| UNITED      STATES                                      |
|---------------------------------------------------------|
| SECURITIES      AND EXCHANGE COMMISSION                 |
| Washington,      D.C.  20549                  |
|                                                    |
| FORM      10-K                                          |
| (Mark      One)                                         |   |   |
| [X]                                                     |                              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) |
| OF THE      SECURITIES EXCHANGE ACT OF 1934             |
|                                                    |
| For the      fiscal year ended December 31,      2007   |
|                                                    |
| OR                                                      |
|                                                    |   |
| [  ]                                          |                          TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) |
| OF THE      SECURITIES EXCHANGE ACT OF 1934             |
|                                                    |
| For the      transition period from ________ to________ |

| CommissionFile Number | Registrant;      State of Incorporation;Address; and Telephone    Number | IRS      EmployerIdentification No. |
|-----------------------|--------------------------------------------------------------------------|-------------------------------------|
|                  |                                                                     |                                |
| 2-35965               | NORTH SHORE      GAS COMPANY                                             | 36-1558720                          |
|                  | (An Illinois      Corporation)                                           |                                |
|                  | 130 East      Randolph Drive                                             |                                |
|                  | 18th      Floor                                                          |                                |
|                  | Chicago,      Illinois  60601-6207                             |                                |
|                  | (312)      240-4000                                                      |                                |

| Indicate by      check mark if the Registrant is a well-known seasoned issuer, as defined      in Rule 405 of the Securities Act.  Yes      [  ]   No[X] |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Indicate by      check mark if the Registrant is not required to file reports pursuant to      Section 13 or 15(d) of the Exchange Act.  Yes      [X]   No[  ] |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Indicate by      check mark whether the Registrant (1) has filed all reports required to be      filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during      the preceding 12 months (or for such shorter period that the Registrant      was required to file such reports), and (2) has been subject to such      filing requirements for the past 90 days.  Yes [X]  No      [  ] |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                   |   |   |
| Indicate by      check mark if disclosure of delinquent filers pursuant to Item 405 of      Regulation S-K (§229.405 of this chapter) is not contained herein, and      will not be contained, to the best of Registrant's knowledge, in      definitive proxy or information statements incorporated by reference in      Part III of this Form 10-K or any amendment to this Form 10-K.      [X]                                |

| Indicate by      check mark whether the Registrant is a large accelerated filer, an      accelerated filer, a non-accelerated filer, or a smaller reporting      company. See definition of "large accelerated filer," "accelerated filer"      and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check      one):                                                                                                                                                                                                               |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Large      accelerated filer      [  ]                                                                         Accelerated      filer [  ]        |
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |
| Non-accelerated      filer      [X]                                                                           Smaller      Reporting Company [  ] |
| (Do not check      if a smaller reporting company)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |

| Indicate by      check mark whether the Registrant is a shell company (as defined in Rule      12b-2 of the Act).  Yes [  ]   No      [X] |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| Number of      shares outstanding of each class of common stock, as of February 28,      2008. |
|------------------------------------------------------------------------------------------------|
|                                                                                           |   |
| 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, a wholly-owned      subsidiary of Integrys Energy Group,Inc.) |

| Definitive      proxy statement for the Integrys Energy Group, Inc. Annual Meeting of      Shareholders to be held on May 15, 2008 is incorporated by reference into      Item 14 of Part III.                                               |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                                                                                                                                                                                                                                         |
| The      Registrant meets the conditions set forth in General Instruction I(1)(a)      and (b) of Form 10-K and is therefore filing this Form with the reduced      disclosure format permitted by General Instruction I(2)(b) and      (c). |

----

|                            |                                                                                                                   |                                                                | Page                                            |
|---------------------------------|------------------------------------------------------------------------------------------------------------------------|---------------------------------------------------------------------|-------------------------------------------------|
|                            |                                                                                                                   |                                                                |                                            |
| Forward-Looking      Statements |                                                                                                                   | 6                                                                   |
|                            |                                                                                                                   |                                                                |                                            |
| PART      I                     |                                                                                                                   |                                                                |                                            |
|                            |                                                                                                                   |                                                                |                                            |
| Item      1.                    | BUSINESS                                                                                                               |                                                                | 7                                               |
|                            |                                                                                                                   |                                                                |                                            |
| Item      1A.                   | RISK      FACTORS                                                                                                      |                                                                | 11                                              |
|                            |                                                                                                                   |                                                                |                                            |
| Item      1B.                   | UNRESOLVED      STAFF COMMENTS                                                                                         |                                                                | 14                                              |
|                            |                                                                                                                   |                                                                |                                            |
| Item      2.                    | PROPERTIES                                                                                                             |                                                                | 14                                              |
|                            |                                                                                                                   |                                                                |                                            |
| Item      3.                    | LEGAL      PROCEEDINGS                                                                                                 |                                                                | 15                                              |
|                            |                                                                                                                   |                                                                |                                            |
| Item      4.                    | SUBMISSION OF      MATTERS TO A VOTE OF SECURITY HOLDERS                                                               |                                                                | 15                                              |
|                            |                                                                                                                   |                                                                |                                            |
|                            |                                                                                                                   |                                                                |                                            |
|                            |                                                                                                                   |                                                                |                                            |
| PART      II                    |                                                                                                                   |                                                                |                                            |
|                            |                                                                                                                   |                                                                |                                            |
| Item      5.                    | MARKET FOR      REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER      PURCHASES OF EQUITY SECURITIES |                                                                | 15                                              |
|                            |                                                                                                                   |                                                                |                                            |
| Item      6.                    | SELECTED      FINANCIAL DATA                                                                                           |                                                                | 16                                              |
|                            |                                                                                                                   |                                                                |                                            |
| Item      7.                    | MANAGEMENT'S      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF      OPERATIONS                        |                                                                | 17                                              |
|                            |                                                                                                                   |                                                                |                                            |
| Item      7A.                   | QUANTITATIVE      AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK                                                   |                                                                | 28                                              |
|                            |                                                                                                                   |                                                                |                                            |
| Item      8.                    | FINANCIAL      STATEMENTS AND SUPPLEMENTARY DATA                                                                       |                                                                |                                            |
|                            | A.                                                                                                                     | Management      Report on Internal Control over Financial Reporting |                                            | 28 |
|                            | B.                                                                                                                     | Consolidated      Statements of Income                              |                                            | 29 |
|                            | C.                                                                                                                     | Consolidated      Balance Sheets                                    |                                            | 30 |
|                            | D.                                                                                                                     | Consolidated      Statements of Capitalization                      |                                            | 31 |
|                            | E.                                                                                                                     | Consolidated      Statements of Common Shareholder’s Equity   |                                            | 32 |
|                            | F.                                                                                                                     | Consolidated      Statements of Cash Flows                          |                                            | 33 |
|                            | G.                                                                                                                     | Notes to      Consolidated Financial Statements                     |                                            | 34 |
|                            |                                                                                                                   |                                                                |                                            |   |
|                            |                                                                                                                   | Note      1                                                         | SUMMARY OF      SIGNIFICANT ACCOUNTING POLICIES |   | 34 |
|                            |                                                                                                                   | Note      2                                                         | FAIR VALUE OF      FINANCIAL INSTRUMENTS        |   | 40 |
|                            |                                                                                                                   | Note      3                                                         | PROPERTY,      PLANT AND EQUIPMENT              |   | 41 |
|                            |                                                                                                                   | Note      4                                                         | SHORT-TERM      DEBT AND LONG-TERM DEBT         |   | 41 |
|                            |                                                                                                                   | Note      5                                                         | INCOME      TAXES                               |   | 42 |
|                            |                                                                                                                   | Note      6                                                         | COMMITMENTS      AND CONTINGENCIES              |   | 44 |
|                            |                                                                                                                   | Note      7                                                         | EMPLOYEE      BENEFIT PLANS                     |   | 47 |
|                            |                                                                                                                   | Note      8                                                         | PREFERRED      STOCK                            |   | 55 |
|                            |                                                                                                                   | Note      9                                                         | REGULATORY      ENVIRONMENT                     |   | 55 |

----

|                                                       |                                                                                                          | Note      10                                                 | BUSINESS      SEGMENTS                    |   | 56     |
|------------------------------------------------------------|---------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------|-------------------------------------------|--------|--------|
|                                                       |                                                                                                          | Note      11                                                 | QUARTERLY      FINANCIAL DATA (UNAUDITED) |   | 58     |
|                                                       |                                                                                                          |                                                         |                                      |   |   |
|                                                       | H.                                                                                                            | Report of      Independent Registered Public Accounting Firm |                                      | 59     |
|                                                       |                                                                                                          |                                                         |                                      |
| Item      9.                                               | CHANGES IN      AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING      AND FINANCIAL DISCLOSURE           |                                                         | 60                                        |
|                                                       |                                                                                                          |                                                         |                                      |
| Item      9A.                                              | CONTROLS AND      PROCEDURES                                                                                  |                                                         | 60                                        |
|                                                       |                                                                                                          |                                                         |                                      |
| Item      9B.                                              | OTHER      INFORMATION                                                                                        |                                                         | 60                                        |
|                                                       |                                                                                                          |                                                         |                                      |
| PART      III                                              |                                                                                                          |                                                         |                                      |
|                                                       |                                                                                                          |                                                         |                                      |
| Item      10.                                              | DIRECTORS,      EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE                                                   |                                                         | 61                                        |
|                                                       |                                                                                                          |                                                         |                                      |
| Item      11.                                              | EXECUTIVE      COMPENSATION                                                                                   |                                                         | 61                                        |
|                                                       |                                                                                                          |                                                         |                                      |
| Item      12.                                              | SECURITY      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT      AND RELATED STOCKHOLDER MATTERS |                                                         | 61                                        |
|                                                       |                                                                                                          |                                                         |                                      |
| Item      13.                                              | CERTAIN      RELATIONSHIPS, RELATED TRANSACTIONS, AND DIRECTOR    INDEPENDENCE                                |                                                         | 61                                        |
|                                                       |                                                                                                          |                                                         |                                      |
| Item      14.                                              | PRINCIPAL      ACCOUNTING FEES AND SERVICES                                                                   |                                                         | 61                                        |
|                                                       |                                                                                                          |                                                         |                                      |
| PART      IV                                               |                                                                                                          |                                                         |                                      |
|                                                       |                                                                                                          |                                                         |                                      |
| Item      15.                                              | EXHIBITS AND      FINANCIAL STATEMENT SCHEDULES                                                               |                                                         | 62                                        |
|                                                       |                                                                                                          |                                                         |                                      |
| SCHEDULE II –      VALUATION AND QUALIFYING ACCOUNTS |                                                                                                          | 63                                                           |
|                                                       |                                                                                                          |                                                         |
| SIGNATURES                                                 |                                                                                                          | 64                                                           |
|                                                       |                                                                                                          |                                                         |
| EXHIBITS      FILED HEREWITH                               |                                                                                                          | 65                                                           |

----

| AG       | Illinois      Attorney General                                                                                           |
|----------|--------------------------------------------------------------------------------------------------------------------------|
| Btu      | British      thermal unit                                                                                                |
| CERCLA   | The      Comprehensive Environmental Response, Compensation and Liability Act of      1980, as amended                   |
| Dth      | 1 dekatherm =      10 therms                                                                                             |
| EPA      | United States      Environmental Protection Agency                                                                       |
| FASB     | Financial      Accounting Standards Board                                                                                |
| FERC     | Federal      Energy Regulatory Commission                                                                                |
| FIN      | FASB      Interpretation No.                                                                                             |
| GAAP     | Accounting      principles generally accepted in the United States                                                       |
| ICC      | Illinois      Commerce Commission                                                                                        |
| IEPA     | Illinois      Environmental Protection Agency                                                                            |
| IRS      | United States      Internal Revenue Service                                                                              |
| LIFO     | Last in,      first out                                                                                                  |
| MD&A | Management’s      Discussion and Analysis of Financial Condition and Results of      Operations                    |
| MDth     | Thousand      dekatherms                                                                                                 |
| MGUC     | Michigan Gas      Utilities Corporation (a wholly-owned subsidiary of Integrys Energy Group,      Inc.)                  |
| MTM      | Mark-to-market                                                                                                           |
| OMC      | Outboard      Marine Corporation                                                                                         |
| NSG      | North Shore      Gas Company (including its wholly-owned subsidiary)                                                     |
| PCB      | Polychlorinated      biphenyl                                                                                            |
| PEC      | Peoples      Energy Corporation (a wholly-owned subsidiary of Integrys Energy Group,      Inc. and direct parent of NSG) |
| PGL      | The Peoples      Gas Light and Coke Company (a wholly-owned subsidiary of    PEC)                                        |
| PRP      | Potentially      Responsible Party                                                                                       |
| ROD      | Record of      decision                                                                                                  |
| SEC      | United States      Securities and Exchange Commission                                                                    |
| SFAS     | Statement of      Financial Accounting Standards                                                                         |
| Therm    | 100,000 Btu      (approximately 100 cubic feet)                                                                          |
| WPSC     | Wisconsin      Public Service Company (a wholly-owned subsidiary of Integrys Energy      Group, Inc.)                    |

----

Forward-Looking Statements

nts concerning expectations,beliefs, plans, objectives, goals, strategies, and future events or performance.Such statements are "forward-looking statements" within the meaning of Section21E of the Securities Exchange Act of 1934, as amended. Although NSG believesthat these forward-looking statements and the underlying assumptions arereasonable, it cannot provide assurance that they will prove correct. Except tothe extent required by the federal securities laws, NSG undertakes no obligationto publicly update or revise any forward-looking statements, whether as a resultof new information, future events or otherwise.

| ·   | Revenues or      expenses, |
|--------------------|----------------------------|

| ·   | Capital      expenditure projections, and |
|--------------------|-------------------------------------------|

| ·   | Financing      sources. |
|--------------------|-------------------------|

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

| ·   | Unexpected      costs and/or unexpected liabilities related to the merger between a      subsidiary of Integrys Energy Group andPEC; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------|

| ·   | The combined      company of Integrys Energy Group and PEC may be unable to achieve the      forecasted synergies or it may take longer or cost more than expected to      achieve these synergies; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| ·   | The impact of      recent and future federal, state and local regulatory change, including      legislative and regulatory initiatives regarding deregulation and      restructuring of the natural gas utility industry and possible future      initiatives to address concerns about global climate change, changes in      environmental, tax and other laws and regulations to which NSG and its      subsidiary are subject, as well as changes in application of existing laws      and regulations; |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| ·   | The credit      ratings of NSG could change in thefuture; |
|--------------------|-----------------------------------------------------------|

| ·   | Resolution of      audits or other tax disputes with the IRS, Illinois state revenue agencies      or other taxing authorities; |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------|

| ·   | The effects,      extent and timing of additional competition or regulation in the markets      in which NSG operates; |
|--------------------|------------------------------------------------------------------------------------------------------------------------|

| ·   | The impact of      fluctuations in commodity prices, interest rates, and customer      demand; |
|--------------------|------------------------------------------------------------------------------------------------|

| ·   | Available      sources and costs of natural gas; |
|--------------------|--------------------------------------------------|

| ·   | Investment      performance of employee benefit planassets; |
|--------------------|-------------------------------------------------------------|

| ·   | Advances in      technology; |
|--------------------|------------------------------|

