Peoples Gas Light & Coke 10Q 2006 Q2 Quarterly report

FORM 10-Q

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)

[ X ]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended MARCH 31, 2006
OR
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

	Exact Name of Registrant as
	Specified in Charter, State of
	Incorporation, Address of
Commission	Principal Executive	IRS Employer
File Number	Office and Telephone Number	Identification Number
1-5540	PEOPLES ENERGY CORPORATION	36-2642766
2-26983	THE PEOPLES GAS LIGHT AND COKE COMPANY	36-1613900
2-35965	NORTH SHORE GAS COMPANY	36-1558720

	(Illinois Corporations)
	130 East Randolph Drive, 24^th Floor
	Chicago, Illinois 60601-6207
	Telephone (312) 240-4000

Indicate by check mark whether the registrants (1) have filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrants were required to file such reports), and (2) have been subject to such filing requirements for the past 90 days. Yes [x] No [ ]

Indicate by a check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check One):
Peoples Energy Corporation	Large accelerated filer [ X ] Accelerated filer [ ] Non-accelerated filer [ ]
The Peoples Gas Light and Coke Company	Large accelerated filer [ ��] Accelerated filer [ ] Non-accelerated filer [ X ]
North Shore Gas Company	Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [ X ]

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

Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date (April 30, 2006):

Peoples Energy Corporation	Common Stock, no par value, 38,409,036 shares outstanding

The Peoples Gas Light and Coke Company	Common Stock, no par value, 24,817,566 shares outstanding (all of which are owned beneficially and of record by Peoples Energy Corporation)

North Shore Gas Company	Common Stock, no par value, 3,625,887 shares outstanding (all of which are owned beneficially and of record by Peoples Energy Corporation)

This combined Form 10-Q is separately filed by Peoples Energy Corporation, The Peoples Gas Light and Coke Company, and North Shore Gas Company. Information contained herein relating to any individual company is filed by such company on its own behalf. Each company makes no representation as to information relating to the other companies. The Peoples Gas Light and Coke Company and North Shore Gas Company meet the conditions set forth in General Instruction H(1)(a) and (b) of Form 10-Q and are therefore filing this Form 10-Q with the reduced disclosure format permitted by General Instruction H(2) of Form 10-Q.

Part I - Financial Information

Item I. Financial Statements

Peoples Energy Corporation
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

	Three Months Ended					Six Months Ended
	March 31,					March 31,
		2006			2005		2006			2005
(In Thousands, Except Per-Share Amounts)
Revenues	$	1,180,028		$	1,026,906	$	2,232,414		$	1,764,317

Operating Expenses:
Cost of energy sold		886,640			727,715		1,683,067			1,236,607
Gas charge settlement		15,662			-		107,330			-
Operation and maintenance, excluding
restructuring and environmental costs		93,447			90,204		180,811			169,032
Restructuring costs		-			1,956		-			13,163
Environmental costs		14,033			14,145		25,329			23,128
Depreciation, depletion and amortization		29,531			28,957		58,516			59,293
Taxes, other than income taxes		79,470			75,806		148,190			128,860
Losses (gains) on property sales		(162	)		-		(69	)		72
Total Operating Expenses		1,118,621			938,783		2,203,174			1,630,155

Equity investment income (loss)		(1,975	)		397		7,677			1,744

Operating Income		59,432			88,520		36,917			135,906

Other income		1,520			1,036		2,871			2,006

Other expense		153			71		191			128

Interest expense		15,182			12,844		28,405			25,354

Income from Continuing Operations
Before Income Taxes		45,617			76,641		11,192			112,430

Income tax expense (benefit)		12,026			26,810		(4,073	)		39,536

Income from Continuing Operations		33,591			49,831		15,265			72,894

Income (loss) from Discontinued Operations,
net of income tax expense (benefit) of $(277),
$884, $(1,039) and $498, respectively		(421	)		1,341		(1,576	)		754

Net Income	$	33,170		$	51,172	$	13,689		$	73,648

Average Shares of Common Stock Outstanding
Basic		38,338			37,928		38,291			37,873
Diluted		38,467			38,093		38,423			38,042

Earnings (Loss) Per Share of Common Stock
Basic, continuing operations	$	0.88		$	1.31	$	0.40		$	1.92
Basic, discontinued operations		(0.01	)		0.04		(0.04	)		0.02
Total - basic earnings per share	$	0.87		$	1.35	$	0.36		$	1.94

Diluted, continuing operations	$	0.87		$	1.31	$	0.40		$	1.92
Diluted, discontinued operations		(0.01	)		0.03		(0.04	)		0.02
Total - diluted earnings per share	$	0.86		$	1.34	$	0.36		$	1.94

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

- 2 -

Peoples Energy Corporation

CONSOLIDATED BALANCE SHEETS
(Unaudited)

		March 31,		September 30,		March 31,
(In Thousands)		2006		2005		2005
ASSETS
CAPITAL INVESTMENTS:
Property, plant and equipment
Utility plant	$	2,663,588	$	2,634,629	$	2,642,151
Oil and gas		742,870		555,365		519,757
Other		23,765		22,740		20,387
Total property, plant and equipment		3,430,223		3,212,734		3,182,295
Less - Accumulated depreciation, depletion and amortization		1,315,470		1,266,351		1,274,022
Net property, plant and equipment		2,114,753		1,946,383		1,908,273
Investment in equity investees		-		20,851		13,652
Other investments		13,215		13,796		13,076
Total Capital Investments - Net		2,127,968		1,981,030		1,935,001

CURRENT ASSETS:
Cash and cash equivalents		68,255		18,186		92,775
Short-term investments		7,000		-		7,700
Deposits with broker or trustee		32,026		25,327		18,833
Receivables -
Customers, net of reserve for uncollectible accounts
of $49,949, $34,954, and $35,796, respectively		644,410		246,393		515,540
Other		1,469		4,092		1,152
Derivative assets, at fair value - current		19,485		247,612		36,764
Materials and supplies, at average cost		10,685		10,468		10,486
Gas in storage		94,957		236,995		79,360
Gas costs recoverable through rate adjustments		12		8,608		12
Regulatory assets of utility subsidiaries		92,757		30,062		20,997
Prepayments and other		45,850		70,887		32,564
Assets of discontinued operations		116,717		128,319		117,701
Total Current Assets		1,133,623		1,026,949		933,884

OTHER ASSETS:
Prepaid pension costs		151,919		152,720		166,733
Noncurrent regulatory assets of utility subsidiaries		314,116		322,163		234,345
Derivative assets, at fair value - noncurrent		7,377		7,021		2,765
Deferred charges and other		47,766		47,908		49,432
Total Other Assets		521,178		529,812		453,275

Total Assets	$	3,782,769	$	3,537,791	$	3,322,160

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

- 3 -

Peoples Energy Corporation

CONSOLIDATED BALANCE SHEETS
(Unaudited)

		March 31,			September 30,			March 31,
(In Thousands, Except Shares)		2006			2005			2005
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common Stockholders' Equity:
Common stock, no par value -
Authorized 60,000,000 shares
Issued 38,600,116, 38,400,318 and
38,211,596 shares, respectively	$	415,570		$	409,060		$	400,407
Treasury stock - 243,100 shares		(6,677	)		(6,677	)		(6,677	)
Retained earnings		518,025			546,237			583,435
Accumulated other comprehensive loss		(82,947	)		(148,466	)		(99,363	)
Total Common Stockholders' Equity		843,971			800,154			877,802

Long-term debt		894,261			895,583			895,647
Total Capitalization		1,738,232			1,695,737			1,773,449

CURRENT LIABILITIES:
Commercial paper		166,190			8,148			-
Accounts payable		237,912			236,212			220,807
Regulatory liabilities of utility subsidiaries		-			198,550			27,006
Dividends payable		20,902			20,791			20,693
Customer deposits		37,283			29,803			30,711
Customer credit balances		22,718			59,635			24,368
Accrued taxes		30,173			26,096			73,197
Gas deliverable to customers		40,120			56,129			15,924
Derivative liabilities, at fair value - current		152,377			186,854			84,948
Other accrued liabilities		35,099			54,370			29,871
Gas charge settlement		115,849			13,332			11,100
Gas costs refundable through rate adjustments		52,985			293			7,241
Accrued interest		11,915			11,474			11,461
Temporary LIFO liquidation credit		194,377			-			174,377
Deferred credit related to discontinued operations		2,201			2,201			2,201
Total Current Liabilities		1,120,101			903,888			733,905

DEFERRED CREDITS AND LONG-TERM LIABILITIES:
Deferred income taxes		455,661			446,382			416,197
Investment tax credits		26,149			26,373			26,176
Derivative liabilities, at fair value - noncurrent		37,789			68,895			44,655
Environmental		273,900			282,411			195,193
Pension		52,407			42,593			72,827
Other		78,530			71,512			59,758
Total Deferred Credits and Other Liabilities		924,436			938,166			814,806

Total Capitalization and Liabilities	$	3,782,769		$	3,537,791		$	3,322,160

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

- 4 -

Peoples Energy Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Six Months Ended
	March 31,
(In Thousands)		2006			2005
Operating Activities:
Net income	$	13,689		$	73,648
Adjustments to reconcile net income to cash provided by operations:
Depreciation, depletion and amortization		61,359			62,075
Deferred income taxes and investment tax credits—net		(6,150	)		3,693
Gas charge settlement		107,330			-
Change in undistributed earnings from equity investments		4,959			3,472
Mark-to-market (gain) loss included in net income		4,224			341
Pension funding less than expense		10,613			18,024
Other adjustments		892			21,944
Net changes in:
Receivables—net		(400,394	)		(323,341	)
Gas in storage, excluding fair value adjustments		141,174			111,692
Gas costs recoverable/refundable through rate adjustments		61,288			27,812
Accounts payable		(10,629	)		67,419
Gas deliverable to customers		(16,009	)		(19,999	)
Other accrued liabilities		(20,095	)		(22,082	)
Accrued interest		441			154
Accrued taxes		4,077			47,141
Temporary LIFO liquidation		194,377			174,377
Prepayments and other		(33,354	)		(17,849	)
Net Cash Provided by (Used in) Operating Activities		117,792			228,521

Investing Activities:
Capital spending		(231,266	)		(68,066	)
Return of capital investments		24,635			13,070
Decrease (increase) in deposits with broker or trustee,
excluding fair value adjustments		9,336			(8,993	)
Proceeds from sale of assets		2,562			-
Other		(5,065	)		3,219
Net Cash Provided By (Used in) Investing Activities		(199,798	)		(60,770	)

Financing Activities:
Proceeds from (payment of) overdraft facility		12,328			8,679
Issuance of commercial paper		158,042			-
Retirement of commercial paper		-			(55,625	)
Issuance of long-term debt		-			(212	)
Retirement of long-term debt		(1,322	)		(1,731	)
Proceeds from issuance of common stock		4,692			7,501
Dividends paid on common stock		(41,665	)		(40,816	)
Net Cash Provided by (Used in) Financing Activities		132,075			(82,204	)

Net Increase (Decrease) in Cash and Cash Equivalents		50,069			85,547
Cash and Cash Equivalents at Beginning of Period		18,186			7,228
Cash and Cash Equivalents at End of Period	$	68,255		$	92,775

Supplemental information:
Income taxes paid, net of refunds	$	27,969		$	19,680
Interest paid, net of amounts capitalized	$	26,441		$	24,680

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

- 5 -

The Peoples Gas Light and Coke Company
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)

	Three Months Ended					Six Months Ended
	March 31,					March 31,
		2006			2005		2006			2005
(In Thousands)
Revenues	$	694,163		$	627,485	$	1,307,689		$	1,066,337

Operating Expenses:
Gas costs		485,194			403,722		912,054			676,155
Gas charge settlement		28,362			-		103,030			-
Operation and maintenance, excluding
restructuring and environmental costs		69,083			65,900		134,095			123,850
Restructuring costs		-			1,512		-			8,467
Environmental costs		13,124			13,337		23,626			21,943
Depreciation and amortization		13,964			15,383		27,663			30,659
Taxes, other than income taxes		68,045			64,837		126,637			109,983
Losses (gains) on property sales		(170	)		-		(170	)		122
Total Operating Expenses		677,602			564,691		1,326,935			971,179

Operating Income (Loss)		16,561			62,794		(19,246	)		95,158

Other income		992			794		1,996			1,611

Other expense		116			39		223			59

Interest expense		6,991			6,121		13,270			12,063

Income (Loss) Before Income Taxes		10,446			57,428		(30,743	)		84,647

Income tax expense (benefit)		2,838			21,788		(14,111	)		31,738

Net Income (Loss)	$	7,608		$	35,640	$	(16,632	)	$	52,909

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

- 6 -

The Peoples Gas Light and Coke Company

CONSOLIDATED BALANCE SHEETS
(Unaudited)


		March 31,		September 30,		March 31,
		2006		2005		2005
(In Thousands)
ASSETS
CAPITAL INVESTMENTS:
Property, plant and equipment	$	2,297,428	$	2,271,716	$	2,282,555
Less - Accumulated depreciation and amortization		924,406		904,200		927,753
Net property, plant and equipment		1,373,022		1,367,516		1,354,802
Other investments		1,454		1,548		1,631
Total Capital Investments - Net		1,374,476		1,369,064		1,356,433

CURRENT ASSETS:
Cash and cash equivalents		35,580		-		52,001
Short-term investments		-		-		7,700
Deposits with broker or trustee		709		38		-
Receivables -
Customers, net of reserve for uncollectible accounts
of $46,310, $31,947 and $31,915, respectively		435,655		113,946		349,337
Intercompany receivables		3,865		189,794		25,006
Other		130		2		83
Materials and supplies, at average cost		9,484		9,238		9,281
Gas in storage, at last-in, first-out cost		30,992		106,242		22,094
Gas costs recoverable through rate adjustments		-		6,889		-
Regulatory assets		80,775		28,061		18,115
Other		13,915		9,127		17,787
Total Current Assets		611,105		463,337		501,404

OTHER ASSETS:
Prepaid pension costs		153,410		153,110		166,365
Noncurrent regulatory assets		247,659		256,180		181,664
Deferred charges and other		35,274		35,490		36,205
Total Other Assets		436,343		444,780		384,234

Total Assets	$	2,421,924	$	2,277,181	$	2,242,071

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

- 7 -

The Peoples Gas Light and Coke Company

CONSOLIDATED BALANCE SHEETS
(Unaudited)


		March 31,			September 30,			March 31,
		2006			2005			2005
(In Thousands, Except Shares)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common Stockholder's Equity:
Common stock, without par value -
Authorized 40,000,000 shares
Outstanding 24,817,566 shares	$	165,307		$	165,307		$	165,307
Retained earnings		437,415			469,447			498,537
Accumulated other comprehensive loss		(22,412	)		(21,482	)		(19,254	)
Total Common Stockholder's Equity		580,310			613,272			644,590

Long-term debt		502,000			502,000			502,000
Total Capitalization		1,082,310			1,115,272			1,146,590

CURRENT LIABILITIES:
Other short-term debt - intercompany		-			360			-
Accounts payable		116,069			98,069			112,856
Intercompany payables		67,839			22,573			9,601
Regulatory liabilities		-			166,745			22,159
Customer deposits		34,141			27,314			28,326
Customer credit balances		18,783			49,873			19,767
Accrued taxes		53,066			24,089			72,777
Gas deliverable to customers		36,806			51,456			13,470
Other accrued liabilities		16,758			17,315			16,398
Gas charge settlement		111,649			13,332			11,100
Gas costs refundable through rate adjustments		44,808			29			5,096
Accrued interest		5,918			5,559			5,688
Dividends payable		7,200			-			11,900
Temporary LIFO liquidation credit		153,866			-			138,012
Total Current Liabilities		666,903			476,714			467,150

DEFERRED CREDITS AND LONG-TERM LIABILITIES:
Deferred income taxes		350,855			365,016			368,467
Investment tax credits		23,303			23,514			23,355
Environmental		209,300			217,611			143,304
Pension		31,364			26,342			49,001
Other		57,889			52,712			44,204
Total Deferred Credits and Other Liabilities		672,711			685,195			628,331

Total Capitalization and Liabilities	$	2,421,924		$	2,277,181		$	2,242,071

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

- 8 -

The Peoples Gas Light and Coke Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Six Months Ended
	March 31,
		2006			2005
(In Thousands)
Operating Activities:
Net income (loss)	$	(16,632	)	$	52,909
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization		30,027			33,011
Deferred income taxes and investment tax credits—net		(14,095	)		(12,168	)
Gas charge settlement		103,030			-
Pension funding less than expense		4,721			8,724
Other adjustments		10,507			39,125
Net changes in:
Receivables—net		(326,737	)		(238,720	)
Intercompany receivables		12,721			2,259
Gas in storage		75,250			85,181
Gas costs recoverable/refundable through rate adjustments		51,668			23,017
Accounts payable		7,152			59,659
Intercompany accounts payable		(11,981	)		(27,075	)
Gas deliverable to customers		(14,650	)		(18,993	)
Other accrued liabilities		(1,239	)		(39,033	)
Accrued interest		359			156
Accrued taxes		28,977			50,233
Temporary LIFO liquidation		153,866			138,012
Other		(25,469	)		(32,929	)
Net Cash Provided by (Used in) Operating Activities		67,475			123,368

Investing Activities:
Capital spending		(36,483	)		(31,390	)
Proceeds from sale of assets		1,349			-
Other		951			(4,921	)
Net Cash Provided by (Used in) Investing Activities		(34,183	)		(36,311	)

Financing Activities:
Proceeds from (payment of) overdraft facility		10,848			10,050
Intercompany loan payable		(360	)		-
Retirement of commercial paper		-			(31,000	)
Issuance of long-term debt		-			(212	)
Dividends paid on common stock		(8,200	)		(13,900	)
Net Cash Provided by (Used in) Financing Activities		2,288			(35,062	)

Net Increase (Decrease) in Cash and Cash Equivalents		35,580			51,995
Cash and Cash Equivalents at Beginning of Period		-			6
Cash and Cash Equivalents at End of Period	$	35,580		$	52,001

Supplemental information:
Income taxes paid, net of refunds	$	4,121		$	22,227
Interest paid, net of amounts capitalized	$	11,825		$	11,162

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

- 9 -

North Shore Gas Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)


	Three Months Ended					Six Months Ended
	March 31,					March 31,
		2006			2005		2006		2005
(In Thousands)
Revenues	$	127,194		$	115,147	$	242,657	$	195,243

Operating Expenses:
Gas costs		98,301			84,454		188,592		141,625
Gas charge settlement (credit)		(12,700	)		-		4,300		-
Operation and maintenance, excluding
restructuring and environmental costs		9,529			8,976		18,699		17,078
Restructuring costs		-			40		-		561
Environmental costs		909			808		1,703		1,184
Depreciation		1,379			1,733		2,805		3,450
Taxes, other than income taxes		6,500			6,790		12,074		11,645
Total Operating Expenses		103,918			102,801		228,173		175,543

Operating Income		23,276			12,346		14,484		19,700

Other income		171			159		251		208

Other expense		33			30		57		67

Interest expense		973			934		1,949		1,872

Income Before Income Taxes		22,441			11,541		12,729		17,969

Income tax expense		8,612			4,416		4,558		6,751

Net Income	$	13,829		$	7,125	$	8,171	$	11,218

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

- 10 -

North Shore Gas Company

CONSOLIDATED BALANCE SHEETS
(Unaudited)


		March 31,		September 30,		March 31,
		2006		2005		2005
(In Thousands)
ASSETS
CAPITAL INVESTMENTS:
Property, plant and equipment	$	366,160	$	362,912	$	359,596
Less - Accumulated depreciation		146,434		144,504		144,631
Net property, plant and equipment		219,726		218,408		214,965

