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 June 30, 2004
For the Quarterly Period Ended December 31, 2004
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 an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).
Peoples Energy Corporation		Yes [x] No [ ]
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 (July 31, 2004):
Indicate the number of shares outstanding of each of the issuer's classes of common stock as of the latest practicable date (January 31, 2005):
Peoples Energy Corporation	Common Stock, no par value, 37,~~630~~914,~~892~~479 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~~ITEM 1. Financial Statements

Peoples Energy Corporation
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
	Three Months Ended		~~Nine Months Ended~~
	June 30,		June 30,
	December 31,
	2004	2003	~~2004~~	~~2003~~
(In Thousands, Except Per-Share Amounts)
Revenues	$ ~~401~~737,~~137~~411	$ ~~398~~604,~~147~~884	~~$ 1,933,042~~	~~$ 1,851,092~~
Operating Expenses:
Cost of energy sold	~~247~~508,~~146~~892	~~238~~380,~~092~~560	~~1,260,197~~	~~1,165,829~~
Operation and maintenance	83,739	84,058	270,106	261,570
Operation and maintenance, excluding
Depreciation, depletion and amortization	29,749	27,658	89,641	83,135
restructuring charge	88,325	87,310
Taxes, other than income taxes	29,761	27,729	148,508	144,835
Depreciation, depletion and amortization	30,344	28,921
Gains on property sales	(1,476)	-	(1,476)	-
Taxes, other than income taxes	53,046	47,696
Total Operating Expenses	388,919	377,537	1,766,976	1,655,369
Losses on property sales	72	-
Equity investment income (loss)	4,866	3,811	6,110	3,545
Restructuring charge	11,207	-
Operating Income	17,084	24,421	172,176	199,268
Total Operating Expenses	691,886	544,487
Other income and expense - net	918	661	2,299	1,751
Equity investment income (loss)	888	(245)
Interest expense	11,758	12,004	36,420	37,376
Operating Income	46,413	60,152
Income Before Income Taxes	6,244	13,078	138,055	163,643
Other income and expense - net	913	605
Income tax expense	621	5,065	46,178	61,148
Interest expense	12,510	12,281
Net Income	$ 5,623	$ 8,013	$ 91,877	$ 102,495
Income Before Income Taxes	34,816	48,476
Average Shares of Common Stock Outstanding
Income tax expense	12,340	17,125
Basic	37,549	36,265	37,212	35,867
Net Income	$ 22,476	$ 31,351
Diluted	37,722	36,435	37,393	35,999
Average Shares of Common Stock Outstanding
Earnings Per Share of Common Stock
Basic	37,816	36,814
Basic	$ 0.15	$ 0.22	$ 2.47	$ 2.86
Diluted	37,993	36,976
Diluted	$ 0.15	$ 0.22	$ 2.46	$ 2.85
Earnings Per Share of Common Stock
Dividends Declared Per Share	$ 0.54	$ 0.53	$ 1.61	$ 1.58
Basic	$ 0.59	$ 0.85
The Notes to Consolidated Financial Statements are an integral part of these statements.
Diluted	$ 0.59	$ 0.85
Dividends Declared Per Share	$ 0.54	$ 0.53
The Notes to Consolidated Financial Statements are an integral part of these statements.

- 2 -

Peoples Energy Corporation
CONSOLIDATED BALANCE SHEETS
(Unaudited)
	June 30,	September 30,	June 30,
	December 31,	September 30,	December 31,
(In Thousands)	2004	~~2003~~2004	2003
ASSETS
CAPITAL INVESTMENTS:
Property, plant and equipment
Utility plant	$ 2,~~600~~628,~~526~~054	$ 2,~~552~~615,~~464~~002	$ 2,~~532~~575,~~654~~328
Oil and gas	~~473~~501,~~067~~225	~~391~~488,~~135~~275	~~372~~442,~~238~~635
Other	2021,~~450~~083	1821,~~357~~010	1719,~~092~~033
Total property, plant and equipment	3,~~094~~150,~~043~~362	23,~~961~~124,~~956~~287	23,~~921~~036,~~984~~996
Less - Accumulated depreciation, depletion and amortization	1,~~201~~247,~~012~~190	1,~~123~~220,~~783~~102	1,~~103~~148,~~946~~780
Net property, plant and equipment	1,~~893~~903,~~031~~172	1,~~838~~904,~~173~~185	1,~~818~~888,~~038~~216
Investment in equity investees	~~130~~124,~~950~~633	~~142~~135,~~142~~819	~~137~~132,~~216~~005
Other investments	2324,~~847~~288	2123,~~768~~921	2021,~~112~~843
Total Capital Investments - Net	2,~~047~~052,~~828~~093	2,~~002~~063,~~083~~925	12,~~975~~042,~~366~~064
CURRENT ASSETS:
Cash and cash equivalents	7516,~~900~~502	137,~~648~~228	522,~~007~~626
Deposits with broker or trustee	1518,~~493~~148	1913,~~361~~891	1824,~~368~~660
Advances to joint venture partnerships	50	-	-
Receivables -
Customers, net of reserve for uncollectible accounts
of $31,267, $33,185, and $33,318, respectively	267,880	212,901	313,455
of $26,177, $29,138, and $29,400, respectively	480,371	190,379	403,377
Other	3117,~~447~~046	955,~~036~~769	2445,~~549~~609
Materials and supplies, at average cost	1011,~~083~~691	910,~~754~~444	910,~~841~~141
Gas in storage	98178,~~010~~251	~~165~~191,~~583~~052	78173,~~430~~352
Gas costs recoverable through rate adjustments	214,~~878~~391	2220,~~665~~612	329,~~319~~505
Regulatory assets of utility subsidiaries	2648,~~307~~116	2737,~~279~~076	421,~~914~~046
Other	1425,~~701~~979	925,~~917~~910	811,~~387~~781
Total Current Assets	~~561~~800,~~699~~545	~~490~~552,~~144~~361	~~542~~702,~~270~~097
OTHER ASSETS:
Prepaid pension costs	~~184~~169,~~059~~176	~~186~~176,~~961~~329	~~189~~187,~~763~~783
Noncurrent regulatory assets of utility subsidiaries	~~187~~237,~~261~~288	~~181~~228,~~223~~186	~~187~~181,~~204~~861
Deferred charges and other	7461,~~143~~190	6873,~~127~~989	4170,~~639~~924
Total Other Assets	~~445~~467,~~463~~654	~~436~~478,~~311~~504	~~418~~440,~~606~~568
Total Assets	$ 3,~~054~~320,~~990~~292	$ 23,~~928~~094,~~538~~790	$ 23,~~936~~184,~~242~~729
The Notes to Consolidated Financial Statements are an integral part of these statements.