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

| ·   | The direct or      indirect effects of terrorist incidents, natural disasters or responses to      such events; |
|--------------------|-----------------------------------------------------------------------------------------------------------------|

| ·   | The impacts      of changing financial market conditions, credit ratings and interest rates      on our financing efforts, and the risks associated with commodity prices      (particularly natural gas), interest rates and counter-party      credit; |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

----

----

|                                             |   |   | North      Shore Gas |
|--------------------------------------------------|--------|--------|----------------------|
|                                             |   |   | Design      Peak-Day |   |   |
|                                             |   |   | Availability         |   | Year of      Contract |
| Source                                           |   | (MDth) |                 | Expiration |
| Firm pipeline      capacity                      |   | 55     |                 | 2009-2017 |
| Firm      city-gate supply                       |   | 60     |                 | 2008 |
| Liquefied      petroleum gas                     |   | 40     |                 |   |
| Contracted      storage gas                      |   | 229    |                 | 2009-2017 |
| Customer-owned                                   |   | 55     |                 |   |
| Total      expected design peak-day availability |   | 439    |                 |   |

|                                                     |   |              |   |   | Transition        |   |   |               |   |   |               |   |
|----------------------------------------------------------|--------|-------------------|--------|--------|-------------------|--------|--------|--------------------|--------|--------|--------------------|--------|
|                                                     |   | Year      Ended   |   |   | Period      Ended |   |   | Year      Ended    |   |   | Year      Ended    |   |
|                                                     |   | December      31, |   |   | December      31, |   |   | September      30, |   |   | September      30, |   |
|                                                     |   | 2007              |   |   | 2006              |   |   | 2006               |   |   | 2005               |   |
|  Natural      gas purchases                         |   |              | 23,432 |   |              |   | 5,930  |               |   |   | 23,523             |   |   |   | 24,052 |   |
|  Liquefied      petroleum gas produced              |   |              | 7      |   |              |   | -      |               |   |   | 10                 |   |   |   | 6 |   |
|  Customer-owned      natural gas received           |   |              | 12,782 |   |              |   | 3,646  |               |   |   | 12,793             |   |   |   | 12,516 |   |
|  Underground      storage—net                 |   |              | 767    |   |              |   | 1,612  |               |   |   | (883               | )      |   |   | 116 |   |
|  Purchased      storage compressor fuel, franchise  |   |              |   |   |              |   |   |               |   |   |               |   |   |   |   |   |
|  requirements,      and unaccounted-for natural gas |   |              | (559   | )      |              |   | (451   | )                  |   |   | (517               | )      |   |   | (868 | ) |
|  Total                                              |   |              | 36,429 |   |              |   | 10,737 |               |   |   | 34,926             |   |   |   | 35,822 |   |

----

----

| Regulated      Natural Gas Segment Operating Statistics |   |
|---------------------------------------------------------|--------|
|                                                    |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                    |   |   |   |   | Transition |   |   |   |   |   |   |   |
|                                                    |   | Year      Ended |   |   | Period      Ended |   |   | Year      Ended |   |   | Year      Ended |   |
|                                                    |   | December      31, |   |   | December      31, |   |   | September      30, |   |   | September      30, |   |
|                                                    |   | 2007 |   |   | 2006 |   |   | 2006 |   |   | 2005 |   |
| Operating      Revenues (Millions of dollars)           |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                             |   |   | 209.7 |   |   |   | 57.0 |   |   |   | 221.3 |   |   |   | 190.1 |   |
| Commercial      and industrial                          |   |   | 45.8 |   |   |   | 12.2 |   |   |   | 47.8 |   |   |   | 41.4 |   |
| Transportation                                          |   |   | 14.1 |   |   |   | 4.0 |   |   |   | 14.3 |   |   |   | 13.3 |   |
| Other                                                   |   |   | 1.4 |   |   |   | 0.3 |   |   |   | 1.7 |   |   |   | 1.5 |   |
| Total                                                   |   |   | 271.0 |   |   |   | 73.5 |   |   |   | 285.1 |   |   |   | 246.3 |   |
| Therms      Delivered (Millions)                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                             |   |   | 193.3 |   |   |   | 59.0 |   |   |   | 182.8 |   |   |   | 192.1 |   |
| Commercial      and industrial                          |   |   | 41.7 |   |   |   | 12.4 |   |   |   | 39.1 |   |   |   | 41.3 |   |
| Total therm      sales                                  |   |   | 235.0 |   |   |   | 71.3 |   |   |   | 221.9 |   |   |   | 233.4 |   |
| Transportation                                          |   |   | 129.3 |   |   |   | 36.0 |   |   |   | 127.4 |   |   |   | 124.8 |   |
| Total                                                   |   |   | 364.3 |   |   |   | 107.4 |   |   |   | 349.3 |   |   |   | 358.2 |   |
| Customers      Served (End of period)                   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                             |   |   | 141,204 |   |   |   | 141,578 |   |   |   | 139,844 |   |   |   | 139,777 |   |
| Commercial      and industrial                          |   |   | 9,666 |   |   |   | 9,707 |   |   |   | 9,538 |   |   |   | 9,909 |   |
| Transportation      customers                           |   |   | 7,268 |   |   |   | 6,300 |   |   |   | 5,960 |   |   |   | 4,700 |   |
| Total                                                   |   |   | 158,138 |   |   |   | 157,585 |   |   |   | 155,342 |   |   |   | 154,386 |   |
| Average      Therm Price (Cents)                        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                                             |   |   | 108.48 |   |   |   | 96.61 |   |   |   | 121.06 |   |   |   | 98.96 |   |
| Commercial      and industrial                          |   |   | 109.83 |   |   |   | 98.39 |   |   |   | 122.25 |   |   |   | 100.24 |   |

----

| ·   | Annual      Reports on Form 10-K; |
|--------------------|-----------------------------------|

| ·   | Quarterly      Reports on Form 10-Q; |
|--------------------|--------------------------------------|

| ·   | Current      Reports on Form 8-K; and |
|--------------------|---------------------------------------|

| ·   | Any      amendments to these documents |
|--------------------|----------------------------------------|

----

----

| ·   | whether state      public utility and other regulatory authorities 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 andNSG; |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

| ·   | the ability      of Integrys Energy Group and PEC (including NSG) to combine certain of      their operations or take advantage of expected growth      opportunities; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

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

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

----

| ·   | 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 the merged companies and resolving potential      conflicts that may arise. |
|--------------------|------------------------------------------------------------------------------------------------------------------------|

----

----

| NORTH      SHORE GAS COMPANY                              |   |
|-----------------------------------------------------------|--------|
| COMPARATIVE      FINANCIAL STATEMENTS AND                 |   |
| FINANCIAL      AND OTHER STATISTICS (2003 TO 2007)        |   |
|                                                      |   |   |   |   |   |   |   |   |   |
|                                                      |   |
|                                                      |   |   |   |   | Transition |   |   |   |   |
|                                                      |   | Year      Ended |   |   | Period      Ended |   |   | Year      Ended |   |
|                                                      |   | December      31, |   |   | December      31, |   |   | September      30, |   |
| (Millions,      except weather and per share information) |   | 2007 |   |   | 2006 |   |   | 2006 |   |
|                                                      |   |   |   |   |   |   |   |   |   |
| Gas operating      revenues (1)                           |   | $ | 271.0 |   |   | $ | 73.5 |   |   | $ | 285.1 |   |
| Net      income                                           |   |   | 7.9 |   |   |   | 4.4 |   |   |   | 6.7 |   |
| Total      assets                                         |   |   | 424.9 |   |   |   | 410.9 |   |   |   | 400.0 |   |
| Long-term      debt (excluding current portion)           |   |   | 69.0 |   |   |   | 69.1 |   |   |   | 69.2 |   |
|                                                      |   |   |   |   |   |   |   |   |   |   |   |   |
| Weather      information                                  |   |   |   |   |   |   |   |   |   |   |   |   |
| Heating      degree days                                  |   |   | 6,025 |   |   |   | 2,116 |   |   |   | 5,775 |   |
| Heating      degree days as a percent of normal (2)       |   |   | 97.6 | % |   |   | 95.4 | % |   |   | 90.1 | % |
|                                                      |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                      |   |
|                                                      |   | Year      Ended |   |   | Year      Ended |   |   | Year      Ended |   |
|                                                      |   | September      30, |   |   | September      30, |   |   | September      30, |   |
| (Millions,      except weather information)               |   | 2005 |   |   | 2004 |   |   | 2003 |   |
|                                                      |   |   |   |   |   |   |   |   |   |   |   |   |
| Gas operating      revenues (1)                           |   | $ | 246.3 |   |   | $ | 209.4 |   |   | $ | 217.9 |   |
| Net      income                                           |   |   | 11.4 |   |   |   | 11.1 |   |   |   | 14.5 |   |
| Total      assets                                         |   |   | 371.2 |   |   |   | 323.0 |   |   |   | 304.1 |   |
| Long-term      debt (excluding current portion)           |   |   | 69.3 |   |   |   | 69.3 |   |   |   | 69.3 |   |
|                                                      |   |   |   |   |   |   |   |   |   |   |   |   |
| Weather      information                                  |   |   |   |   |   |   |   |   |   |   |   |   |
| Heating      degree days                                  |   |   | 5,864 |   |   |   | 6,091 |   |   |   | 6,684 |   |
| Heating      degree days as a percent of normal (2)       |   |   | 91.2 | % |   |   | 94.8 | % |   |   | 104.0 | % |

| (1) | Gas operating      revenues are net of revenue taxes billed NSG's utility customers. (See      Note 1(d), "Revenue and Customer Receivables," of the Notes to      Consolidated Financial Statements) |
|-----|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| (2) | Normal      heating degree days for fiscal 2003 through 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. Normal heating degree days for the transition period      ended December 31, 2006 and fiscal 2007 are based on a 10-year average of      monthly total heating degree days at Chicago’s O’Hare Airport for the      fiscal years 1996 to 2005. |
|-----|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

----

|                                    |   | Year      Ended   |   |   |               |   |   |               |   |
|-----------------------------------------|--------|-------------------|--------|--------|--------------------|--------|--------|--------------------|--------|
|                                    |   | December      31, |   |   | September      30, |   |   | September      30, |   |   | % Increase      (Decrease) |   |
| NSG      Results (Millions)             |   | 2007              |   |   | 2006               |   |   | 2005               |   |   | 2007 |   |   | 2006 |   |
|                                    |   |              |   |   |               |   |   |               |   |   |   |   |   |   |   |
| Revenues                                |   | $                 | 271.0  |   |               | $      | 285.1  |               |   | $ | 246.3 |   |   |   | (4.9 | )% |   |   | 15.8 | % |
| Purchased gas      costs                |   |              | 205.2  |   |               |   | 220.3  |               |   |   | 180.9 |   |   |   | (6.9 | )% |   |   | 21.8 | % |
| Margins                                 |   |              | 65.8   |   |               |   | 64.8   |               |   |   | 65.4 |   |   |   | 1.5 | % |   |   | (0.9 | )% |
|                                    |   |              |   |   |               |   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating and      maintenance expenses |   |              | 39.3   |   |               |   | 39.5   |               |   |   | 36.2 |   |   |   | (0.5 | )% |   |   | 9.1 | % |
| Gas charge      settlement              |   |              | 2.0    |   |               |   | 4.3    |               |   |   | - |   |   |   | (53.5 | )% |   |   | N/A |   |
| Depreciation      and amortization      |   |              | 6.0    |   |               |   | 5.7    |               |   |   | 5.7 |   |   |   | 5.3 | % |   |   | 0.0 | % |
| Taxes, other      than income taxes     |   |              | 2.4    |   |               |   | 2.0    |               |   |   | 2.4 |   |   |   | 20.0 | % |   |   | (16.7 | )% |
| Operating      income                   |   | $                 | 16.1   |   |               | $      | 13.3   |               |   | $ | 21.1 |   |   |   | 21.1 | % |   |   | (37.0 | )% |
|                                    |   |              |   |   |               |   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |
| Throughput      in therms               |   |              |   |   |               |   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |
| Residential                             |   |              | 193.3  |   |               |   | 182.8  |               |   |   | 192.1 |   |   |   | 5.7 | % |   |   | (4.8 | )% |
| Commercial      and industrial          |   |              | 41.7   |   |               |   | 39.1   |               |   |   | 41.3 |   |   |   | 6.6 | % |   |   | (5.3 | )% |
| Transport                               |   |              | 129.3  |   |               |   | 127.4  |               |   |   | 124.8 |   |   |   | 1.5 | % |   |   | 2.1 | % |
| Total sales      in therms              |   |              | 364.3  |   |               |   | 349.3  |               |   |   | 358.2 |   |   |   | 4.3 | % |   |   | (2.5 | )% |
|                                    |   |              |   |   |               |   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |
| Weather                                 |   |              |   |   |               |   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |
| Heating      degree days - actual       |   |              | 6,025  |   |               |   | 5,775  |               |   |   | 5,864 |   |   |   | 4.3 | % |   |   | (1.5 | )% |

| ·   | The impact on      revenues of lower natural gas prices (approximately $27 million) that are      recovered on a dollar-for-dollar basis, partially offset by increased      natural gas throughput volumes due to weather (approximately $12 million)      that was 4% colder compared with fiscal 2006 and due to higher      weather-normalized demand (approximately $2  million). |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Natural gas      costs were 12% lower (on a per-unit basis) during the year ended December      31, 2007 compared to the fiscal year ended September 30,      2006.  Following regulatory practice, changes in the total cost      of natural gas are passed on tocustomers. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | The impact on      revenues of higher natural gas prices (approximately $48 million) that are      recovered on a dollar-for-dollar basis, partially offset by decreased      natural gas throughput volumes due to lower weather-normalized demand      (approximately $11 million). |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Natural gas      costs were 26% higher (on a per-unit basis) during the fiscal year ended      September 30, 2006 compared to the fiscal year ended September 30,      2005.  Following regulatory practice, changes in the total cost      of natural gas are passed on tocustomers. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Operating and      maintenance expenses decreased $0.2 million (0.5%), to $39.3 million      during the year ended December 31, 2007, from $39.5 million during the      fiscal year ended September 30, 2006, driven by the    following: |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Ø   | Increased      expense of $1.0 million (excluding interest) related to the 2005 Gas      Charge reconciliation case as discussed in Note 6, “Commitments and      Contingencies,” in the Notes to Consolidated Financial      Statements. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Ø   | Decreased      pension expense of $0.7 million due to a higher assumed discount rate in      2007 and higher levels of lump sum settlements upon retirement in      2006. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Ø   | Decreased      utility environmental costs of $0.6 million related to investigation and      remediation activities at multiple manufactured gas plant sites (see Note      6, "Commitments and Contingencies," of the Notes to Consolidated Financial      Statements for further discussion).  These costs are recovered      through the utility’s environmental rate recovery mechanism and a similar      amount is included in revenues, therefore these costs do not affect      operating income. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Gas Charge      settlement totaled $2.0 million in 2007 and relates to the funding of the      Conservation Programs as discussed in Note 6, "Commitments and      Contingencies," of the Notes to Consolidated Financial Statements. The      $4.3 million charge in 2006 relates to the settlement of Gas Charge      proceedings for fiscal years 2001 through2004. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Depreciation      and amortization expense for the year ended December 31, 2007,      increased $0.3 million (5.3%) primarily due to impacts of a higher      year-over-year property, plant and equipment balance due to capital      expenditures for NSG's gas distributionsystem. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Taxes, other      than income taxes for the year ended December 31, 2007 increased $0.4      million (20%) primarily due to higher real estate taxes and higher      payroll-related taxes resulting from increased labor    expenses. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | Operating and      maintenance expenses increased $3.3 million (9.1%), to $39.5 million      during the fiscal year ended September 30, 2006, from $36.2 million during      the fiscal year ended September 30, 2005, driven  by: |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Ø   | Increased      utility environmental costs of $0.2 million related to investigation and      remediation activities at multiple manufactured gas plant sites (see Note      6, "Commitments and Contingencies," of the Notes to Consolidated Financial      Statements for further discussion).  These costs are recovered      through the utility’s environmental rate recovery mechanism and a similar      amount is included in revenues, therefore these costs do not affect      operating income. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| Ø   | Increased bad      debt expense of $0.5 million. |
|--------------------|--------------------------------------------------|