CURRENT ASSETS:
Cash and cash equivalents		23,251		10,545		34,119
Short-term investments		7,000		-		-
Receivables -
Customers, net of reserve for uncollectible
accounts of $2,371, $1,455 and $1,610, respectively		60,941		14,209		50,686
Intercompany receivables		447		39,815		5,152
Materials and supplies, at average cost		1,201		1,230		1,204
Gas in storage, at last-in, first-out cost		3,556		14,231		2,068
Gas costs recoverable through rate adjustments		12		1,719		12
Regulatory assets		11,982		2,001		2,882
Other		429		371		1,920
Total Current Assets		108,819		84,121		98,043

OTHER ASSETS:
Noncurrent regulatory assets		66,457		65,983		52,680
Deferred charges and other		2,927		2,677		2,723
Total Other Assets		69,384		68,660		55,403

Total Assets	$	397,929	$	371,189	$	368,411

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

- 11 -

North Shore Gas Company

CONSOLIDATED BALANCE SHEETS
(Unaudited)


		March 31,			September 30,			March 31,
		2006			2005			2005
(In Thousands, Except Shares)
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common Stockholder's Equity:
Common stock, without par value -
Authorized 5,000,000 shares
Outstanding 3,625,887 shares	$	24,757		$	24,757		$	24,757
Retained earnings		77,726			80,555			85,676
Accumulated other comprehensive loss		(2,365	)		(2,376	)		(2,032	)
Total Common Stockholder's Equity		100,118			102,936			108,401

Long-term debt		69,250			69,250			69,250
Total Capitalization		169,368			172,186			177,651

CURRENT LIABILITIES:
Accounts payable		16,048			21,879			13,898
Intercompany payables		13,842			2,722			2,410
Regulatory liabilities		-			32,485			4,846
Customer deposits		2,939			2,489			2,386
Customer credit balances		3,146			8,761			3,820
Accrued taxes		10,362			2,904			6,731
Gas deliverable to customers		3,315			4,673			2,454
Other accrued liabilities		3,790			3,504			1,184
Gas charge settlement		4,200			-			-
Gas costs refundable through rate adjustments		8,177			264			2,145
Accrued interest		1,309			1,284			1,279
Dividends payable		1,500			-			2,800
Temporary LIFO liquidation credit		40,511			-			36,365
Total Current Liabilities		109,139			80,965			80,318

DEFERRED CREDITS AND LONG-TERM LIABILITIES:
Deferred income taxes		38,582			39,061			36,592
Investment tax credits		2,846			2,859			2,820
Environmental		64,600			64,800			51,889
Pension		5,143			3,293			12,012
Other		8,251			8,025			7,129
Total Deferred Credits and Other Liabilities		119,422			118,038			110,442

Total Capitalization and Liabilities	$	397,929		$	371,189		$	368,411

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

- 12 -

North Shore Gas Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Six Months Ended
	March 31,
		2006			2005
(In Thousands)
Operating Activities:
Net income	$	8,171		$	11,218
Adjustments to reconcile net income to cash provided by operations:
Depreciation		3,257			3,863
Deferred income taxes and investment tax credits—net		(200	)		696
Pension funding less than expense		1,850			2,289
Gas charge settlement		4,300			-
Other adjustments		475			(1,714	)
Net changes in:
Receivables—net		(46,474	)		(37,194	)
Intercompany receivables		5,254			14,602
Gas in storage		10,675			12,853
Gas costs recoverable/refundable through rate adjustments		9,620			4,795
Accounts payable		(5,460	)		5,167
Intercompany accounts payable		1,201			(3,810	)
Gas deliverable to customers		(1,358	)		(1,006	)
Other accrued liabilities		286			(4,877	)
Accrued interest		25			9
Accrued taxes		7,458			5,052
Temporary LIFO liquidations		40,511			36,365
Other		(5,439	)		(3,456	)
Net Cash Provided by (Used in) Operating Activities		34,152			44,852

Investing Activities:
Capital spending		(4,575	)		(3,714	)
Short-term investments		(7,000	)		-
Other		-			25
Net Cash Provided by (Used in) Investing Activities		(11,575	)		(3,689	)

Financing Activities:
Proceeds from (payment of) overdraft facility		(371	)		(156	)
Retirement of short-term debt		-			(3,810	)
Retirement of long-term debt		-			(80	)
Dividends paid on common stock		(9,500	)		(3,000	)
Net Cash Provided by (Used in) Financing Activities		(9,871	)		(7,046	)

Net Increase (Decrease) in Cash and Cash Equivalents		12,706			34,117
Cash and Cash Equivalents at Beginning of Period		10,545			2
Cash and Cash Equivalents at End of Period	$	23,251		$	34,119

Supplemental information:
Income taxes paid, net of refunds	$	465		$	3,970
Interest paid, net of amounts capitalized	$	1,781		$	1,824

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

- 13 -

Notes to Consolidated Financial Statements (Unaudited)

1: BASIS OF PRESENTATION

General

The condensed, unaudited financial statements of Peoples Energy Corporation (the Company or Peoples Energy), The Peoples Gas Light and Coke Company (Peoples Gas) and North Shore Gas Company (North Shore Gas), have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC). Peoples Gas and North Shore Gas are wholly-owned subsidiaries of the Company. As described below, the unaudited prior period financial statements of the Company have been restated for discontinued operations.

This Quarterly Report on Form 10-Q is a combined report of the Company, Peoples Gas and North Shore Gas. Certain footnote disclosures and other information, normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (GAAP), have been condensed or omitted from these interim financial statements, pursuant to SEC rules and regulations. Therefore, the statements should be read in conjunction with the consolidated financial statements and related notes contained in the Annual Report on Form 10-K, as amended, for the Company, Peoples Gas and North Shore Gas for the fiscal year ended September 30, 2005. Certain items previously reported for the prior periods have been reclassified to conform with the presentation in the current period. Due to a number of factors, including seasonality of businesses and market price volatility, the quarterly results of operations and statements of financial position and cash flows should not be considered indicative of the year as a whole.

In the opinion of management, the accompanying unaudited consolidated financial statements contain all adjustments, consisting of normal recurring adjustments unless otherwise noted, necessary to present fairly the financial position of the Company, Peoples Gas and North Shore Gas and their results of operations and cash flows for the interim periods presented.

Discontinued Operations

The Company announced in March, 2006 its intention to exit the power generation business and is actively engaged in discussions regarding the sale of its 50% interest in the Elwood power generation facility, and its 100% interest in a fully-permitted power development site in Oregon. On March 31, 2006, the Company signed an agreement to sell to Exelon Generation Company, LLC, the Company's 27% interest in the Southeast Chicago Energy Project facility. On January 31, 2006, the Company sold its 100% interest in the Valencia Energy power development site in New Mexico. Through two partnerships and the Oregon development site, the Company currently owns approximately 800 net Megawatts of power generation assets, with a book value of approximately $115.7 million at March 31, 2006. Subject to final due diligence, negotiations and regulatory approvals by the FERC and Federal Trade Commission, the Company expects to close on the sales during fiscal 2006.

The operating results of the Company's power generation business were reported under the Power Generation segment and included in consolidated operating income prior to the change in segment reporting described below and the treatment as discontinued operations. Effective in the second quarter of fiscal 2006, the Company reports the results of operations and assets of its power generation business as discontinued operations in accordance with SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS No. 144). Results of operations and assets for the prior periods have been reclassified to conform with the discontinued operations presentation in the current period.

- 14 -

Notes to Consolidated Financial Statements (Unaudited)

The following table summarizes the power generation items which are reflected as assets of and deferred credit related to discontinued operations in the Company’s consolidated balance sheets.

		March 31,		September 30,		March 31,
		2006		2005		2005
(In Thousands)
Investments in unconsolidated affiliates	$	106,425	$	115,168	$	105,724
Other investments		10,249		12,245		11,060
Property, plant and equipment, net		43		906		917
Total assets	$	116,717	$	128,319	$	117,701

Deferred credit	$	2,201	$	2,201	$	2,201

The summarized financial results for the Company’s discontinued operations were as follows:

	Three Months Ended						Six Months Ended
	March 31,						March 31,
		2006			2005			2006			2005
(In Thousands)
Operation and maintenance	$	(776	)	$	(503	)	$	(1,420	)	$	(1,025	)
Taxes, other than income taxes		6			(20	)		(8	)		(11	)
Impairments and losses on property sales		(50	)		(143	)		(2,139	)		(143	)
Equity investment income		122			2,891			952			2,431
Income (loss) before income taxes		(698	)		2,225			(2,615	)		1,252
Income tax expense (benefit)		(277	)		884			(1,039	)		498
Income (loss) from discontinued operations,
net of income taxes	$	(421	)	$	1,341		$	(1,576	)	$	754

Change In Segment Reporting

Beginning in fiscal 2006, the Company restructured the management and operations of certain of its businesses and has realigned its segment reporting to match these changes. The Company's reportable segments are Gas Distribution (including Peoples Gas hub operations, formerly included as part of Midstream Services), Oil and Gas Production, Energy Assets , Energy Marketing (both retail and wholesale activity, formerly included as Retail Energy Services and part of Midstream Services, respectively), and Corporate and Other.

- 15 -

Notes to Consolidated Financial Statements (Unaudited)

The following table summarizes the quarterly results for fiscal 2006 and 2005 under the new segment reporting structure.

	Fiscal 2006						Fiscal 2005
(In Thousands, except per share amounts)		Mar. 31,			Dec. 31,			Sep. 30,			Jun. 30,			Mar. 31,			Dec. 31,
For the Quarter Ended		2006			2005			2005			2005			2005			2004
Operating Income (Loss):
Gas Distribution	$	42,921		$	(40,954	)	$	(6,778	)	$	17,251		$	77,187		$	49,674
Oil and Gas Production		8,801			11,394			(2,769	)		5,854			5,177			8,591
Energy Marketing		10,324			9,764			(77	)		1,329			9,857			2,364
Energy Assets		1,450			1,692			502			(311	)		566			972
Corporate and Other		(4,064	)		(4,408	)		2,775			(4,265	)		(4,267	)		(14,215	)
Total Operating Income (Loss)	$	59,432		$	(22,512	)	$	(6,347	)	$	19,858		$	88,520		$	47,386

Income (loss) from continuing operations		33,591			(18,325	)		(10,880	)		4,835			49,831			23,062
Income (loss) from discontinued operations,
net of taxes		(421	)		(1,156	)		8,566			1,964			1,341			(586	)
Net Income (Loss)	$	33,170		$	(19,481	)	$	(2,314	)	$	6,799		$	51,172		$	22,476

Per Diluted Share:
Income (loss) from continuing operations	$	0.87		$	(0.48	)	$	(0.28	)	$	0.13		$	1.31		$	0.61
Income (loss) from discontinued operations		(0.01	)		(0.03	)		0.22			0.05			0.03			(0.02	)
Net Income (Loss)	$	0.86		$	(0.51	)	$	(0.06	)	$	0.18		$	1.34		$	0.59

2: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Gas Charge Settlement

On March 28, 2006, the Illinois Commerce Commission (the “Commission”) approved orders that settle gas charge reconciliation proceedings for fiscal years 2001 through 2004 for Peoples Energy Corporation and its utility subsidiaries. The orders, which became publicly available March 30, adopt a January 17, 2006 Settlement Agreement and Release, as amended by an Amendment and Addendum dated March 6, 2006 (the “Agreement”).

Pursuant to the Agreement, Peoples Gas and North Shore Gas agreed to refund (through a credit applied to customer bills) the total sum of $100 million to their customers (the “Refund”). The Agreement provides for the Commission to prescribe the manner in which this amount is to be refunded to customers. In its orders approving the Agreement, the Commission determined that $96 million will be refunded to customers of Peoples Gas and $4 million will be refunded to customers of North Shore Gas. In April 2006, the utilities credited customer accounts for the refund.

Peoples Energy also agreed to pay to the City of Chicago and the Illinois Attorney General, jointly $5 million. The Company also agreed to pay up to $5 million per year over the next five years towards the funding of conservation and weatherization programs for low and moderate-income residential dwellings (“Conservation Programs”). The five subsequent payments of up to $5 million shall be paid based upon Conservation Programs to be developed by the City of Chicago and/or the Illinois Attorney General. Peoples Gas and North Shore Gas will not seek recovery in any future rate or reconciliation cases of any amounts associated with the Conservation Programs.

- 16 -

Notes to Consolidated Financial Statements (Unaudited)

Peoples Gas and North Shore Gas agreed to credit fiscal 2005 and fiscal 2006 revenues derived from the provision of gas hub services as an offset to utility customers’ gas charges and to account for such revenues received from gas hub services in the same manner in all future gas charge reconciliation cases.

As a result of the Agreement, Peoples Energy reported a $15.7 million pre-tax settlement charge in its fiscal 2006 second quarter to reflect the $10.7 million impact of the change in accounting treatment for hub activity revenues for fiscal 2005 and the combined $5 million estimated impact on Peoples Gas and North Shore Gas’ reserves for uncollectible accounts due to termination of collection activities on the $207 million of accounts previously written off. This amount is in addition to the $91.7 million first quarter charge recorded by the Company in connection with the signing of the initial proposed Settlement Agreement and Release dated January 17, 2006. The allocation of settlement amounts between Peoples Gas and North Shore Gas approved by the Commission’s orders differed from Peoples Energy’s allocation estimate of the $91.7 million charged in the first quarter of fiscal 2006. Accordingly, Peoples Gas recorded a pre-tax settlement charge in the second fiscal quarter of $28.4 million in addition to the amount previously recorded, and North Shore Gas recorded a pre-tax credit of $12.7 million to reduce the accruals for the settlement made in earlier periods.

The Company has reported for the six month period ended March 31, 2006 a charge and an accrued liability as of March 31, 2006 reflecting the terms of the settlement. This charge totaled $107.3 million pretax or $1.68 per share after tax. The charge reflects $100 million in expected refunds to customers, $10.7 million to reflect a change in the regulatory accounting treatment for fiscal 2005 hub revenues, $5 million in estimated additional bad debt expense and $5 million related to the first payment to the Illinois Attorney General and City of Chicago under the settlement, and is net of approximately $13.3 million in previously recorded liabilities related to the cases. The $107.3 million charge has been allocated $103.0 million to Peoples Gas and $4.3 million to North Shore Gas in accordance with the Order. Fiscal year-to-date 2006 hub revenues that were reversed as a result of being treated as a reduction of recoverable gas costs totaled $7.7 million, including first quarter revenues of $2.8 million reversed in the second quarter of fiscal 2006. Accrued liabilities totaling $115.8 million are reflected in the consolidated balance sheet caption “gas charge settlement” under current liabilities. The $115.8 million liability has been allocated $111.6 million to Peoples Gas and $4.2 million to North Shore Gas. Following is a reconciliation of the total gas charge settlement per the statement of operations and the related liability.

		Total			Peoples Gas			North Shore Gas
(Dollars in Thousands)
Refund	$	100,000		$	96,000		$	4,000
Payment to Illinois Attorney General and City of Chicago		5,000			4,800			200
Hub fiscal 2005 revenues		10,662			10,662			-
Bad debt expense		5,000			4,900			100
Amounts recognized prior to fiscal 2006		(13,332	)		(13,332	)		-

Gas charge settlement per consolidated statements of income	$	107,330		$	103,030		$	4,300
Add:
Amounts recognized prior to fiscal 2006		13,332			13,332			-
Interest on Hub fiscal 2005 revenues refundable		187			187			-
Less:
Addition to reserve for uncollectible accounts		5,000			4,900			100

Gas charge settlement liability per consolidated balance sheets	$	115,849		$	111,649		$	4,200

See Note 7A for a complete discussion of the gas charge cases and the settlement agreement.

- 17 -

Notes to Consolidated Financial Statements (Unaudited)

Gas in Storage

Peoples Gas and North Shore Gas price storage injections at the fiscal year average of the costs of natural gas supply purchased. Withdrawals from storage for the utilities are priced on the LIFO cost method. For interim periods, the difference between current projected replacement cost and the LIFO cost for quantities of gas temporarily withdrawn from storage is recorded as a temporary LIFO liquidation credit. Due to seasonality requirements, the Company expects interim reductions in LIFO layers to be replenished by the fiscal year end. The Energy Marketing segment accounts for gas in inventory primarily using the lower of average cost or market method. A portion of gas in storage for Energy Marketing is reported at fair value to reflect the effects of fair value hedge accounting in accordance with SFAS 133, "Accounting for Derivatives and Hedging Activities" (SFAS No. 133).

Derivative Instruments and Hedging Activities

The Company's earnings may vary due to changes in commodity prices and interest rates (market risk) that affect its operations and investments. To manage this risk, the Company uses forward contracts and financial instruments, including commodity futures contracts, swaps and options. It is the policy of the Company to use these instruments solely for the purpose of managing risk and not for any speculative purpose. The Company accounts for derivative financial instruments pursuant to SFAS No. 133. Under the provisions of SFAS No. 133, all derivatives are recognized on the balance sheet at their fair value unless they qualify for the normal purchases and sales exception.

Cash Flow Hedges. In connection with its Oil and Gas Production and Energy Marketing businesses, the Company uses derivative financial instruments to protect against loss of value of future anticipated cash transactions caused by commodity price changes in the marketplace. Additionally, the Gas Distribution utilities use derivatives to hedge changes in the price of gas used in operations. These instruments are designated as cash flow hedges, which allow for the effective portion of unrealized changes in value during the life of the hedge to be recorded in other comprehensive income. Realized gains and losses from commodity cash flow hedges are recorded in revenues or cost of energy sold in the income statement in the same month the related physical sales or purchases are recorded in the income statement.

Cash flow hedge accounting is discontinued when it is no longer probable that the original forecasted transactions will occur. The carrying value of contracts which no longer qualify for hedge accounting are prospectively marked-to-market, with the change in value recorded in each reporting period in the income statement. If the original forecasted transactions are probable of not occurring, any amounts previously recorded in other comprehensive income are immediately recorded in the income statement. In addition, cash flow hedge ineffectiveness can result from differences in critical terms (such as location) between the hedging instrument and the hedged transaction and result in the immediate recognition of gains or losses recorded in revenues.

- 18 -

Notes to Consolidated Financial Statements (Unaudited)

The following table summarizes selected information related to cash flow hedges included in the Consolidated Income Statement and Balance Sheets for the periods ended March 31, 2006 and 2005, respectively.

					Interest			Partnership
Periods ended March 31, 2006		Commodities			Rate			Transactions			Total
(In Thousands)
Portion of after-tax gains on hedging instruments
determined to be ineffective and included in net income
- three months ended	$	2,419		$	-			N/A		$	2,419
- six months ended	$	3,596		$	-			N/A		$	3,596

Accumulated other comprehensive income (loss) after tax at
March 31, 2006	$	(55,249	)	$	(464	)	$	(3,177	)	$	(58,890	)

Portion of accumulated other comprehensive income (loss)
expected to be reclassified to earnings during the next
12 months based on prices at March 31, 2006	$	(36,402	)	$	(65	)		N/A		$	(36,467	)
Maximum term		54 months			85 months

Periods ended March 31, 2005
(In Thousands)
Portion of after-tax gains (losses) on hedging instruments
determined to be ineffective and included in net income
- three months ended	$	(133	)	$	-			N/A		$	(133	)
- six months ended	$	139		$	-			N/A		$	139

Accumulated other comprehensive income (loss) after tax at
March 31, 2005	$	(72,351	)	$	(530	)	$	(4,975	)	$	(77,856	)

Fair Value Hedges. The Company uses financial hedges to protect the value of a portion of Energy Marketing's gas in storage and these are accounted for as fair value hedges. The change in value of these hedges, along with the offsetting change in value of the inventory hedged (to the extent the hedge is effective), are recorded on the income statement in each reporting period's cost of energy sold.