- 3 -

Peoples Energy Corporation
CONSOLIDATED BALANCE SHEETS
(Unaudited)
	June 30,	September 30,	June 30,
	December 31,	September 30,	December 31,
(In Thousands, Except Shares)	2004	~~2003~~2004	2003
CAPITALIZATION AND LIABILITIES
CAPITALIZATION:
Common Stockholders' Equity:
Common stock, no par value -
Authorized 60,000,000 shares
Issued 37,826,054, 36,936,068 and
Issued 38,110,647, 37,976,994 and
36,863,602 shares, respectively	$ 381,864	$ 346,545	$ 343,430
37,231,180 shares, respectively	$ 392,911	$ 387,845	$ 357,626
Treasury stock - 243,100, 246,100 and 246,100 shares, respectively	(6,677)	(6,760)	(6,760)
Treasury stock - 243,100, 243,100 and 246,100 shares, respectively	(6,677)	(6,677)	(6,760)
Retained earnings	~~581~~556,~~756~~456	~~549~~554,~~969~~222	~~567~~561,~~976~~806
Accumulated other comprehensive loss	(6658,~~390~~897)	(4165,~~755~~307)	(2850,~~988~~088)
Total Common Stockholders' Equity	~~890~~883,~~553~~793	~~847~~870,~~999~~083	~~875~~862,~~658~~584
Long-term debt, exclusive of maturities due within one
year and adjustable-rate bonds classified as short-term debt	~~846~~897,~~330~~207	~~744~~897,~~345~~377	~~744~~846,~~345~~330
Total Capitalization	1,~~736~~781,~~883~~000	1,~~592~~767,~~344~~460	1,~~620~~708,~~003~~914
CURRENT LIABILITIES:
Commercial paper	-172,049	55,~~949~~625	-192,921
Adjustable-rate bonds classified as short-term debt	~~50,000~~-	~~152,000~~-	~~152~~50,000
Accounts payable	~~187~~210,~~356~~943	~~148~~144,~~769~~709	~~184~~173,~~409~~352
Accrued taxes	5154,~~726~~372	4526,~~730~~056	7677,~~067~~150
Other accrued liabilities	~~134~~145,~~328~~159	98164,~~870~~039	9791,~~846~~607
Regulatory liabilities of utility subsidiaries	~~17,502~~-	-33,575	2418,~~246~~430
Dividends payable	20,~~293~~448	1920,~~446~~367	19,~~407~~513
Customer deposits	2830,~~619~~128	2627,~~369~~833	2330,~~833~~890
Customer credit balances	2660,~~820~~879	4852,~~402~~576	2561,~~089~~390
Gas costs refundable through rate adjustments	291,044	~~5,039~~29	54,~~967~~113
Temporary LIFO liquidation credit	50,539	-	47,916
Accrued interest	15,489	11,307	14,709
Total Current Liabilities	567,212	600,574	656,780
Temporary LIFO liquidation credit	4,919	-	10,260
Total Current Liabilities	715,430	536,116	744,335
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes	~~401~~431,~~829~~715	~~407~~423,~~835~~356	~~387~~395,~~176~~823
Investment tax credits	26,~~818~~373	2726,~~642~~597	27,~~741~~368
Environmental, pension and other	~~322~~365,~~248~~774	~~300~~341,~~143~~261	~~244~~308,~~542~~289
Total Deferred Credits and Other Liabilities	~~750~~823,~~895~~862	~~735~~791,~~620~~214	~~659~~731,~~459~~480
Total Capitalization and Liabilities	$ 3,~~054~~320,~~990~~292	$ 23,~~928~~094,~~538~~790	$ 23,~~936~~184,~~242~~729
The Notes to Consolidated Financial Statements are an integral part of these statements.

- 4 -

Peoples Energy Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
	Nine Months Ended
	Three Months Ended
	June 30,
	December 31,
(In Thousands)	2004	2003
Operating Activities:
Net income	$ 9122,~~877~~476	$ ~~102~~31,~~495~~351
Adjustments to reconcile net income to cash provided by operations:
Depreciation, depletion and amortization	9331,~~765~~742	8630,~~816~~304
Deferred income taxes and investment tax credits - net	95,~~106~~261	14(6,~~645~~941)
Change in environmental, pension and other liabilities	627,~~475~~387	312,~~008~~801
Change in undistributed earnings from equity investments	~~(383)~~641	108,~~497~~992
Other changes in noncurrent operating activities	~~(24~~17,~~328)~~538	(466,~~952~~427)
Changes in current assets and liabilities:
Receivables - net	(77251,~~390~~268)	(~~114~~227,~~424~~049)
Gas in storage	6712,~~573~~801	11(7,~~138~~769)
Gas costs recoverable/refundable through rate adjustments	(417,~~223)~~236	~~(16~~12,~~162)~~234
Net regulatory assets/liabilities of utility subsidiaries	18(44,~~474~~616)	724,~~630~~663
Payables and other accrued liabilities	49,132	98,083
Accounts payable	65,592	24,420
Accrued taxes	5,996	28,784
Accrued other liabilities	(18,880)	(6,825)
Temporary LIFO liquidation credit	50,539	47,916
Accrued interest	4,182	3,710
Other	(24,446)	(23,799)
Accrued taxes	28,316	31,420
Net Cash Provided by Operating Activities	262,167	237,675
Temporary LIFO liquidation credit	4,919	10,260
Other	9,281	15,257
Net Cash (Used in) Operating Activities	(67,392)	(59,599)
Investing Activities:
Capital spending	(~~144~~31,~~855~~275)	(~~133~~70,~~326~~518)
Return of capital investments	1110,~~576~~545	71,~~134~~145
Decrease in deposits with broker or trustee	3,868	10,277
Net change in advances to joint venture partnerships	(50)	-
Proceeds from the sale of assets	1,250	-
Temporary investments and other	(4,319)	(5,205)
Other	(73)	(1,721)
Net Cash (Used in) Investing Activities	(25,099)	(74,578)
Net Cash Used in Investing Activities	(128,234)	(117,636)
Financing Activities:
Proceeds from (payment of) overdrafts	14,045	(21,632)
Proceeds from overdrafts	642	163
Retirement of commercial paper	(55,949)	(85,871)
Issuance of commercial paper	116,424	136,972
Retirement of short-term debt	~~(102,000)~~-	(~~140~~102,000)
Issuance of long-term debt	~~177,000~~-	~~265~~172,~~000~~900
Retirement of long-term debt	~~(75,015)~~-	(7476,~~669~~515)
Long-term debt issuance/retirement costs	(5,954)	(2,037)
Issuance of common/treasury stock	5,066	11,081
Issuance of common/treasury stock	35,402	41,731
Dividends paid on common stock	(20,367)	(19,446)
Dividends paid on common stock	(59,210)	(55,987)
Net Cash Provided by Financing Activities	101,765	123,155
Net Cash Used in Financing Activities	(71,681)	(73,465)
Net Increase in Cash and Cash Equivalents	9,274	(11,022)
Net Increase in Cash and Cash Equivalents	62,252	46,574
Cash and Cash Equivalents at Beginning of Period	7,228	13,648
Cash and Cash Equivalents at Beginning of Period	13,648	5,433
Cash and Cash Equivalents at End of Period	$ 16,502	$ 2,626
Cash and Cash Equivalents at End of Period	$ 75,900	$ 52,007
Supplemental Information:
Income taxes paid	$ 12,149	$ 10,973
Income taxes paid, net of refunds	$ -	$ 2,872
Interest paid	$ 317,~~281~~808	$ 318,~~545~~128
The Notes to Consolidated Financial Statements are an integral part of these statements.