| Ø   | Increased      maintenance expenses of $0.1million. |
|--------------------|-----------------------------------------------------|

| Ø   | Increased      corporate allocated costs of $1.2million. |
|--------------------|----------------------------------------------------------|

| Ø   | Increased      various other operations expense of $0.8  million. |
|--------------------|-------------------------------------------------------------------|

| ·   | Gas Charge      settlement of $4.3 million in 2006 related to the settlement of Gas      Charge proceedings for fiscal years 2001 through 2004 as discussed in Note      6, "Commitments and Contingencies," of the Notes to Consolidated Financial      Statements. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Taxes, other      than income taxes for the year ended September 30, 2006 decreased      $0.4 million (16.7%) primarily due to lower payroll-related and other      taxes. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                               |   | Year      Ended   |   |   |                    |   |
|----------------------------------------------------|--------|-------------------|--------|--------|--------------------|--------|
|                                               |   | December      31, |   |   | September      30, |   |   | September      30, |   |   | %      Increase (Decrease) |   |
| NSG’s Other      (Expense) Income (Millions) |   | 2007              |   |   | 2006               |   |   | 2005 |   |   | 2007 |   |   | 2006 |   |
| Miscellaneous      income                          |   | $                 | 1.2    |   |               | $      | 1.3 |   |   | $ | 0.8 |   |   |   | (7.7)% |   |   |   | 62.5% |   |
| Interest      expense                              |   |              | (4.2)  |   |               |   | (4.1) |   |   |   | (3.8) |   |   |   | 2.4% |   |   |   | 7.9% |   |
| Other      (expense) income                        |   | $                 | (3.0)  |   |               | $      | (2.8) |   |   | $ | (3.0) |   |   |   | 7.1% |   |   |   | (6.7)% |   |

| ·   | Miscellaneous      income decreased $0.1 million (7.7%) due to decreases in interest      income. |
|--------------------|---------------------------------------------------------------------------------------------------|

| ·   | Interest      expense increased $0.1 million (2.4%) due to higher interest rates and      higher amounts of short-term borrowingbalances. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Miscellaneous      income increased $0.5 million (62.5%) due to increases in interest      income. |
|--------------------|----------------------------------------------------------------------------------------------------|

| ·   | Interest      expense increased $0.3 million (7.9%) due to higher interest rates and      higher amounts of short-term borrowing balances, and due to an increase in      gas costs refundable to customers through rate  adjustments. |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                    |   | Transition        |   |   |               |   |   |            |   |
|-----------------------------------------|--------|-------------------|--------|--------|--------------------|--------|--------|-----------------|--------|
|                                    |   | Period      Ended |   |   | Quarter      Ended |   |   |            |   |
|                                    |   | December      31, |   |   | December      31,  |   |   | %      Increase |   |
| NSG      Results (Millions)             |   | 2006              |   |   | 2005               |   |   | (Decrease)      |   |
|                                    |   |              |   |   |               |   |   |            |   |
| Revenues                                |   | $                 | 73.5   |   |               | $      | 110.3  |            |   |   | (33.4 | )% |
| Purchased gas      costs                |   |              | 54.6   |   |               |   | 90.3   |            |   |   | (39.5 | )% |
| Margins                                 |   |              | 18.9   |   |               |   | 20.0   |            |   |   | (5.5 | )% |
|                                    |   |              |   |   |               |   |   |            |   |   |   |   |
| Operating and      maintenance expenses |   |              | 9.0    |   |               |   | 10.0   |            |   |   | (10.0 | )% |
| Gas charge      settlement              |   |              | -      |   |               |   | 17.0   |            |   |   | (100.0 | )% |
| Depreciation      and amortization      |   |              | 1.5    |   |               |   | 1.4    |            |   |   | 7.1 | % |
| Taxes, other      than income taxes     |   |              | 0.5    |   |               |   | 0.4    |            |   |   | 25.0 | % |
| Operating      income                   |   | $                 | 7.9    |   |               | $      | (8.8   | )               |   |   | 189.8 | % |
|                                    |   |              |   |   |               |   |   |            |   |   |   |   |
| Throughput      in therms               |   |              |   |   |               |   |   |            |   |   |   |   |
| Residential                             |   |              | 59.0   |   |               |   | 64.7   |            |   |   | (8.8 | )% |
| Commercial      and industrial          |   |              | 12.4   |   |               |   | 13.6   |            |   |   | (8.8 | )% |
| Transport                               |   |              | 36.0   |   |               |   | 37.4   |            |   |   | (3.7 | )% |
| Total sales      in therms              |   |              | 107.4  |   |               |   | 115.7  |            |   |   | (7.2 | )% |
|                                    |   |              |   |   |               |   |   |            |   |   |   |   |
| Weather                                 |   |              |   |   |               |   |   |            |   |   |   |   |
| Heating      degree days - actual       |   |              | 2,116  |   |               |   | 2,302  |            |   |   | (8.1 | )% |

----

| ·   | The impact on      revenues of lower natural gas prices (approximately $30 million) that are      recovered on a dollar-for-dollar basis and impact on revenues of lower      deliveries due to weather (approximately $8 million) that was 8% warmer      compared with the same year-agoperiod. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Natural gas      costs were 34% lower (on a per-unit basis) during the transition period      ended December 31, 2006 compared to the quarter ended December 31,      2005.  Following regulatory practice, changes in the total cost      of natural gas are passed on tocustomers. |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Operating and      maintenance expenses decreased $1.0 million (10.0%), to $9.0 million      during the transition period ended December 31, 2006, from $10.0      million during the quarter ended December 31, 2005, driven primarily by a      decrease in bad debt expense. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | As noted      above, the Gas Charge settlement of $17.0 million in 2005 relates to the      settlement of Gas Charge proceedings for fiscal years 2001 through      2004. |
|--------------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Taxes, other      than income taxes for the transition period ended December 31, 2006      increased $0.1 million (25.0%) primarily due to higher      payroll-related taxes resulting from increased labor    expenses. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

|                                               |   | Transition        |   |   |               |   |   |            |   |
|----------------------------------------------------|--------|-------------------|--------|--------|--------------------|--------|--------|-----------------|--------|
|                                               |   | Period      Ended |   |   | Quarter      Ended |   |   |            |   |
|                                               |   | December      31, |   |   | December      31,  |   |   | %      Increase |   |
| NSG’s Other      (Expense) Income (Millions) |   | 2006              |   |   | 2005               |   |   | (Decrease)      |   |
| Miscellaneous      income                          |   | $                 | 0.2    |   |               | $      | 0.1    |            |   |   | 100.0% |   |
| Interest      expense                              |   |              | (1.1)  |   |               |   | (1.0)  |            |   |   | 10.0% |   |
| Other      (expense) income                        |   | $                 | (0.9)  |   |               | $      | (0.9)  |            |   |   | 0% |   |

----

|                                                     |         | Transition        |               |              |               |
|----------------------------------------------------------|--------------|-------------------|--------------------|-------------------|--------------------|
|                                                     | Year Ended   | Period      Ended | Year      Ended    | Quarter-Ended     | Year      Ended    |
|                                                     | December 31, | December      31, | September      30, | December      31, | September      30, |
| (Millions)                                               | 2007         | 2006              | 2006               | 2005              | 2005               |
| Net cash      provided by (used in) operating activities | $7.0         | $(8.3)            | $22.3              | $(9.1)            | $35.7              |
| Net cash      provided by (used in) investing activities | $(9.7)       | $(1.7)            | $(9.0)             | $(2.1)            | $(10.2)            |
| Net cash      provided by (used in) financing activities | $2.6         | $(2.7)            | $(11.0)            | $1.9              | $(15.0)            |

----

|                     |   | Standard      & Poor's |   | Moody's |
|--------------------------|--------|----------------------------|--------|---------|
| Senior      secured debt |   | A                          |   | A1      |

|                                      |   | Payments Due      by Period |   |
|-------------------------------------------|--------|-----------------------------|--------|
|                                      |   |                        |   |   | Less      than |   |   | 1 to      3 |   |   | 4 to      5 |   |   | More      than |   |
| (Millions)                                |   | Total                       |   |   | 1      year |   |   | years |   |   | years |   |   | 5      years |   |
| North      Shore Gas                      |   |                        |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Long-term      debt (See Note 4)          |   | $                           | 69.0   |   |   | $ | - |   |   | $ | - |   |   | $ | - |   |   | $ | 69.0 |   |
| Estimated      interest payments on debt  |   |                        | 40.7   |   |   |   | 3.3 |   |   |   | 6.6 |   |   |   | 6.6 |   |   |   | 24.2 |   |
| Purchase      obligations (See Note 6)    |   |                        | 60.7   |   |   |   | 20.3 |   |   |   | 13.7 |   |   |   | 9.2 |   |   |   | 17.5 |   |
| Minimum      pension funding (See Note 7) |   |                        | 1.0    |   |   |   | 0.5 |   |   |   | 0.5 |   |   |   | - |   |   |   | - |   |
| Total      contractual cash obligations   |   | $                           | 171.4  |   |   | $ | 24.1 |   |   | $ | 20.8 |   |   | $ | 15.8 |   |   | $ | 110.7 |   |

----

----

----

| Actuarial      Assumption(Millions,      except percentages) |   | PercentChange      inAssumption |   |   | Impact      onProjectedBenefitObligation |   |                   | Impact      onPensionCost |   |
|--------------------------------------------------------------|--------|---------------------------------|--------|--------|------------------------------------------|--------|------------------------|---------------------------|--------|
| Discount      rate                                           |   |                            | (0.5)  |   |                                     |   | $      2.0   |                      |   |   | $      0.3   |   |
| Discount      rate                                           |   |                            | 0.5    |   |                                     |   | (1.8)                  |                      |   |   | (0.3) |   |
| Rate of      return on plan assets                           |   |                            | (0.5)  |   |                                     |   | N/A                    |                      |   |   | 0.1 |   |
| Rate of      return on plan assets                           |   |                            | 0.5    |   |                                     |   | N/A                    |                      |   |   | (0.1) |   |

| Actuarial      Assumption(Millions,      except percentages) |   | Percent      Change in Assumption |   |   | Impact      on Postretirement Benefit Obligation |   |                   | Impact      on Postretirement Benefit Cost |   |
|--------------------------------------------------------------|--------|-----------------------------------|--------|--------|--------------------------------------------------|--------|------------------------|--------------------------------------------|--------|
| Discount      rate                                           |   |                              | (0.5)  |   |                                             |   | $      0.7   |                                       |   |   | $      0.1   |   |
| Discount      rate                                           |   |                              | 0.5    |   |                                             |   | (0.7)                  |                                       |   |   | (0.1) |   |
| Health care      cost trend rate                             |   |                              | (1.0)  |   |                                             |   | (1.3)                  |                                       |   |   | (0.3) |   |
| Health care      cost trend rate                             |   |                              | 1.0    |   |                                             |   | 1.5                    |                                       |   |   | 0.3 |   |
| Rate of      return on plan assets                           |   |                              | (0.5)  |   |                                             |   | N/A                    |                                       |   |   | - |   |
| Rate of      return on plan assets                           |   |                              | 0.5    |   |                                             |   | N/A                    |                                       |   |   | - |   |

----

----

| NORTH      SHORE GAS COMPANY                                                                                    |   |
|-----------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |
| B. CONSOLIDATED      STATEMENTS OF INCOME                                                                  |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                            |   |
|                                                                                                            |   |   |   |   | Transition |   |   |   |   |   |   |   |
|                                                                                                            |   | Year      Ended |   |   | Period      Ended |   |   | Year      Ended |   |   | Year      Ended |   |
|                                                                                                            |   | December      31, |   |   | December      31, |   |   | September      30, |   |   | September      30, |   |
| (Millions)                                                                                                      |   | 2007 |   |   | 2006 |   |   | 2006 |   |   | 2005 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |
| Gas      operating revenues                                                                                     |   | $ | 271.0 |   |   | $ | 73.5 |   |   | $ | 285.1 |   |   | $ | 246.3 |   |
| Operating      expenses                                                                                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Gas purchased      for resale                                                                                   |   |   | 205.2 |   |   |   | 54.6 |   |   |   | 220.3 |   |   |   | 180.9 |   |
| Operating and      maintenance expenses                                                                         |   |   | 39.3 |   |   |   | 9.0 |   |   |   | 39.5 |   |   |   | 36.2 |   |
| Gas charge      settlement                                                                                      |   |   | 2.0 |   |   |   | - |   |   |   | 4.3 |   |   |   | - |   |
| Depreciation      and amortization                                                                              |   |   | 6.0 |   |   |   | 1.5 |   |   |   | 5.7 |   |   |   | 5.7 |   |
| Taxes, other      than income taxes                                                                             |   |   | 2.4 |   |   |   | 0.5 |   |   |   | 2.0 |   |   |   | 2.4 |   |
| Operating      income                                                                                           |   |   | 16.1 |   |   |   | 7.9 |   |   |   | 13.3 |   |   |   | 21.1 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Miscellaneous      income                                                                                       |   |   | 1.2 |   |   |   | 0.2 |   |   |   | 1.3 |   |   |   | 0.8 |   |
| Interest      expense                                                                                           |   |   | (4.2 | ) |   |   | (1.1 | ) |   |   | (4.1 | ) |   |   | (3.8 | ) |
| Other      (expense) income                                                                                     |   |   | (3.0 | ) |   |   | (0.9 | ) |   |   | (2.8 | ) |   |   | (3.0 | ) |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Income before      taxes                                                                                        |   |   | 13.1 |   |   |   | 7.0 |   |   |   | 10.5 |   |   |   | 18.1 |   |
| Income tax      expense                                                                                         |   |   | 5.2 |   |   |   | 2.6 |   |   |   | 3.8 |   |   |   | 6.7 |   |
| Net      Income                                                                                                 |   | $ | 7.9 |   |   | $ | 4.4 |   |   | $ | 6.7 |   |   | $ | 11.4 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| The      accompanying notes to consolidated financial statements are an integral      part of these statements. |   |