The Energy Marketing segment recorded in the three- and six-month periods ended March 31, 2006 $(1.5) million and $2.9 million, respectively, in mark-to-market gains (losses) related to the application of fair value hedge accounting to certain storage inventory transactions. The segment uses derivatives to mitigate commodity price risk and substantially lock in the profit margin that it will ultimately realize when inventory volumes are withdrawn from storage. Under fair value accounting, which this segment is using for certain storage activity, the mark-to-market adjustment to inventory is computed using spot prices, while the derivatives used to mitigate the risk of changes in inventory value are marked-to-market using forward prices. When the spot price of natural gas changes disproportionately to the forward price, the difference is recorded in operating results. As a result, earnings are subject to volatility, even when the underlying expected profit margin over the duration of the contracts is unchanged. The volatility resulting from this accounting can be significant from period to period. As volumes are withdrawn from storage, these mark-to-market accounting impacts are reversed.

The Company also uses certain financial instruments to adjust the portfolio composition of its debt from fixed-rate to floating-rate debt. These derivative instruments are accounted for as fair value hedges. The change in value of these hedges along with the offsetting change in value of the debt hedged (to the extent the hedge is effective) are recorded in each reporting period in interest expense in the income statement.

- 19 -

Notes to Consolidated Financial Statements (Unaudited)

Mark-To-Market Derivative Instruments. Peoples Gas and North Shore Gas use derivative instruments to manage each utility's cost of gas supply and mitigate price volatility. All such derivative instruments are measured at fair value. The regulated utilities' tariffs allow for full recovery from their customers of prudently incurred gas supply costs, including gains or losses on these derivative instruments. As a result, SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation", allows for these mark-to-market derivative gains or losses to be recorded as regulatory assets or regulatory liabilities. Realized gains or losses are recorded as an adjustment to the cost of gas supply in the period that the underlying gas purchase transaction takes place. The costs and benefits of this activity are passed through to customers under the tariffs of Peoples Gas and North Shore Gas.

The Energy Marketing segment uses certain derivative contracts (such as Nymex or Basis swaps) that do not qualify for hedge accounting under SFAS No. 133. Included in these contracts are hedges of location differentials associated with its wholesale natural gas contracts and transactions involving storage assets. In the three and six months ended March 31, 2006, the Energy Marketing segment recognized mark-to-market pretax losses (included in revenues) of $2.0 million and $4.7 million, respectively, related to these derivatives. As physical volumes are delivered under natural gas contracts or withdrawn under certain gas storage contracts, these mark-to-market accounting impacts are reversed. The above losses include net mark-to-market activity both for hedges for settlement in future periods and the reversal of amounts recorded in prior periods and settled within the current period.

The following table reflects the mark-to-market value of these contracts and other miscellaneous derivative contracts that do not qualify for hedge accounting.

		March 31,			September 30,			March 31,
(In Thousands)		2006			2005			2005
Peoples Gas mark-to-market asset (liability)	$	(51,337	)	$	172,549		$	17,962
North Shore Gas mark-to-market asset (liability)		(8,970	)		33,754			4,083
Other mark-to-market asset (liability)		(6,120	)		(2,027	)		(29	)
Total	$	(66,427	)	$	204,276		$	22,016

- 20 -

Notes to Consolidated Financial Statements (Unaudited)

Derivative Summary. The following table summarizes the changes in valuation of all outstanding derivative contracts during the three and six months ended March 31, 2006 and 2005. All amounts are based on fair values at the end of the period and do not necessarily indicate that a gain or loss on the derivative will be recognized in income in future periods. Generally, hedges are held to maturity, which coincides with recognition of the transaction being hedged (e.g., anticipated sales or cost of purchases in earnings), thereby achieving the realization of prices contemplated by the underlying risk management strategies.

	Derivative Type
	Cash Flow						Fair Value
	Hedges						Hedges						Mark-to-Market
Fiscal Quarter (In Thousands)		2006			2005			2006			2005			2006			2005
Value of contracts outstanding at January 1	$	(136,892	)	$	(54,157	)	$	(6,271	)	$	1,024		$	21,950		$	(22,779	)
Less: Gain (loss) on contracts realized or otherwise
settled during the period		(23,920	)		(3,459	)		3,748			-			(11,032	)		(11,958	)
Plus: Unrealized gain (loss) on new contracts entered
into during the period and outstanding at end of period		(761	)		(6,790	)		251			59			(13,482	)		13,765
Plus: Other unrealized gain (loss), primarily changes
in market prices on contracts outstanding at the
beginning of the period		22,232			(63,463	)		8,525			(2,088	)		(85,927	)		19,072
Value of contracts outstanding at March 31	$	(91,501	)	$	(120,951	)	$	(1,243	)	$	(1,005	)	$	(66,427	)	$	22,016

	Derivative Type
	Cash Flow						Fair Value
	Hedges						Hedges						Mark-to-Market
Fiscal Year-to-Date (In Thousands)		2006			2005			2006			2005			2006			2005
Value of contracts outstanding at October 1	$	(202,904	)	$	(89,306	)	$	(21,457	)	$	908		$	204,276		$	27,678
Less: Gain (loss) on contracts realized or otherwise
settled during the period		(62,652	)		(22,850	)		4,372			(113	)		53,560			(1,605	)
Plus: Unrealized gain (loss) on new contracts entered
into during the period and outstanding at end of period		(9,135	)		(11,105	)		746			(69	)		(53,570	)		20,406
Plus: Other unrealized gain (loss), primarily changes
in market prices on contracts outstanding at the
beginning of the period		57,886			(43,390	)		23,840			(1,957	)		(163,573	)		(27,673	)
Value of contracts outstanding at March 31	$	(91,501	)	$	(120,951	)	$	(1,243	)	$	(1,005	)	$	(66,427	)	$	22,016

- 21 -

Notes to Consolidated Financial Statements (Unaudited)

The following table is a summary of the fair market value of commodity derivatives by type and a reconciliation to the fair market value of all derivatives at March 31, 2006. Valuations are based on the New York Mercantile Exchange (NYMEX) closing prices for the respective NYMEX Henry Hub futures contracts and on the closing prices published in various commodity pricing publications for the geographical differential between a specific location price and the NYMEX Henry Hub futures contract closing price where applicable.

(Fair Value amounts in thousands)
*Futures/Forwards*	*Maturity*	*Volumes* *(Mmbtus*	)		*Fair Value*
Natural Gas	Less than 1 Year	38,096,207		$	(5,419	)
Natural Gas	1 to 3 Years	489,261			8
		38,585,468		$	(5,411	)

*Options*	*Maturity*	*Volumes* *(Mmbtus*	)		*Fair Value*
Natural Gas	Less than 1 Year	44,425,000		$	(26,719	)
Natural Gas	1 to 3 Years	9,763,000			(6,419	)
		54,188,000		$	(33,138	)

*Swaps*	*Maturity*	*Volumes* *(Mmbtus*	)		*Fair Value*
Natural Gas	Less than 1 Year	102,736,352		$	(83,334	)
Natural Gas	1 to 3 Years	21,152,211			(21,205	)
Natural Gas	4 to 5 Years	82,909			(55	)
		123,971,472		$	(104,594	)

*Total (Natural Gas)*	*Maturity*	*Volumes* *(Mmbtus*	)		*Fair Value*
Natural Gas	Less than 1 Year	185,257,559		$	(115,472	)
Natural Gas	1 to 3 Years	31,404,472			(27,616	)
Natural Gas	4 to 5 Years	82,909			(55	)
		216,744,940		$	(143,143	)

*Futures/Forwards (Propane)*	*Maturity*	*Volumes* *(Mmbtus*	)		*Fair Value*
Propane	Less than 1 Year	2,100,000		$	(195	)
		2,100,000		$	(195	)

*Swaps (Oil)*	*Maturity*	*Volumes* *(Bbls*	)		*Fair Value*
WTI Crude Oil	Less than 1 Year	274,000		$	(10,190	)
WTI Crude Oil	1 to 3 Years	164,700			(3,654	)
		438,700		$	(13,844	)
*Grand Total - Fair Value of Commodity Derivatives*				$	(157,182	)

*Fair Value of Interest Rate Swap*				$	(1,989	)

*Grand Total - Fair Value of all Derivatives*				$	(159,171	)

- 22 -

Notes to Consolidated Financial Statements (Unaudited)

Revenue Recognition

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

		March 31,		September 30,		March 31,
(In Thousands)		2006		2005		2005
Peoples Gas	$	100,640	$	32,282	$	94,408
North Shore Gas		18,792		6,136		17,085
Peoples Energy Services		42,528		19,362		36,779
Consolidated Peoples Energy	$	161,960	$	57,780	$	148,272

In Illinois, delivering, supplying, furnishing or selling gas for use or consumption and not for resale is subject to state and, in some cases, municipal taxes (revenue taxes). The Illinois Public Utilities Act provides that the tax may be recovered from utility customers by adding an additional charge to customers' bills. These taxes are due only to the extent they are collected as cash receipts as opposed to amounts billed. As a result, most revenue taxes are reported on a gross basis, whereby the billed amounts for the recovery of these taxes are included in revenues and an offsetting expense amount (net of an administrative fee) representing the expected cash payment of the taxes is included in taxes, other than income taxes on the income statement. Revenue tax amounts included in utility revenues are as follows:

	Three Months Ended				Six Months Ended
	March 31,				March 31,
(In Thousands)		2006		2005		2006		2005
Peoples Gas	$	64,125	$	60,187	$	119,517	$	101,755
North Shore Gas		5,754		5,963		10,712		10,003
Consolidated Peoples Energy	$	69,879	$	66,150	$	130,229	$	111,758

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

Statement of Cash Flows

For purposes of reporting cash flows, the Company considers all highly liquid financial instruments with a maturity at the date of purchase of three months or less to be cash equivalents. Under the Company's cash management practices, checks issued pending clearance that result in overdraft balances for accounting purposes are included in accounts payable and total $ 21.4 million, $9.1 million and $15.1 million as of March 31, 2006, September 30, 2005 and March 31, 2005, respectively. For Peoples Gas, the amounts in accounts payable at March 31, 2006, September 30, 2005 and March 31, 2005 were $18.0 million, $7.1 million and $14.9 million, respectively. North Shore Gas' amounts in accounts payable at March 31, 2006, September 30, 2005 and March 31, 2005 were immaterial.

- 23 -

Notes to Consolidated Financial Statements (Unaudited)

3: BUSINESS SEGMENTS

Total segment capital assets include net property, plant and equipment and certain intangible assets classified in other investments. Results for the three and six months ended March 31, 2005 have been restated to conform with the new segment organization and discontinued operations described in Note 1. Financial data by business segment is presented below.

												Corporate
	Gas			Oil and Gas			Energy		Energy			and
(In Thousands)	Distribution			Production			Marketing		Assets			Other			Adjustments			Total
Three Months Ended March 31, 2006
Revenues (1)	$	821,357		$	37,281		$	317,353	$	7,791		$	-		$	(3,754	)	$	1,180,028
Cost of energy sold		583,495			-			301,044		5,791			-			(3,690	)		886,640
Gas charge settlement		15,662			-			-		-			-			-			15,662
Operation and maintenance, excluding environmental costs		75,528			9,108			5,400		447			3,028			(64	)		93,447
Environmental costs		14,033			-			-		-			-			-			14,033
Depreciation, depletion and amortization		15,343			13,363			440		88			297			-			29,531
Taxes, other than income taxes		74,545			4,026			145		15			739			-			79,470
Losses (gains) on property sales		(170	)		8			-		-			-			-			(162	)
Equity investment income (loss) (2)		-			(1,975	)		-		-			-			-			(1,975	)
Operating income (loss)	$	42,921		$	8,801		$	10,324	$	1,450		$	(4,064	)	$	-		$	59,432
Income (loss) from discontinued operations,
net of income taxes	$	-		$	-		$	-	$	(421	)	$	-		$	-		$	(421	)
Segment capital assets of continuing operations,
net (3), (6)	$	1,592,997		$	508,806		$	4,745	$	5,224		$	7,286		$	-		$	2,119,058
Investments in equity investees (4)	$	-		$	-		$	-	$	-		$	-		$	-		$	-
Capital spending (5)	$	23,431		$	168,688		$	105	$	15		$	1,370		$	-		$	193,609
Three Months Ended March 31, 2005
Revenues (1)	$	742,442		$	27,631		$	254,600	$	5,209		$	-		$	(2,976	)	$	1,026,906
Cost of energy sold		488,176			-			239,165		3,785			-			(3,411	)		727,715
Operation and maintenance, excluding
restructuring and environmental costs		74,190			8,392			4,861		705			1,621			435			90,204
Restructuring costs		-			-			-		-			1,956			-			1,956
Environmental costs		14,145			-			-		-			-			-			14,145
Depreciation, depletion and amortization		17,117			11,040			433		122			245			-			28,957
Taxes, other than income taxes		71,627			3,152			284		31			712			-			75,806
Equity investment income (2)		-			130			-		-			267			-			397
Operating income (loss)	$	77,187		$	5,177		$	9,857	$	566		$	(4,267	)	$	-		$	88,520
Income (loss) from discontinued operations,
net of income taxes	$	-		$	-		$	-	$	1,346		$	(5	)	$	-		$	1,341
Segment capital assets of continuing operations,
net (3)	$	1,570,015		$	326,957		$	6,452	$	5,740		$	4,127		$	-		$	1,913,291
Investments in equity investees (4)	$	-		$	10,024		$	-	$	-		$	3,628		$	-		$	13,652
Capital spending (5)	$	17,442		$	18,584		$	60	$	408		$	201		$	-		$	36,695
(1) Oil and Gas Production revenues are net of gains and losses from hedging activities.
(2) Excludes equity investment income from discontinued operations. See Note 5.
(3) Excludes segment assets of discontinued operations at March 31, 2006 and 2005 of $9,366 and $11,020, respectively.
(4) Excludes investments in equity investees of discontinued operations at March 31, 2006 and 2005 of $106,425 and $105,724, respectively.
(5) Excludes capital spending relating to assets of discontinued operations three months ended at March 31, 2006 and 2005 of $102 and $96, respectively.
(6) Includes $139 million acquisition of oil and gas properties by the Oil and Gas Production segment in February 2006.

- 24 -

Notes to Consolidated Financial Statements (Unaudited)

												Corporate
	Gas			Oil and Gas		Energy			Energy			and
(In Thousands)	Distribution			Production		Marketing			Assets			Other			Adjustments			Total
Six Months Ended March 31, 2006
Revenues (1)	$	1,550,346		$	64,339	$	612,223		$	10,398		$	-		$	(4,892	)	$	2,232,414
Cost of energy sold		1,100,646			-		581,382			6,127			-			(5,088	)		1,683,067
Gas charge settlement		107,330			-		-			-			-			-			107,330
Operation and maintenance, excluding
environmental costs		146,065			17,213		9,626			911			6,800			196			180,811
Environmental costs		25,329			-		-			-			-			-			25,329
Depreciation, depletion and amortization		30,468			26,416		882			177			573			-			58,516
Taxes, other than income taxes		138,711			8,117		244			43			1,075			-			148,190
Losses (gains) on property sales		(170	)		8		-			-			93			-			(69	)
Equity investment income (2)		-			7,610		-			-			67			-			7,677
Operating income (loss)	$	1,967		$	20,195	$	20,089		$	3,140		$	(8,474	)	$	-		$	36,917
Income (loss) from discontinued operations,
net of income taxes	$	-		$	-	$	-		$	(1,566	)	$	(10	)	$	-		$	(1,576	)
Segment capital assets of continuing operations,
net (3), (6)	$	1,592,997		$	508,806	$	4,745		$	5,224		$	7,286		$	-		$	2,119,058
Investments in equity investees (4)	$	-		$	-	$	-		$	-		$	-		$	-		$	-
Capital spending (5)	$	41,058		$	188,047	$	130		$	15		$	1,618		$	-		$	230,868
Six Months Ended March 31, 2005
Revenues (1)	$	1,262,500		$	56,831	$	442,147		$	7,726		$	-		$	(4,887	)	$	1,764,317
Cost of energy sold		817,780			-		420,062			4,480			-			(5,715	)		1,236,607
Operation and maintenance, excluding
restructuring and environmental costs		138,871			14,605		8,696			1,426			4,606			828			169,032
Restructuring costs		-			-		-			-			13,163			-			13,163
Environmental costs		23,128			-		-			-			-			-			23,128
Depreciation, depletion and amortization		34,109			23,626		864			243			451			-			59,293
Taxes, other than income taxes		121,628			6,046		355			40			791			-			128,860
Losses (gains) on property sales		122			-		(50	)		-			-			-			72
Equity investment income (2)		-			1,215		-			-			529			-			1,744
Operating income (loss)	$	126,862		$	13,769	$	12,220		$	1,537		$	(18,482	)	$	-		$	135,906
Income (loss) from discontinued operations,
net of income taxes	$	-		$	-	$	-		$	763		$	(9	)	$	-		$	754
Segment capital assets of continuing operations,
net (3)	$	1,570,015		$	326,957	$	6,452		$	5,740		$	4,127		$	-		$	1,913,291
Investments in equity investees (4)	$	-		$	10,024	$	-		$	-		$	3,628		$	-		$	13,652
Capital spending (5)	$	35,104		$	31,582	$	130		$	408		$	206		$	-		$	67,430
(1) Oil and Gas Production revenues are net of gains and losses from hedging activities.
(2) Excludes equity investment income from discontinued operations. See Note 5.
(3) Excludes segment assets of discontinued operations at March 31, 2006 and 2005 of $9,366 and $11,020, respectively.
(4) Excludes investments in equity investees of discontinued operations at March 31, 2006 and 2005 of $106,425 and $105,724, respectively.
(5) Excludes capital spending relating to assets of discontinued operations six months ended at March 31, 2006 and 2005 of $398 and $636, respectively.
(6) Includes $139 million acquisition of oil and gas properties by the Oil and Gas Production segment in February 2006.

- 25 -

Notes to Consolidated Financial Statements (Unaudited)

4: RESTRUCTURING COSTS

During the fourth quarter of fiscal 2004, the Company commenced a restructuring plan to enhance operating efficiency and customer service and to mitigate the impact of rising operating costs on utility customers, while maintaining solid financial results for the Company. The restructuring activities were designed to result in a reduction of over 100 nonunion permanent positions at all levels in the utility business and corporate support functions. An enhanced voluntary termination severance package was offered to nonunion employees including a termination allowance of three weeks' pay for each completed year of service up to a maximum of 52 weeks of pay, outplacement assistance, enhanced educational assistance, and reduced Consolidated Omnibus Budget Reconciliation Act (COBRA) rates. Approximately 300 employees accepted the package, resulting in about 200 open positions, some of which have been filled in fiscal 2005 with the remainder expected to be filled in fiscal 2006.

The restructuring activities were substantially completed by September 30, 2004. The restructuring plan resulted in aggregate charges of $17.0 million to the Consolidated Statement of Income for fiscal 2004. Included in this amount were charges of $9.7 million and $0.9 million related to Peoples Gas and North Shore Gas, respectively, based primarily upon severance payments and related employer payroll taxes at each respective utility.

A total of approximately $16.6 million and $12.5 million for severance payments, program expenses, employer taxes and legal fees had been paid through March 31, 2006 and 2005, respectively. In addition, approximately $0.4 million in severance costs originally expensed was reversed in connection with the revocation of severance agreements. The Company had approximately $4.1 million of unpaid liabilities related to the restructuring costs included in accounts payable on the Consolidated Balance Sheet at March 31, 2005 and no remaining liabilities as of September 30, 2005 and March 31, 2006.

In the second quarter and fiscal year to date through March 31, 2005, the Company recorded $2.0 million and $13.2 million, respectively, for pension settlements and curtailments, net of capitalized amounts, associated with the restructuring plan described above (see Note 10). Included in these amounts were charges for the three and six months ended March 31, 2005, of $1.5 million and $8.5 million for Peoples Gas and $40 thousand and $0.6 million for North Shore Gas, respectively. As the Company's pension plan measurement year ends June 30, these restructuring costs for settlements and curtailments subsequent to June 30, 2004 were required to be recognized in fiscal 2005.