- 5 -

The Peoples Gas Light and Coke Company
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
	Three Months Ended		~~Nine Months Ended~~
	June 30,		June 30,
	December 31,
	2004	2003	~~2004~~	~~2003~~
(In Thousands)
Revenues	$ ~~202~~438,~~279~~852	$ ~~228~~375,~~429~~637	~~$ 1,150,188~~	~~$ 1,159,241~~
Operating Expenses:
Gas costs	98272,~~929~~433	~~115~~213,~~317~~949	~~668,426~~	~~645,474~~
Operation and maintenance	58,528	61,322	197,235	196,191
Operation and maintenance, excluding
Depreciation and amortization	15,694	15,136	46,055	44,882
restructuring charge	66,555	63,778
Taxes, other than income taxes	23,237	20,920	124,716	121,224
Depreciation and amortization	15,276	14,817
Gains on property sales	(111)	-	(111)	-
Taxes, other than income taxes	45,147	40,595
Total Operating Expenses	196,277	212,695	1,036,321	1,007,771
Losses on property sales	122	-
Operating Income	6,002	15,734	113,867	151,470
Restructuring charge	6,955	-
Other income and expense - net	767	500	2,022	1,647
Total Operating Expenses	406,488	333,139
Interest expense	4,934	5,311	15,601	17,115
Operating Income	32,364	42,498
Income Before Income Taxes	1,835	10,923	100,288	136,002
Other income and expense - net	797	521
Income tax expense (credit)	(618)	4,370	36,774	51,458
Interest expense	5,942	5,505
Net Income	$ 2,453	$ 6,553	$ 63,514	$ 84,544
Income Before Income Taxes	27,219	37,514
The Notes to Consolidated Financial Statements are an integral part of these statements.
Income tax expense	9,950	14,326
Net Income	$ 17,269	$ 23,188
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)
	June 30,	September 30,	June 30,
	December 31,	September 30,	December 31,
	2004	~~2003~~2004	2003
(In Thousands)
ASSETS
CAPITAL INVESTMENTS:
Property, plant and equipment	$ 2,~~246~~270,~~808~~017	$ 2,~~203~~258,~~842~~516	$ 2,~~185~~225,~~851~~071
Less - Accumulated depreciation and amortization	~~894~~914,~~146~~319	~~858~~901,~~838~~938	~~850~~870,~~595~~240
Net property, plant and equipment	1,~~352~~355,~~662~~698	1,~~345~~356,~~004~~578	1,~~335~~354,~~256~~831
Other investments	21,~~012~~788	1,~~969~~776	21,~~381~~984
Total Capital Investments - Net	1,~~354~~357,~~674~~486	1,~~346~~358,~~973~~354	1,~~337~~356,~~637~~815
CURRENT ASSETS:
Cash and cash equivalents	~~45,960~~6	-6	~~8,620~~-
Deposits with broker or trustee	~~772~~-	~~11,080~~-	1011,~~158~~320
Receivables -
Customers, net of reserve for uncollectible accounts
of $27,423, $29,207 and $29,454, respectively	163,369	131,248	206,540
of $23,285, $26,536 and $25,759, respectively	299,047	109,506	261,398
Intercompany receivables	297,~~447~~096	2733,~~094~~388	2715,~~452~~877
Other	~~3,417~~39	21,~~971~~193	~~4,082~~80
Materials and supplies, at average cost	89,~~874~~489	89,~~404~~169	8,~~571~~754
Gas in storage, at last-in, first-out cost	4098,~~196~~028	~~111~~107,~~992~~275	36108,~~847~~626
Gas costs recoverable through rate adjustments	183,~~082~~822	2217,~~341~~950	329,~~308~~493
Regulatory assets	2442,~~372~~347	2334,~~223~~522	319,~~916~~622
Other	47,~~238~~565	36,~~456~~865	23,~~517~~019
Total Current Assets	~~338~~467,~~727~~439	~~341~~319,~~809~~874	~~341~~438,~~011~~189
OTHER ASSETS:
Prepaid pension costs	~~176~~167,~~122~~185	~~178~~175,~~003~~279	~~189~~177,~~764~~403
Noncurrent regulatory assets	~~149~~183,~~363~~431	~~141~~180,~~987~~690	~~148~~143,~~113~~592
Deferred charges and other	4837,~~546~~432	4752,~~073~~161	2944,~~569~~598
Total Other Assets	~~374~~388,~~031~~048	~~367~~408,~~063~~130	~~367~~365,~~446~~593
Total Assets	$ 2,~~067~~212,~~432~~973	$ 2,~~055~~086,~~845~~358	$ 2,~~046~~160,~~094~~597
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)
	June 30,	September 30,	June 30,
	December 31,	September 30,	December 31,
	2004	~~2003~~2004	2003
(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	~~499~~474,~~830~~797	~~482~~471,~~228~~293	~~503~~487,~~014~~216
Accumulated other comprehensive loss	(21,019)	(21,052)	(911)
Accumulated other comprehensive income (loss)	(19,265)	(7,080)	(21,041)
Total Common Stockholder's Equity	~~644~~620,~~118~~839	~~626~~629,~~483~~520	~~667~~631,~~410~~482
Long-term debt, exclusive of maturities due within one
year and adjustable-rate bonds classified as short-term debt	452,000	350,000	350,000
year and long-term maturities classified as short-term debt	502,000	502,000	452,000
Total Capitalization	1,~~096~~122,~~118~~839	~~976~~1,~~483~~131,520	1,~~017~~083,~~410~~482
CURRENT LIABILITIES:
Commercial paper	-114,964	5531,~~949~~000	-115,944
Other short-term debt	50,000	176,400	152,000
Adjustable-rate bonds classified as short-term debt	-	-	50,000
Accounts payable	91105,~~457~~622	8370,~~409~~222	8993,~~427~~770
Accrued taxes	5852,~~209~~890	2922,~~421~~544	7064,~~888~~484
Other accrued liabilities	5469,~~161~~700	4375,~~892~~971	3845,~~550~~269
Intercompany payables	1723,~~805~~449	4536,~~720~~676	2511,~~267~~679
Regulatory liabilities	~~14,758~~-	-27,923	2016,~~908~~045
Dividends payable	13,~~200~~900	-	1718,~~400~~200
Customer deposits	2627,~~546~~768	2425,~~470~~692	2228,~~237~~664
Customer credit balances	2150,~~741~~242	3943,~~728~~831	2150,~~587~~805
Gas costs refundable through rate adjustments	29	2829	~~2,285~~916
Temporary LIFO liquidation credit	364,~~227~~031	-	329,~~386~~459
Total Current Liabilities	~~384~~462,~~133~~595	~~499~~333,~~017~~888	~~492~~505,~~935~~235
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes	~~355~~366,~~862~~869	~~355~~376,~~160~~745	~~353~~347,~~892~~570
Investment tax credits	23,~~892~~534	2423,~~634~~735	24,~~718~~386
Environmental, pension and other	~~207~~237,~~427~~136	~~200~~220,~~551~~470	~~157~~199,~~139~~924
Total Deferred Credits and Other Liabilities	~~587~~627,~~181~~539	~~580~~620,~~345~~950	~~535~~571,~~749~~880
Total Capitalization and Liabilities	$ 2,~~067~~212,~~432~~973	$ 2,~~055~~086,~~845~~358	$ 2,~~046~~160,~~094~~597
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)
	Nine Months Ended
	Three Months Ended
	June 30,
	December 31,
	2004	2003
(In Thousands)
Operating Activities:
Net income	$ 6317,~~514~~269	$ 8423,~~544~~188
Adjustments to reconcile net income to cash provided by operations:
Depreciation and amortization	4916,~~607~~466	4816,~~160~~005
Deferred income taxes and investment tax credits - net	(1,~~558~~663)	4(8,~~516~~361)
Change in environmental, pension and other liabilities	8,~~394~~250	~~10,222~~(104)
Other changes in noncurrent operating activities	(18,~~538)~~154	~~(20~~7,~~288)~~082
Changes in current assets and liabilities:
Receivables - net	(34162,~~920~~095)	(85116,~~289~~042)
Gas in storage	719,~~796~~247	283,~~517~~366
Gas costs recoverable/refundable through rate adjustments	414,~~260~~128	~~(22~~13,~~993)~~736
Net regulatory assets/liabilities	13(35,~~609~~748)	919,~~976~~646
Payables and other accrued liabilities	(22,327)	50,957
Accounts payable	33,777	(24,909)
Accrued taxes	28,788	33,078
Other accrued liabilities	(19,193)	(4,725)
Temporary LIFO liquidation credit	36,227	32,386
Accrued interest	(305)	(1,072)
Other	(17,166)	(17,329)
Accrued taxes	30,347	35,063
Net Cash Provided by Operating Activities	198,686	156,457
Temporary LIFO liquidation credit	4,031	9,459
Other	7,468	15,357
Net Cash (Used in) Operating Activities	(69,867)	(12,311)
Investing Activities:
Capital spending	(4615,~~249~~719)	(4615,~~555~~440)
Decrease in deposits with broker or trustee	10,308	11,644
Decrease (increase) in deposits with broker or trustee	-	(240)
Other	~~(81)~~-	-155
Net Cash Used in Investing Activities	(36,022)	(34,911)
Net Cash (Used in) Investing Activities	(15,719)	(15,525)
Financing Activities:
Proceeds from (payment of) overdrafts	21,~~168~~623	(162,~~277~~158)
Retirement of commercial paper	(55,949)	(82,671)
Issuance of commercial paper	83,963	59,995
Retirement of short-term debt	~~(126,400)~~-	(~~140~~126,~~475~~400)
Issuance of long-term debt	~~177,000~~-	~~225~~172,~~000~~899
Retirement of long-term debt	~~(75,000)~~-	(5076,~~000~~500)
Long-term debt issuance/retirement costs	(5,923)	(1,391)
Net Cash Provided by Financing Activities	85,586	27,836
Dividends paid on common stock	(32,600)	(47,112)
Net Increase (Decrease) in Cash and Cash Equivalents	-	-
Net Cash Used in Financing Activities	(116,704)	(112,926)
Cash and Cash Equivalents at Beginning of Period	6	-
Net Increase in Cash and Cash Equivalents	45,960	8,620
Cash and Cash Equivalents at End of Period	$ 6	$ -
Cash and Cash Equivalents at Beginning of Period	-	-
Supplemental information:
Cash and Cash Equivalents at End of Period	$ 45,960	$ 8,620
Income taxes paid, net of refunds	$ -	$ (1,271)
Supplemental Information:
Interest paid, net of amounts capitalized	$ 5,842	$ 6,387
Income taxes paid	$ 5,932	$ 3,771
Interest paid	$ 15,923	$ 16,194
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	~~Three Months Ended~~			~~Nine Months Ended~~
		June 30,			June 30,
	December 31,
	2004	~~2004~~	2003	~~2003~~	~~2004~~	~~2003~~
(In Thousands)
Revenues	$ 80,096	~~$ 33,678~~	$ 63,863	~~$ 40,313~~	~~$ 198,825~~	~~$ 208,526~~
Operating Expenses:
Gas costs	57,171	~~19,707~~	41,037	~~24,871~~	~~131,330~~	~~137,917~~
Operation and maintenance		8,300		8,132	26,637	24,048
Operation and maintenance, excluding
Depreciation		1,784		1,769	5,386	5,284
restructuring charge	8,478		8,799
Taxes, other than income taxes		2,840		2,952	13,735	14,266
Depreciation	1,716		1,692
Gains on property sales		(1,130)		-	(1,130)	-
Taxes, other than income taxes	4,856		4,334
Total Operating Expenses		31,501		37,724	175,958	181,515
Restructuring charge	521		-
Operating Income		2,177		2,589	22,867	27,011
Total Operating Expenses	72,742		55,862
Other income and expense - net		82		77	130	(85)
Operating Income	7,354		8,001
Interest expense		911		825	2,776	2,688
Other income and expense - net	13		49
Income Before Income Taxes		1,348		1,841	20,221	24,238
Interest expense	939		926
Income tax expense		427		982	7,489	9,379
Income Before Income Taxes	6,428		7,124
Net Income		$ 921		$ 859	$ 12,732	$ 14,859
Income tax expense	2,335		2,673
The Notes to Consolidated Financial Statements are an integral part of these statements.
Net Income	$ 4,093		$ 4,451
The Notes to Consolidated Financial Statements are an integral part of these statements.