----

| NORTH      SHORE GAS COMPANY                                                                                    |   |
|-----------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                            |   |   |   |   |   |   |
| C.  CONSOLIDATED      BALANCE SHEETS                                                                  |   |
|                                                                                                            |   |
|                                                                                                            |   | At      December 31, |   |   | At September      30, |   |
| (Millions)                                                                                                      |   | 2007 |   |   | 2006 |   |
| Assets                                                                                                          |   |   |   |   |   |   |
| Current      assets                                                                                             |   |   |   |   |   |   |
| Cash and cash      equivalents                                                                                  |   | $ | - |   |   | $ | 12.8 |   |
| Customer and      other receivables, net of reserves of $2.0 and $2.1                                           |   |   |   |   |   |   |   |   |
|      at      December 31, 2007 and September 30, 2006, respectively                    |   |   | 27.0 |   |   |   | 9.0 |   |
| Receivables      from related parties                                                                           |   |   | 2.3 |   |   |   | 3.6 |   |
| Accrued      unbilled revenues                                                                                  |   |   | 23.9 |   |   |   | 5.8 |   |
| Natural gas      in storage, primarily at last-in, first-out cost                                               |   |   | 8.9 |   |   |   | 21.7 |   |
| Materials and      supplies, at average cost                                                                    |   |   | 0.9 |   |   |   | 1.1 |   |
| Regulatory      assets                                                                                          |   |   | 9.1 |   |   |   | 24.6 |   |
| Gas costs      recoverable through rate adjustments                                                             |   |   | 0.7 |   |   |   | 2.2 |   |
| Assets from      risk management activities                                                                     |   |   | 1.3 |   |   |   | 0.3 |   |
| Deferred      income taxes                                                                                      |   |   | 0.7 |   |   |   | 2.5 |   |
| Prepayments      and other                                                                                      |   |   | 0.4 |   |   |   | 0.6 |   |
| Total      current assets                                                                                       |   |   | 75.2 |   |   |   | 84.2 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |
| Property,      plant, and equipment, net of accumulated depreciation of $154.2 and      $149.8                  |   |   |   |   |   |   |   |   |
|      at      December 31, 2007 and September 30, 2006, respectively                    |   |   | 244.8 |   |   |   | 224.7 |   |
| Noncurrent      regulatory assets                                                                               |   |   | 101.7 |   |   |   | 86.8 |   |
| Investments      and other assets                                                                               |   |   | 3.1 |   |   |   | 4.3 |   |
| Long-term      assets from risk management activities                                                           |   |   | 0.1 |   |   |   | - |   |
| Total      assets                                                                                               |   | $ | 424.9 |   |   | $ | 400.0 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |
| Liabilities      and Capitalization                                                                             |   |   |   |   |   |   |   |   |
| Current      liabilities                                                                                        |   |   |   |   |   |   |   |   |
| Accounts      payable                                                                                           |   | $ | 25.8 |   |   | $ | 21.1 |   |
| Payables to      related parties                                                                                |   |   | 7.3 |   |   |   | 29.6 |   |
| Notes payable      to related parties                                                                           |   |   | 11.9 |   |   |   | - |   |
| Current      liabilities from risk management activities                                                        |   |   | 5.7 |   |   |   | - |   |
| Accrued      interest and taxes                                                                                 |   |   | 3.0 |   |   |   | 2.6 |   |
| Gas costs      refundable through rate adjustments                                                              |   |   | 8.9 |   |   |   | 12.4 |   |
| Customer      deposits                                                                                          |   |   | 2.9 |   |   |   | 2.9 |   |
| Customer      credit balances                                                                                   |   |   | 8.1 |   |   |   | 11.8 |   |
| Other                                                                                                           |   |   | 2.2 |   |   |   | 1.7 |   |
| Total      current liabilities                                                                                  |   |   | 75.8 |   |   |   | 82.1 |   |
| Long-term      liabilities and deferred credits                                                                 |   |   |   |   |   |   |   |   |
| Deferred      income taxes                                                                                      |   |   | 39.0 |   |   |   | 45.7 |   |
| Deferred      investment tax credits                                                                            |   |   | 2.8 |   |   |   | 2.9 |   |
| Noncurrent      regulatory liabilities                                                                          |   |   | 2.0 |   |   |   | 2.1 |   |
| Environmental      remediation liability                                                                        |   |   | 84.6 |   |   |   | 67.9 |   |
| Pension and      postretirement benefit obligations                                                             |   |   | 25.1 |   |   |   | 9.9 |   |
| Asset      retirement obligations                                                                               |   |   | 23.0 |   |   |   | 19.3 |   |
| Other                                                                                                           |   |   | 2.2 |   |   |   | - |   |
| Total      long-term liabilities and deferred credits                                                           |   |   | 178.7 |   |   |   | 147.8 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |
| Commitments      and contingencies                                                                              |   |   |   |   |   |   |   |   |
|                                                                                                            |   |   |   |   |   |   |   |   |
| Capitalization                                                                                                  |   |   |   |   |   |   |   |   |
| Common stock      equity                                                                                        |   |   | 101.4 |   |   |   | 100.9 |   |
| Long-term      debt                                                                                             |   |   | 69.0 |   |   |   | 69.2 |   |
| Total      capitalization                                                                                       |   |   | 170.4 |   |   |   | 170.1 |   |
| Total      liabilities and capitalization                                                                       |   | $ | 424.9 |   |   | $ | 400.0 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |
| The      accompanying notes to consolidated financial statements are an integral      part of these statements. |   |   |   |   |   |

----

| NORTH      SHORE GAS COMPANY                                                                                    |   |
|-----------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |
| D.  CONSOLIDATED      STATEMENTS OF CAPITALIZATION                                                    |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                            |   |   |   |   |   | December      31, |   | September      30, |   |
| (Millions,      except share amounts)                                                                           |   |   |   | 2007 |   | 2006 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |
| Long-term      debt                                                                                             |   |   |   |   |   |   |   |   |   |   |   |
| First      mortgage bonds                                                                                       |   |   |   |   |   |   |   |   |   |   |
|                                                                                                            | Series |   | Year Due |   |   |   |   |   |   |   |   |
|                                                                                                            | M      | 5.00% | 2028 |   |   | $ | 29.0 |   | $ | 29.2 |   |
|                                                                                                            | N-2    | 4.625% | 2013 |   |   |   | 40.0 |   |   | 40.0 |   |
| Total      long-term debt                                                                                       |   |   |   |   |   | 69.0 |   |   | 69.2 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |
| Common      stock equity                                                                                        |   |   |   |   |   |   |   |   |   |   |
| Common stock,      without par value—                                                                     |   |   |   |   |   |   |   |   |
| Authorized      5,000,000 shares                                                                           |   |   |   |   |   |   |   |   |   |
| Outstanding      3,625,887 shares                                                                          |   |   |   |   | 24.8 |   |   | 24.8 |   |
| Accumulated      other comprehensive loss                                                                       |   |   |   | (0.1 | ) |   | (0.2 | ) |
| Retained      earnings                                                                                          |   |   |   |   |   | 76.7 |   |   | 76.3 |   |
| Total      common stock equity                                                                                  |   |   |   |   | 101.4 |   |   | 100.9 |   |
| Total      capitalization                                                                                       |   |   |   |   |  $ | 170.4 |   |  $ | 170.1 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |
| The      accompanying notes to consolidated financial statements are an integral      part of these statements. |   |   |   |   |

----

| NORTH      SHORE GAS COMPANY                                                                                    |   |
|-----------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                            |   |
| E. CONSOLIDATED      STATEMENTS OF COMMON SHAREHOLDER'S EQUITY                                             |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   | Accumulated |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   | Other |   |
|                                                                                                            |   | Comprehensive |  |   |   | Common |   |   | Retained |   |   | Comprehensive |   |
| (Millions)                                                                                                      |   | Income |   |   | Total |   |   | Stock |   |   | Earnings |   |   | Income      (Loss) |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance      at September 30, 2004                                                                              |   |   |   |   | $ | 103.8 |   |   | $ | 24.8 |   |   | $ | 80.3 |   |   | $ | (1.3 | ) |
| Income      available for common shareholders                                                                   |   | $ | 11.4 |   |   |   | 11.4 |   |   |   | - |   |   |   | 11.4 |   |   |   | - |   |
| Other      comprehensive income -                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| minimum      pension liability (net of tax of $0.7)                                                             |   |   | (1.1 | ) |   |   | (1.1 | ) |   |   | - |   |   |   | - |   |   |   | (1.1 | ) |
| Comprehensive      Income                                                                                       |   |   | 10.3 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends on      common stock                                                                                  |   |   |   |   |   |   | (11.1 | ) |   |   | - |   |   |   | (11.1 | ) |   |   | - |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance      at September 30, 2005                                                                              |   |   |   |   |   | $ | 103.0 |   |   | $ | 24.8 |   |   | $ | 80.6 |   |   | $ | (2.4 | ) |
| Income      available for common shareholders                                                                   |   | $ | 6.7 |   |   |   | 6.7 |   |   |   | - |   |   |   | 6.7 |   |   |   | - |   |
| Other      comprehensive income -                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| minimum      pension liability (net of tax of $1.5)                                                             |   |   | 2.2 |   |   |   | 2.2 |   |   |   | - |   |   |   | - |   |   |   | 2.2 |   |
| Comprehensive      Income                                                                                       |   |   | 8.9 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends on      common stock                                                                                  |   |   |   |   |   |   | (11.0 | ) |   |   | - |   |   |   | (11.0 | ) |   |   | - |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance      at September 30, 2006                                                                              |   |   |   |   |   | $ | 100.9 |   |   | $ | 24.8 |   |   | $ | 76.3 |   |   | $ | (0.2 | ) |
| Income      available for common shareholders                                                                   |   | $ | 4.4 |   |   |   | 4.4 |   |   |   | - |   |   |   | 4.4 |   |   |   | - |   |
| Other      comprehensive income                                                                                 |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Comprehensive      Income                                                                                       |   |   | 4.4 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends on      common stock                                                                                  |   |   |   |   |   |   | (2.5 | ) |   |   | - |   |   |   | (2.5 | ) |   |   | - |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance      at December 31, 2006                                                                               |   |   |   |   |   | $ | 102.8 |   |   | $ | 24.8 |   |   | $ | 78.2 |   |   | $ | (0.2 | ) |
| Income      available for common shareholders                                                                   |   | $ | 7.9 |   |   |   | 7.9 |   |   |   | - |   |   |   | 7.9 |   |   |   | - |   |
| Other      comprehensive income -                                                                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| unrealized      hedge gain (net of tax of $0.1)                                                                 |   |   | 0.1 |   |   |   | 0.1 |   |   |   | - |   |   |   | - |   |   |   | 0.1 |   |
| Comprehensive      Income                                                                                       |   |   | 8.0 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Dividends on      common stock                                                                                  |   |   |   |   |   |   | (9.4 | ) |   |   | - |   |   |   | (9.4 | ) |   |   | - |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Balance      at December 31, 2007                                                                               |   |   |   |   |   | $ | 101.4 |   |   | $ | 24.8 |   |   | $ | 76.7 |   |   | $ | (0.1 | ) |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| The      accompanying notes to consolidated financial statements are an integral      part of these statements. |   |

----

| NORTH      SHORE GAS COMPANY                                                                                    |   |
|-----------------------------------------------------------------------------------------------------------------|--------|
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |
| F.  CONSOLIDATED      STATEMENTS OF CASH FLOWS                                                        |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                                                                            |   |   |   |   | Transition |   |   |   |   |   |   |   |
|                                                                                                            |   | Year      Ended |   |   | Period      Ended |   |   | Year      Ended |   |   | Year      Ended |   |
|                                                                                                            |   | December      31, |   |   | December      31, |   |   | September      30, |   |   | September      30, |   |
| (Millions)                                                                                                      |   | 2007 |   |   | 2006 |   |   | 2006 |   |   | 2005 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |
| Operating      Activities:                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      income                                                                                                 |   | $ | 7.9 |   |   | $ | 4.4 |   |   | $ | 6.7 |   |   | $ | 11.4 |   |
| Adjustments      to reconcile net income to cash provided (used in) by      operations:                         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Depreciation                                                                                                    |   |   | 6.9 |   |   |   | 1.8 |   |   |   | 6.6 |   |   |   | 6.5 |   |
| Deferred      income taxes and investment tax credits—net                                                 |   |   | (1.3 | ) |   |   | - |   |   |   | 3.4 |   |   |   | 6.1 |   |
| Pension and      postretirement expense                                                                         |   |   | 4.2 |   |   |   | 0.5 |   |   |   | 1.5 |   |   |   | (6.9 | ) |
| Gas charge      settlement                                                                                      |   |   | 1.6 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Other      adjustments                                                                                          |   |   | (3.6 | ) |   |   | 1.3 |   |   |   | 1.3 |   |   |   | 1.4 |   |
| Net changes      in:                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Receivables—net                                                                                           |   |   | (7.5 | ) |   |   | (30.5 | ) |   |   | 2.0 |   |   |   | (0.7 | ) |
| Receivables      from related parties                                                                           |   |   | (1.9 | ) |   |   | 3.4 |   |   |   | 2.1 |   |   |   | 9.2 |   |
| Gas in      storage                                                                                             |   |   | 1.1 |   |   |   | 11.7 |   |   |   | (7.5 | ) |   |   | 0.7 |   |
| Gas costs      recoverable/refundable through rate adjustments                                                  |   |   | 6.5 |   |   |   | (8.6 | ) |   |   | 11.7 |   |   |   | 1.2 |   |
| Accounts      payable                                                                                           |   |   | 0.8 |   |   |   | 3.9 |   |   |   | (5.5 | ) |   |   | 10.4 |   |
| Payables to      related parties                                                                                |   |   | 3.5 |   |   |   | 1.2 |   |   |   | - |   |   |   | (3.5 | ) |
| Accrued      interest                                                                                           |   |   | - |   |   |   | (0.8 | ) |   |   | - |   |   |   | - |   |
| Accrued      taxes                                                                                              |   |   | (6.1 | ) |   |   | 3.6 |   |   |   | (4.2 | ) |   |   | 1.8 |   |
| Customer      credit balances                                                                                   |   |   | (4.1 | ) |   |   | 0.4 |   |   |   | 3.0 |   |   |   | 1.6 |   |
| Other                                                                                                           |   |   | (1.0 | ) |   |   | (0.6 | ) |   |   | 1.2 |   |   |   | (3.5 | ) |
| Net      cash provided by (used in) operating activities                                                        |   |   | 7.0 |   |   |   | (8.3 | ) |   |   | 22.3 |   |   |   | 35.7 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Investing      Activities:                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Capital      spending                                                                                           |   |   | (9.7 | ) |   |   | (1.6 | ) |   |   | (9.4 | ) |   |   | (9.8 | ) |
| Intercompany      loan receivable                                                                               |   |   | - |   |   |   | (0.1 | ) |   |   | 0.4 |   |   |   | (0.4 | ) |
| Net      cash provided by (used in) investing activities                                                        |   |   | (9.7 | ) |   |   | (1.7 | ) |   |   | (9.0 | ) |   |   | (10.2 | ) |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Financing      Activities:                                                                                      |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Intercompany      loan payable                                                                                  |   |   | 11.9 |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Retirement of      short-term debt                                                                              |   |   | - |   |   |   | - |   |   |   | - |   |   |   | (3.8 | ) |
| Retirement of      long-term debt                                                                               |   |   | - |   |   |   | (0.2 | ) |   |   | - |   |   |   | (0.1 | ) |
| Dividends      paid on common stock                                                                             |   |   | (9.3 | ) |   |   | (2.5 | ) |   |   | (11.0 | ) |   |   | (11.1 | ) |
| Net      cash provided by (used in) financing activities                                                        |   |   | 2.6 |   |   |   | (2.7 | ) |   |   | (11.0 | ) |   |   | (15.0 | ) |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      increase (decrease) in cash and cash equivalents                                                       |   |   | (0.1 | ) |   |   | (12.7 | ) |   |   | 2.3 |   |   |   | 10.5 |   |
| Cash      and cash equivalents at beginning of period                                                           |   |   | 0.1 |   |   |   | 12.8 |   |   |   | 10.5 |   |   |   | - |   |
| Cash      and cash equivalents at end of period                                                                 |   | $ | - |   |   | $ | 0.1 |   |   | $ | 12.8 |   |   | $ | 10.5 |   |
|                                                                                                            |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| The      accompanying notes to consolidated financial statements are an integral      part of these statements. |   |   |   |   |   |   |   |   |   |