5: EQUITY INVESTMENTS

The Company has several investments in the form of partnerships that are accounted for as unconsolidated equity method investments. Individually, the Company's equity investments do not meet the requirements for separate financial statement disclosure. However, in aggregate these investments are material. The Company records its share of equity investment income based on financial information it receives from the partnerships. All information is current or based on estimated results for the quarter. The Company is not a managing partner in any of these investments.

On March 31, 2006 the Company agreed to sell its interest in the Southeast Chicago Energy Project (SCEP) for approximately $50 million subject to closing adjustments. Closing is expected to occur in the fiscal third quarter and result in a modest gain. The Company expects to sell its remaining power generation assets, including its 50% interest in Elwood Energy, by fiscal year-end.

In fiscal 2006 Peoples Energy Production, through its equity investment in EnerVest Energy, L.P. (“Enervest”), recognized a $7.6 million gain related to the sale of all remaining properties in the partnership. It is expected that the partnership will be liquidated sometime during 2006.

- 26 -

Notes to Consolidated Financial Statements (Unaudited)

On September 30, 2005, Trigen-Peoples District Energy Company (Trigen-Peoples), a 50%-50% partnership between the Company and Trigen Energy Company (“Trigen”), sold its district heating and cooling plant. The Company liquidated its partnership with Trigen effective with the sale of the plant.

The following table summarizes the combined partnership financial results and financial position of the Company's unconsolidated equity method investments.

	Three Months Ended				Six Months Ended
	March 31,				March 31,
(In Thousands)		2006		2005		2006		2005
Revenues	$	16,758	$	38,633	$	72,332	$	66,414
Operating income		11,118		16,321		53,622		31,248
Interest expense		8,113		9,298		16,444		18,851
Net income	$	1,105	$	7,803	$	33,286	$	4,126

Current assets	$	48,630	$	41,217	$	48,630	$	41,217
Noncurrent assets		603,866		715,071		603,866		715,071
Current liabilities		88,232		45,291		88,232		45,291
Noncurrent liabilities	$	316,433	$	431,224	$	316,433	$	431,224

The following table summarizes the Company's equity method investment ownership percentage and its equity share of the net income shown in the previous table.

		Ownership Percentage				Equity Investment Income (Loss)
						Three Months Ended		Six Months Ended
(In Thousands)		At March 31,				March 31,		March 31,
Investment	Segment	2006		2005		2006	2005	2006	2005
EnerVest	Oil and Gas	23	%	30	%	$ (1,975)	$ 130	$ 7,610	$ 1,215
Trigen-Peoples	Corporate and Other	0		50		-	267	67	529
Equity investment income (loss) from
continuing operations						(1,975)	397	7,677	1,744

Elwood	Energy Assets	50		50		(1,167)	1,528	(1,644)	(314)
SCEP	Energy Assets	27		29		1,289	1,363	2,596	2,745
Equity investment income from
discontinued operations						122	2,891	952	2,431
Total equity investment income (loss)						$ (1,853)	$ 3,288	$ 8,629	$ 4,175
Undistributed partnership income included in the
Company's retained earnings at the end of each period						$ 25,290	$ 16,627	$ 25,290	$ 16,627

6: ENVIRONMENTAL MATTERS

A. Former Manufactured Gas Plant Operations

The Company's utility subsidiaries, their predecessors and certain former affiliates operated facilities in the past at multiple sites for the purpose of manufacturing gas and storing manufactured gas. In connection with manufacturing and storing gas, waste materials were produced that may have resulted in soil and groundwater contamination at these sites. Under certain laws and regulations relating to the protection of the environment, the subsidiaries might be required to undertake remedial action with respect to some of these materials. The subsidiaries are addressing these sites under a program supervised by the Illinois Environmental Protection Agency.

- 27 -

Notes to Consolidated Financial Statements (Unaudited)

Peoples Gas is addressing 29 manufactured gas sites, including several sites described in more detail below. Investigations have been completed at all or portions of 25 sites. Remediations have been completed at all or portions of nine of these 25 sites. Peoples Gas has determined that remediations are not required at three of these 25 sites.

North Shore Gas is addressing five manufactured gas sites, including one site described in more detail below. Investigations have been completed at all or portions of four sites (including one site which the Company formerly considered to be two separate sites). Remediations have not yet been completed at any of these four sites. North Shore Gas has determined that remediation is not required at one of these four sites.

The United States Environmental Protection Agency (EPA) has identified North Shore Gas as a potentially responsible party (PRP) under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA) at the Waukegan Coke Plant Site located in Waukegan, Illinois (Waukegan Site). The Waukegan Site is part of the Outboard Marine Corporation (OMC) Superfund Site. The EPA also has identified OMC, General Motors Corporation and certain other parties as PRPs at the Waukegan Site. The EPA has issued a record of decision (ROD) selecting the remedial action for the Waukegan Site. The selected remedy consists of on-site treatment of groundwater and off-site disposal of soil containing polynuclear aromatic hydrocarbons and arsenic. North Shore Gas and the other PRPs have executed a remedial action consent decree which has been entered by the federal district court. The consent decree requires North Shore Gas and General Motors, jointly and severally, to perform the remedial action and establish and maintain financial assurance of $27 million. The soil component of the remedial action was completed in August 2005. The groundwater component of the remedial action is undergoing design and is expected to begin in 2006. The EPA has agreed to reduce the financial assurance requirement to $21 million to reflect completion of the soil component of the remedial action.

In 2004, the owners (River Village West) of a property in the vicinity of the former Pitney Court Station filed suit against Peoples Gas in the United States District Court for the Northern District of Illinois under the Resource Conservation and Recovery Act (RCRA). The suit, River Village West LLC et al v. The Peoples Gas Light and Coke Company, No. 04-C-3392 (N.D. Ill. 2004), seeks an order directing Peoples Gas to remediate the site. In December 2005, Peoples Gas and the plaintiffs settled and the litigation has been dismissed with prejudice. Pursuant to the terms of the settlement agreement, Peoples Gas has agreed to remediate the site and to investigate and, if necessary, remediate sediments in the area of the Chicago River adjacent to the site. At this time, management is unable to determine the effect, if any, of the settlement upon the recorded liability for the Pitney Court site.

With respect to portions of certain other sites in Chicago, Peoples Gas has received demands from site owners and others asserting standing regarding the investigation or remediation of their parcels. Some of these demands seek to require Peoples Gas to perform extensive investigations or remediations. These demands include notice letters sent to Peoples Gas by River Village West. These letters informed Peoples Gas of River Village West's intent to file suit under RCRA seeking an order directing Peoples Gas to remediate seven former manufactured gas plant sites located on or near the Chicago River. In April 2005, River Village West filed suit against Peoples Gas in the United States District Court for the Northern District of Illinois under RCRA. The suit, River Village West LLC et al v. The Peoples Gas Light and Coke Company, No. 05-C-2103 (N.D. Ill. 2005), seeks an order directing Peoples Gas to remediate three of the seven sites: the former South Station, the former Throop Street Station and the former Hough Place Station. Peoples Gas is currently engaged in settlement discussions with River Village West.

In January 2006, an individual notified Peoples Gas of his intent to file suit under RCRA seeking an order directing Peoples Gas to remediate the Willow Street Station site, one of the sites described in the preceding paragraph. At this time, management is unable to determine the effect, if any, of the notice letter upon the recorded liability for the Willow Street Station site.

- 28 -

Notes to Consolidated Financial Statements (Unaudited)

The utility subsidiaries are accruing liabilities and deferring costs (recorded as regulatory assets) incurred in connection with all of the manufactured gas sites, including related legal expenses, pending recovery through rates or from other entities. At March 31, 2006, regulatory assets (stated in current year dollars) were recorded in the following amounts: for Peoples Gas, $231 million; for North Shore Gas, $65 million; and for the Company on a consolidated basis, $296 million. Each of the foregoing amounts reflects the net amount of (1) costs incurred to date, (2) carrying costs, (3) amounts recovered from insurance companies, other entities and from customers, and (4) management's best estimates of the costs the utilities will spend in the future for investigating and remediating the manufactured gas sites. Management has recorded liabilities for the amounts described in clause (4) of the preceding sentence as follows: for Peoples Gas, $209.3 million; for North Shore Gas, $64.6 million; and for the Company on a consolidated basis, $273.9 million. Management also estimates that additional costs in excess of the recorded liabilities are reasonably possible in the following amounts: for Peoples Gas, $113.8 million; for North Shore Gas, $77.1 million; and for the Company on a consolidated basis, $190.9 million.

Management's foregoing estimates are developed with the aid of probabilistic modeling. They are based upon an ongoing review and judgment by management and its outside consultants of potential costs associated with conducting investigative and remedial actions at the manufactured gas sites, and of the likelihood of incurring such costs. The liabilities recorded reflect the costs of all activities estimated, as a result of this analysis, to have a 75% or greater likelihood of occurrence. The additional costs described above as reasonably possible reflect the difference between the costs reflected in the liabilities for manufactured gas sites and costs that would result from the use of a lower probability threshold determined for each subsidiary by management after considering the sites included for that subsidiary. Because these estimates reflect future expenditures, they are sensitive to changes in assumptions with respect to the probability and magnitude of the various factors used in the modeling. The estimates are also affected by changes that result from the Company's actual experience in remediating the sites.

Actual costs, which may differ materially from these estimates, will depend on several factors including whether contamination exists at all sites, the nature and extent of contamination and the level of remediation that may be required. Other factors that may affect such costs include, but are not limited to, changes in remediation technology, fluctuations in unit costs and changes in environmental laws and regulations. With respect to certain sites or portions of sites, the subsidiaries have received demands to investigate and remediate to extensive levels. Management does not believe that the utility subsidiaries are legally required to comply with such demands. However, if the subsidiaries were required to do so at all of the sites that have not been remediated, the Company currently estimates that its aggregate maximum potential liability would be approximately $375 million higher than the total of the recorded liabilities and estimates of additional reasonably possible costs indicated above.

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

Peoples Gas and North Shore Gas are recovering the costs of environmental activities relating to the utilities' former manufactured gas operations, including carrying charges on the unrecovered balances, under rate mechanisms approved by the Illinois Commerce Commission (Commission) which authorize recovery of prudently incurred costs. Costs incurred in each fiscal year are subject to a prudence review by the Commission during a reconciliation proceeding for such fiscal year. Costs are expensed in the income statement in the same period they are billed to customers and recognized as revenues.

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

- 29 -

Notes to Consolidated Financial Statements (Unaudited)

B. Former Mineral Processing Site in Denver, Colorado

In 1994, North Shore Gas received a demand from the S.W. Shattuck Chemical Company, Inc. (Shattuck), a responsible party under CERCLA, for reimbursement, indemnification and contribution for response costs incurred at Shattuck's Denver site. Shattuck is a wholly owned subsidiary of Salomon, Inc. (Salomon). The demand alleges that North Shore Gas is a successor to the liability of a former entity that was allegedly responsible during the period 1934-1941 for the disposal of mineral processing wastes containing radium and other hazardous substances at the site. In 1992, the EPA issued the ROD for the Denver site. The remedy selected in the ROD consisted of the on-site stabilization, solidification and capping of soils containing radioactive wastes. In 1997, the remedial action was completed. The cost of the remedy at the site has been estimated by Shattuck to be approximately $31 million. Salomon has provided financial assurance for the performance of the remediation of the site.

North Shore Gas filed a declaratory judgment action against Salomon in the U.S. District Court for the Northern District of Illinois. The suit asked the court to declare that North Shore Gas is not liable for response costs at the Denver site. Salomon filed a counterclaim for costs incurred by Salomon and Shattuck with respect to the site. In 1997, the district court granted North Shore Gas' motion for summary judgment, declaring that North Shore Gas is not liable for any response costs in connection with the Denver site.

In 1998, the United States Court of Appeals, Seventh Circuit, reversed the district court's decision and remanded the case for determination of what liability, if any, the former entity has, and therefore North Shore Gas has, for activities at the site.

In 1999, the EPA announced that it was reopening the ROD for the Denver site. The EPA's announcement followed a six-month scientific/technical review by the agency of the remedy's effectiveness. In 2000, the EPA amended the ROD to require removal of the radioactive wastes from the site to a licensed off-site disposal facility. The EPA estimates that this action will cost an additional $22.0 million (representing the present worth of estimated capital costs and estimated operation and maintenance costs). The remediation of the site is currently in progress. According to the EPA, project completion is scheduled for the end of 2006.

In December 2001, Shattuck entered into a proposed settlement agreement with the United States and the State of Colorado regarding past and future response costs at the site. In August 2002, the agreement was approved by the District Court for the District of Colorado. Under the terms of the agreement, Shattuck will pay, in addition to amounts already paid for response costs at the site, approximately $7.2 million in exchange for a release from further obligations at the site. The release will not apply in the event that new information shows that the remedy selected in the amended ROD is not protective of human health or the environment or if it becomes necessary to remediate contaminated groundwater beneath or emanating from the site.

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

7: GAS CHARGE RECONCILIATION PROCEEDINGS AND RELATED MATTERS

A. Illinois Commerce Commission Proceedings

For each utility subsidiary, the Commission conducts annual proceedings regarding the reconciliation of revenues from the Gas Charge and related gas costs. In these proceedings, the accuracy of the reconciliation of revenues and costs is reviewed and the prudence of gas costs recovered through the Gas Charge is examined by interested parties. If the Commission were to find that the reconciliation was inaccurate or any gas costs were imprudently incurred, the Commission would order the utility to refund the affected amount to customers through subsequent Gas Charge filings. The proceedings are initiated shortly after the close of the fiscal year and historically take at least a year to 18 months to complete.

- 30 -

Notes to Consolidated Financial Statements (Unaudited)

The Commission issued orders on March 28, 2006, approving a settlement that resolved all proceedings regarding Peoples Gas and North Shore Gas for fiscal 2001 - 2004 costs. The recommendation that proceedings for Peoples Gas' and North Shore Gas' fiscal 2000 be reopened was made moot by approval of the settlement. The orders adopted a January 17, 2006 Settlement Agreement and Release among and between Peoples Energy Corporation (“Peoples Energy”), The Peoples Gas Light and Coke Company (“Peoples Gas”), Peoples MW, LLC, Peoples Energy Resources Company, LLC and North Shore Gas Company (“North Shore Gas”)(collectively, the “Peoples Companies”), the People of the State of Illinois through Lisa Madigan, Illinois Attorney General (“AG”), the City of Chicago (“Chicago”) and the Citizens Utility Board, as amended by an Amendment and Addendum dated March 6, 2006 (the “Agreement”).

The Agreement provides for the following:

(i)

Peoples Gas and North Shore Gas agreed to refund the total sum of $100 million to their customers (the “Refund”). In its orders approving the Agreement, the Commission determined that $96 million will be refunded to customers of Peoples Gas and $4 million will be refunded to customers of North Shore Gas. The orders require the utilities to issue the refunds within thirty days after entry of the orders. Pursuant to the orders, on April 6, 2006, Peoples Gas and North Shore Gas filed informational statements with the Commission showing the amount of the refund to various customer classes.

(ii)

Peoples Energy agrees to pay to the City and the AG, jointly $5 million. The Company also agrees to pay up to $5 million per year over the next five years towards the funding of conservation and weatherization programs for low and moderate-income residential dwellings (“Conservation Programs”). The five subsequent payments of up to $5 million shall be paid based upon Conservation Programs to be developed by the City of Chicago and/or the Illinois Attorney General. The Conservation Programs will have the purpose of providing energy and natural gas conservation programs for residents within Peoples Gas' and North Shore Gas' service areas and will have the goal of reducing those residents' energy usage and costs. Peoples Gas and North Shore Gas will not seek recovery in any future rate or reconciliation cases of any amounts associated with the Conservation.

(iii)

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

(iv)

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

(v)

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

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

- 31 -

Notes to Consolidated Financial Statements (Unaudited)

The terms of the Agreement expressly provide that nothing in the Agreement, or any acts performed or documents executed in furtherance of the Agreement, shall constitute or may be used as an admission of liability against Peoples Energy or its utility subsidiaries. The Commission's orders effectively adopted the provisions of the Agreement as a resolution on the merits of the differences between the parties concerning the gas charge reconciliation matters related to the years 2000 through 2004 for Peoples Energy, Peoples Gas and North Shore Gas and also made other findings and conclusions.

See Note 2 for a summary of significant accounting matters related to the settlement.

Fiscal 2005 Gas Charge reconciliation cases were initiated in November 2005. Peoples Gas and North Shore Gas each filed direct testimony. The settlement of the prior fiscal years' Gas Charge reconciliation proceedings does not affect these cases, except for Peoples Gas' agreement to credit fiscal 2005 hub revenues as an offset to utility customers' gas charges.

B. Illinois Attorney General and the City of Chicago Lawsuits

On March 21, 2005, the AG and Chicago filed separate lawsuits in the Circuit Court of Cook County, Illinois against the Company and several of its subsidiaries, including Peoples Gas and, in the case of the AG's lawsuit, North Shore Gas. The AG's lawsuit alleges that during the period 1999 to 2002 the Company and four of its subsidiaries engaged in midstream gas transactions with Enron and certain of its affiliates in violation of the Illinois Consumer Fraud and Deceptive Business Practices Act. Chicago's lawsuit alleges that during the period from 2000 to the present, the Company and three of its subsidiaries engaged in similar transactions in violation of certain consumer protection provisions of the City of Chicago Municipal Code. Both lawsuits seek to impose fines and damages and seek injunctive orders to cease further violations. On April 12, 2005, the Court granted a motion to consolidate the proceedings. On May 13, 2005, the Company filed Motions to Dismiss or, in the alternative, stay the complaints filed by the AG and Chicago pending the resolution of the fiscal year 2001 gas charge reconciliation proceedings pending before the Commission. On August 17, 2005, the Court granted the motion to stay these cases pending the ruling by the Commission on the fiscal year 2001 reconciliation matter.

The settlement agreement entered into in connection with the gas charge reconciliation proceedings, as described in Note 7A, also settles these lawsuits. The court has approved the settlement agreement and stayed this matter pending the Commission's approval of the settlement and expiration of the statutory period for parties to appeal for rehearing of the Commission's order. A status hearing has been set for May 15, 2006, at which the Company anticipates the court will dismiss this case.

C. Class Action

In February 2004, a purported class action was filed in Cook County Circuit Court against the Company and Peoples Gas by Stephen Alport, a Peoples Gas customer, alleging, among other things, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act related to matters at issue in Peoples Gas' fiscal year 2001 gas charge reconciliation proceedings. The suit seeks unspecified compensatory and punitive damages. The Company and Peoples Gas deny the allegations and are vigorously defending the suit. Peoples Gas has been dismissed as a defendant and the only remaining counts of the suit allege violations of the Consumer Fraud and Deceptive Business Practices Act and that the Company acted in concert with others to commit a tortious act. The Company has filed two currently pending motions to dismiss based upon the settlement and dismissal of Peoples Gas' fiscal years 2001 - 2004 gas charge reconciliation cases. Management cannot predict the outcome of this litigation and has not recorded a liability associated with this contingency.

D. CFTC Subpoena

In February 2005, the Company received a subpoena from the U.S. Commodity Futures Trading Commission (CFTC) requesting information regarding price reporting of transactional data to the energy trade press, other information related to gas supply, the Energy Marketing business for the years 2000 through 2002 and a copy of certain documents produced in response to a separate subpoena issued by the AG. The Company has produced the requested information and is cooperating with the CFTC. The Company has not been charged by the CFTC with any violation nor does it have any knowledge of any violations concerning the matters covered by the subpoena.