- 10 -

North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
(Unaudited)
	June 30,	September 30,	June 30,
	December 31,	September 30,	December 31,
	2004	~~2003~~2004	2003
(In Thousands)
ASSETS
CAPITAL INVESTMENTS:
Property, plant and equipment	$ ~~353~~358,~~718~~037	$ ~~348~~356,~~622~~486	$ ~~346~~350,~~803~~257
Less - Accumulated depreciation	~~140~~142,~~625~~888	~~136~~141,~~299~~346	~~135~~137,~~809~~665
Net property, plant and equipment	~~213~~215,~~093~~149	~~212~~215,~~323~~140	~~210~~212,~~994~~592
CURRENT ASSETS:
Cash and cash equivalents	~~20,747~~2	~~12,108~~2	~~29,839~~-
Deposits with broker or trustee	~~813~~-	~~2,766~~-	2,~~274~~225
Receivables -
Customers, net of reserve for uncollectible
accounts of $1,024, $1,012 and $1,107, respectively	29,221	16,090	25,829
accounts of $978, $943 and $904, respectively	47,137	12,157	38,290
Intercompany receivables	42,~~529~~385	120,~~466~~629	2,~~668~~204
Other	~~1,622~~-	~~800~~1,335	~~762~~(25)
Materials and supplies, at average cost	12,~~209~~202	1,~~351~~275	1,~~270~~387
Gas in storage, at last-in, first-out cost	510,~~856~~909	914,~~442~~921	49,~~481~~166
Gas costs recoverable through rate adjustments	~~3,796~~569	~~323~~2,662	1112
Regulatory assets	15,~~935~~769	42,~~055~~553	~~999~~1,424
Other	~~517~~1,439	~~202~~1,458	~~330~~207
Total Current Assets	70,~~245~~412	4856,~~603~~992	6854,~~463~~890
OTHER ASSETS:
Noncurrent regulatory assets	3753,~~898~~857	3947,~~236~~496	3938,~~091~~268
Deferred charges and other	32,~~208~~918	3,~~980~~358	23,~~775~~500
Total Other Assets	4156,~~106~~775	4350,~~216~~854	41,~~866~~768
Total Assets	$ ~~324~~342,~~444~~336	$ ~~304~~322,~~142~~986	$ ~~321~~309,~~323~~250
The Notes to Consolidated Financial Statements are an integral part of these statements.

- 11 -

North Shore Gas Company
CONSOLIDATED BALANCE SHEETS
(Unaudited)
	June 30,	September 30,	June 30,
	December 31,	September 30,	December 31,
	2004	~~2003~~2004	2003
(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	8481,~~813~~351	80,~~882~~258	8381,~~985~~932
Accumulated other comprehensive loss	(2,260)	(2,278)	(224)
Accumulated other comprehensive income (loss)	(2,038)	(1,336)	(2,272)
Total Common Stockholder's Equity	~~107~~104,~~310~~070	103,~~361~~679	~~108~~104,~~518~~417
Long-term debt, exclusive of maturities due within one year	69,~~330~~250	69,~~345~~330	69,~~345~~330
Total Capitalization	~~176~~173,~~640~~320	~~172~~173,~~706~~009	~~177~~173,~~863~~747
CURRENT LIABILITIES:
Accounts payable	15,760	13,202	14,918
Commercial paper	-	-	1,645
Accrued taxes	6,500	315	8,885
Other short-term debt	7,815	3,810	-
Other accrued liabilities	4,431	5,143	4,200
Accounts payable	20,506	12,697	13,852
Intercompany payables	4,252	10,060	1,825
Accrued taxes	4,817	1,679	3,600
Regulatory liabilities	2,744	-	3,338
Other accrued liabilities	4,764	5,711	4,148
Dividends payable	2,500	-	3,700
Intercompany payables	4,480	6,220	2,232
Customer deposits	2,073	1,899	1,596
Regulatory liabilities	-	5,652	2,385
Customer credit balances	4,186	6,963	3,441
Dividends payable	3,000	-	3,400
Gas costs refundable through rate adjustments	-	5,011	3,682
Customer deposits	2,360	2,141	2,226
Temporary LIFO liquidation credit	14,312	-	15,529
Customer credit balances	7,591	7,130	9,346
Total Current Liabilities	56,758	42,593	61,114
Gas costs refundable through rate adjustments	1,014	-	3,197
Temporary LIFO liquidation credit	888	-	801
Accrued interest	446	1,270	443
Total Current Liabilities	57,681	46,310	47,275
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes	3236,~~275~~094	3135,~~126~~652	30,~~063~~604
Investment tax credits	2,~~926~~840	32,~~008~~862	32,~~023~~981
Environmental, pension and other	5572,~~845~~401	5465,~~709~~153	4954,~~260~~643
Total Deferred Credits and Other Liabilities	91111,~~046~~335	88103,~~843~~667	8288,~~346~~228
Total Capitalization and Liabilities	$ ~~324~~342,~~444~~336	$ ~~304~~322,~~142~~986	$ ~~321~~309,~~323~~250
The Notes to Consolidated Financial Statements are an integral part of these statements.