----

| Revenues                          |   | $      | 110.3 |   |
|-----------------------------------|--------|--------|-------|--------|
| Operating      income (loss)      |   |   | (8.8  | )      |
| Income tax      expense (benefit) |   |   | (4.1  | )      |
| Net income      (loss)            |   |   | (5.7  | )      |

----

|                            |   | Year      EndedDecember      31, |   |   | TransitionPeriod      EndedDecember      31, |   |   | Year      EndedSeptember      30, |   |   | Year      EndedSeptember      30, |   |
|---------------------------------|--------|----------------------------------|--------|--------|----------------------------------------------|--------|--------|-----------------------------------|--------|--------|-----------------------------------|--------|
| (Millions)                      |   | 2007                             |   |   | 2006                                         |   |   | 2006                              |   |   | 2005                              |   |
| Cash paid for      interest     |   | $                                | 3.8    |   |                                         | $      | 1.8    |                              |   | $      | 3.6                               |   |   | $ | 3.5 |   |
| Cash paid for      income taxes |   | $                                | 12.3   |   |                                         | $      | 0.5    |                              |   | $      | 3.9                               |   |   | $ | (1.2 | ) |

----

|                                                    |   | Assets            |   |   | Liabilities        |   |
|---------------------------------------------------------|--------|-------------------|--------|--------|--------------------|--------|
|                                                    |   | December      31, |   |   | September      30, |   |   | December      31, |   |   | September      30, |   |
| (Millions)                                              |   | 2007              |   |   | 2006               |   |   | 2007 |   |   | 2006 |   |
|                                                    |   |              |   |   |               |   |   |   |   |   |   |   |
| Commodity      contracts                                |   | $                 | 2.1    |   |               | $      | 2.8 |   |   | $ | 5.7 |   |   | $ | 26.9 |   |
| Balance      Sheet Presentation                         |   |              |   |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Current                                                 |   |              |   |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Assets/liabilities      from risk management activities |   | $                 | 1.3    |   |               | $      | 0.3 |   |   | $ | 5.7 |   |   | $ | - |   |
| Other      receivables                                  |   |              | 0.7    |   |               |   | 2.5 |   |   |   |   |   |   |   |   |   |
| Payables to      related parties                        |   |              | -      |   |               |   | - |   |   |   | - |   |   |   | 26.9 |   |
| Total      current                                      |   | $                 | 2.0    |   |               | $      | 2.8 |   |   | $ | 5.7 |   |   | $ | 26.9 |   |
| Long-term                                               |   |              |   |   |               |   |   |   |   |   |   |   |   |   |   |   |
| Assets/liabilities      from risk management activities |   | $                 | 0.1    |   |               | $      | - |   |   | $ | - |   |   | $ | - |   |
| Total      long-term                                    |   |              | 0.1    |   |               |   | - |   |   |   | - |   |   |   | - |   |
| Total                                                   |   | $                 | 2.1    |   |               | $      | 2.8 |   |   | $ | 5.7 |   |   | $ | 26.9 |   |

----

|                                                          |   | December 31, |   |   | September      30, |   |
|---------------------------------------------------------------|--------|--------------|--------|--------|--------------------|--------|
|                                                          |   | 2007         |   |   | 2006               |   |
| (Millions)                                                    |   |         |   |   |               |   |
| Regulatory      assets                                        |   |         |   |   |               |   |
| Environmental      costs, net of recoveries (see Note 6)      |   | $            | 87.6   |   |               | $      | 69.2 |   |
| Asset      retirement obligations (see Note 1(i))             |   |         | 2.2    |   |               |   | 15.8 |   |
| Gas costs      recoverable through rate adjustments           |   |         | 0.7    |   |               |   | 2.2 |   |
| Discount,      premium, expenses and loss on reacquired bonds |   |         | 1.8    |   |               |   | 2.0 |   |
| Gas costs      hedging program (see Note 1(f))                |   |         | 5.0    |   |               |   | 24.4 |   |
| Pension and      post-retirement benefits (see Note 7)        |   |         | 12.6   |   |               |   | - |   |
| Merger      related costs (see Note 9)                        |   |         | 1.6    |   |               |   | - |   |
| Total      regulatory assets                                  |   |         | 111.5  |   |               |   | 113.6 |   |
|                                                          |   |         |   |   |               |   |   |   |
| Regulatory      liabilities                                   |   |         |   |   |               |   |   |   |
| Income tax      (see Note 1(j))                               |   |         | 2.0    |   |               |   | 2.1 |   |
| Gas costs      refundable through rate adjustments            |   |         | 8.9    |   |               |   | 12.4 |   |
| Total      regulatory liabilities                             |   |         | 10.9   |   |               |   | 14.5 |   |
|                                                          |   |         |   |   |               |   |   |   |
| Net      regulatory assets and liabilities of subsidiaries    |   | $            | 100.6  |   |               | $      | 99.1 |   |

----

----

| (Millions)                                              |   |   |   |
|---------------------------------------------------------|--------|--------|--------|
| Asset      retirement obligations at September 30, 2005 |   | $      | -      |   |
| Adoption of      FIN 47                                 |   |   | 19.3   |   |
| Asset      retirement obligations at September 30, 2006 |   |   | 19.3   |   |
| Accretion      expense                                  |   |   | 1.4    |   |
| Liabilities      incurred                               |   |   | 0.1    |   |
| Revisions in      estimated cash flows                  |   |   | 2.2    |   |
| Liabilities      settled                                |   |   | -      |   |
| Asset      retirement obligations at December 31, 2007  |   | $      | 23.0   |   |

----

| (Millions)                                              |   |                 |   |
|---------------------------------------------------------|--------|----------------------|--------|
| Long-term      debt including current      portion |   | Carrying      Amount |   | Estimated      Fair      Value |   |
| At      December 31, 2007                               |   | $69.0                |   | $68.9 |   |
| At September      30, 2006                              |   | $69.2                |   | $67.4 |   |

----

|                                      |   | December 31, |   |   | September      30, |   |
|-------------------------------------------|--------|--------------|--------|--------|--------------------|--------|
| Year Ended      (Millions)                |   | 2007         |   |   | 2006               |   |
| Total utility      plant                  |   | $            | 396.8  |   |               | $      | 373.0 |   |
| Less:      Accumulated depreciation       |   |         | 154.2  |   |               |   | 149.8 |   |
| Net                                       |   |         | 242.6  |   |               |   | 223.2 |   |
| Construction      in progress             |   |         | 2.2    |   |               |   | 1.5 |   |
| Total      Property, plant, and equipment |   | $            | 244.8  |   |               | $      | 224.7 |   |

| Year ending      December 31 |   |   |   |
|------------------------------|--------|--------|--------|
| (Millions)                   |   |   |   |
| 2008                         |   | $      | -      |   |
| 2009                         |   |   | -      |   |
| 2010                         |   |   | -      |   |
| 2011                         |   |   | -      |   |
| 2012                         |   |   | -      |   |
| Later      years             |   |   | 69.0   |   |
| Total      payments          |   | $      | 69.0   |   |

----

|                                          |   | December 31, |   |   | September      30, |   |
|-----------------------------------------------|--------|--------------|--------|--------|--------------------|--------|
|                                          |   | 2007         |   |   | 2006               |   |
| (Millions)                                    |   |         |   |   |               |   |
| Deferred      tax assets:                     |   |         |   |   |               |   |
| Group      insurance                          |   | $            | 4.1    |   |               | $      | 3.0 |   |
| Other                                         |   |         | 5.6    |   |               |   | 6.2 |   |
| Total      deferred income tax assets         |   | $            | 9.7    |   |               | $      | 9.2 |   |
| Deferred      tax liabilities:                |   |         |   |   |               |   |   |   |
| Property      related, net                    |   | $            | 45.3   |   |               | $      | 43.9 |   |
| Other                                         |   |         | 2.7    |   |               |   | 8.5 |   |
| Total      deferred income tax liabilities    |   |         | 48.0   |   |               |   | 52.4 |   |
| Net      deferred income tax liabilities      |   | $            | 38.3   |   |               | $      | 43.2 |   |
|                                          |   |         |   |   |               |   |   |   |
| Consolidated      Balance Sheet Presentation: |   |         |   |   |               |   |   |   |
| Current      deferred tax assets              |   | $            | 0.7    |   |               | $      | 2.5 |   |
| Long-term      deferred tax liabilities       |   |         | 39.0   |   |               |   | 45.7 |   |
| Net deferred      tax liabilities             |   | $            | 38.3   |   |               | $      | 43.2 |   |

|                                        |   |              |   |   |              |   |   | Transition         |   |   |               |   |   |   |   |   |   |   |   |   |   |
|---------------------------------------------|--------|-------------------|--------|--------|-------------------|--------|--------|--------------------|--------|--------|--------------------|--------|--------|--------|--------|--------|--------|--------|--------|--------|--------|
|                                        |   | Year      Ended   |   |   | Period      Ended |   |   | Year      Ended    |   |   | Year      Ended    |   |
|                                        |   | December      31, |   |   | December      31, |   |   | September      30, |   |   | September      30, |   |
|                                        |   | 2007              |   |   | 2006              |   |   | 2006               |   |   | 2005               |   |
|                                        |   |              |   |   |              |   |   |               |   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (Millions,      except for percentages)     |   | Amount            |   |   | Rate              |   |   | Amount             |   |   | Rate               |   |   | Amount |   |   | Rate   |   |   | Amount |   |   | Rate |   |
| Computed      federal income tax expense    |   | $                 | 4.6    |   |              |   | 35.00  |               |   | $      | 2.4                |   |   |   | 35.00  |   |   | $      | 3.7    |   |   |   | 35.00 |   |   | $ | 6.3 |   |   |   | 35.00 |   |
| Increase      (decrease) due to:            |   |              |   |   |              |   |   |               |   |   |               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| State income      taxes—net           |   |              | 0.6    |   |              |   | 4.53   |               |   |   | 0.3                |   |   |   | 4.60   |   |   |   | 0.5    |   |   |   | 4.74 |   |   |   | 0.9 |   |   |   | 4.78 |   |
| Unrecognized      tax benefits—FIN 48 |   |              | 0.3    |   |              |   | 2.32   |               |   |   | -                  |   |   |   | -      |   |   |   | -      |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Other—net                             |   |              | (0.3   | )      |              |   | (2.28  | )                  |   |   | (0.1               | )      |   |   | (1.97  | )      |   |   | (0.4   | )      |   |   | (3.59 | ) |   |   | (0.5 | ) |   |   | (2.91 | ) |
| Total      income tax expense               |   | $                 | 5.2    |   |              |   | 39.57  |               |   | $      | 2.6                |   |   |   | 37.63  |   |   | $      | 3.8    |   |   |   | 36.15 |   |   | $ | 6.7 |   |   |   | 36.87 |   |

----

|                                        |   |              |   |   | Transition        |   |   |               |   |   |               |   |
|---------------------------------------------|--------|-------------------|--------|--------|-------------------|--------|--------|--------------------|--------|--------|--------------------|--------|
|                                        |   | Year      Ended   |   |   | Period      Ended |   |   | Year      Ended    |   |   | Year      Ended    |   |
|                                        |   | December      31, |   |   | December      31, |   |   | September      30, |   |   | September      30, |   |
| (Millions)                                  |   | 2007              |   |   | 2006              |   |   | 2006               |   |   | 2005               |   |
|                                        |   |              |   |   |              |   |   |               |   |   |               |   |
| Current:                                    |   |              |   |   |              |   |   |               |   |   |               |   |
| Federal                                     |   | $                 | 3.9    |   |              | $      | 2.3    |               |   | $      | 0.7                |   |   | $ | 0.6 |   |
| State                                       |   |              | 2.3    |   |              |   | 0.3    |               |   |   | (0.3               | )      |   |   | - |   |
| Total      current income taxes             |   |              | 6.2    |   |              |   | 2.6    |               |   |   | 0.4                |   |   |   | 0.6 |   |
|                                        |   |              |   |   |              |   |   |               |   |   |               |   |   |   |   |   |
| Deferred      provision                     |   |              | (1.3   | )      |              |   | -      |               |   |   | 3.4                |   |   |   | 6.1 |   |
|                                        |   |              |   |   |              |   |   |               |   |   |               |   |   |   |   |   |
| Unrecognized      Tax Benefits—FIN 48 |   |              | 0.3    |   |              |   | -      |               |   |   | -                  |   |   |   | - |   |
|                                        |   |              |   |   |              |   |   |               |   |   |               |   |   |   |   |   |
| Net      income tax expense                 |   | $                 | 5.2    |   |              | $      | 2.6    |               |   | $      | 3.8                |   |   | $ | 6.7 |   |

| (Millions)                                           |   | Unrecognized      Tax Benefits |   |
|------------------------------------------------------|--------|--------------------------------|--------|
| Balance at      January 1, 2007                      |   | $                              | 0.1    |   |
| Increase in      tax positions taken in prior years  |   |                           | 0.1    |   |
| Increase in      tax positions taken in current year |   |                           | 0.2    |   |
| Balance      at December 31, 2007                    |   | $                              | 0.4    |   |

| ·   | Illinois      Department of Revenue – NSG has agreed to extensions of the statutes of      limitations for assessing tax for tax years covering 2001-2004. The      extensions for tax years covering 2001-2002 expire March 31, 2008, and the      extensions for tax years covering 2003-2004 expire December 31,      2008. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | IRS – NSG has      agreed to extensions of the statutes of limitations for tax years covering      1999-2004. The extensions for tax years covering 1999-2003 expire      September 30, 2008, and the extension covering tax year 2004 expires June      30, 2009. |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | IRS –      NSG  has partially agreed to an audit report and closing      statement for an IRS examination of the 1999-2003 tax years, but NSG has      protested one issue from the agent’s report that has been sent to IRS      appeals for potential resolution. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | IRS – NSG has      an open examination for the 2004-2005 taxyears. |
|--------------------|--------------------------------------------------------------------------|

| ·   | Illinois      Department of Revenue – NSG has an open examination for the 2001-2006 tax      years. |
|--------------------|-----------------------------------------------------------------------------------------------------------|