- 32 -

Notes to Consolidated Financial Statements (Unaudited)

8: OTHER LITIGATION

A. Oil and Gas Production Royalties Dispute

The Oil and Gas Production segment pays royalties and overriding royalties (collectively, royalties) to parties who own the mineral rights on wells operated by the Company. The royalties are computed based upon the amount of oil and gas produced and terms and conditions specified in certain agreements, which may provide the recipient with certain rights to review and challenge the royalties received. Pursuant to an audit, a claim was made against the Company by Coates Energy Trust and Coates Energy Interests, Ltd. for underpayment of royalties totaling approximately $2.4 million. In accordance with the agreements (which were assigned to a subsidiary of Peoples Energy Production Company pursuant to an acquisition) the Company was required to pay the claim in December of 2004 while disputing the audit findings. In December 2004, the claimant filed suit in the District Court of Starr County, Texas, seeking a declaratory judgment that the $2.4 million is owed to the claimant and that the Company cannot contest the audit's findings. The parties are attempting to resolve the dispute through mediation. The Company believes that the lawsuit and the matters asserted by the claimant are not consistent with the terms of the agreements or applicable laws. The Company intends to vigorously defend the suit and believes, but cannot assure, that it will prevail in this matter and that the amounts will be refunded. Pending resolution of these matters, the Company has not recorded a royalty expense for these claims.

B. Corrosion Control Inspection Proceeding

State and federal law requires gas utilities to conduct periodic corrosion control inspections on natural gas pipelines. On April 19, 2006 the Commission initiated a citation proceeding related to such inspections that were required to be performed by Peoples Gas during 2003 and 2004, but which were not completed in the requisite timeframe. If the Commission determines that Peoples Gas did not complete the inspections or did not take remedial action to correct deficiencies revealed by the inspections within the requisite timeframes, it could impose a civil penalty up to a maximum amount of $1 million for each series of related violations.

The Commission staff is also currently performing record and field test audits of corrosion control inspections completed in 2005 by Peoples Gas and North Shore Gas. The staff's field test samples taken in March, 2006 revealed a number of discrepancies compared to readings taken by Peoples Gas and North Shore Gas. The Company is investigating the inspection records to determine whether there are in fact discrepancies and, if so, the possible causes for the discrepancies.

Management cannot predict the outcome of this proceeding and has not recorded a liability associated with this contingency.

C. Builders Class Action

In June 2005, a purported class action was filed against the Company by Birchwood Builders, LLC in the Circuit Court of Cook County, Illinois alleging that Peoples Gas and North Shore Gas were fraudulently and improperly charging fees to customers with respect to utility connections, disconnections, reconnections, relocations, extensions of gas service pipes and extensions of distribution gas mains and failing to return related customer deposits. The Company believes it has meritorious defenses and intends to vigorously defend against the class action lawsuit. The parties have agreed to attempt to mediate this matter and mediation is scheduled to begin June 15, 2006. Management cannot predict the outcome of this litigation and has not recorded a liability associated with this contingency.

9: COMPREHENSIVE INCOME

Comprehensive income is the total of net income and all other nonowner changes in equity. Comprehensive income recorded includes net income plus the effect of unrealized hedge gains or losses on derivative instruments and the effect of the minimum pension liability adjustment. Total comprehensive income is summarized below.

	Three Months Ended March 31,
	Peoples Energy					Peoples Gas					North Shore Gas
(In Thousands)		2006		2005			2006			2005		2006		2005
Comprehensive income
Net income	$	33,170	$	51,172		$	7,608		$	35,640	$	13,829	$	7,125
Other comprehensive income, net of tax
Unrealized hedge gain (loss)		27,027		(40,466	)		(607	)		11		6		6

Total comprehensive income	$	60,197	$	10,706		$	7,001		$	35,651	$	13,835	$	7,131

- 33 -

Notes to Consolidated Financial Statements (Unaudited)

	Six Months Ended March 31,
	Peoples Energy					Peoples Gas						North Shore Gas
(In Thousands)		2006		2005			2006			2005			2006		2005
Comprehensive income (loss)
Net income (loss)	$	13,689	$	73,648		$	(16,632	)	$	52,909		$	8,171	$	11,218
Other comprehensive income (loss), net of tax
Minimum pension liability adjustment		-		(13,609	)		-			(12,195	)		-		(708	)
Unrealized hedge gain (loss)		65,519		(20,447	)		(930	)		21			11		11

Total comprehensive income (loss)	$	79,208	$	39,592		$	(17,562	)	$	40,735		$	8,182	$	10,521

10: RETIREMENT AND POSTRETIREMENT BENEFITS

The Company and its subsidiaries participate in two noncontributory defined benefit pension plans, the Retirement Plan and the Service Annuity System, covering substantially all employees. These plans provide pension benefits that generally are based on an employee's length of service, compensation during the five years preceding retirement and social security benefits. Employees who began participation in the Retirement Plan July 1, 2001, and thereafter will have their benefits determined based on their compensation during the five years preceding termination of employment and an aged-based percentage credited to them for each year of their participation. The Company and its subsidiaries make contributions to the plans based upon actuarial determinations and in consideration of tax regulations and funding requirements under federal law. The Company also has a non-qualified pension plan (Supplemental Plan) that provides certain employees with pension benefits in excess of qualified plan limits imposed by federal tax law. Effective October 1, 2004, the Company began including amounts related to executive deferred compensation (EDC) in the calculation of supplemental pension expense.

Retiring employees have the option of receiving retirement benefits in the form of an annuity or a lump sum payment. The Company follows SFAS No. 88, “Employer's Accounting for Settlements and Curtailments of Defined Benefit Plans and for Termination Benefits” (SFAS No. 88), to account for unrecognized gains and losses related to the settlement of its pension plans' Projected Benefit Obligations (PBO). During fiscal 2006, as in past fiscal periods, a portion of each plan's PBO was settled by the payment of lump sum benefits, resulting in a settlement cost under SFAS No. 88 for the Retirement Plan, Service Annuity System and Supplemental Plan.

In addition, the Company and its subsidiaries currently provide certain contributory health care and life insurance benefits for retired employees. Substantially all employees may become eligible for such benefit coverage if they reach retirement age while working for the Company. These plans, like the pension plans, are funded based upon actuarial determinations, consideration of tax regulations and the Company's funding policy. The Company accrues the expected costs of such benefits over the service lives of employees who meet the eligibility requirements of the plan.

The Company determined that the benefits provided by its retiree health care benefit plan is at least actuarially equivalent to Medicare Part D under the Medicare Prescription Drug, Improvement and Modernization Act of 2003 (the Act). The impact of the Act on the Company's postretirement benefit plan was considered a significant event and a remeasurement of plan assets and obligations was performed as of February 28, 2005. The impact of the Act was reflected in the benefit cost effective with the quarter ended June 30, 2005. Amortization of the actuarial gain, before consideration of capitalized costs, resulted in $1.6 million and $3.1 million reductions in net periodic benefit cost for the three- and six-month periods ended March 31, 2006, respectively.

The Company previously disclosed in its financial statements for the year ended September 30, 2005, that it expected to contribute $30 million to its pension plans in fiscal 2006. As of March 31, 2006, $1 million of contributions have been made. The Company presently anticipates contributing an additional $4 million in fiscal 2006, representing the minimum funding requirement of its qualified plan.

- 34 -

Notes to Consolidated Financial Statements (Unaudited)

Net pension benefit cost and net postretirement benefit cost (before consideration of capitalized costs) for all plans include the following components:

							Other Postretirement
	Pension Benefits						Benefits
(In Millions) Three Months Ended March 31		2006			2005			2006			2005
Service cost	$	5.2		$	4.0		$	1.8		$	1.0
Interest cost		6.4			6.8			1.6			2.3
Expected return on plan assets		(10.2	)		(10.8	)		(0.7	)		(0.9	)
Amortization of:
Net transition (asset)/obligation		-			(0.2	)		0.3			0.7
Prior service cost		0.7			0.7			-			-
Net actuarial (gain)/loss		1.5			0.5			0.2			0.5
Net periodic benefit cost		3.6			1.0			3.2			3.6

Effect of lump sum settlements upon retirement-restructuring (See Note 4)		-			1.2			-			-
Effect of lump sum settlements upon retirement-other		2.2			1.5			-			0.4
Net benefit cost	$	5.8		$	3.7		$	3.2		$	4.0

							Other Postretirement
	Pension Benefits						Benefits
(In Millions) Six Months Ended March 31		2006			2005			2006			2005
Service cost	$	10.4		$	7.9		$	3.6		$	2.6
Interest cost		12.8			13.6			3.2			4.4
Expected return on plan assets		(20.4	)		(21.5	)		(1.4	)		(1.7	)
Amortization of:
Net transition (asset)/obligation		-			(0.4	)		0.6			1.1
Prior service cost		1.4			1.4			-			-
Net actuarial (gain)/loss		3.0			1.0			0.4			0.9
Net periodic benefit cost		7.2			2.0			6.4			7.3

Effect of lump sum settlements upon retirement-restructuring (See Note 4)		-			9.2			-			-
Effect of lump sum settlements upon retirement-other		4.4			2.9			-			-
Curtailment recognition (See Note 4)		-			5.1			-			0.4
Net benefit cost	$	11.6		$	19.2		$	6.4		$	7.7

Weighted-average assumptions used to determine net benefit cost:
Discount rate (1)		5.25	%		6.13	%		5.00	%		6.02	%
Expected return on plan assets		8.75	%		8.75	%		8.75	%		8.75	%
Rate of compensation increase		3.75	%		3.75	%

(1)	For plans impacted by the September 2004 restructuring, a 6.00% discount rate was utilized for valuing the plan re-measurement at August 31, 2004.

In addition to the defined benefit pension plans, the Company has defined contribution plans that allow eligible employees to contribute a portion of their income in accordance with specified guidelines. The Company matches a percentage of the employee contribution up to certain limits. The cost of the Company's matching contribution to the plans for the three-and six-month periods ended March 31, 2006 totaled $0.9 million and $1.8 million, respectively.

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

EXECUTIVE SUMMARY

The Company reported net income for its second quarter ended March 31, 2006 of $33.2 million, or $0.86 per diluted share compared to $51.2 million, or $1.34 per diluted share for the same period in 2005. Fiscal year-to-date net income was $13.7 million, or $0.36 per diluted share compared to $73.6 million, or $1.94 per diluted share a year-ago.

Second quarter and fiscal year-to-date results were negatively impacted by charges of $15.7 million pre-tax ($0.25 per share after tax) and $107.3 million pre-tax ($1.68 per share after tax), respectively, from the previously announced settlement of utility gas charge proceedings for fiscal years 2001 through 2004. Last year's second quarter and year-to-date periods included pre-tax charges of $2.0 million and $13.2 million, respectively, related to the Company's 2004 organizational restructuring. Fiscal 2006 second quarter and year-to-date Gas Distribution segment results were also negatively impacted by lower deliveries and a change in the regulatory treatment of Hub revenue. Diversified results improved significantly from the year-ago periods.

Financial results for the second quarter and year-to-date periods are summarized in the below table in accordance with generally accepted accounting principles (GAAP) and on an ongoing (non-GAAP) basis before the impact of the fiscal 2006 settlement charge and last year's restructuring charge. Management believes that ongoing results are useful for year over year comparisons since changes of the magnitude associated with the settlement and the organizational restructuring are infrequent and affect the comparability of operating results. Ongoing results are used internally to measure performance and in reports for management and the Company's Board of Directors.

	Three Months Ended March 31,
							Restructuring
	Ongoing						and Settlement						As Reported
	(non-GAAP)						Charges						(GAAP)
(In Thousands, except per share amounts)		2006			2005			2006			2005			2006			2005
Operating Income (Loss):
Gas Distribution	$	58,583		$	77,187		$	(15,662	)				$	42,921		$	77,187
Oil and Gas Production		8,801			5,177									8,801			5,177
Energy Marketing		10,324			9,857									10,324			9,857
Energy Assets		1,450			566									1,450			566
Corporate and Other		(4,064	)		(2,311	)				$	(1,956	)		(4,064	)		(4,267	)
Total Operating Income (Loss)	$	75,094		$	90,476		$	(15,662	)	$	(1,956	)	$	59,432		$	88,520

Income (loss) from continuing operations	$	43,028		$	51,010		$	(9,437	)	$	(1,179	)		33,591			49,831
Income (loss) from discontinued operations,
net of taxes														(421	)		1,341
Net Income													$	33,170		$	51,172

Per Diluted Share:
Income (loss) from continuing operations	$	1.12		$	1.34		$	(0.25	)	$	(0.03	)	$	0.87		$	1.31
Income (loss) from discontinued operations														(0.01	)		0.03
Net Income								��					$	0.86		$	1.34

- 36 -

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

	Six Months Ended March 31,
							Restructuring
	Ongoing						and Settlement						As Reported
	(non-GAAP)						Charges						(GAAP)
(In Thousands, except per share amounts)		2006			2005			2006			2005			2006			2005
Operating Income (Loss):
Gas Distribution	$	109,297		$	126,862		$	(107,330	)				$	1,967		$	126,862
Oil and Gas Production		20,195			13,769									20,195			13,769
Energy Marketing		20,089			12,220									20,089			12,220
Energy Assets		3,140			1,537									3,140			1,537
Corporate and Other		(8,474	)		(5,319	)				$	(13,163	)		(8,474	)		(18,482	)
Total Operating Income (Loss)	$	144,247		$	149,069		$	(107,330	)	$	(13,163	)	$	36,917		$	135,906

Income (loss) from continuing operations	$	79,937		$	80,825		$	(64,672	)	$	(7,931	)		15,265			72,894
Income (loss) from discontinued operations,
net of taxes														(1,576	)		754
Net Income													$	13,689		$	73,648

Per Diluted Share:
Income (loss) from continuing operations	$	2.08		$	2.13		$	(1.68	)	$	(0.21	)	$	0.40		$	1.92
Income (loss) from discontinued operations														(0.04	)		0.02
Net Income													$	0.36		$	1.94

Notable items for the second quarter include the following:

As previously announced, the Illinois Commerce Commission (ICC) approved an amended settlement agreement related to the utilities' gas charges for fiscal years 2001 through 2004. As a result of the amended settlement, the Company recorded a $15.7 million pre-tax charge in the second quarter. This is in addition to the $91.7 million pre-tax charge recorded in the first quarter and $13.3 million recognized in prior fiscal years.

Pursuant to the amended settlement agreement Hub revenues are treated as a reduction of gas costs recoverable from customers. The impact of this change related to pre-fiscal 2006 Hub revenue is included in the settlement charge. Beginning in the second quarter of fiscal 2006, Hub revenues are recorded as a credit to customers' gas charges, including $2.8 million previously reported as revenue in the fiscal 2006 first quarter.

·	In connection with the Company's plans, announced during the second quarter, to exit the power generation business, financial results for power generation are now being reported as discontinued operations.

·	Gas distribution deliveries for the quarter were negatively impacted by 15% warmer than normal weather. In addition, utility deliveries continue to be impacted by customer conservation.

Oil and gas production volumes for the quarter increased 7% from a year ago. The higher production levels reflect strong performance on both existing and new wells and the impact of the Company's second quarter acquisition of certain oil and gas properties in East Texas, North Louisiana, and Mississippi.

·	Energy Marketing operating income increased substantially from the year-ago periods, driven by higher wholesale margins.

Effective in fiscal 2006, the Company's business segments were reorganized and will be reported as follows: Gas Distribution (including Peoples Gas hub operations, formerly included as part of Midstream Services), Oil and Gas Production, Energy Assets, Energy Marketing (both retail and wholesale activity, formerly included as Retail Energy Services and part of Midstream Services, respectively) and Corporate and Other. All periods have been reclassified to conform with the current presentation.

Rate Case. The Company announced in September 2005 that Peoples Gas and North Shore Gas will file rate proposals with the Commission requesting increases in delivery rates. The Company now expects to file the two rate cases in early summer of 2006. The normal rate case process at the Commission usually requires about eleven months, so any rate increase granted would not become effective until late spring of 2007.

- 37 -

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

Earnings Outlook. The Company lowered its ongoing (non-GAAP) fiscal 2006 earnings from continuing operations estimate to $1.40 to $1.65 per share (or ($0.05) to $0.20 per share on a GAAP basis). This outlook excludes approximately $0.23 per share of annual income from the Company's power generation business which is now classified as discontinued operations. This downward revision reflects two major factors, the adverse impact on utility deliveries from warm weather and customer conservation (including April weather that was almost 30% warmer than normal), and the change in the regulatory treatment of Hub revenue. The Company's ongoing (non-GAAP) outlook also excludes the impacts of the settlement and expected sizable gain from the sale of its power generation assets. The outlook does not reflect the potential variability in earnings due to fair value accounting adjustments, which could be material but are not estimable. The below table reconciles the current earnings outlook for fiscal 2006 to the Company's original estimate.

On a longer-term basis, fiscal 2007 earnings will continue to be under pressure as a result of continued cost increases in the Gas Distribution segment and only a partial year of rate relief. However, assuming reasonable rate relief and continued solid performance by the Company's diversified businesses, the Company anticipates sharp improvement in fiscal 2008 earnings.

Earnings Outlook Table

	EPS Impact

Original FY 2006 earnings outlook	$	2.25		-	$	2.45
Reclassification of power generation
to discontinued operations		(0.23	)	-		(0.23	)
Adjusted original FY 2006 outlook	$	2.00			$	2.20

Warmer than normal weather/conservation		(0.30	)	-		(0.35	)
Change in treatment of Hub revenue		(0.14	)	-		(0.14	)
Higher interest expense		(0.03	)	-		(0.05	)
Other, net		(0.04	)	-		(0.06	)

FY 2006 outlook from continuing operations	$	1.40		-	$	1.65
Income from discontinued operations*		0.23		-		0.23
Net Income - (non-GAAP)	$	1.65		-	$	1.90
Settlement charge		(1.68	)	-		(1.68	)
Net Income - (GAAP)	$	(0.05	)	-	$	0.20

* Includes operating results of assets held for sale. Excludes expected net gain from sales.

RESULTS OF OPERATIONS

Income Statement Variations

The Company's revenues and cost of energy sold increased $153.1 million and $158.9 million, respectively, for the three-month period ended March 31, 2006 compared to the same year-ago period and increased $468.1 million and $446.5 million, respectively, for the six-month period due to higher commodity prices, partially offset by the impact of lower Gas Distribution segment deliveries, resulting from warmer weather and customer conservation, and lower volumes in the Energy Marketing segment. Revenue results for the three-months ended March 31, 2006 were favorably impacted by a 7% year over year increase in average daily production volumes at the Oil and Gas Production segment. Revenue results for the three- and six- month periods were adversely impacted by the change in the regulatory treatment of Hub revenue in the Gas Distribution segment.

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

In the three and six months ended March 31, 2006, the Company recorded a $15.7 million and $107.3 million pretax charge, respectively, related to a settlement of the Company's gas charge proceedings for fiscal years 2001 through 2004 approved by the Commission, as discussed in Notes 2 and 7A of the Notes to Consolidated Financial Statements.

In the three and six months ended March 31, 2005, the Company recorded $2.0 and $13.2 million in pension-related charges resulting from its organizational restructuring commenced in the fall of fiscal 2004 (as described in Note 4 of the Notes to the Consolidated Financial Statements).

Utility environmental costs were flat for the three months and increased $2.2 million for the six months ended March 31, 2006 and relate to investigation and remediation activities at multiple sites that formerly had operations for gas manufacturing and the storage of manufactured gas (see Note 6 of the Notes to Consolidated Financial Statement for further discussion). These costs are recovered through the utilities' rate mechanism and a similar amount is included in revenues, therefore these costs do not affect operating income.

Operation and maintenance expense for the three and six months ended March 31, 2006, excluding the above mentioned organizational restructuring and environmental costs, increased $3.2 million and $11.8 million, respectively. Significant items to note in the three and six months ended March 31, 2006, compared to the corresponding prior year period were:

·	Increased bad debt expense at the Gas Distribution segment of $1.9 million and $6.6 million due to high natural gas prices and their corresponding impact on revenues

·	Increased pension expense at Corporate and the Gas Distribution segment totaling $3.0 million and $5.5 million due to a lower discount rate assumption to value the pension liability and pension cost

·	Increased direct labor costs at Corporate and the Gas Distribution segment totaling $2.4 million for the six months ended March 31, 2006, offset by a $1.9 million decrease in insurance, primarily weather insurance.