- 12 -

North Shore Gas Company
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
	Nine Months Ended
	Three Months Ended
	June 30,
	December 31,
	2004	2003
(In Thousands)
Operating Activities:
Net income	$ 12,732	$ 14,859
Net Income	$ 4,093	$ 4,451
Adjustments to reconcile net income to cash provided by operations:
Depreciation	51,~~958~~924	51,~~682~~885
Deferred income taxes and investment tax credits - net	1,~~874~~008	~~1,967~~(280)
Change in environmental, pension and other liabilities	~~329~~6,660	~~9,597~~(335)
Other changes in noncurrent operating activities	~~973~~(6,623)	~~(10~~1,~~221)~~453
Changes in current assets and liabilities:
Receivables - net	(1715,~~016~~400)	(922,~~502~~112)
Gas in storage	34,~~586~~012	~~5,048~~276
Gas costs recoverable/refundable through rate adjustments	(83,~~484)~~107	6(1,~~831~~503)
Net regulatory assets/liabilities	4(8,~~864~~868)	(25,~~347)~~016
Payables and other accrued liabilities	(4,230)	3,976
Accounts payable	7,575	(7,412)
Accrued taxes	6,185	6,684
Accrued other liabilities	(2,687)	281
Temporary LIFO liquidation credit	14,312	15,529
Accrued interest	(824)	(834)
Other	(2,777)	(5,576)
Accrued taxes	3,138	3,285
Net Cash Provided by Operating Activities	18,306	42,527
Temporary LIFO liquidation credit	888	801
Other	(227)	2,670
Net Cash (Used in) Operating Activities	(2,224)	(12,358)
Investing Activities:
Capital spending	(61,~~781~~943)	(52,~~700~~094)
Decrease in deposits with broker or trustee	1,953	2,788
Decrease (increase) in deposits with broker or trustee	-	541
Proceeds from the sale of assets	1,250	-
Other	9	(60)
Other	(42)	-
Net Cash (Used in) Investing Activities	(1,934)	(1,613)
Net Cash Used in Investing Activities	(3,620)	(2,912)
Financing Activities:
Proceeds from (payment of) overdrafts	~~268~~233	~~(2,997)~~233
Issuance of short-term debt	-	(17,210)
Issuance of commercial paper	-	1,645
Issuance of long-term debt	-	40,000
Issuance of short-term debt	4,005	-
Retirement of long-term debt	(1580)	(~~24,669~~15)
Dividends paid on common stock	(6,300)	(4,900)
Net Cash Provided by Financing Activities	4,158	1,863
Net Cash Used in Financing Activities	(6,047)	(9,776)
Net Increase (Decrease) in Cash and Cash Equivalents	-	(12,108)
Net Increase in Cash and Cash Equivalents	8,639	29,839
Cash and Cash Equivalents at Beginning of Period	2	12,108
Cash and Cash Equivalents at Beginning of Period	12,108	-
Cash and Cash Equivalents at End of Period	$ 2	$ -
Cash and Cash Equivalents at End of Period	$ 20,747	$ 29,839
Supplemental information:
Supplemental Information:
Income taxes paid, net of refunds	$ -	$ 9
Income taxes paid	$ 254	$ 302
Interest paid, net of amounts capitalized	$ 1,784	$ 1,712
Interest paid	$ 3,436	$ 3,743
The Notes to Consolidated Financial Statements are an integral part of these statements.

- 13 -

Notes to Consolidated Financial Statements (Unaudited)

1.: BASIS OF PRESENTATION

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.

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 for the Company, Peoples Gas and North Shore Gas for the fiscal year ended September 30, ~~2003~~2004. 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 accruals 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.

2.: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Gas in Storage

Peoples Gas' and North Shore Gas' ~~inventories~~price ~~are~~storage ~~carried~~injections at ~~cost~~the onfiscal-year aaverage ~~last-in,~~of ~~first-out~~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 Retail Energy Services and Midstream Services segments account for gas in inventory using the average cost method.

Stock Compensation Plans

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

As allowed under Statement of Financial Accounting Standards (SFAS) No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of Financial Accounting Standards Board (FASB) Statement No. 123," the Company has chosen to continue accounting for stock-based compensation using the intrinsic value method under Accounting Principles Board Opinion No. 25. Therefore, no compensation cost has been recognized for nonqualified stock options (under the ~~superceded~~superseded LTIC Plan and the Directors Stock and Option Plan (DSOP)) and shares issued under the Employee Stock Purchase Plan (ESPP). No options were granted in the ~~nine~~three-month ~~period~~periods ended ~~June~~December 3031, 2004. ~~There~~and ~~were 426,900 options granted in the nine-month period ended June 30,~~ 2003. There were 135,~~244~~924 shares and 126,~~926~~307 shares sold through the ESPP in the ~~nine~~three-month periods ended ~~June~~December 3031, 2004 and 2003, respectively.

- 14 -

~~Stock-based~~Notes ~~employee compensation cost relative~~ to ~~stock~~Consolidated ~~appreciation~~Financial ~~rights,~~Statements restricted stock awards and directors fees paid in stock included in reported net income for the three- and nine-month periods ended June 30, 2004 totaled $0.1 million and $1.5 million, respectively. Stock-based employee compensation cost included in reported net income for the three- and nine-month periods ended June 30, 2003 totaled $2.9 million and $5.4 million, respectively. Had compensation cost for stock options and shares issued under the superceded LTIC Plan, DSOP and ESPP been determined consistent with SFAS No. 123, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:(Unaudited)

	Three Months Ended		Nine Months Ended
	June 30,		June 30,
(In Thousands, Except Per-Share Amounts)	2004	2003	2004	2003
Net income as reported	$ 5,623	$ 8,013	$ 91,877	$ 102,495
Pro forma effects of LTIC, DSOP and ESPP
compensation expense under SFAS No. 123	17	227	29	672
Pro forma net income	$ 5,606	$ 7,786	$ 91,848	$ 101,823
Earnings per average common share:
Basic	$ 0.15	$ 0.22	$ 2.47	$ 2.86
Diluted	0.15	0.22	2.46	2.85
Pro forma basic	0.15	0.22	2.47	2.84
Pro forma diluted	0.15	0.21	2.46	2.83

Stock-based employee compensation cost relative to stock appreciation rights, restricted stock awards and directors fees paid in stock included in reported net income for the three-month periods ended December 31, 2004 and 2003 totaled $1.4 million and $1.1 million. Had compensation cost for stock options and shares issued under the superseded LTIC Plan, DSOP and ESPP been determined consistent with SFAS No. 123, the effect on the Company's net income and earnings per share is shown in the following pro forma amounts:

For the three and nine months ended June 30, 2004, all outstanding options were included in the computation of diluted earnings per share. For the three and nine months ended June 30, 2003, options to purchase 470,300 shares and 580,900 shares of common stock, respectively, were excluded from the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares, and therefore were antidilutive.

	Three Months Ended
	December 31,
(In Thousands, Except Per-Share Amounts)	2004	2003
Net income as reported	$ 22,476	$ 31,351
Pro forma effects of LTIC, DSOP and ESPP
compensation expense under SFAS No. 123	16	11
Pro forma net income	$ 22,460	$ 31,340
Earnings per average common share:
Basic	$ 0.59	$ 0.85
Diluted	0.59	0.85
Pro forma basic	0.59	0.85
Pro forma diluted	0.59	0.85

~~The~~For ~~following~~the ~~table~~three ~~summarizes~~months ~~the~~ended ~~assumptions~~December ~~used~~31, to2004, ~~calculate~~all ~~the~~outstanding ~~fair~~options ~~value~~were ofincluded ~~each~~in ~~option~~the ~~grant.~~computation ~~The~~of ~~pro~~diluted ~~forma~~earnings ~~disclosures~~per ~~are~~share. ~~based~~For ~~upon~~the ~~recognizing~~three ~~expense~~months ~~over~~ended ~~the~~December ~~vesting~~31, ~~period~~2003, ofoptions ~~the~~to ~~options~~purchase 435,300 ~~the~~shares ~~longest~~ of ~~which~~common isstock 12were ~~months.~~excluded ~~There~~from ~~was~~the nocomputation ~~pro~~of ~~forma~~diluted ~~effect~~earnings ~~for~~per share because the ~~three~~option ~~months~~exercise ~~ended~~prices ~~June~~were ~~30,~~greater ~~2004~~than asthe ~~all~~average ~~outstanding~~market ~~options~~price ~~had~~of ~~vested~~the ~~prior~~common toshares, ~~that~~and ~~period.~~therefore were antidilutive.

	Three Months Ended		Nine Months Ended
	June 30,		June 30,
	2004	2003	2004	2003
Expected volatility	N/A	25.84%	25.90%	25.80%
Dividend yield	N/A	4.9%	5.1%	4.9%
Risk-free interest rate	N/A	2.09%	2.47%	2.13%
Expected lives (years)	N/A	3	3	3
Weighted average fair value	N/A	$ 3.34	$ 3.83	$ 3.37

The following table summarizes the assumptions used to calculate the fair value of each option grant. The pro forma disclosures are based upon recognizing expense over the vesting period of the options, the longest of which is 12 months. There was no pro forma effect for the three months ended December 31, 2004 as all outstanding options had vested prior to that period.