----

----

----

----

| ·   | Closure of      the defined benefit pension plans to non-union new hires, effective as of      January 1, 2008; |
|--------------------|-----------------------------------------------------------------------------------------------------------------|

| ·   | A freeze in      defined benefit pension service accruals for non-union employees,      effective as of January 1, 2013; |
|--------------------|--------------------------------------------------------------------------------------------------------------------------|

| ·   | A freeze in      compensation amounts used for determining defined benefit pension amounts      for non-union employees, effective as of January 1,  2018; |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Revised      eligibility requirements for retiree medical benefits for employees hired      on or after January 1, 2008, and the introduction, beginning in 2013, of      an annual premium reduction credit for employees retiring after December      31, 2012; and |
|--------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | Closure of      the retiree dental and life benefit programs to all new hires, effective      January 1, 2008, and elimination of these benefits for any existing      employees retiring after December 31,2012. |
|--------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

|                                                             |   | Pension      Benefits |   |
|------------------------------------------------------------------|--------|-----------------------|--------|
|                                                             |   |                  |   |   | Transition |   |   |   |   |   |   |   |
|                                                             |   | Year      Ended       |   |   | Period      Ended |   |   | Year      Ended |   |   | Year      Ended |   |
|                                                             |   | December      31,     |   |   | December      31, |   |   | September      30, |   |   | September      30, |   |
|                                                             |   | 2007                  |   |   | 2006 |   |   | 2006 |   |   | 2005 |   |
| (Millions)                                                       |   |                  |   |   |   |   |   |   |   |   |   |   |
| Change      in benefit obligation                                |   |                  |   |   |   |   |   |   |   |   |   |   |
| Benefit      obligation at beginning of measurement period       |   | $                     | 28.6   |   |   | $ | 26.3 |   |   | $ | 32.1 |   |   | $ | 28.7 |   |
| Service      cost                                                |   |                  | 1.3    |   |   |   | 0.3 |   |   |   | 1.5 |   |   |   | 1.1 |   |
| Interest      cost                                               |   |                  | 1.6    |   |   |   | 0.4 |   |   |   | 1.6 |   |   |   | 1.6 |   |
| Participant      contributions                                   |   |                  | -      |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Curtailment                                                      |   |                  | (0.8   | ) |   |   | - |   |   |   | - |   |   |   | - |   |
| Transfers                                                        |   |                  | (0.2   | ) |   |   | - |   |   |   | (0.3 | ) |   |   | - |   |
| Plan      amendments                                             |   |                  | -      |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Actuarial      (gain)/loss                                       |   |                  | 0.4    |   |   |   | 1.8 |   |   |   | (5.1 | ) |   |   | 8.1 |   |
| Benefits      paid                                               |   |                  | (2.6   | ) |   |   | (0.2 | ) |   |   | (3.5 | ) |   |   | (7.4 | ) |
| Benefit      obligation at end of measurement period             |   | $                     | 28.3   |   |   | $ | 28.6 |   |   | $ | 26.3 |   |   | $ | 32.1 |   |
|                                                             |   |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Accumulated      benefit obligation at end of measurement period |   | $                     | 22.6   |   |   | $ | 22.5 |   |   | $ | 20.9 |   |   | $ | 24.0 |   |

|                                                       |   | Other      Postretirement Benefits |   |
|------------------------------------------------------------|--------|------------------------------------|--------|
|                                                       |   |                               |   |   | Transition |   |   |   |   |   |   |   |
|                                                       |   | Year      Ended                    |   |   | Period      Ended |   |   | Year      Ended |   |   | Year      Ended |   |
|                                                       |   | December      31,                  |   |   | December      31, |   |   | September      30, |   |   | September      30, |   |
|                                                       |   | 2007                               |   |   | 2006 |   |   | 2006 |   |   | 2005 |   |
| (Millions)                                                 |   |                               |   |   |   |   |   |   |   |   |   |   |
| Change      in benefit obligation                          |   |                               |   |   |   |   |   |   |   |   |   |   |
| Benefit      obligation at beginning of measurement period |   | $                                  | 12.6   |   |   | $ | 11.9 |   |   | $ | 12.1 |   |   | $ | 12.6 |   |
| Service      cost                                          |   |                               | 0.7    |   |   |   | 0.2 |   |   |   | 0.6 |   |   |   | 0.5 |   |
| Interest      cost                                         |   |                               | 0.8    |   |   |   | 0.2 |   |   |   | 0.6 |   |   |   | 0.6 |   |
| Participant      contributions                             |   |                               | 0.7    |   |   |   | 0.1 |   |   |   | 0.6 |   |   |   | 0.5 |   |
| Curtailment                                                |   |                               | (0.1   | ) |   |   | - |   |   |   | - |   |   |   | (0.1 | ) |
| Transfers                                                  |   |                               | -      |   |   |   | - |   |   |   | - |   |   |   | - |   |
| Plan      amendments                                       |   |                               | -      |   |   |   | - |   |   |   | - |   |   |   | (0.6 | ) |
| Actuarial      (gain)/loss                                 |   |                               | 1.0    |   |   |   | 0.4 |   |   |   | (0.4 | ) |   |   | (0.1 | ) |
| Benefits      paid                                         |   |                               | (1.1   | ) |   |   | (0.2 | ) |   |   | (1.6 | ) |   |   | (1.3 | ) |
| Benefit      obligation at end of measurement period       |   | $                                  | 14.6   |   |   | $ | 12.6 |   |   | $ | 11.9 |   |   | $ | 12.1 |   |

----

|                                                              |   |                                                                                                                | Pension      Benefits |                                                                                                                |
|-------------------------------------------------------------------|--------|---------------------------------------------------------------------------------------------------------------------|-----------------------|---------------------------------------------------------------------------------------------------------------------|
|                                                              |   |                                                                                                                |                  |                                                                                                                |   |   |   |  Transition |   |   |   |   |   |   |   |   |   |
|                                                              |   |                                                                                                                |                  | Year Ended                                                                                                          |   |   |  Period      Ended |   |   |   |  Year      Ended |   |   |   |  Year      Ended |   |
|                                                              |   |                                                                                                                |                  | December      31,                                                                                                   |   |   | December      31, |   |   |   |  September      30, |   |   |   |  September      30, |   |
|                                                              |   |                                                                                                                |                  | 2007                                                                                                                |   |   |   | 2006 |   |   |   | 2006 |   |   |   | 2005 |   |
| (Millions)                                                        |   |                                                                                                                |                  |                                                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change      in plan assets                                        |   |                                                                                                                |                  |                                                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair value of      plan assets at beginning of measurement period | $      | 16.4                                                                                                                |                  |                                                                                                                | $ | 16.2 |   |   | $ | 16.6 |   |   | $ | 12.7 |   |
| Actual return      on plan assets                                 |   |                                                                                                                |                  |                  2.1           |   |   |   |                   0.6 |   |   |   |                     1.2 |   |   |   |                     0.6 |   |
| Employer      contributions (including non-qualified plans)       |   |                    - |                  |                                                                                                                |   |                      - |   |   |   |                     1.9 |   |   |   |                   10.7 |   |
| Transfers                                                         |   |                                                                                                                |                  |                (0.2                      | ) |   |   |                 (0.2 | ) |   |   |                        - |   |   |   |                        - |   |
| Participant      contributions                                    |   |                                                                                                                |                  |                    - |   |   |   |                      - |   |   |   |                        - |   |   |   |                        - |   |
| Benefits      paid                                                |   |                                                                                                                |                  |                (2.6                      | )  |   |   |                 (0.2 | ) |   |   |                    (3.5 | ) |   |   |                    (7.4 | ) |
| Fair      value of plan assets at end of measurement period       | $      | 15.7                                                                                                                |                  |                                                                                                                | $ | 16.4 |   |   | $ | 16.2 |   |   | $ | 16.6 |   |

|                                                              |   |                                                                                                      | Other      Postretirement Benefits |                                                                                                                |
|-------------------------------------------------------------------|--------|-----------------------------------------------------------------------------------------------------------|------------------------------------|---------------------------------------------------------------------------------------------------------------------|
|                                                              |   |                                                                                                      |                               |                                                                                                                |   |   |   |  Transition |   |   |   |   |   |   |   |   |   |
|                                                              |   |                                                                                                      |                               | Year      Ended                                                                                                     |   |   |  Period      Ended |   |   |   |  Year      Ended |   |   |   |  Year      Ended |   |
|                                                              |   |                                                                                                      |                               | December      31,                                                                                                   |   |   | December      31, |   |   |   |  September      30, |   |   |   |  September      30, |   |
|                                                              |   |                                                                                                      |                               | 2007                                                                                                                |   |   |   | 2006 |   |   |   | 2006 |   |   |   | 2005 |   |
| (Millions)                                                        |   |                                                                                                      |                               |                                                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Change      in plan assets                                        |   |                                                                                                      |                               |                                                                                                                |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Fair value of      plan assets at beginning of measurement period | $      | 2.3                                                                                                       |                               |                                                                                                                | $ | 2.0 |   |   | $ | 1.3 |   |   | $ | 2.0 |   |
| Actual return      on plan assets                                 |   |                                                                                                      |                               |                  0.5           |   |   |   |                   0.4 |   |   |   |                     1.6 |   |   |   |                     0.1 |   |
| Employer      contributions (including non-qualified plans)       |   |                  0.1 |                               |                                                                                                                |   |                      - |   |   |   |                     0.1 |   |   |   |                        - |   |
| Transfers                                                         |   |                                                                                                      |                               |                    - |   |   |   |                   0.1 |   |   |   |                        - |   |   |   |                        - |   |
| Participant      contributions                                    |   |                                                                                                      |                               |                  0.7           |   |   |   |                   0.1 |   |   |   |                     0.6 |   |   |   |                     0.5 |   |
| Benefits      paid                                                |   |                                                                                                      |                               |                (1.2                      | )  |   |   |                 (0.3 | ) |   |   |                    (1.6 | ) |   |   |                    (1.3 | ) |
| Fair      value of plan assets at end of measurement period       | $      | 2.4                                                                                                       |                               |                                                                                                                | $ | 2.3 |   |   | $ | 2.0 |   |   | $ | 1.3 |   |

|                                    |   | Pension      Benefits |   |   | Other      Postretirement Benefits |   |
|-----------------------------------------|--------|-----------------------|--------|--------|------------------------------------|--------|
|                                    |   | December 31,          |   |   | September      30,                 |   |   | December 31, |   |   | September      30, |   |
| Years      Ended                        |   | 2007                  |   |   | 2006                               |   |   | 2007 |   |   | 2006 |   |
| (Millions)                              |   |                  |   |   |                               |   |   |   |   |   |   |   |
| Funded      status of plans             |   |                  |   |   |                               |   |   |   |   |   |   |   |
| Funded      status                      |   | $                     | (12.6  | )      |                               | $      | (10.1 | ) |   | $ | (12.2 | ) |   | $ | (9.9 | ) |
| Unrecognized      transition obligation |   |                  | -      |   |                               |   | - |   |   |   | - |   |   |   | 1.0 |   |
| Unrecognized      prior-service cost    |   |                  | -      |   |                               |   | 2.2 |   |   |   | - |   |   |   | - |   |
| Unrecognized      loss                  |   |                  | -      |   |                               |   | 7.9 |   |   |   | - |   |   |   | 1.8 |   |
| Net asset      (liability) recognized   |   | $                     | (12.6  | )      |                               | $      | - |   |   | $ | (12.2 | ) |   | $ | (7.1 | ) |

----

|                                  |   |     |                   |   | Other          |   |
|---------------------------------------|--------|----------|------------------------|--------|----------------|--------|
|                                  |   | Pension  |                   |   | Postretirement |   |
| (Millions)                            |   | Benefits |                   |   | Benefits       |   |
| Prepaid      pension cost             |   |     | $      2.8   |   |           |   | $       -     |   |
| Accrued      benefit cost             |   |     | (2.8)                  |   |           |   | (7.1) |   |
| Net asset      (liability) recognized |   |     | $       -    |   |           |   | $      (7.1)   |   |

|                               |   |     |       |   | Other          |   |
|------------------------------------|--------|----------|------------|--------|----------------|--------|
|                               |   | Pension  |       |   | Postretirement |   |
| (Millions)                         |   | Benefits |       |   | Benefits       |   |
| Regulatory      assets             |   |     |       |   |           |   |
| Net actuarial      loss            |   |     | $      7.6 |   |           |   | $      2.3   |   |
| Prior service      costs (credits) |   |     | 1.9        |   |           |   | - |   |
| Transition      obligation         |   |     | -          |   |           |   | 0.8 |   |
|                               |   |     | $      9.5 |   |           |   | $      3.1   |   |

|                                |   | December      31, |                          |   | September      30, |   |
|-------------------------------------|--------|-------------------|-------------------------------|--------|--------------------|--------|
| (Millions)                          |   | 2007              |                          |   | 2006               |   |
| Benefit      obligation             |   |              | $      28.3    |   |               |   | $      15.9    |   |
| Accumulated      benefit obligation |   |              | 22.6                          |   |               |   | 12.6 |   |
| Fair value of      plan assets      |   |              | 15.7                          |   |               |   | 7.6 |   |

----

| (Millions)                      |   | Pension      Benefits |   |   | Other      Postretirement Benefits |   |
|---------------------------------|--------|-----------------------|--------|--------|------------------------------------|--------|
| Employer      contributions:    |   |                  |   |   |                               |   |
| 2008      (expected)            |   | $                     | 0.5    |   |                               | $      | - |   |
|                            |   |                  |   |   |                               |   |   |   |
| Expected      benefit payments: |   |                  |   |   |                               |   |   |   |
| 2008                            |   | $                     | 2.2    |   |                               | $      | 1.0 |   |
| 2009                            |   |                  | 1.9    |   |                               |   | 1.0 |   |
| 2010                            |   |                  | 2.2    |   |                               |   | 1.1 |   |
| 2011                            |   |                  | 2.2    |   |                               |   | 1.2 |   |
| 2012                            |   |                  | 1.9    |   |                               |   | 1.3 |   |
| Years      2013–2017      |   |                  | 14.2   |   |                               |   | 7.4 |   |

| (Millions)                         | 2008       | 2009       | 2010       | 2011       | 2012       | 2013–2017 |
|------------------------------------|------------|------------|------------|------------|------------|-----------------|
| Other      postretirement benefits | $      0.1 | $      0.1 | $      0.1 | $      0.1 | $      0.1 | $      0.7      |