Depreciation, depletion and amortization (DD&A) was essentially flat for the three and six months ended March 31, 2006. DD&A at the Oil and Gas Production segment increased $2.3 million and $2.8 million for the three- and six- month periods, primarily due to the impacts of higher production and higher DD&A rates (due to the mix of production). Depreciation expense at the Gas Distribution segment decreased $1.8 million and $3.6 million for the three- and six- month periods mainly due to the implementation of new Commission-approved depreciation rates in the third quarter of fiscal 2005.

Taxes, other than income taxes, for the three and six months ended March 31, 2006 increased $3.7 million and $19.3 million primarily due to higher revenue taxes in the Gas Distribution segment, reflecting higher revenue in the current period.

Equity investment income for the three-month period decreased $2.4 million and increased $5.9 million for the six-month period ended March 31, 2006. The decrease in the three-month period was due primarily to a $2.0 million adjustment to the $9.6 million pretax gain recorded in connection with the first quarter sale of oil and gas assets by the Company's equity investment, EnerVest Energy, L.P. ("EnerVest"). Results for the six months ended March 31, 2006 and 2005 are primarily due to the $7.6 million EnerVest pretax gain and EnerVest equity earnings of $1.2 million, respectively.

Interest expense for the three and six months ended March 31, 2006 increased $2.3 million and $3.1 million, respectively, primarily due to higher interest rates.

Income tax expense for the three and six months ended March 31, 2006 decreased $14.8 million and $43.6 million, respectively, primarily due to the charge for the amended settlement agreement related to the Company's gas charge proceedings and related tax benefit of $6.2 million and $42.7 million, respectively. The effective tax rate on fiscal 2006 year-to-date ongoing income, excluding the impact of the charge, was about 33% down from 35% last year. For the six months ended March 31, 2006, the income tax benefit on the gas charge settlement was recorded using an approximate 40% tax rate applicable to that item. Income tax expense associated with income from ongoing, continuing operations (excluding the impact of the gas charge settlement and related income tax expense) for the same period was recorded using the estimated effective rate of 33% for the fiscal year. Because the 40% tax rate applied to the gas charge settlement exceeds the 33% effective rate on ongoing, continuing operations, the income tax expense (benefit) for the six months ended March 31, 2006, was $(4.1) million while income from continuing operations before income taxes was $11.2 million.

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

Results from discontinued operations, net of taxes, declined $1.8 million and $2.3 million, respectively, for the three and six months ended March 31, 2006. The three-month decrease was due to higher equity earnings from the Company's partnership interest in the Elwood power generation facility in the second quarter of fiscal 2005, which included a $2.2 million prior period adjustment to depreciation expense. Six-month results include a $1.8 million asset impairment provision related to the sale on January 31, 2006 of the Company's 100% interest in the Valencia Energy power development site in New Mexico.

The Company announced in March 2006 its intention to exit the power generation business and is actively engaged in discussions regarding the sale of its 50% interest in the Elwood power generation facility, and its 100% interest in a fully-permitted power development site in Oregon. On March 31, 2006, the Company signed an agreement to sell to Exelon Generation Company, LLC, the Company's 27% interest in the Southeast Chicago Energy Project facility. On January 31, 2006, the Company sold its 100% interest in the Valencia Energy power development site in New Mexico. Through two partnerships and the Oregon development site, the Company currently owns approximately 800 net Megawatts of power generation assets, with a book value of approximately $115.7 million at March 31, 2006. Subject to final due diligence, negotiations and regulatory approvals by the FERC and Federal Trade Commission, the Company expects to close on the sales and record a significant gain during fiscal 2006.

Segment Discussion

The Company's financial results and applicable operating statistics by segment are discussed in this section.

Gas Distribution Segment. Revenues for the Gas Distribution segment for the three and six months ended March 31, 2006 increased $78.9 million and $287.8 million, respectively, primarily due to the impact of higher commodity prices (approximately $192 million and $354 million) that are recovered on a dollar-for-dollar basis. These results were partially offset by decreases in deliveries due warmer weather (approximately $78 million and $17 million), lower weather-normalized demand (approximately $55 million and $81 million) and by the impact of the change in the regulatory treatment of Hub revenues ($6.4 million and $5.9 million) due to the amended settlement agreement.

Operating income for the three and six months ended March 31, 2006 decreased $34.3 million and $124.9 million, respectively, reflecting the impact of the amended settlement agreement. The $107.3 million in settlement charges recorded year-to-date in fiscal 2006 and the $13.3 million liability recognized in prior periods reflect the following settlement amounts: $100 million in refunds to customers; $5.0 million related to the payment to the City and the AG pursuant to the setttlement agreement; $10.7 million to reflect a change in regulatory treatment for fiscal 2005 hub revenues; and an estimated $5.0 million net increase in bad debt expense primarily related to the termination of collection activities on approximately $207 million of bad debt written off during fiscal years 2000-2005.

Ongoing (non-GAAP) operating income for the second quarter was $58.6 million, compared to $77.2 million last year. The decrease reflected lower deliveries ($14.3 million) and a change in treatment of Hub revenue ($6.4 million), as noted earlier. Weather was 15% or 484 degree days warmer than normal and 11% or 339 degree days warmer than last year. Deliveries declined 12 Bcf to 87 Bcf. Operating expenses were down slightly from a year ago, primarily due to a decline in depreciation expense due to the implementation of new depreciation rates in the third quarter of fiscal 2005.

On a fiscal year-to-date basis, ongoing (non-GAAP) operating income was $109.3 million compared to $126.9 million last year. The decrease is due primarily to the impact of lower gas deliveries ($9.3 million), including an estimated 4% decline in weather normalized demand due to the impact of customer conservation, the change in treatment of Hub revenue ($5.9 million) noted above, and slightly higher operating expenses. Year-to-date weather was 472 degree days or 9% warmer than normal, and 120 degree days or 2% warmer than last year. Operating expenses increased $2.9 million, as an increase in bad debt expense ($6.6 million) due to record high natural gas prices and their corresponding impact on revenues, and higher pension expense ($4.5 million) were nearly offset by reductions in depreciation expense ($3.6 million) and various other operating costs (including outside service and weather insurance expenses).

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

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

Gas Distribution Statistics

	Three Months Ended					Six Months Ended				Increase/Decrease
	March 31,					March 31,					Three Months			Six Months
Margin Data (In Thousands)		2006			2005		2006		2005		Ended			Ended
Gas Distribution revenues:
Sales
Residential	$	643,437		$	577,615	$	1,216,184	$	982,491	$	65,822		$	233,693
Commercial		105,810			93,889		198,941		156,792		11,921			42,149
Industrial		18,905			17,086		36,479		28,689		1,819			7,790
Total sales		768,152			688,590		1,451,604		1,167,972		79,562			283,632
Transportation
Residential		12,912			12,960		23,730		22,637		(48	)		1,093
Commercial		18,730			19,345		34,063		33,567		(615	)		496
Industrial		6,054			6,951		11,504		12,426		(897	)		(922	)
Contract pooling		13,869			7,551		20,518		11,572		6,318			8,946
Total transportation		51,565			46,807		89,815		80,202		4,758			9,613
Total Hub revenues		(2,813	)		3,626		-		5,904		(6,439	)		(5,904	)
Other Gas Distribution revenues ⁽¹⁾		4,453			3,419		8,927		8,422		1,034			505
Total Gas Distribution revenues		821,357			742,442		1,550,346		1,262,500		78,915			287,846
Less: Gas costs		583,495			488,176		1,100,646		817,780		95,319			282,866
Gross margin ⁽²⁾		237,862			254,266		449,700		444,720		(16,404	)		4,980
Less: Revenue taxes		69,136			65,706		129,133		111,670		3,430			17,463
Environmental costs recovered		14,033			14,145		25,329		23,128		(112	)		2,201
Net margin ⁽²⁾	$	154,693		$	174,415	$	295,238	$	309,922	$	(19,722	)	$	(14,684	)
Gas Distribution deliveries (MDth):
Gas sales
Residential		46,052			53,764		83,234		88,801		(7,712	)		(5,567	)
Commercial		7,903			9,131		14,165		14,924		(1,228	)		(759	)
Industrial		1,480			1,759		2,715		2,905		(279	)		(190	)
Total gas sales		55,435			64,654		100,114		106,630		(9,219	)		(6,516	)
Transportation
Residential		8,300			9,110		14,937		15,327		(810	)		(390	)
Commercial		16,438			17,715		29,862		30,204		(1,277	)		(342	)
Industrial		6,609			7,802		12,641		13,964		(1,193	)		(1,323	)
Total transportation		31,347			34,627		57,440		59,495		(3,280	)		(2,055	)
Total Distribution deliveries		86,782			99,281		157,554		166,125		(12,499	)		(8,571	)
Gross margin per Dth delivered	$	2.77		$	2.52	$	2.85	$	2.64	$	0.25		$	0.21

Net margin per Dth delivered	$	1.81		$	1.72	$	1.87	$	1.83	$	0.09		$	0.04

Average cost per Dth of gas sold	$	10.53		$	7.55	$	10.99	$	7.67	$	2.98		$	3.32

Actual heating degree days (HDD)		2,741			3,080		5,043		5,163		(339	)		(120	)
Normal heating degree days⁽³⁾		3,225			3,254		5,515		5,533

Actual heating degree days as a percent
of normal (actual/normal)		85			95		91		93

(1)	Includes accruals for weather insurance recoveries.

(2)

As used above, net margin is not a financial measure computed under GAAP. Gross margin is the GAAP measure most closely related to net margin. Management believes net margin to be useful in understanding the Gas Distribution segment's operations because the utility subsidiaries are allowed, under their tariffs, to recover gas costs, revenue taxes and environmental costs from their customers on a dollar-for-dollar basis.

(3)

The normal heating degree days for fiscal 2005 were based on the 30-year average of monthly total heating degree days at Chicago's O'Hare International Airport for the years 1970-1999. The normal heating degree days for fiscal 2006 were based on the 30-year average of monthly total heating degree days at Chicago's O'Hare International Airport for the years 1975-2004.

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

Oil and Gas Production Segment. Revenues for the three and six months ended March 31, 2006 increased $9.7 million and $7.5 million, respectively, compared with the same periods last year. Operating income for the three- and six-month periods increased $3.6 million and $6.4 million, respectively, compared with year ago periods. The increases in revenue and operating income in the three-month period are due primarily to higher net realized commodity prices (26%) and an increase in equivalent average daily production (7%). Operating income for the three month period reflects a $2.0 million adjustment in the first quarter gain that was recorded on the sale of properties by EnerVest Energy, L.P. (EnerVest). The downward revision in the gain was related to a correction to the net equity investment balance of the partnership. Increases in revenue and operating income in the six-month period are due mainly to higher net commodity prices (15%) and a net $7.6 million gain on sale of the EnerVest properties, offset by higher operating expenses and slightly lower production. The decline in production from a year ago reflects the normal decline of existing production, partially offset by the Company's 2006 drilling program and the impact of the recent acquisition. Increases in operating costs for the three- and six-month periods ($3.9 million and $7.5 million, respectively) partially offset the impact of improved commodity prices, with higher general and administrative costs, higher production taxes (associated with higher wellhead gas prices) and higher DD&A ($2.3 million and $2.8 million, for the three and six months) negatively impacting operating income. The higher DD&A is primarily the result of the increase in production.

On February 23, 2006 the Company announced that it had acquired certain oil and gas properties in East Texas, North Louisiana and Mississippi from a private entity for approximately $139 million. The acquired properties, virtually all of which will be operated by the Company, consist of approximately 60,000 gross acres in 33 fields in the heart of the Cotton Valley / Travis Peak (Hosston) gas trend. The acquisition initially added approximately 7.5 MMCFED to existing production and an estimated 59 BCFE of proven reserves. Approximately 47% of the acquired reserves are developed. The Company expects to spend approximately $15 million to $20 million of drilling capital on the acquired properties in fiscal 2006 and $30 million to $35 million in fiscal 2007.

The following table summarizes hedges in place for the remainder of fiscal 2006 and 2007 for the Oil and Gas Production segment as of April 20, 2006. Hedges in place are net of approximately 32 Mbl of open oil swaps that are excluded as a result of hedge dedesignation. These swaps were dedesignated as hedges in the third and fourth quarters of fiscal 2005 due to higher than anticipated hedge percentages relative to current production estimates.

	Remaining
	Fiscal 2006	Fiscal 2007
Gas hedges in place (MMbtus)	8,157,000	12,705,000
Gas hedges as a percent of estimated fiscal production ⁽¹⁾	65%-70%	50%-60%
Percent of gas hedges that are swaps	61%	63%
Average swap price ($/MMbtu)	$5.09	$ 5.37
Percent of gas hedges that are no cost collars	39%	37%
Weighted average floor price ($/MMbtu)	$4.54	$ 5.62
Weighted average ceiling price ($/MMbtu)	$5.56	$ 6.77
Oil hedges in place (MBbls)	150	182
Oil hedges as a percent of estimated fiscal production ⁽¹⁾	75%-80%	45%-55%
Average hedge price ($/Bbl)	$27.65	$ 37.50

(1) Based on expected production for fiscal 2006 and assumes fiscal 2007 production is flat with fiscal 2006 levels.

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

While NYMEX gas prices were up substantially, increases in the net realized gas price were tempered by the percentage of gas hedged and by wider than normal basis differentials. The following table summarizes operating statistics from the Oil and Gas Production segment.

	Three Months Ended March 31,				Six Months Ended March 31,
		2006		2005		2006		2005
Total production - gas equivalent (MMcfe)⁽¹⁾		6,447		6,003		12,336		12,504
Daily average gas production (MMcfd)		64.9		59.1		61.4		60.8
Daily average oil production (MBd)		1.1		1.3		1.1		1.3
Daily average production - gas equivalent (MMcfed)⁽¹⁾		71.6		66.7		67.8		68.7
Gas production as a percentage of total production		91		89		91		89
Percent of production hedged during the period - gas		64		95		74		95
Percent of production hedged during the period - oil⁽²⁾		74		96		77		89
Gas net realized price ($/Mcf) ⁽³⁾	$	5.94	$	4.62	$	5.28	$	4.52
Oil net realized price ($/Bbl) ⁽³⁾	$	25.64	$	26.94	$	27.63	$	28.56
Depreciation, depletion and amortization rate ($/Mcfe)⁽⁴⁾	$	2.06	$	1.83	$	2.13	$	1.88
Average lease operating expense ($/Mcfe)	$	0.73	$	0.90	$	0.71	$	0.67
Average production taxes ($/Mcfe)	$	0.60	$	0.50	$	0.64	$	0.47

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

(2)	Due to higher than anticipated hedge percentages, a small amount of open hedges were dedesignated in fiscal 2005, reflecting current production estimates.

(3)	Reflects the impact of all hedges, including mark-to-market derivatives as well as basis differentials, transportation, gathering and mmbtu/mcf conversion and are not NYMEX-equivalent prices.

(4)	2006 increase due to production mix and the addition of unproved capital and costs associated with the development of unproved reserves.

Energy Marketing Segment. Revenues for the three and six months ended March 31, 2006 increased $62.8 million and $170.1 million, respectively, primarily due to higher commodity prices.

Operating income totaled $10.3 million for the quarter and $20.1 million year-to-date, up $0.5 million and $7.9 million from the year ago periods, respectively. Wholesale marketing results were up sharply in both periods, reflecting additional capacity and the positive impact of price volatility and spreads on storage and transportation optimization strategies. Second quarter and year-to-date results for retail marketing activities declined from a year ago due primarily to mark-to-market accounting and the impact of warmer than normal weather on gas margins.

Results for the segment include an unrealized loss of $13.8 million and $16.0 million related to lower-of-cost-or market inventory adjustments and mark-to-market accounting for the quarter and year-to-date periods, respectively. Much of this is timing and is expected to reverse over this and next fiscal years as the underlying transactions are settled. The earnings variability resulting from accounting timing can be significant from period to period, even when the underlying economic position is unchanged.

Quarterly comparisons can vary due to the seasonal nature of retail gas marketing and the opportunistic nature of wholesale capacity optimization activity. As a result, operating results for the remainder of the fiscal year are expected to break even, as the reversal of temporary accounting adjustments is offset by fixed capacity and other operating costs.

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

The Energy Marketing segment recently acquired two large retail electric customers. Peoples Energy Services Company announced in January 2006 that it won a contract to supply electricity for the Department of Energy's Fermi National Accelerator Laboratory, headquartered in Batavia, Illinois. The contract is for over 400,000 megawatt hours annually and runs from December 2006 through December 2007. In April 2006, Peoples Energy Services won a contract to supply electricity to the Metropolitan Water Reclamation District of Greater Chicago. The contract is for 560,000 megawatt hours of electricity per year, begins in December 2006 and covers a three-year period.

The following table summarizes operating statistics for the Energy Marketing segment.

	Three Months Ended March 31,		Six Months Ended March 31,
	2006	2005		2006	2005
Wholesale gas volumes sold (MDth)	14,015	14,895		23,923	25,802
Retail gas volumes sold (MDth)	17,939	20,654		33,025	35,442
Number of retail gas customers	23,884	24,473		23,884	24,473
Retail electric volumes sold (Mwh)	417	331		817	664
Number of retail electric customers	2,657	2,003		2,657	2,003

Energy Assets Segment. On March 31, 2006 the Company agreed to sell its interest in the Southeast Chicago Energy Project (SCEP) for approximately $50 million subject to closing adjustments. Closing is expected to occur in the fiscal third quarter and result in a modest gain. The Company expects to sell its remaining power generation assets, a 50% interest in Elwood Energy and a development site in Oregon, by fiscal year-end at a sizable gain. All financial results relating to power generation formerly included in this business segment are now reported as discontinued operations, including prior year results.

Revenues for the three and six months ended March 31, 2006 increased $2.6 million and $2.7 million, respectively, primarily due to higher commodity prices and increased volumes associated with activity at the Company's propane-based peaking facility. Operating income totaled $1.4 million for the quarter and $3.1 million year-to-date, up slightly from the year-ago periods.

The costs of activities related to the development of power generation sites are either expensed as incurred or are capitalized as specific site development assets, as appropriate. At March 31, 2006, $9.3 million related to this activity was capitalized or deferred as investments.

The electric capacity of Elwood Energy LLC (Elwood) has been sold through long-term contracts with Exelon Generation Company, LLC (Exelon), Engage Energy America LLC (Engage) and Aquila, Inc. (Aquila). Effective December 31, 2004, the contract with Engage terminated and the related electric capacity is being purchased by Exelon. In September 2005, Standard & Poor's Rating Services (S&P) placed Aquila on CreditWatch Positive and Moody's revised Aquila's credit outlook to positive. Aquila has been providing Elwood with security in the form of a letter of credit equal to one year of capacity payments of approximately $37.8 million. The initial term of the most recently executed letter of credit ends in March of 2007, but it automatically extends for an additional year absent notice by the issuing bank not to extend. On January 20, 2006, S&P affirmed the B+ rating on Elwood's bonds and revised the outlook from negative to stable. Moody's ratings on Elwood's bonds remain at Ba2 with a stable outlook.

Critical Accounting Policies

See the Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) in the Company's Annual Report on Form 10-K, as amended, for the fiscal year ended September 30, 2005 for a detailed discussion of the Company's critical accounting policies. These policies include Regulated Operations, Environmental Activities Relating to Former Manufactured Gas Operations, Retirement and Postretirement Benefits, Derivative Instruments and Hedging Activities, and Provision for Uncollectible Accounts.

