gas—Form 10-Q for the quarter ended March                31, 2003, Exhibit 4(c)); Supplemental Indenture dated as of April                15,                2003, First and Refunding Mortgage 4.625% Bonds, Series NN-1 and                Series                NN-2 (The Company and Peoples Gas—Form 10-Q for the quarter ended March                31, 2003, Exhibit 4(e)); Supplemental Indenture dated as of October                1,                2003, First and Refunding Mortgage Bonds, Series OO (The Company                and                Peoples Gas—Form 10-Q for the quarter ended December 31, 2003, Exhibit                4(a)); Peoples Gas Supplemental Indenture dated as of October 1,                2003,                First and Refunding Mortgage Bonds, Series PP (The Company and Peoples                Gas—Form 10-Q for the quarter ended December 31, 2003, Exhibit 4(b));                Peoples Gas Supplemental Indenture dated as of November 1, 2003,                First and                Refunding Mortgage Multi-Modal Bonds, Series QQ (The Company and                Peoples                Gas—Form 10-Q for the quarter ended December 31, 2003, Exhibit 4(c));                Peoples Gas Supplemental Indenture dated as of January 1, 2005, First                and                Refunding Mortgage Bonds, Series RR (The Company and Peoples Gas—Form 10-Q                for the quarter ended December 31, 2004, Exhibit 4(b)); Loan Agreement                between Peoples Gas and Illinois Development Finance Authority dated                October 1, 2003, Gas Supply Refunding Revenue Bonds, Series 2003C                (The                Company and Peoples Gas—Form 10-Q for the quarter ended December 31, 2003,                Exhibit 4(d)); Loan Agreement between Peoples Gas and Illinois Development                Finance Authority dated October 1, 2003, Gas Supply Refunding Revenue                Bonds, Series 2003D (The Company and Peoples Gas—Form 10-Q for the quarter                ended December 31, 2003, Exhibit 4(e)); Loan Agreement between Peoples                Gas                and Illinois Development Finance Authority dated November 1, 2003,                Gas                Supply Refunding Revenue Bonds, Series 2003E (The Company and Peoples                Gas—Form 10-Q for the quarter ended December 31, 2003, Exhibit 4(f));                Loan                Agreement between Peoples Gas and Illinois Finance Authority dated                as of                January 1, 2005 (The Company and Peoples Gas—Form 10-Q for the quarter                ended December 31, 2004, Exhibit 4(a)). |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 4(c)          | North                Shore Gas Company (North Shore) Indenture, dated as of                April 1, 1955, from North Shore to Continental Bank, National                Association, as Trustee; Third Supplemental Indenture, dated as of                December 20, 1963 (North Shore—File No. 2-35965, Exhibit 4-1); Fourth                Supplemental Indenture, dated as of May 1 1964 (North Shore—File No.                2-35965, Exhibit 4-1); Fifth Supplemental Indenture dated as of                February 1, 1970 (North Shore—File No. 2-35965, Exhibit 4-2);                Ninth Supplemental Indenture dated as of December 1, 1987 (North                Shore—Form 10-K for the fiscal year ended September 30, 1987, Exhibit 4);                Thirteenth Supplemental Indenture dated December 1, 1998 (North Shore                Gas—Form 10-Q for the quarter ended March 31, 1999, Exhibit 4); Fourteenth                Supplemental Indenture dated as of April 15, 2003, First Mortgage                4.625%                Bonds, Series N-1 and Series N-2 (The Company and North Shore Gas—Form                10-Q for the quarter ended March 31, 2003, Exhibit                4(g)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   | 10(f)         | Lease                dated October 20, 1993, between Prudential Plaza Associates, as                Landlord, and Peoples Gas, as Tenant (Peoples Gas—Form 10-Q for the                quarterly period ended December 31, 1993, Exhibit 10); Peoples                Gas fourth Amendment to Lease (for headquarters office space) between                SIP                North Stetson Venture, LLC and Peoples Gas dated August 13, 2003                (Peoples                Gas—Form 10-K for fiscal year ended September 30, 2003, Exhibit                10(h)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |

----

**Peoples      Energy Corporation and Subsidiary Companies**

**EXHIBIT      INDEX**

|   | ExhibitNumber |  Description                of Document                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|--------|---------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10(g)         | Credit                Agreement dated as of June 13, 2006, by and among Peoples Gas, the                financial institutions party hereto, and Bank of America, N.A., JPMorgan                Chase Bank, N.A., ABN AMRO Incorporated, US Bank National Association,                and                The Bank of Tokyo-Mitsubishi, Ltd. Chicago Branch, as agents (The                Company—Form 10-Q for the quarter ended June 30, 2006, Exhibit                10(a). |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10(h)         | Insurance                Agreement between Peoples Gas and Ambac dated as of January 1, 2005                (The                Company and Peoples Gas—Form 10-Q for the quarter ended December 31, 2004,                Exhibit 10(b)).                                                                                                                                                                                                                                      |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10(i)         | Employee                Stock Purchase Plan, as amended, dated August 6, 1997 (The Company—Form                10-K for the fiscal year ended September 30, 1997, Exhibit                3(d)).                                                                                                                                                                                                                                                                                |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10(j)         | Executive                Deferred Compensation Plan, amended as of December 4, 2002 (The                Company—Form 10-Q for the quarter ended December 31, 2002, Exhibit                10(c)).                                                                                                                                                                                                                                                                              |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10(k)         | Directors                Stock and Option Plan as amended December 4, 2002 (The Company—Form 10-Q                for the quarterly period ended December 31, 2002, Exhibit                10(g)).                                                                                                                                                                                                                                                                              |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10(l)         | Amended                and Restated Trust under the Company's Directors Deferred Compensation                Plan, Directors Stock and Option Plan, Executive Deferred Compensation                Plan and Supplemental Retirement Benefit Plan, dated as of August                13, 2003                (The Company—Form 10-K for fiscal year ended September 30, 2003, Exhibit                10(a)).                                                                    |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10(m)         | Directors                Deferred Compensation Plan, as amended, dated April 7, 2004 (The                Company—Form 10-Q for the quarter ended June 30, 2004, Exhibit                10(a)).                                                                                                                                                                                                                                                                                 |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10(n)         | The                Company's 2004 Incentive Compensation Plan, effective February 27,                2004                (The Company—Form 10-Q for the quarter ended March 31, 2004, Exhibit                10(a)).                                                                                                                                                                                                                                                           |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10(o)         | The                Company’s Long-Term Incentive Compensation Plan, as amended December 4,                2002 (The Company—Form 10-Q for the quarter ended December 31, 2002,                Exhibit 10(d)).                                                                                                                                                                                                                                                            |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10(p)         | Percentage                Interest Award granted to Steven W. Nance, dated December 17, 2001                (The                Company—Form 10-K for fiscal year ended September 30, 2003, Exhibit                10(b)).                                                                                                                                                                                                                                                     |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|   | 10(q)         | Equity                Interest Award granted to Steven W. Nance, dated December 17, 2001                (The                Company—Form 10-K for fiscal year ended September 30, 2003, Exhibit                10(c)).                                                                                                                                                                                                                                                         |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

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**Peoples      Energy Corporation and Subsidiary Companies**

**EXHIBIT      INDEX**

|   | ExhibitNumber |  Description                of Document                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                       |
|--------|---------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 10(r)         | Severance                Agreement between the Company and Desiree G. Rogers dated as of April                22,                2005 (The Company—Form 10-Q for the quarter ended June 30, 2005, Exhibit                10(a)); Severance Agreement between the Company and Steven W. Nance                dated                as of June 2, 2004 (The Company—Form 10-K for fiscal year ended September                30, 2004, Exhibit 10(e)); Severance Agreement between the Company                and                William E. Morrow dated as of June 2, 2004 (The Company—Form 10-K for                fiscal year ended September 30, 2004, Exhibit 10(f)); Severance Agreement                between the Company and Thomas A. Nardi dated as of June 2, 2004                (The                Company—Form 10-K for fiscal year ended September 30, 2004, Exhibit                10(g)). |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 10(s)         | Retainer                Agreement between the Company and Theodore R. Tetzlaff dated as of                June                30, 2005 (The Company—Form 10-Q for the quarter ended June 30, 2005,                Exhibit 10(b)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 10(t)         | Summary                Sheet for Officer Perquisites (The Company—Form 10-K for fiscal year ended                September 30, 2005, Exhibit 10(b)).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 10(u)         | Order                of the Illinois Commerce Commission in Docket No. 01-0706 for North                Shore                Gas (the Company (The Company—Form 10-Q for the quarter ended March 31,                2006, Exhibit 10.1).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                     |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 10(v)         | Order                of the Illinois Commerce Commission in Docket No. 02-0726 for North                Shore                Gas (The Company—Form 10-Q for the quarter ended March 31, 2006, Exhibit                10.2).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 10(w)         | Order                of the Illinois Commerce Commission in Docket No. 02-0727 for Peoples                Gas                (The Company—Form 10-Q for the quarter ended March 31, 2006, Exhibit                10.3).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 10(x)         | Order                of the Illinois Commerce Commission in Docket No. 03-0704 for North                Shore                Gas (The Company—Form 10-Q for the quarter ended March 31, 2006, Exhibit                10.4).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 10(y)         | Order                of the Illinois Commerce Commission in Docket No. 03-0705 for Peoples                Gas                (The Company—Form 10-Q for the quarter ended March 31, 2006, Exhibit                10.5).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 10(z)         | Order                of the Illinois Commerce Commission in Docket No. 04-0682 for North                Shore                Gas (The Company—Form 10-Q for the quarter ended March 31, 2006, Exhibit                10.6).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
|   | 10(aa)        | Order                of the Illinois Commerce Commission in Docket No. 04-0683 for Peoples                Gas                (The Company—Form 10-Q for the quarter ended March 31, 2006, Exhibit                10.7).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                      |
|   |          |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |

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