----

|                                                 |   | Pension      Benefits |   |
|------------------------------------------------------|--------|-----------------------|--------|
|                                                 |   |                  |   |   | Transition |   |   |   |   |   |   |   |
|                                                 |   | Year Ended            |   |   | Period      Ended |   |   | Year      Ended |   |   | Year      Ended |   |
|                                                 |   | December 31,          |   |   | December      31, |   |   | September      30, |   |   | September      30, |   |
|                                                 |   | 2007                  |   |   | 2006 |   |   | 2006 |   |   | 2005 |   |
| (Millions)                                           |   |                  |   |   |   |   |   |   |   |   |   |   |
| Service      cost                                    |   | $                     | 1.3    |   |   | $ | 0.3 |   |   | $ | 1.5 |   |   | $ | 1.2 |   |
| Interest      cost                                   |   |                  | 1.7    |   |   |   | 0.4 |   |   |   | 1.6 |   |   |   | 1.6 |   |
| Expected      return on plan assets                  |   |                  | (1.2   | ) |   |   | (0.3 | ) |   |   | (1.3 | ) |   |   | (1.0 | ) |
| Amortization      of:                                |   |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Prior service      cost                              |   |                  | 0.2    |   |   |   | - |   |   |   | 0.2 |   |   |   | 0.2 |   |
| Net actuarial      (gain)/loss                       |   |                  | 0.3    |   |   |   | 0.1 |   |   |   | 0.6 |   |   |   | 0.2 |   |
| Net      periodic benefit cost                       |   |                  | 2.3    |   |   |   | 0.5 |   |   |   | 2.6 |   |   |   | 2.2 |   |
|                                                 |   |                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Curtailment      recognition                         |   |                  | -      |   |   |   | - |   |   |   | - |   |   |   | 0.3 |   |
| Effects of      lump sum settlements upon retirement |   |                  | 0.3    |   |   |   | - |   |   |   | 0.8 |   |   |   | 1.3 |   |
| Net      benefit cost                                |   | $                     | 2.6    |   |   | $ | 0.5 |   |   | $ | 3.4 |   |   | $ | 3.8 |   |

|                                   |   | Other      Postretirement Benefits |   |
|----------------------------------------|--------|------------------------------------|--------|
|                                   |   |                               |   |   |   | Transition |   |   |   |   |   |   |   |   |   |
|                                   |   | Year      Ended                    |   |   | Period      Ended |   |   | Year      Ended |   |   | Year      Ended |   |
|                                   |   | December 31,                       |   |   | December      31, |   |   | September      30, |   |   | September      30, |   |
|                                   |   | 2007                               |   |   | 2006 |   |   | 2006 |   |   | 2005 |   |
| (Millions)                             |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Service      cost                      |   | $                                  | 0.8    |   |   | $ | 0.2 |   |   | $ | 0.6 |   |   | $ | 0.5 |   |
| Interest      cost                     |   |                               | 0.8    |   |   |   | 0.2 |   |   |   | 0.6 |   |   |   | 0.7 |   |
| Expected      return on plan assets    |   |                               | (0.2   | ) |   |   | - |   |   |   | (0.1 | ) |   |   | (0.2 | ) |
| Amortization      of:                  |   |                               |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Net      transition (asset)/obligation |   |                               | 0.1    |   |   |   | - |   |   |   | 0.1 |   |   |   | 0.2 |   |
| Net actuarial      (gain)/loss         |   |                               | 0.1    |   |   |   | - |   |   |   | 0.2 |   |   |   | 0.2 |   |
| Net      periodic benefit cost         |   | $                                  | 1.6    |   |   | $ | 0.4 |   |   | $ | 1.4 |   |   | $ | 1.4 |   |

|                                                                                                             |   |  Pension      Benefits |   | Other      PostretirementBenefits |
|------------------------------------------------------------------------------------------------------------------|--------|-----------------------------|--------|-----------------------------------|
|                                                                                                             |   | Year      Ended             |   | Year      Ended                   |   | Year      Ended |   | Year      Ended |
|                                                                                                             |   | December      31,           |   | September      30,                |   | December      31, |   | September      30, |
|                                                                                                             |   | 2007                        |   | 2006                              |   | 2007 |   | 2006 |
| Weighted-average      assumptions used to determinebenefit      obligations :                                    |   |                        |   |                              |   |   |   |   |
|   Discount      rate                                                                                   |   | 6.35%                       |   | 6.50%                             |   | 6.25% |   | 6.25% |
|   Future      compensation increases                                                                   |   | 4-4.5%                      |   | 3.75%                             |   |   |   |   |
|   Health      care cost trend rate assumed for next year (under age      65)                      |   |                        |   |                              |   | 10% |   | 8% |
|   Rate      to which the cost trend rate is assumed to      decline (the      ultimate rate) |   |                        |   |                              |   | 5% |   | 5% |
|   Year      that the rate reaches the ultimate trend rate                                              |   |                        |   |                              |   | 2013 |   | 2010 |
|   Health      care cost trend rate assumed for next year (over age      65)                       |   |                        |   |                              |   | 10.5% |   | 8% |
|   Rate      to which the cost trend rate is assumed to      decline (the      ultimate rate) |   |                        |   |                              |   | 5.5% |   | 5% |
|   Year      that the rate reaches the ultimate trend rate                                              |   |                        |   |                              |   | 2013 |   | 2010 |

----

|                                                                           |   | Pension      Benefits |
|--------------------------------------------------------------------------------|--------|-----------------------|
|                                                                           |   | Year-Ended            |   | Year-Ended |   | Year-Ended |
|                                                                           |   | December      31,     |   | September      30, |   | September      30, |
|                                                                           |   | 2007                  |   | 2006 |   | 2005 |
| Weighted-average      assumptions used to determine net periodic benefit cost: |   |                  |   |   |   |   |
|   Discount      rate                                                 |   | 6.0%                  |   | 5.25% |   | 6.16% |
|   Expected      return on assets                                     |   | 8.50%                 |   | 8.75% |   | 8.75% |
|   Future      compensation increases                                 |   | 3.75%                 |   | 3.75% |   | 3.75% |

|                                                                                                                     |   | Other      Postretirement Benefits |
|--------------------------------------------------------------------------------------------------------------------------|--------|------------------------------------|
|                                                                                                                     |   | Year-Ended                         |   | Year-Ended |   | Year-Ended |
|                                                                                                                     |   | December      31,                  |   | September      30, |   | September      30, |
|                                                                                                                     |   | 2007                               |   | 2006 |   | 2005 |
| Weighted-average      assumptions used to determine net periodic benefit cost:                                           |   |                               |   |   |   |   |
|   Discount      rate                                                                                           |   | 5.75%                              |   | 5.00% |   | 6.02% |
|   Expected      return on assets                                                                               |   | 8.50%                              |   | 8.75% |   | 8.75% |
|   Health      care cost trend rate assumed for next year                                                       |   | 8.00%                              |   | 9.00% |   | 10.00% |
|   Rate      to which the cost trend rate is assumed to decline    (the      ultimate rate) |   | 5.00%                              |   | 5.00% |   | 5.00% |
|   Year      that the rate reaches the ultimate trend rate                                                      |   | 2010                               |   | 2010 |   | 2010 |

|                                |   | Target     |   | Percentage of      Plan Assets |
|-------------------------------------|--------|------------|--------|--------------------------------|
|                                |   | Allocation |   | December      31,              |   | September      30, |
|                                |   | 2007       |   | 2007                           |   | 2006 |
| Pension      Benefits:              |   |       |   |                           |   |   |
| Equity      securities              |   | 70%        |   | 69%                            |   | 69% |
| Debt      securities                |   | 30%        |   | 31%                            |   | 30% |
| Other                               |   | 0%         |   | 0%                             |   | 1% |
| Total                               |   | 100%       |   | 100%                           |   | 100% |
|                                |   |       |   |                           |   |   |
| Other      Postretirement Benefits: |   |       |   |                           |   |   |
| Equity      securities              |   | 60%        |   | 53%                            |   | 57% |
| Debt      securities                |   | 40%        |   | 36%                            |   | 38% |
| Other                               |   | 0%         |   | 11%                            |   | 5% |
| Total                               |   | 100%       |   | 100%                           |   | 100% |

----

|                                              | 1-Percentage-Point |
|---------------------------------------------------|--------------------|
| (Millions)                                        | Increase           |   | (Decrease) |
| Effect on      total of service and interest cost | 0.2                |   | (0.2) |
| Effect on      postretirement benefit obligation  | 1.5                |   | (1.3) |

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

| ·   | a mechanism      to recover the gas cost portion of uncollectible expense based on current      gas prices (“uncollectible expense mechanism”);  and |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

| ·   | a mechanism      to recover $1.1 million of energy efficiency costs under a program to be      approved by the ICC (“energy efficiency  mechanism”). |
|--------------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------|

----

| ·   | provide      certain reports, |
|--------------------|-------------------------------|

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

| ·   | file a plan      for formation and implementation of a service  company, |
|--------------------|--------------------------------------------------------------------------|

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

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

----

| Segments      of Business                                                                                                           |   | Natural      Gas |   |   |     |   |   | NSG          |   |
|-------------------------------------------------------------------------------------------------------------------------------------|--------|------------------|--------|--------|----------|--------|--------|--------------|--------|
| (Millions)                                                                                                                          |   | Utility(1)       |   |   | Other(2) |   |   | Consolidated |   |
|                                                                                                                                |   |             |   |   |     |   |   |         |   |
| Year Ended December 31,2007                                                                                                         |   |             |   |   |     |   |   |         |   |
| Income      Statement                                                                                                               |   |             |   |   |     |   |   |         |   |
| Revenues                                                                                                                            |   | $                | 271.0  |   |     | $      | -      |         |   | $ | 271.0 |   |
| Gas charge      settlement                                                                                                          |   |             | 2.0    |   |     |   | -      |         |   |   | 2.0 |   |
| Depreciation      and amortization expense                                                                                          |   |             | 6.0    |   |     |   | -      |         |   |   | 6.0 |   |
| Miscellaneous      income                                                                                                           |   |             | 1.2    |   |     |   | -      |         |   |   | 1.2 |   |
| Interest      expense                                                                                                               |   |             | 4.2    |   |     |   | -      |         |   |   | 4.2 |   |
| Income tax      expense                                                                                                             |   |             | 5.2    |   |     |   | -      |         |   |   | 5.2 |   |
| Net      income                                                                                                                     |   |             | 7.9    |   |     |   | -      |         |   |   | 7.9 |   |
| Total      assets                                                                                                                   |   |             | 424.9  |   |     |   | -      |         |   |   | 424.9 |   |
| Cash expenditures for long-lived      assets                                                                                        |   |             | 9.7    |   |     |   | -      |         |   |   | 9.7 |   |
|                                                                                                                                |   |             |   |   |     |   |   |         |   |   |   |   |
| Transition Period Ended      December 31, 2006                                                                                      |   |             |   |   |     |   |   |         |   |   |   |   |
| Income      Statement                                                                                                               |   |             |   |   |     |   |   |         |   |   |   |   |
| Revenues                                                                                                                            |   | $                | 73.5   |   |     | $      | -      |         |   | $ | 73.5 |   |
| Depreciation      and amortization expense                                                                                          |   |             | 1.5    |   |     |   | -      |         |   |   | 1.5 |   |
| Miscellaneous      income                                                                                                           |   |             | 0.2    |   |     |   | -      |         |   |   | 0.2 |   |
| Interest      expense                                                                                                               |   |             | 1.1    |   |     |   | -      |         |   |   | 1.1 |   |
| Income tax      expense                                                                                                             |   |             | 2.6    |   |     |   | -      |         |   |   | 2.6 |   |
| Net      income                                                                                                                     |   |             | 4.4    |   |     |   | -      |         |   |   | 4.4 |   |
| Total      assets                                                                                                                   |   |             | 410.9  |   |     |   | -      |         |   |   | 410.9 |   |
| Cash      expenditures for long-lived      assets                                                                                   |   |             | 1.6    |   |     |   | -      |         |   |   | 1.6 |   |
|                                                                                                                                |   |             |   |   |     |   |   |         |   |   |   |   |
| Year Ended September 30,    2006                                                                                                    |   |             |   |   |     |   |   |         |   |   |   |   |
| Income      Statement                                                                                                               |   |             |   |   |     |   |   |         |   |   |   |   |
| Revenues                                                                                                                            |   | $                | 285.1  |   |     | $      | -      |         |   | $ | 285.1 |   |
| Gas charge      settlement                                                                                                          |   |             | 4.3    |   |     |   | -      |         |   |   | 4.3 |   |
| Depreciation      and amortization expense                                                                                          |   |             | 5.7    |   |     |   | -      |         |   |   | 5.7 |   |
| Miscellaneous      income                                                                                                           |   |             | 1.3    |   |     |   | -      |         |   |   | 1.3 |   |
| Interest      expense                                                                                                               |   |             | 4.1    |   |     |   | -      |         |   |   | 4.1 |   |
| Income tax      expense                                                                                                             |   |             | 3.8    |   |     |   | -      |         |   |   | 3.8 |   |
| Net      income                                                                                                                     |   |             | 6.7    |   |     |   | -      |         |   |   | 6.7 |   |
| Total      assets                                                                                                                   |   |             | 400.0  |   |     |   | -      |         |   |   | 400.0 |   |
| Cash      expenditures for long-lived      assets                                                                                   |   |             | 9.4    |   |     |   | -      |         |   |   | 9.4 |   |
|                                                                                                                                |   |             |   |   |     |   |   |         |   |   |   |   |
| Year Ended September 30,      2005                                                                                                  |   |             |   |   |     |   |   |         |   |   |   |   |
| Income      Statement                                                                                                               |   |             |   |   |     |   |   |         |   |   |   |   |
| Revenues                                                                                                                            |   | $                | 246.3  |   |     | $      | -      |         |   | $ | 246.3 |   |
| Depreciation      and amortization expense                                                                                          |   |             | 5.7    |   |     |   | -      |         |   |   | 5.7 |   |
| Miscellaneous      income                                                                                                           |   |             | 0.8    |   |     |   | -      |         |   |   | 0.8 |   |
| Interest      expense                                                                                                               |   |             | 3.8    |   |     |   | -      |         |   |   | 3.8 |   |
| Income tax      expense                                                                                                             |   |             | 6.7    |   |     |   | -      |         |   |   | 6.7 |   |
| Net      income                                                                                                                     |   |             | 11.4   |   |     |   | -      |         |   |   | 11.4 |   |
| Total      assets                                                                                                                   |   |             | 371.2  |   |     |   | -      |         |   |   | 371.2 |   |
| Cash      expenditures for long-lived      assets                                                                                   |   |             | 9.8    |   |     |   | -      |         |   |   | 9.8 |   |
|                                                                                                                                |   |             |   |   |     |   |   |         |   |   |   |   |
| (1) Includes      only utility operations.                                                                                          |   |             |   |   |     |   |   |         |   |   |   |   |
| (2)      Nonutility operations are included in the Other column. Amounts for all      categories rounded to less than $0.1 million. |   |