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

LIQUIDITY AND CAPITAL RESOURCES

The following is a summary of cash flows for the Company:

	Six Months Ended March 31,
(In Thousands)		2006			2005
Net cash provided by (used in) operating activities	$	117,792		$	228,521
Net cash provided by (used in) investing activities	$	(199,798	)	$	(60,770	)
Net cash provided by (used in) financing activities	$	132,075		$	(82,204	)

Cash provided by operating activities decreased for the six months ended March 31, 2006 as compared to the six months ended March 31, 2005, primarily due to unfavorable net changes in working capital. In the accompanying cash flow statements, balance sheet changes in current deferred tax assets, gas in storage and deposits with broker or trustee exclude certain noncash transactions (primarily the effects of mark-to-market accounting). Additionally, balance sheet changes in intercompany assets/liabilities of Peoples Gas and North Shore Gas exclude the noncash effects of derivative activity conducted on their behalf by Peoples Energy. Net cash used in investing activities increased as a result of an increase in capital spending, primarily in the Oil and Gas Production segment. On February 23, 2006, the Company announced that it had acquired certain oil and gas properties in East Texas, North Louisiana and Mississippi from a private entity for approximately $139 million. This activity was partially offset by an increase in the return of capital from the Company's equity method investments, primarily related to the sale of properties by the EnerVest partnership and the Trigen-Peoples partnership. Net cash provided by financing activities increased primarily due to additional commercial paper borrowing ($158.0 million) in fiscal 2006 related to the Oil and Gas segment acquisition compared to commercial paper retirement ($55.6 million) in fiscal 2005.

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

Balance Sheet Variations

Total assets at March 31, 2006 increased $245.0 million compared to September 30, 2005 due to an increase in capital investments at the Oil and Gas Production segment, an increase in current regulatory assets related primarily to mark-to-market accounting for the utility gas costs hedging program, and increases in cash and cash equivalents and customer receivables, primarily due to seasonality and higher gas prices. On February 23, 2006, the Company announced that it had acquired certain oil and gas properties in East Texas, North Louisiana and Mississippi from a private entity for approximately $139 million. These increases were partially offset by a decrease in gas in storage due to seasonality and a decrease in derivative assets that are marked-to-market and largely relate to utility hedge activity. The decrease in derivative assets reflects price declines during the first half of fiscal 2006 relative to utility long positions. The increase in current liabilities was driven by increases in commercial paper (primarily due to the oil and gas properties acquisition) and the temporary LIFO liquidation credit, as well as the gas charge settlement liability described in Note 2 of the Notes to Consolidated Financial Statements. These increases were partially offset by a decrease in utility regulatory liabilities. The decrease in utility regulatory liabilities largely corresponds with the above decrease in derivative assets that are marked-to-market. Settlement of these assets is included as an adjustment to gas costs included in customer bills. The Company's capitalization did not change significantly, with the combined decrease in the accumulated other comprehensive loss and increase in common stock (primarily issued through the Direct Purchase and Investment Plan and the Long-Term Incentive Compensation Plans) being partially offset by the reduction in retained earnings, due primarily to the $64.7 million after tax charge related to the gas charge settlement. The decrease in the accumulated other comprehensive loss reflects price declines related to short position derivatives accounted for as cash flow hedges at the Company's Oil and Gas Production and Energy Marketing segments.

- 45 -

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

Total assets at March 31, 2006 increased $460.6 million compared to March 31, 2005 due to an increase in capital investments at the Oil and Gas Production segment, an increase in current regulatory assets related primarily to mark-to-market accounting for the utility gas costs hedging program, increases in customer receivables and gas in storage due to higher gas prices and higher volumes, and higher noncurrent regulatory assets reflecting increases in environmental liabilities. The increase in current liabilities was driven by increases in commercial paper (primarily due to the oil and gas properties acquisition) and derivative liabilities that are marked-to-market and relate to the hedge activity of the Gas Distribution, Oil and Gas Production and Energy Marketing segments. The increase in current liabilities is also attributable to the gas charge settlement liability described in Note 2. Deferred credits and long-term liabilities increased due to higher environmental costs. The Company's capitalization did not change significantly, with the reduction in retained earnings, due primarily to the $64.7 million after tax charge related to the gas charge settlement, being partially offset by the combined decrease in the accumulated other comprehensive loss and increase in common stock (primarily issued through the Direct Purchase and Investment Plan and Long-Term Incentive Compensation Plans). The decrease in the accumulated other comprehensive loss reflects price declines related to short position derivatives accounted for as cash flow hedges at the Company's Oil and Gas Production and Energy Marketing segments.

Financial Sources

In addition to cash generated internally by operations, as of March 31, 2006, the Company had committed credit facilities of $600 million (Peoples Energy, $350 million; Peoples Gas, $250 million). These various facilities primarily support the Company's ability to borrow using commercial paper. As of March 31, 2006, $183.7 million of Peoples Energy's and all of Peoples Gas' facilities were available. The Company has a seasonal credit facility that will expire in June 2006 ($125 million) and a long-term credit facility that will expire March 2007 ($225 million). Peoples Gas has a long-term credit facility that expires in July 2010. The long-term credit facilities are expected to be renewed when they expire, although the exact amount of the renewals will be evaluated at that time and may change from the current levels. North Shore Gas intends to meet its future short term borrowing requirements through loans from Peoples Energy or Peoples Gas.

The Company's and Peoples Gas' credit facilities contain debt triggers that permit the lenders to terminate the credit commitments to the borrowing company and declare any outstanding amounts due and payable if the borrowing company's debt-to-total capital ratio exceeds 65%. At March 31, 2006, total debt was 56% of total debt plus equity, up from 51% a year ago due primarily to the settlement charge and February oil and gas acquisition which is being temporarily financed with commercial paper borrowing. The current debt-to-total capital ratio for Peoples Gas is 46%. The current debt-to-total capital ratio for North Shore Gas is 41%. Management does not believe the gas reconciliation settlement will have a material adverse affect on the Company's liquidity or its ability to fund its strategic initiatives and capital expenditures.

The Company maintains lines of credit facilities to ensure sufficient liquidity for seasonal working capital requirements and other short-term financial needs. As forecasts of liquidity change throughout the year (due to high gas prices, for example), the Company may seek additional sources of liquidity in order to meet its objectives. In November 2005 and February 2006, the Company arranged for seasonal credit facilities with three and four banks, respectively, under which the Company may borrow up to an additional $125 million through June 30, 2006, for general corporate purposes and commercial paper backup.

In addition to the committed credit facilities discussed above, the Company has uncommitted lines of credit and letters of credit backup of $25.0 million, of which $1.0 million was used for letters of credit backup and $24.0 million was unused as of March 31, 2006. Peoples Gas and North Shore Gas also have the authority to borrow up to $150 million and $50 million, respectively, from Peoples Energy. As of March 31, 2006, Peoples Gas and North Shore Gas had no loans outstanding from Peoples Energy.

Peoples Gas and North Shore Gas also have the ability to loan between themselves as utilities up to $50.0 million. As of March 31, 2006, there were no loans outstanding between the utilities.

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

On April 20, 2006, Moody's Investor Service downgraded the long-term rating of debt issued by Peoples Energy (Baa2 senior unsecured), Peoples Gas (A1 senior secured) and North Shore Gas (A1 senior secured). The Company's Prime-2 and Peoples Gas' Prime-1 commercial paper ratings were not under review. On May 5, 2006, Fitch downgraded the long-term debt rating of debt issued by Peoples Energy (A- senior unsecured), Peoples Gas (A+ senior secured), and North Shore Gas (A+ senior secured). Fitch also downgraded Peoples Energy's short-term debt rating from F1 to F2. The Standard and Poor's long-term ratings of debt issued by the Company (BBB+ senior unsecured), Peoples Gas (A- senior secured) and North Shore Gas (A- senior secured), have not changed since the filing of the Company's Annual Report on Form 10-K/A for the period ending September 30, 2005.

As a result of the downgrade of its long-term senior unsecured debt, Peoples Energy Corporation expects that it will need to increase the amount of cash collateral held by counterparties with respect to various price swaps, options, collars and other derivative instruments used by the company to hedge commodity price, volume, and basis risk. Management does not expect the increased cash deposit requirement (approximately $30 million) to have a material adverse affect on the Company's liquidity or cash flow.

Changes in Equity Securities

The Company has filed a universal shelf registration statement on Form S-3 for the issuance from time to time of up to 1.5 million shares of common stock pursuant to a continuous equity offering in one or more negotiated transactions or "at-the-market" offerings. As of March 31, 2006, a total of 1,235,700 shares of common stock had been issued through the continuous equity offering. Proceeds, net of issuance costs, totaled $47.9 million. No shares have been issued subsequent to March 31, 2004. However, the Company did issue common stock primarily through its Direct Purchase and Investment Plan and Long-Term Incentive Compensation Plans. Activity in the Long-Term Incentive Compensation Plan is net of reacquired shares, which dollar amounts also reflect expense recognition for awards of performance shares.

	Three Months Ended					Six Months Ended
	March 31, 2006					March 31, 2006
(Dollars in Thousands)		Shares			Dollars		Shares		Dollars
Shares outstanding - beginning of period		38,292,768		$	406,258		38,157,218	$	402,383
Shares issued:
Employee Stock Purchase Plan		-			-		7,992		260
Long-Term Incentive Compensation Plans, net		(3,410	)		110		51,099		1,096
Directors Deferred Compensation Plan		3,056			168		3,056		162
Direct Purchase and Investment Plan		64,602			2,357		137,651		4,992
Total activity for the period		64,248			2,635		199,798		6,510

Shares outstanding - end of period		38,357,016		$	408,893		38,357,016	$	408,893

Financial Uses

Capital Spending. In the six-month period ended March 31, 2006, the Company spent $231.3 million on capital projects. The Gas Distribution segment spent $41.1 million on property, plant and equipment of which $36.5 million was spent by Peoples Gas and $4.6 million was spent by North Shore Gas. The majority of the remaining $190.2 million was spent by the Oil and Gas Production segment, which spent $188.0 million on acquisitions, drilling projects, and the exploitation of existing assets. Management currently estimates that fiscal 2006 capital spending will total approximately $330 million, including $105 million in the Gas Distribution segment and the remainder primarily in the Oil and Gas Production segment.

- 47 -

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

Gas Charge Settlement. The after tax cash impact of the refund required by the Amended Settlement Agreement and Release described in Notes 2 and 7A of the Notes to Consolidated Financial Statements will approximate $60-$70 million in fiscal 2006. The Company intends to finance the settlement initially with seasonal cash on hand at its utility subsidiaries. On a longer term basis, the Company will make equity contributions into the utility subsidiaries to restore their capitalization to approximate pre-settlement charge levels.

Dividends. On January 31, 2006, the Company's Board of Directors voted to maintain the regular quarterly dividend on the Company's common stock at 54 1/2 cents per share.

Overall Financing Requirements. The increase in capital spending is expected to be more than offset by the proceeds from the sale of the Company's power generation assets in the latter part of fiscal 2006 (see Energy Assets segment discussion above). Overall financing requirements for fiscal 2006 are now expected to approximate $120 million. These financing needs are likely to be met through a combination of debt and equity, consistent with the Company's targeted ratio of total debt to total debt plus equity of 50% to 55%.

Commitments, Contractual Obligations and Uncertainties

Off-Balance Sheet Arrangements. Off-balance sheet debt at March 31, 2006 and 2005 consists of the Company's pro rata share of nonrecourse debt of various equity investments, including Elwood ($167.3 million and $176.2 million), Trigen-Peoples District Energy Company ($0 and $14.8 million), and EnerVest ($0 and $2.5 million). The Company believes this off-balance sheet financing will not have a material effect on the Company's future financial condition. The Company also has commercial obligations of $20.5 million in guarantees and $5.4 million in letters of credit at March 31, 2006. The Company enters into these arrangements to secure financing and facilitate commercial transactions by its investees and subsidiaries with third parties.

Contractual Obligations. Since the filing of the September 30, 2005 Annual Report on Form 10-K, as amended, there have been no significant changes to contractual obligations with the exception of the following items.

The Company is required under the Amended Settlement Agreement and Release, as described in Note 7A to the Notes to Consolidated Financial Statements, to pay the Illinois Attorney General and the City of Chicago (1) $5 million within 15 business days of March 28, 2006 and (2) up to $5 million per year in each of the next five years towards funding conservation and weatherization programs. The Company also agreed to credit fiscal 2005 and fiscal 2006 revenues derived from the provision of gas hub services as an offset to utility customers' gas charges. The fiscal 2006 revenues are being credited in fiscal 2006. The fiscal 2005 revenues ($10.7 million) are expected to be credited to customers following an order in the fiscal 2005 gas charge reconciliation case.

On March 17, 2006, Peoples Gas entered into a precedent agreement for firm transportation with Kinder Morgan Illinois Pipeline LLC. Capacity payments total approximately $33 million over a 10 year period.

During the three months ended March 31, 2006, the Energy Marketing segment has entered into net additional purchase obligations for the supply of gas and electricity totaling approximately $41.6 million.

In March and April of 2006, the Oil and Gas Production segment entered into multiple drilling rig commitments totaling $58 million over 2 to 3 years.

Environmental Matters. Peoples Gas and North Shore Gas are conducting environmental investigations and remedial work at certain sites that were the locations of former manufactured gas operations. (See Note 6A of the Notes to Consolidated Financial Statements.) North Shore Gas received a demand from a responsible party under CERCLA for environmental costs associated with a site in Denver, Colorado. (See Note 6B of the Notes to Consolidated Financial Statements.)

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

Gas Charge Reconciliation Proceedings and Related Matters. For each utility subsidiary, the Commission conducts annual proceedings regarding the reconciliation of revenues from the Gas Charge and related gas costs. In these proceedings, the accuracy of the reconciliation of revenues and costs is reviewed and the prudence of gas costs recovered through the Gas Charge is examined by interested parties. On March 21, 2005, the Illinois Attorney General (AG) and Chicago filed lawsuits against the Company and several of its subsidiaries alleging violations against its customers under certain state and city consumer fraud laws, respectively. On March 28, 2006, the Commission issued an order approving a settlement that resolved Peoples Gas' and North Shore Gas' fiscal 2001 - 2004 gas charge cases and the AG and Chicago lawsuits. (See Notes 7A and 7B of the Notes to Consolidated Financial Statements.)

In February 2004, a purported class action was filed against the Company and Peoples Gas by a Peoples Gas customer alleging, among other things, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act related to maters at issue in Peoples Gas' gas charge reconciliation proceedings. The Company has also received a subpoena from the U.S. Commodity Futures Trading Commission. (See Notes 7C and 7D of the Notes to Consolidated Financial Statements.)

Indenture Restrictions

North Shore Gas' indenture relating to its first mortgage bonds contains provisions and covenants restricting the payment of cash dividends and the purchase or redemption of capital stock. At March 31, 2006, such restrictions amounted to $6.9 million of North Shore Gas' total retained earnings of $77.7 million.

Peoples Energy Resources owns a 50% equity interest in Elwood. Elwood's trust indenture and other agreements related to its project financing prohibit Elwood from making distributions unless Elwood has maintained certain minimum historic and projected debt service coverage ratios. At January 5, 2006, the most recent semi-annual distribution date, a minimum debt service coverage ratio of 1.2 to 1.0 was required and Elwood's actual debt service coverage ratio was approximately 1.5 to 1.0.

- 49 -

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

PEOPLES GAS AND NORTH SHORE GAS DISCUSSIONS

The financial results of Peoples Gas (including its hub activity) and North Shore Gas are reported primarily within the Gas Distribution segment. A portion of Peoples Gas' and North Shore Gas' results are included in the Corporate and Other segment. Operating income (loss) (GAAP) and ongoing operating income (non-GAAP) by business segment for Peoples Gas and North Shore Gas is presented below.

	Peoples Gas									North Shore Gas
		Gas			Corporate						Gas		Corporate
(In Thousands)		Distribution			and Other			Total			Distribution		and Other			Total
For the Three Months Ended
March 31, 2006 (GAAP)	$	19,330		$	(2,769	)	$	16,561		$	23,651	$	(375	)	$	23,276
March 31, 2006 (non-GAAP) ⁽¹⁾		47,692			(2,769	)		44,923			10,951		(375	)		10,576
March 31, 2005 (GAAP)		66,119			(3,325	)		62,794			12,628		(282	)		12,346
March 31, 2005 (non-GAAP) ⁽¹⁾		66,119			(1,813	)		64,306			12,628		(242	)		12,386

For the Six Months Ended
March 31, 2006 (GAAP)	$	(13,213	)	$	(6,033	)	$	(19,246	)	$	15,295	$	(811	)	$	14,484
March 31, 2006 (non-GAAP) ⁽²⁾		89,817			(6,033	)		83,784			19,595		(811	)		18,784
March 31, 2005 (GAAP)		107,453			(12,295	)		95,158			20,771		(1,071	)		19,700
March 31, 2005 (non-GAAP) ⁽²⁾		107,453			(3,828	)		103,625			20,771		(510	)		20,261

(1)

Fiscal 2006 ongoing operating income (non-GAAP) is defined as GAAP operating (loss) adjusted to exclude the effects of a charge of $28.4 million and ($12.7) million at Peoples Gas and North Shore Gas, respectively, associated with the settlement of gas charge proceedings. Fiscal 2005 ongoing operating income (non-GAAP) is defined as GAAP operating income adjusted to exclude the effects of pension expense related restructuring costs of $1.5 million and $40 thousand at Peoples Gas and North Shore Gas, respectively. See Item 2- MD&A- Executive Summary for a discussion of management's use of non-GAAP financial measures and a reconciliation of GAAP and non-GAAP earnings.

(2)

Fiscal 2006 year to date ongoing operating income (non-GAAP) is defined as GAAP operating (loss) adjusted to exclude the effects of a charge of $103.0 million and $4.3 million at Peoples Gas and North Shore Gas, respectively, associated with the settlement of gas charge proceedings. Fiscal 2005 year to date ongoing operating income (non-GAAP) is defined as GAAP operating income adjusted to exclude the effects of pension expense related restructuring costs of $8.5 million and $0.6 million at Peoples Gas and North Shore Gas, respectively. See Item 2- MD&A- Executive Summary for a discussion of management's use of non-GAAP financial measures and a reconciliation of GAAP and non-GAAP earnings.

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

Peoples Gas Discussion

Income Statement Variations

GAAP net income (loss) for Peoples Gas for the three and six months ended March 31, 2006 was $7.6 million and $(16.6) million, respectively. Excluding the charge for the three and six months ($17.1 million and $62.1 million, after tax) related to the settlement of gas charge proceedings, on-going net income (non-GAAP) was $24.7 million and $45.4 million for the three and six months ended March 31, 2006, respectively. Excluding pension-related charges ($0.9 million and $5.1 million, after tax for the three and six months ended March 31, 2005) resulting from the fiscal year 2004 organizational restructuring, on-going net income (non-GAAP) for the three and six months ended March 31, 2005 was $36.5 million and $58.0 million respectively.

Revenues for the three and six months ended March 31, 2006 increased $66.7 million and $241.4 million, respectively, compared with the same year ago periods. The increase was due to the impact on revenues of higher gas prices (approximately $164 million and $297 million), partially offset by the impact on revenues of decreased deliveries due to weather (approximately $68 million and $14 million) that was 11% and 2% warmer compared with the same year-ago periods, lower weather-normalized

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

demand (approximately $48 million and $73 million) and by the impact of the change in the regulatory treatment of Hub revenues ($6.4 million and $5.9 million) due to the amended settlement agreement.. The $46.2 million and $114.4 million decreases in operating income for the three and six months ended March 31, 2006, respectively, were primarily due to lower deliveries resulting from warmer weather (approximately $7 million and $2 million), lower normalized deliveries (approximately $5 million and $7 million) and due to the charge ($28.4 million and $103.0 million) related to the amended settlement of the gas charge proceedings. Partially offsetting the impact of this settlement on the three and six months ended March 31, 2006 was a decrease in depreciation expense ($1.4 million and $3.0 million) due to a fiscal 2005 Commission order lowering depreciation rates, and the fiscal 2005 restructuring-related pension charge of $1.5 million and $8.5 million).