	Three Months Ended
	December 31,
	2004	2003
Expected volatility	N/A	25.90%
Dividend yield	N/A	5.0%
Risk-free interest rate	N/A	2.47%
Expected lives (years)	N/A	3
Weighted average fair value	N/A	$ 3.83

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 subsidiaries' operations and investments. To manage this market risk, the Company uses forward contracts and financial instruments, including commodity futures contracts, swaps and options. It is the policy of the Company to use these instruments solely for the purpose of managing risk and not for any speculative purpose. The Company accounts for derivative financial instruments pursuant to Statement of Financial Accounting Standard No. 133, "Accounting for Derivatives and Hedging Activities" (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 normal sales exception.

- 15 -

Notes to Consolidated Financial Statements (Unaudited)

Cash Flow Hedges.
The Company has positions in oil and gas reserves, natural gas, and transportation as part of its Oil and Gas Production, Midstream Services and Retail Energy Services businesses. The Company uses derivative financial instruments to protect against loss of value of future anticipated cash transactions caused by changes in the marketplace. The Company has also used derivative instruments to reduce interest rate risk associated with debt refinancing activities. In addition to periodically utilizing derivative instruments to hedge debt issuance, the Company uses interest rate derivatives to adjust the portfolio composition of floating debt. All these instruments are designated cash flow hedges, which allow for the unrealized changes in value during the life of the hedge to be recorded in other comprehensive income. Realized gains and losses from cash flow hedges are recorded in the income statement in the same month the related physical sales and purchases and interest expense is recorded.

15The following table summarizes selected information related to outstanding cash flow hedges included in the Consolidated Income Statement and Balance Sheet through December 31, 2004.

losses from cash flow hedges are recorded in the income statement in the same month the related physical sales and purchases and interest expense is recorded.

		Interest	Partnership
(In Thousands)	Commodities	Rate	Transactions	Total
Portion of after tax gains (losses) on hedging instruments
determined to be ineffective and included in net income
at December 31, 2004	$ (714)	$ -	$ -	$ (714)
Accumulated other comprehensive income (loss) after tax at
December 31, 2004	$ (31,800)	$ (546)	$ (5,044)	$ (37,390)
Portion of accumulated other comprehensive income (loss)
expected to be reclassified to earnings during the next
12 months based on prices at December 31, 2004	$ (17,859)	$ (66)	N/A	$ (17,925)
Maximum term	45 months	100 months

The ~~following~~maturities ~~table~~of ~~summarizes~~the ~~selected~~open ~~information related to~~ cash flow hedges ~~included~~are summarized in the ~~Consolidated~~table ~~Income~~below. ~~Statement~~All ~~and~~valuations ~~Balance~~are ~~Sheet~~based ~~through~~on ~~June~~New 30York Mercantile Exchange (NYMEX) closing prices at December 31, 2004.

		Interest	Partnership
Cash Flow Hedges
(In Thousands)	Commodities	Rate	Transactions	Total
Value by Year of Maturity
Portion of after tax gains (losses) on hedging instruments determined
		Less than	1 to 2	2 to 3	3 to 4
to be ineffective and included in net income during the
(In Thousands)	Total	1 Year	Years	Years	Years
nine months ended June 30, 2004	$ (422)	$ -	$ -	$ (422)
Loss at December 31, 2004	$(54,157)	$(29,940)	$(20,330)	$ (3,678)	$ (209)
Accumulated other comprehensive income (loss) after tax at
Loss at December 31, 2003	$(37,966)	$(23,267)	$(10,380)	$ (4,319)	$ -
June 30, 2004	$ (37,659)	$ (579)	$ (4,207)	$(42,445)
Portion of accumulated other comprehensive income (loss) expected
to be reclassified to earnings during the next 12 months based on
prices at June 30, 2004	$ (25,003)	$ (131)	N/A	$(25,134)
Maximum term	39 months	106 months

The maturities of the open cash flow hedges are summarized in the table below. All valuations are based on New York Mercantile Exchange (NYMEX) closing prices at June 30, 2004.
Cash Flow Hedges
Value by Year of Maturity
Less than 1 to 2 2 to 3 3 to 4
(In Thousands) Total 1 Year Years Years Years
Gain (loss) at June 30, 2004 $(64,040) $(39,351) $(21,046) $ (4,024) $ 381
Loss at June 30, 2003 $(41,773) $(22,567) $(11,786) $ (5,638) $ (1,782)
Mark-To-Market Derivative Instruments.
Peoples Gas and North Shore Gas use derivative instruments to manage each utility's cost of gas supply and mitigate price volatility. The regulated utilities' tariffs allow for full recovery from their customers of prudently incurred gas supply costs. Since the utilities do not bear the price risk associated with future gas supply purchases, any associated derivative activity will not qualify for hedge accounting and therefore must be marked-to-market. Statement of Financial Accounting Standard No. 71, "Accounting for the Effects of Certain Types of Regulation", allows for unrealized gains or losses on the derivative instruments to be recorded as regulatory assets or regulatory liabilities. Realized gains or losses are recorded as an adjustment to the cost of gas supply in the period that the underlying gas purchase transaction takes place. The costs and benefits of this activity are passed through to customers under the tariffs of Peoples Gas and North Shore Gas. The following table summarizes the market value of these outstanding instruments and other derivative instruments that do not qualify for hedge accounting and are recorded on a mark-to-market basis. All amounts are expected to be settled during the next 12 months.

	June 30,
(In Thousands)	2004	2003
Peoples Gas mark-to-market asset	$ 14,758	$ 20,859
North Shore Gas mark-to-market asset	2,744	3,329
Other mark-to-market asset (liability)	128	(100)
Total	$ 17,630	$ 24,088

- 16 -

16Notes to Consolidated Financial Statements (Unaudited)

	December 31,
(In Thousands)	2004	2003
Peoples Gas mark-to-market asset (liability)	$ (18,829)	$ 12,658
North Shore Gas mark-to-market asset (liability)	(3,989)	1,803
Other mark-to-market asset (liability)	39	87
Total	$ (22,779)	$ 14,548

Fair Value Hedges.
The Company uses financial hedges to protect the value of a small portion of Midstream Services' gas in storage and these are accounted for as fair value hedges. The change in value of these hedges along with the change in value of the inventory hedged are recorded in the income statement. In August 2004, the Company began using certain instruments to hedge debt issuance and adjust the portfolio composition of fixed-rate and floating rate debt. These derivative instruments are accounted for as fair value hedges. The change in value of these hedges along with the change in value of the debt hedged are recorded in the income statement.

Derivative Summary.
The following table summarizes the changes in valuation of all outstanding derivative contracts during the three months ended December 31, 2004 and 2003. 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 in income), thereby achieving the realization of prices contemplated by the underlying risk management strategies.