----

|                                           |   | First   |   |   | Second  |   |   | Third   |   |   | Fourth  |   |   | Fiscal |   |
|------------------------------------------------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|---------|--------|--------|--------|--------|
| (Millions)                                     |   | Quarter |   |   | Quarter |   |   | Quarter |   |   | Quarter |   |   | Year   |   |
|                                           |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |
| Year      Ended December 31, 2007              |   |    | 3/31   |   |    |   | 6/30   |    |   |   | 9/30    |   |   |   | 12/31  |   |   |   | 12/31 |   |
| Operating      revenue (1)                     |   | $       | 124.1  |   |    | $      | 45.5   |    |   | $      | 22.9    |   |   | $      | 78.5   |   |   | $ | 271.0 |   |
| Operating      income (loss)                   |   |    | 11.1   |   |    |   | (0.1   | )       |   |   | (1.4    | )      |   |   | 6.5    |   |   |   | 16.1 |   |
| Net income      (loss)                         |   |    | 6.6    |   |    |   | (0.4   | )       |   |   | (1.3    | )      |   |   | 3.0    |   |   |   | 7.9 |   |
|                                           |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   |   |   |
| Transition      Period Ended December 31, 2006 |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   | 12/31 |   |
| Operating      revenue (1)                     |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |   | $ | 73.5 |   |
| Operating      income (loss)                   |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   | 7.9 |   |
| Net income      (loss)                         |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   | 4.4 |   |
|                                           |   |    |   |   |    |   |   |    |   |   |    |   |   |   |   |   |   |   |   |   |
| Year      Ended September 30, 2006             |   |    | 12/31  |   |    |   | 3/31   |    |   |   | 6/30    |   |   |   | 9/30   |   |   |   | 9/30 |   |
| Operating      revenue (1)                     |   | $       | 110.3  |   |    | $      | 121.2  |    |   | $      | 31.3    |   |   | $      | 22.3   |   |   | $ | 285.1 |   |
| Operating      income (loss)                   |   |    | (8.8   | )      |    |   | 23.2   |    |   |   | 0.5     |   |   |   | (1.6   | ) |   |   | 13.3 |   |
| Net income      (loss)                         |   |    | (5.7   | )      |    |   | 13.8   |    |   |   | -       |   |   |   | (1.4   | ) |   |   | 6.7 |   |

| (1) | Gas operating      revenues are net of revenue taxes billed NSG's utility customers. (See      Note 1(d), "Revenue and CustomerReceivables.") |
|-----|-----------------------------------------------------------------------------------------------------------------------------------------------|

----

----

----

----

|   |   |                       |   |   | Page   |   |   |
|--------|--------|----------------------------|--------|--------|--------|--------|--------|
| (a)    | 1.     | Financial      Statements: |   |   |   |   |
|   |   | See Part II,      Item 8.  |   | 28     |   |   |

|   | 2.     | Financial      Statement Schedules: |                                   |   |   |   |
|--------|--------|-------------------------------------|----------------------------------------|--------|--------|--------|
|   |   |                                |                                   |   |   |   |   |
|   |   | Schedule                            |                                   |   |   |   |
|   |   |  Number                        |                                   |   |   |   |
|   |   | II                                  | Valuation and      Qualifying Accounts |   | 63     |   |   |
|   |   |                                |                                   |   |   |   |
|   | 3.     | Exhibits                            |                                   |   |   |   |
|   |   | See Exhibit      Index              |                                   | 65     |   |   |

----

| Schedule      II                                      |   |
|-------------------------------------------------------|--------|
|                                                  |   |   |   |   |   |   |   |   |   |   |   |   |
| VALUATION AND      QUALIFYING ACCOUNTS                |   |   |   |   |   |   |   |   |   |   |   |   |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |   |
| 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      (Millions)                           |   | of      period |   |   | expenses |   |   | credits were      created |   |   | of      period |   |
| Year      Ended December 31, 2007                     |   |   |   |   |   |   |   |   |   |   |   |   |
| RESERVES                                              |   |   |   |   |   |   |   |   |   |   |   |   |
| (deducted      from assets in balance sheet):         |   |   |   |   |   |   |   |   |   |   |   |   |
| Reserve for      uncollectible accounts               |   | $ | 1.6 |   |   | $ | 2.1 |   |   | $ | 1.7 |   |   | $ | 2.0 |   |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Transition      Period Ended December 31, 2006        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| RESERVES                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (deducted      from assets in balance sheet):         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reserve for      uncollectible accounts               |   | $ | 2.1 |   |   | $ | 0.4 |   |   | $ | 0.9 |   |   | $ | 1.6 |   |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Year Ended      September 30, 2006                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| RESERVES                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (deducted      from assets in balance sheet):         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reserve for      uncollectible accounts               |   | $ | 1.4 |   |   | $ | 2.2 |   |   | $ | 1.5 |   |   | $ | 2.1 |   |
|                                                  |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Year Ended      September 30, 2005                    |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| RESERVES                                              |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| (deducted      from assets in balance sheet):         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Reserve for      uncollectible accounts               |   | $ | 0.9 |   |   | $ | 1.6 |   |   | $ | 1.1 |   |   | $ | 1.4 |   |

----

SIGNATURES

|                                    |   |   | NORTH SHORE      GAS COMPANY                   |
|-----------------------------------------|--------|--------|------------------------------------------------|
|                                    |   |   |                                           |
|                                    |   |   | (Registrant)                                   |
|                                    |   |   |                                           |
| Date:  February      28, 2008 |   |   | By:/s/      Lawrence T. Borgard                |
|                                    |   |   | Lawrence T.      Borgard                       |
|                                    |   |   | Vice Chairman      and Chief Executive Officer |

| Signature                                     | Title                                               | Date                   |
|-----------------------------------------------|-----------------------------------------------------|------------------------|
|                                          |                                                |                   |
|  /s/  Larry L.      Weyers     |                                                |                   |
| Larry L.      Weyers                          | Director                                            | February 28,      2008 |
|                                          |                                                |                   |
|  /s/  Thomas P.      Meinz     |                                                |                   |
| Thomas P.      Meinz                          | Director                                            | February 28,      2008 |
|                                          |                                                |                   |
|  /s/  Phillip M.      Mikulsky |                                                |                   |
| Phillip M.      Mikulsky                      | Director                                            | February 28,      2008 |
|                                          |                                                |                   |
|  /s/  Thomas A.    Nardi       |                                                |                   |
| Thomas A.      Nardi                          | Director                                            | February 28,      2008 |
|                                          |                                                |                   |
|  /s/  Joseph P.      O'Leary   | Senior Vice      President, Chief Financial Officer |                   |
| Joseph P.      O'Leary                        |    and      Director                 | February 28,      2008 |
|                                          |                                                |                   |
|  /s/ Desiree G. Rogers                   |                                                |                   |
| Desiree G.      Rogers                        | President and      Director                         | February 28,      2008 |
|                                          |                                                |                   |
|  /s/  James F.      Schott     |                                                |                   |
| James F.      Schott                          | Vice      President Regulatory Affairs and Director | February 28,      2008 |
|                                          |                                                |                   |
|  /s/  Lawrence T.      Borgard |                                                |                   |
| Lawrence T.      Borgard                      | Vice Chairman      and Chief Executive Officer      | February 28,      2008 |
|                                          |                                                |                   |
|  /s/  Diane L.      Ford       |                                                |                   |
| Diane L.      Ford                            | Vice      President and Corporate Controller        | February 28,      2008 |
|                                          |                                                |                   |

----

| ExhibitNumber |  Description      of Document                                                                                                                                                            |
|---------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| (a)           | The exhibits      listed below are filed herewith and made a part hereof:                                                                                                                     |
|          |                                                                                                                                                                                          |
| 12            | Statement      re:  Ratio of Earnings to Fixed Charges for  NSG.                                                                                                                    |
|          |                                                                                                                                                                                          |
| 31.1          | Certification      of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley      Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of      1934 for NSG.  |
|          |                                                                                                                                                                                          |
| 31.2          | Certification      of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley      Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of      1934 for NSG.  |
|          |                                                                                                                                                                                          |
| 32            | Certification      of Chief Executive Officer and Chief Financial Officer pursuant to 18      U.S.C. Section 1350, as adopted pursuant to Section 906 of the      Sarbanes-Oxley Act of 2002. |

----

| 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.                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                 |
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.1     | Articles of      Incorporation of NSG, as amended on April 24, 1995 (NSG—Form 10-K for      fiscal year ended 1995, Exhibit 3(b) [File No.  1-05540]).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 3.2     | By-Laws of      NSG, as amended May 17, 2007, (NSG—Form 10-Q for the quarter ended June      30, 2007, Exhibit 3(d) [File No. 1-05540]).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                  |
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 4.1     | NSG      Indenture, dated as of April 1, 1955, from NSG to Continental      Illinois National Bank and Trust Company of Chicago, as Trustee; Third      Supplemental Indenture, dated as of December 20, 1963 (NSG—File      No. 2-35965, Exhibit 4-1); Fourth Supplemental Indenture, dated as of      May 1 1964 (NSG—File No. 2-35965, Exhibit 4-1); Fifth Supplemental      Indenture dated as of February 1, 1970 (NSG—File No. 2-35965,      Exhibit 4-2); Ninth Supplemental Indenture dated as of December 1, 1987      (NSG—Form 10-K for the fiscal year ended September 30, 1987, Exhibit 4      [File No. 1-05540]); Thirteenth Supplemental Indenture dated December 1,      1998 (NSG—Form 10-Q for the quarter ended March 31, 1999, Exhibit 4 [File      No. 1-05540]); Fourteenth Supplemental Indenture dated as of April 15,      2003, First Mortgage 4.625% Bonds, Series N-1 and Series N-2 (NSG—Form      10-Q for the quarter ended March 31, 2003, Exhibit 4(g) [File No.      1-05540]). |
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.1+        | Amendment      Number One to the Amended and Restated Trust under PEC'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 (NSG—Form 10-K for fiscal year ended September 30,      2006, Exhibit 10(e) [File No. 1-05540]).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.2+        | Executive      Deferred Compensation Plan, amended as of December 4, 2002 (NSG—Form 10-Q      for the quarter ended December 31, 2002, Exhibit 10(c) [File No.      1-05540]).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.3+        | Amended and      Restated Trust under PEC'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      (NSG—Form 10-K for fiscal year ended September 30, 2003, Exhibit 10(a)      [File No. 1-05540]).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                             |
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.4+             | Severance      Agreement between PEC and Desiree G. Rogers dated as of April 22, 2005      (NSG—Form 10-Q for the quarter ended June 30, 2005, Exhibit 10(a) [File      No. 1-05540]); Severance Agreement between PEC and William E. Morrow dated      as of June 2, 2004 (NSG—Form 10-K for fiscal year ended September 30,      2004, Exhibit 10(f) [File No. 1-05540]); Severance Agreement between PEC      and Thomas A. Nardi dated as of June 2, 2004 (NSG—Form 10-K for fiscal      year ended September 30, 2004, Exhibit 10(g) [File No.      1-05540]).                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           |
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.5+                       | Form of      Integrys Energy Group 2007 Omnibus Incentive Compensation Plan Performance      Stock Right Agreement approved May 17, 2007. (Incorporated by reference to      Exhibit 10.5 to Integrys Energy Group's Form 10-K for the year ended      December 31, 2007 [File No. 1-11337].)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.6+                       | Form of      Integrys Energy Group 2007 Omnibus Incentive Compensation Plan Performance      Stock Right Agreement approved February 14, 2008. (Incorporated by      reference to Exhibit 10.6 to Integrys Energy Group's Form 10-K for the      year ended December 31, 2007 [File No. 1-11337].)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.7+                       | Form of      Integrys Energy Group 2007 Omnibus Incentive Compensation Plan Restricted      Stock Award Agreement approved May 17, 2007. (Incorporated by reference to      Exhibit 10.8 to Integrys Energy Group's Form 10-K for the year ended      December 31, 2007 [File No. 1-11337].)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                    |
|                        |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                            |
| 10.8+                       | Form of      Integrys Energy Group 2007 Omnibus Incentive Compensation Plan Restricted      Stock Award Agreement approved February 14, 2008. (Incorporated by      reference to Exhibit 10.9 to Integrys Energy Group's Form 10-K for the      year ended December 31, 2007 [File No.  1-11337].)                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              |

----

|                                |                                                                                                                                                                                                                                                                                                                                                                                                                          |
|-------------------------------------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.9+                               | Form of      Integrys Energy Group 2007 Omnibus Incentive Compensation Plan      NonQualified Stock Option Agreement approved May 17, 2007. (Incorporated      by reference to Exhibit 10.10 to Integrys Energy Group's Form 10-K for the      year ended December 31, 2007 [File No. 1-11337].)                                                                                                                              |
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.10+                              | Form of      Integrys Energy Group 2007 Omnibus Incentive Compensation Plan      NonQualified Stock Option Agreement approved February 14, 2008.      (Incorporated by reference to Exhibit 10.11 to Integrys Energy Group's      Form 10-K for the year ended December 31, 2007 [File No.      1-11337].)                                                                                                                    |
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.11+                              | Integrys      Energy Group, Inc. 2007 Omnibus Incentive Compensation Plan. (Incorporated      by reference to Exhibit 10.17 to Integrys Energy Group's Form 10-K for the      year ended December 31, 2007 [File No. 1-11337].)                                                                                                                                                                                               |
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.12      | Order of the      Illinois Commerce Commission in Docket No. 01-0706 for NSG (NSG—Form 10-Q      for the quarter ended March 31, 2006, Exhibit 10.1 [File No.      1-05540]).                                                                                                                                                                                                                                           |
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.13      | Order of the      Illinois Commerce Commission in Docket No. 02-0726 for NSG (NSG—Form 10-Q      for the quarter ended March 31, 2006, Exhibit 10.2 [File No.      1-05540]).                                                                                                                                                                                                                                           |
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.14      | Order of the      Illinois Commerce Commission in Docket No. 03-0704 for NSG (NSG—Form 10-Q      for the quarter ended March 31, 2006, Exhibit 10.4 [File No.      1-05540]).                                                                                                                                                                                                                                           |
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 10.15      | Order of the      Illinois Commerce Commission in Docket No. 04-0682 for NSG (NSG—Form 10-Q      for the quarter ended March 31, 2006, Exhibit 10.6 [File No.      1-05540]).                                                                                                                                                                                                                                           |
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| 99         | Proxy      Statement for Integrys Energy Group's 2008 Annual Meeting of Shareholders.      [To be filed with the SEC under Regulation 14A within 120 days after      December 31, 2007; except to the extent specifically incorporated by      reference, the Proxy Statement for the 2008 Annual Meeting of Shareholders      shall not be deemed to be filed with the SEC as part of this Annual Report      on Form 10-K.] |
|                                |                                                                                                                                                                                                                                                                                                                                                                                                                          |
| +                              | A management      contract or compensatory plan orarrangement.                                                                                                                                                                                                                                                                                                                                                                |

----