Balance Sheet Variations

Total assets at March 31, 2006 increased $144.7 million compared to September 30, 2005 due to an increase in current regulatory assets related primarily to mark-to-market accounting for the utility gas costs hedging program, an increase in cash and cash equivalents and an increase in customer receivables, primarily due to seasonality and higher gas prices. These increases were partially offset by a decrease in noncurrent regulatory assets, due to decreases in environmental liabilities, a seasonal decrease in gas in storage and a decrease in intercompany receivables made up largely of a decrease in derivative assets contracted by Peoples Energy on behalf of Peoples Gas that are marked-to-market. The decrease in derivative assets reflects price declines during the first half of fiscal 2006 relative to utility long positions. The increase in current liabilities was driven by seasonal increases in accounts payable, the temporary LIFO liquidation credit and accrued taxes, an increase in intercompany payables (made up largely of losses on derivatives contracted by Peoples Energy on behalf of Peoples Gas that are marked-to-market) and the gas charge settlement liability described in Note 2 of the Consolidated Notes to Financial Statements. These increases were partially offset by a decrease in regulatory liabilities. The decrease in regulatory liabilities largely corresponds with above decrease in derivative assets that are marked-to-market. Settlement of these assets is included as an adjustment to gas costs included in customer bills. Deferred credits and long-term liabilities decreased primarily due to a decrease in deferred income taxes and the environmental liability. The Company's capitalization decreased with the reduction in retained earnings due primarily to the $62.1 million after tax charge related to the gas charge settlement.

Total assets at March 31, 2006 increased $179.9 million compared to March 31, 2005 due to increases in customer receivables due to higher gas prices, an increase in current regulatory assets related primarily to mark-to-market accounting for the utility gas costs hedging program, and higher noncurrent regulatory assets reflecting increases in environmental liabilities. These increases were partially offset by a decrease in intercompany receivables made up largely of a decrease in derivative assets contracted by Peoples Energy on behalf of Peoples Gas that are marked-to-market. The decrease in derivative assets reflects price declines since March 31, 2005 relative to utility long positions. The increase in current liabilities was driven by higher intercompany payables (made up largely of losses on derivatives contracted by Peoples Energy on behalf of Peoples Gas that are marked-to-market) and the gas charge settlement liability described in Note 2. Deferred credits and long-term liabilities increased due to higher environmental costs. The Company's capitalization decreased due to the reduction in retained earnings due primarily to the $62.1 million after tax charge related to the gas charge settlement.

North Shore Gas Discussion

Income Statement Variations

GAAP net income for North Shore Gas for the three- and six- months ended March 31, 2006 was $13.8 million and $8.2 million, respectively. Excluding the credit adjustment for the three months ($7.7 million, after tax) and net charge for the six months ($2.6 million, after tax), related to the settlement of gas charge proceedings, on-going net income (non-GAAP) was $6.2 million and $10.8 million for the three and six months ended March 31, 2006, respectively. Excluding pension-related charges ($20

- 51 -

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

thousand and $0.3 million, after tax for the three and six months ended March 31, 2005) resulting from the fiscal year 2004 organizational restructuring, on-going net income (non-GAAP) for the three and six months ended March 31, 2005 was $7.1 million and $11.5 million respectively.

Revenues for the three and six months ended March 31, 2006 increased $12.0 million and $47.4 million, respectively, compared with the same year ago periods. The increase was due to the impact on revenues of higher gas prices (approximately $28 million and $57 million), partially offset by the impact on revenues of decreased deliveries due to weather (approximately $11 million and $3 million) that was 11% and 2% warmer compared with the same year-ago periods and lower weather-normalized demand (approximately $7 million and $9 million). Operating income increased $10.9 million and decreased $5.2 million for the three and six months ended March 31, 2006, respectively. Results for both periods were unfavorably impacted by lower deliveries resulting from warmer weather (approximately $1 million and $0.5 million) and lower normalized deliveries (approximately $0.5 million and $0.5 million). Operating income for the three and six months were also impacted by the credit adjustment ($12.7 million) and net charge ($4.3 million), respectively, related to the amended settlement of the gas charge proceedings. Partially offsetting the impact of this settlement charge on the results for the six months ended March 31, 2006 was a decrease in depreciation expense ($0.6 million) due to a fiscal 2005 Commission order lowering depreciation rates, and the fiscal 2005 six-month period restructuring-related pension charge of $0.6 million.

Balance Sheet Variations

Total assets at March 31, 2006 increased $26.7 million compared to September 30, 2005 due to an increase in current regulatory assets related primarily to mark-to-market accounting for the utility gas costs hedging program, an increase in cash and cash equivalents and an increase in customer receivables, primarily due to seasonality and higher gas prices. This increase was partially offset by a decrease in intercompany receivables made up largely of a decrease in derivative assets contracted by Peoples Energy on behalf of North Shore Gas that are marked-to-market. The decrease in derivative assets reflects price declines during the first half of fiscal 2006 relative to utility long positions. The increase in current liabilities was driven by seasonal increases in the temporary LIFO liquidation credit and accrued taxes, an increase in intercompany payables (made up largely of losses on derivatives contracted by Peoples Energy on behalf of North Shore Gas that are marked-to-market) and the gas charge settlement liability described in Note 2 of the Consolidated Notes to Financial Statements. These increases were partially offset by a decrease in regulatory liabilities. The decrease in regulatory liabilities largely corresponds with above decrease in derivative assets that are marked-to-market. Settlement of these assets is included as an adjustment to gas costs included in customer bills. The Company's capitalization decreased with the reduction in retained earnings due primarily to the $2.6 million after tax charge related to the gas charge settlement.

Total assets at March 31, 2006 increased $29.5 million compared to March 31, 2005 due to increases in customer receivables due to higher gas prices, an increase in current regulatory assets related primarily to mark-to-market accounting for the utility gas costs hedging program and higher noncurrent regulatory assets reflecting increases in environmental liabilities. The increase in current liabilities was driven by higher trade accounts and intercompany payables (made up largely of losses on derivatives contracted by Peoples Energy on behalf of North Shore Gas that are marked-to-market) and the gas charge settlement liability described in Note 2. Deferred credits and long-term liabilities increased due to higher environmental costs. The Company's capitalization decreased due to the reduction in retained earnings due primarily to the $2.6 million after tax charge related to the gas charge settlement.

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

The Peoples Gas Light and Coke Company
Gas Distribution Statistics

	Three Months Ended					Six Months Ended				Increase/Decrease
	March 31,					March 31,					Three Months			Six Months
Margin Data (In Thousands)		2006			2005		2006		2005		Ended			Ended
Gas Distribution revenues:
Sales
Residential	$	542,917		$	486,740	$	1,023,622	$	827,716	$	56,177		$	195,906
Commercial		88,796			78,431		166,813		131,251		10,365			35,562
Industrial		14,643			13,096		28,654		22,265		1,547			6,389
Total sales		646,356			578,267		1,219,089		981,232		68,089			237,857
Transportation
Residential		12,236			12,349		22,485		21,542		(113	)		943
Commercial		16,328			16,970		29,574		29,397		(642	)		177
Industrial		5,227			6,121		9,911		10,848		(894	)		(937	)
Contract pooling		12,778			6,861		18,488		10,535		5,917			7,953
Total transportation		46,569			42,301		80,458		72,322		4,268			8,136
Total Hub revenues		(2,813	)		3,626		-		5,904		(6,439	)		(5,904	)
Other Gas Distribution revenues		4,051			3,291		8,142		6,879		760			1,263
Total Gas Distribution revenues		694,163			627,485		1,307,689		1,066,337		66,678			241,352
Less: Gas costs		485,194			403,722		912,054		676,155		81,472			235,899
Gross margin ⁽¹⁾		208,969			223,763		395,635		390,182		(14,794	)		5,453
Less: Revenue taxes		63,152			59,508		117,946		101,163		3,644			16,783
Environmental costs recovered		13,124			13,337		23,626		21,943		(213	)		1,683
Net margin ⁽¹⁾	$	132,693		$	150,918	$	254,063	$	267,076	$	(18,225	)	$	(13,013	)
Gas Distribution deliveries (MDth):
Gas sales
Residential		38,064			44,645		68,775		73,599		(6,581	)		(4,824	)
Commercial		6,505			7,522		11,674		12,321		(1,017	)		(647	)
Industrial		1,116			1,323		2,082		2,214		(207	)		(132	)
Total gas sales		45,685			53,490		82,531		88,134		(7,805	)		(5,603	)
Transportation
Residential		7,928			8,751		14,277		14,718		(823	)		(441	)
Commercial		13,864			15,141		25,182		25,816		(1,277	)		(634	)
Industrial		5,153			6,242		9,843		10,952		(1,089	)		(1,109	)
Total transportation		26,945			30,134		49,302		51,486		(3,189	)		(2,184	)
Total Distribution deliveries		72,630			83,624		131,833		139,620		(10,994	)		(7,787	)
Gross margin per Dth delivered	$	2.92		$	2.63	$	3.00	$	2.75	$	0.29		$	0.25

Net margin per Dth delivered	$	1.87		$	1.76	$	1.93	$	1.87	$	0.11		$	0.06

Average cost per Dth of gas sold	$	10.62		$	7.55	$	11.05	$	7.67	$	3.07		$	3.38

Actual heating degree days (HDD)		2,741			3,080		5,043		5,163		(339	)		(120	)
Normal heating degree days⁽²⁾		3,225			3,254		5,515		5,533

Actual heating degree days as a percent
of normal (actual/normal)		85			95		91		93

(1)

(2)

- 53 -

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

North Shore Gas Company
Gas Distribution Statistics

	Three Months Ended				Six Months Ended				Increase/Decrease
	March 31,				March 31,					Three Months			Six Months
Margin Data (In Thousands)		2006		2005		2006		2005		Ended			Ended
Gas Distribution revenues:
Sales
Residential	$	100,520	$	90,875	$	192,562	$	154,775	$	9,645		$	37,787
Commercial		17,014		15,458		32,128		25,541		1,556			6,587
Industrial		4,262		3,990		7,825		6,424		272			1,401
Total sales		121,796		110,323		232,515		186,740		11,473			45,775
Transportation
Residential		676		611		1,245		1,095		65			150
Commercial		2,402		2,375		4,489		4,170		27			319
Industrial		827		830		1,593		1,578		(3	)		15
Contract pooling		1,091		690		2,030		1,037		401			993
Total transportation		4,996		4,506		9,357		7,880		490			1,477
Other Gas Distribution revenues		402		318		785		623		84			162
Total Gas Distribution revenues		127,194		115,147		242,657		195,243		12,047			47,414
Less: Gas costs		98,301		84,454		188,592		141,625		13,847			46,967
Gross margin ⁽¹⁾		28,893		30,693		54,065		53,618		(1,800	)		447
Less: Revenue taxes		5,984		6,198		11,187		10,507		(214	)		680
Environmental costs recovered		909		808		1,703		1,185		101			518
Net margin ⁽¹⁾	$	22,000	$	23,687	$	41,175	$	41,926	$	(1,687	)	$	(751	)
Gas Distribution deliveries (MDth):
Gas sales
Residential		7,988		9,119		14,459		15,202		(1,131	)		(743	)
Commercial		1,398		1,609		2,491		2,603		(211	)		(112	)
Industrial		364		436		633		691		(72	)		(58	)
Total gas sales		9,750		11,164		17,583		18,496		(1,414	)		(913	)
Transportation
Residential		372		359		660		609		13			51
Commercial		2,574		2,574		4,680		4,388		-			292
Industrial		1,456		1,560		2,798		3,012		(104	)		(214	)
Total transportation		4,402		4,493		8,138		8,009		(91	)		129
Total Gas Distribution deliveries		14,152		15,657		25,721		26,505		(1,505	)		(784	)

Gross margin per Dth delivered	$	2.04	$	1.96	$	2.10	$	2.02	$	0.08		$	0.08

Net margin per Dth delivered	$	1.55	$	1.51	$	1.60	$	1.58	$	0.04		$	0.02

Average cost per Dth of gas sold	$	10.08	$	7.56	$	10.73	$	7.66	$	2.52		$	3.07

Actual heating degree days (HDD)		2,741		3,080		5,043		5,163		(339	)		(120	)
Normal heating degree days⁽²⁾		3,225		3,254		5,515		5,533

Actual heating degree days as a percent
of normal (actual/normal)		85		95		91		93

(1)

(2)

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FORWARD-LOOKING INFORMATION

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

·	The outcome of rate increase proceedings to be filed with the Commission by the utility subsidiaries;

·	adverse decisions in proceedings before the Commission concerning the prudence review of the utility subsidiaries' gas purchases;

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

·	the future health of the United States and Illinois economies;

·	the timing and extent of changes in interest rates and energy commodity prices, including but not limited to the effect of gas prices on cost of gas supplies, accounts receivable and the provision for uncollectible accounts, interest expense and earnings from the Oil and Gas Production segment;

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

·	adverse resolution of material litigation;

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

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

·	regulatory developments in the United States, Illinois and other states where the Company does business;

·	the Company's success in identifying diversified business segment projects on financially acceptable terms and generating earnings from projects in a reasonable time;

·	operational factors affecting the Company's Gas Distribution, Oil and Gas Production and Energy Assets segments;

·	Aquila, Inc.'s financial ability to perform under its power sales agreements with Elwood;

·	the Company's ability to complete its divestment of its power generation assets during the fiscal year on advantageous terms;

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

·	weather-related energy demand;

·	terrorist activities; and

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

Also, projections to future periods of the effectiveness of internal control over financial reporting are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Some of these uncertainties that may affect future results are discussed in more detail in Item 1—Business, Item 1A—Risk Factors and Item 7—MD&A in the combined Annual Report on Form 10-K, as amended, most recently filed with the SEC by the Company, Peoples Gas, and North Shore Gas. All forward-looking statements included in this document are based upon information presently available, and the Company, Peoples Gas and North Shore Gas assume no obligation to update any forward-looking statements.

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ITEM 3. Quantitative and Qualitative Disclosures about Market Risk

Quantitative and qualitative disclosures about market risk are reported under Note 2 of the Notes to Consolidated Financial Statements.

ITEM 4. Controls and Procedures

Disclosure Controls and Procedures

In accordance with Exchange Act Rules 13a-15 and 15d-15, the Company, Peoples Gas and North Shore Gas carried out an evaluation, under the supervision and with the participation of management, including Thomas M. Patrick, our principal executive officer, and Thomas A. Nardi, our principal financial officer, of the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and our principal financial officer concluded that our disclosure controls and procedures were effective as of March 31, 2006 to provide reasonable assurance that information required to be disclosed and filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms, and that such information is accumulated and communicated to management, including the principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosures.

Changes In Internal Control Over Financial Reporting

There were no changes in the Company's internal control over financial reporting during the quarter ended March 31, 2006 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

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Part II - Other Information

Item 1. Legal Proceedings

See Note 6 of the Notes to Consolidated Financial Statements - Environmental Matters for a discussion pertaining to environmental matters, Note 7 of the Notes to Consolidated Financial Statements - Gas Charge Reconciliation Proceedings and Related Matters pertaining to proceedings at the Commission regarding the prudency of gas purchases by Peoples Gas and North Shore Gas, and Note 8 of the Notes to Consolidated Financial Statements - Other Litigation for a discussion of other events and proceedings, which notes are incorporated herein by reference.

Item 1A. Risk Factors

There were no material changes to the risk factors as presented in the Company's Annual Report on Form 10-K/A for the fiscal year ended September 30, 2005.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

Peoples Energy Corporation:

	a.	Peoples Energy held its Annual Meeting of Shareholders on February 24, 2006.

	b.	The following matters were voted upon at the Annual Meeting of Shareholders.

The election of nominees for directors who will serve for a one-year term or until their respective successors shall be duly elected. The Inspectors of Election certified the following vote tabulations:

	FOR	WITHHELD
Keith E. Bailey	32,199,041	805,867
James R. Boris	32,220,989	785,059
William J. Brodsky	32,213,983	792,064
Pastora San Juan Cafferty	32,113,950	885,240
Diana S. Ferguson	32,201,429	803,784
John W. Higgins	32,216,272	787,461
Dipak C. Jain	32,087,604	917,087
Michael E. Lavin	32,203,376	794,817
Homer J. Livingston, Jr.	32,090,054	907,904
Thomas M. Patrick	32,040,556	963,827
Richard P. Toft	32,114,502	888,957

		2.		A recommendation of the appointment by the Audit Committee of Deloitte & Touche LLP as the independent public accountants for the Company and its subsidiaries for the fiscal year ending September 30, 2006. The Inspectors of Election certified the following vote tabulations:

FOR		AGAINST		ABSTAIN		BROKER NON-VOTES
32,196,415		415,927		390,732		0

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Part II - Other Information

Item 5. Other Information

None.

Item 6. Exhibits

	Peoples Energy Corporation:

		Exhibit
		Number	Description of Document

		3	By-Laws of the Company, as amended December 2, 2005

		10.1	Order of the Illinois Commerce Commission in Docket No. 01-0706 for North Shore Gas

		10.2	Order of the Illinois Commerce Commission in Docket No. 02-0726 for North Shore Gas

		10.3	Order of the Illinois Commerce Commission in Docket No. 02-0727 for Peoples Gas

		10.4	Order of the Illinois Commerce Commission in Docket No. 03-0704 for North Shore Gas

		10.5	Order of the Illinois Commerce Commission in Docket No. 03-0705 for Peoples Gas

		10.6	Order of the Illinois Commerce Commission in Docket No. 04-0682 for North Shore Gas

		10.7	Order of the Illinois Commerce Commission in Docket No. 04-0683 for Peoples Gas

		12	Statement re: Computation of Ratio of Earnings to Fixed Charges for the Company

		31(a)	Certification of Thomas M. Patrick on behalf of the Company pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

		31(b)	Certification of Thomas A. Nardi on behalf of the Company pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

		32(a)	Certification of Thomas M. Patrick on behalf of the Company, Peoples Gas and North Shore Gas pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

		32(b)	Certification of Thomas A. Nardi on behalf of the Company, Peoples Gas and North Shore Gas pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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Part II - Other Information

The Peoples Gas Light and Coke Company:

	Exhibit
	Number	Description of Document
	31(a)	Certification of Thomas M. Patrick on behalf of Peoples Gas pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31(b)	Certification of Thomas A. Nardi on behalf of Peoples Gas pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32(a)	Certification of Thomas M. Patrick on behalf of the Company, Peoples Gas and North Shore Gas pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32(b)	Certification of Thomas A. Nardi on behalf of the Company, Peoples Gas and North Shore Gas pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

North Shore Gas Company:

	Exhibit
	Number	Description of Document

	31(a)	Certification of Thomas M. Patrick on behalf of North Shore Gas pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	31(b)	Certification of Thomas A. Nardi on behalf of North Shore Gas pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

	32(a)	Certification of Thomas M. Patrick on behalf of the Company, Peoples Gas and North Shore Gas pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

	32(b)	Certification of Thomas A. Nardi on behalf of the Company, Peoples Gas and North Shore Gas pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES


Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		Peoples Energy Corporation
		(Registrant)


May 10, 2006		By: /s/ THOMAS A. NARDI
(Date)		Thomas A. Nardi
		Executive Vice President and Chief Financial Officer

		(Same as above)
		Principal Financial Officer



Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		The Peoples Gas Light and Coke Company
		(Registrant)


May 10, 2006		By: /s/ THOMAS A. NARDI
(Date)		Thomas. A. Nardi
		Executive Vice President and Chief Financial Officer

		(Same as above)
		Principal Financial Officer



Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		North Shore Gas Company
		(Registrant)


May 10, 2006		By: /s/ THOMAS A. NARDI
(Date)		Thomas. A. Nardi
		Executive Vice President and Chief Financial Officer

		(Same as above)
		Principal Financial Officer

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Positive
Negative
Uncertain
Constraining
Legalese
Litigious
Readability	H.S. freshman Avg

Peoples Gas Light & Coke Inactive 10-Q2006 Q2 Quarterly report

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