	Derivative Type
	Cash Flow		Fair Value
	Hedges		Hedges		Mark-to-Market
(In Thousands)	2004	2003	2004	2003	2004	2003
Gain (loss) on contracts outstanding at 10/01/2003	$(26,571)	$(35,029)	$ (65)	$ (3)	$ 13,691	$ 37,065
Value of contracts outstanding at October 1	$ (89,306)	$ (24,164)	$ 908	$ (65)	$ 27,678	$ (13,734)
Less: Gain (loss) on contracts realized or otherwise
settled during the period	(1719,~~291~~391)	(81,~~410)~~354	2(113)	95-	310,~~853~~353	19(6,~~639~~121)
Plus: Gain (loss) on new contracts entered into during the
period and outstanding at end of period	~~(24~~3,~~992)~~751	1(4,~~220~~846)	~~157~~75	~~102~~-	14(4,~~320~~449)	(26,~~937)~~456
Plus: Other gain (loss)	~~(29~~12,~~768)~~007	(167,~~374~~602)	38(72)	98(57)	(635,~~528~~655)	915,~~599~~705
Gain (loss) on contracts outstanding at 06/30/2004	$ (64,040)	$ (41,773)	$ 128	$ 102	$ 17,630	$ 24,088
Value of contracts outstanding at December 31	$ (54,157)	$ (37,966)	$ 1,024	$ (122)	$ (22,779)	$ 14,548

Revenue Recognition

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

	June 30,
	December 31,	September 30,	December 31,
(In Thousands)	2004	~~2003~~2004	2003
Peoples Gas	$ 15136,~~516~~351	$ 21,~~131~~632	$ 102,011
North Shore Gas	326,~~666~~151	35,~~799~~196	18,180
Peoples Energy Services	1544,~~701~~450	1113,~~190~~829	30,391
Consolidated Peoples Energy	$ 34206,~~883~~952	$ 3640,~~120~~657	$ 150,582

In- ~~Illinois,~~17 delivering, supplying, furnishing or selling gas for use or consumption and not for resale is subject to state and, in some cases, municipal taxes (revenue taxes). The Illinois Public Utility Act provides that the tax may be recovered from utility customers by adding an additional charge to customers' bills. These taxes are due only to the extent they are collected as cash receipts as opposed to amounts billed. As a result, most revenue taxes are reported on a gross basis. The billed amounts for the recovery of these taxes are included in revenues and an offsetting expense amount representing the expected cash payment of the taxes is included in taxes, other than income taxes on the income statement. Revenue tax amounts included in utility revenues are as follows:-

Three Months Ended Nine Months Ended
June 30, June 30,
(In Thousands) 2004 2003 2004 2003
Peoples Gas $ 18,997 $ 21,975 $ 112,855 $117,284
North Shore Gas 1,711 2,053 10,969 11,608
Consolidated Peoples Energy $ 20,708 $ 24,028 $ 123,824 $128,892
Notes to Consolidated Financial Statements (Unaudited)

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). See Note 8 for a discussion of the current Chicago Municipal Tax Audit. The Illinois Public Utility Act provides that the tax may be recovered from utility customers by adding an additional charge to customers' bills. These taxes are due only to the extent they are collected as cash receipts as opposed to amounts billed. As a result, most revenue taxes are reported on a gross basis. The billed amounts for the recovery of these taxes are included in revenues and an offsetting expense amount representing the expected cash payment of the taxes is included in taxes, other than income taxes on the income statement. Revenue tax amounts included in utility revenues are as follows:

	Three Months Ended
	December 31,
(In Thousands)	2004	2003
Peoples Gas	$ 41,568	$ 37,202
North Shore Gas	4,040	3,600
Consolidated Peoples Energy	$ 45,608	$ 40,802

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

17
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 $196.89 million and $06.70 million as of ~~June~~December 3031, 2004 and 2003, respectively. For Peoples Gas, the amounts in accounts payable at ~~June~~December 3031, 2004 and 2003 were $76.75 million and $03.54 million, respectively. North Shore Gas' amount in accounts payable at ~~June~~December 3031, 2004 and 2003 ~~was~~were ~~immaterial~~$0.4 million and $0.2 million, respectively.

~~Recent~~- ~~Accounting~~18 ~~Pronouncements~~-

~~Under~~Notes ~~Financial~~to ~~Interpretation~~Consolidated ~~No.~~Financial Statements (~~FIN~~Unaudited) 46R, "Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51," as amended, if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities and results of the activities of the variable interest entity should be included in consolidated financial statements with those of the business enterprise. The Company's only off-balance sheet financing is through its equity method investments, none of which qualify as a Variable Interest Entity. Adoption of FIN 46R did not affect the Company's financial condition or results of operations.

On3: ~~October~~BUSINESS 16, 2003, the FASB posted FASB Staff Position (FSP) No. 150-2, "Accounting for Mandatorily Redeemable Shares Requiring Redemption by Payment of an Amount That Differs from the Book Value of Those Shares, under FASB Statement No. 150." Under SFAS No. 150, the investment in Southeast Chicago Energy Project, LLC was deemed to be a mandatorily redeemable investment and the Company's equity in the partnership was reclassified to long-term liabilities on the partnership books. The change on the partnership books has no effect the Company's reporting its results using the equity method investment.SEGMENTS

In December 2003, the "Medicare Prescription Drug, Improvement and Modernization Act of 2003" (Medicare Act) was signed into law. The Company has a postretirement health care plan that may be affected by the Medicare Act. Initially, the FASB issued FSP No. 106-1 "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug, Improvement and Modernization Act of 2003," in January 2004, to permit companies to elect a deferral of the accounting until additional guidance could be provided. In May 2004, the FASB issued FSP No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003" to provide the additional accounting guidance. However, for the Company to make an accurate determination of any potential impact from the Medicare Act, additional guidance is still required from the U.S. Department of Health and Human Services to define terms like "Medicare Equivalent." The effective date for FSP No. 106-2 is the quarter ended September 30, 2004. The Company has elected to defer any potential accounting impact. At this time, the Company cannot determine what effect, if any, the Medicare Act will have on the financial position or results of operations of the Company.

The Company adopted SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," as of October 1, 2001. These statements, in part, clarify that more assets should be distinguished and classified between tangible and intangible. The Company did not change or reclassify contractual mineral rights included in oil and gas properties on the balance sheet upon adoption of SFAS No. 142. On April 30, 2004, the FASB staff issued FSP Nos. 141-1 and 142-1, which clarify that contractual mineral rights are tangible assets. This is consistent with the Company's previous interpretation and application of SFAS Nos. 141 and 142.

SFAS No. 132 (Revised 2003), "Employers' Disclosures about Pensions and Other Postretirement Benefits - An Amendment of FASB Statements No. 87, 88, and 106" revises employers' disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans. This Statement requires additional disclosures to those in the original SFAS No. 132 about the assets, obligations, cash flows and net periodic benefit cost of defined benefit pension plans and other defined benefit postretirement plans, and requires new disclosures in interim financial statements. The required information should be provided separately for pension plans and for other postretirement benefit plans. The interim disclosures were adopted in the

second quarter of fiscal 2004. The annual requirements will be adopted for the fiscal year ended September 30, 2004.

3. BUSINESS SEGMENTS

Total segment capital assets include net property, plant and equipment and certain intangible assets classified in other investments. Financial data by business segment is presented below.

					Retail		Corporate
	Gas	Oil and Gas	Power	Midstream	Energy		and
(In Thousands)	Distribution	Production	Generation	Services	Services	Other	Adjustments	Total
Three Months Ended June 30, 2004
Three Months Ended December 31, 2004
Revenues	$ ~~234~~517,~~611~~780	$ 3029,~~523~~200	$ -	$ 83108,~~506~~682	$ 62112,~~913~~967	$ 36-	$ (1031,~~452~~218)	$ ~~401~~737,~~137~~411
Depreciation, depletion and amortization	17,478	11,550	32	112	452	4	121	29,749
Cost of energy sold	329,604	-	-	104,574	106,325	-	(31,611)	508,892
Equity investment income (loss)	-	1,725	3,091	-	-	50	-	4,866
Operation and maintenance	73,321	6,213	514	1,545	2,938	429	3,365	88,325
Operating income (loss)	11,261	7,390	1,695	835	833	(116)	(4,814)	17,084
Depreciation, depletion and amortization	16,992	12,586	-	112	405	35	214	30,344
Segment capital assets - net	1,565,755	315,137	10,466	6,092	7,398	960	2,035	1,907,843
Taxes, other than income taxes	50,002	2,895	(9)	(19)	87	11	79	53,046
Investments in equity investees	-	19,807	107,469	-	-	3,674	-	130,950
Losses (gains) on property sales	122	-	-	-	(50)	-	-	72
Capital spending	17,133	13,918	1,517	4	481	-	260	33,313
Restructuring charge	-	-	-	-	-	-	11,207	11,207
Three Months Ended June 30, 2003
Equity investment income (loss)	-	1,086	(460)	-	-	262	-	888
Revenues	$ 267,031	$ 27,988	$ -	$ 58,859	$ 50,372	$ 70	$ (6,173)	$ 398,147
Operating income (loss)	47,739	8,591	(965)	2,469	3,263	(213)	(14,471)	46,413
Depreciation, depletion and amortization	16,905	10,759	32	106	(171)	4	23	27,658
Segment capital assets - net	1,571,095	319,465	11,067	5,915	5,626	1,175	4,176	1,918,519
Equity investment income (loss)	-	722	2,900	-	-	189	-	3,811
Investments in equity investees	-	10,290	110,607	-	-	3,736	-	124,633
Operating income (loss)	19,121	10,168	1,704	(800)	792	(79)	(6,485)	24,421
Capital spending	17,662	12,998	540	-	70	-	5	31,275
Segment capital assets - net	1,546,250	261,097	7,150	5,790	7,403	1,343	1,423	1,830,456
Three Months Ended December 31, 2003
Investments in equity investees	-	20,991	112,282	-	-	3,943	-	137,216
Revenues	$ 438,411	$ 28,621	$ -	$ 65,201	$ 83,126	$ 81	$ (10,556)	$ 604,884
Capital spending	19,490	24,957	504	-	282	(264)	711	45,680
Cost of energy sold	254,987	-	-	59,975	76,441	38	(10,881)	380,560
Nine Months Ended June 30, 2004
Operation and maintenance	70,449	5,576	1,045	1,571	2,980	224	5,465	87,310
Revenues	$ 1,344,010	$ 93,915	$ -	$ 257,860	$270,627	$ 290	$ (33,660)	$ 1,933,042
Depreciation, depletion and amortization	16,508	11,734	31	111	430	4	103	28,921
Depreciation, depletion and amortization	51,441	36,093	95	336	1,326	12	338	89,641
Taxes, other than income taxes	44,928	1,919	-	-	127	(20)	742	47,696
Equity investment income (loss)	-	~~3,119~~23	~~2,584~~(214)	-	-	~~407~~(54)	-	~~6,110~~(245)
Operating income (loss)	~~142~~51,~~009~~538	319,~~287~~415	(~~954~~1,290)	73,~~642~~544	83,~~802~~149	~~111~~(219)	(165,~~721~~985)	~~172~~60,~~176~~152
Segment capital assets - net	1,~~565~~567,~~755~~424	~~315~~309,~~137~~048	108,~~466~~567	6,~~092~~313	7,~~398~~167	~~960~~1,031	21,~~035~~896	1,~~907~~901,~~843~~446
Investments in equity investees	-	19,~~807~~873	~~107~~108,~~469~~619	-	-	3,~~674~~513	-	~~130~~132,~~950~~005
Capital spending	5317,~~031~~534	8651,~~980~~962	~~2,255~~347	~~137~~130	~~1,478~~350	~~400~~-	~~574~~195	~~144~~70,~~855~~518
Nine Months Ended June 30, 2003
Revenues	$ 1,359,823	$ 78,122	$ -	$ 233,501	$211,935	$ 141	$ (32,430)	$ 1,851,092
Depreciation, depletion and amortization	50,166	31,238	95	319	1,235	12	70	83,135
Equity investment income (loss)	-	55	2,690	-	-	800	-	3,545
Operating income (loss)	177,603	23,839	(740)	9,827	5,100	15	(16,376)	199,268
Segment capital assets - net	1,546,250	261,097	7,150	5,790	7,403	1,343	1,423	1,830,456
Investments in equity investees	-	20,991	112,282	-	-	3,943	-	137,216
Capital spending	52,257	76,714	2,173	15	825	624	718	133,326

194: RESTRUCTURING CHARGE

~~The~~During ~~financial~~the ~~results~~fourth quarter of ~~Peoples~~fiscal ~~Gas~~2004, the Company commenced a restructuring plan to enhance operating efficiency and ~~North~~customer ~~Shore~~service ~~Gas~~and ~~are~~to ~~reported~~help ~~primarily~~protect ~~within~~utility customers from the ~~Gas~~impact ~~Distribution~~of ~~segment~~rising operating costs, while maintaining solid financial results for the Company. ~~Operating~~The ~~income~~restructuring byactivities resulted in a reduction of over 100 nonunion permanent positions at all levels in the utility business ~~segment~~and corporate support functions. An enhanced voluntary termination severance package was offered to nonunion employees including a termination allowance of three weeks' pay for ~~Peoples~~each ~~Gas~~completed year of service up to a maximum of 52 weeks of pay, outplacement assistance, enhanced educational assistance, and ~~North~~reduced ~~Shore~~COBRA ~~Gas~~rates. isApproximately ~~presented~~300 ~~below~~employees accepted the package, resulting in about 200 open positions, most of which are expected to be filled in fiscal 2005.

	The Peoples Gas Light and Coke Company				North Shore Gas Company
			Corporate			Corporate
	Gas	Midstream	and		Gas	and
(In Thousands)	Distribution	Services	Adjustments	Total	Distribution	Adjustments	Total
Three Months Ended June 30, 2004	$ 8,805	$ 886	$ (3,689)	$ 6,002	$ 2,644	$ (467)	$ 2,177
Three Months Ended June 30, 2003	16,523	1,261	(2,050)	15,734	2,790	(201)	2,589
Nine Months Ended June 30, 2004	119,487	4,060	(9,680)	113,867	24,093	(1,226)	22,867
Nine Months Ended June 30, 2003	151,308	7,230	(7,068)	151,470	27,865	(854)	27,011

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.

4A total of approximately $6.0 ~~EQUITY~~million ~~INVESTMENTS~~for severance payments, program expenses, employer taxes and legal fees had been paid through December 31, 2004. The Company has approximately $11.0 million of unpaid liabilities related to the restructuring charge included in accounts payable on the Consolidated Balance Sheet at December 31, 2004.

~~The~~- ~~Company~~19 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 financial disclosure. However, in aggregate these investments are material. The Company records its share of income gains and losses 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. -

Notes to Consolidated Financial Statements (Unaudited)

Approximately $14 million of pension settlement and curtailment costs related to the restructuring are expected to be recorded in fiscal 2005. In the first quarter of fiscal 2005, $11.2 million was recorded as pension expense ($6.8 million and $4.4 million for settlements and curtailments, respectively), with the remainder to be recorded as pension settlements occur throughout the fiscal year.

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 income gains and losses 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.

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

	Three Months Ended		~~Nine Months Ended~~
	June 30,		June 30,
	December 31,
(In Thousands)	2004	2003	~~2004~~	~~2003~~
Revenues	$ 4347,~~264~~406	$ 4018,~~281~~558	~~$ 88,917~~	~~$ 91,641~~
Operating income	2021,~~303~~144	1910,~~952~~798	~~44,074~~	~~42,557~~
Interest expense	109,~~001~~766	8,~~506~~741	~~28,773~~	~~26,620~~
Net income (loss)	83,~~984~~754	112,~~607~~016	~~16,700~~	~~16,601~~
Total assets	~~822~~799,~~131~~853	~~848~~853,~~336~~810	~~822,131~~	~~848,336~~
Total liabilities	~~508~~510,~~429~~564	~~460~~468,~~217~~125	~~508,429~~	~~460,217~~

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

		Ownership Percentage						Equity Investment Income (Loss)
								Equity Investment
								Three Months Ended		Nine Months Ended
		Ownership Percentage						Income (Loss)
(Dollars in Thousands)		At June 30,						June 30,		June 30,
								Three Months Ended
Investment	Segment	2004			2003			2004	2003	2004	2003
(Dollars in Thousands)		At December 31,						December 31,
EnerVest	Oil and Gas		30	%		30	%	$ 1,725	$ 722	$ 3,119	$ 55
Investment	Segment	2004			2003			2004	2003
Elwood	Power		50			50		1,672	1,406	(1,729)	(1,849)
EnerVest	Oil and Gas		30	%		30	%	$ 1,086	$ 23
SCEP	Power		27			27		1,419	1,494	4,313	4,539
Elwood	Power		50			50		(1,842)	(1,670)
Trigen-Peoples	Other		50			50		50	189	407	797
SCEP	Power		29			27		1,382	1,456
Peoples NGV (1)	Other		0			0		-	-	-	3
Trigen-Peoples	Other		50			50		262	(54)
Total equity investment income								$ ~~4,866~~888	$ ~~3,811~~(245)	~~$ 6,110~~	~~$ 3,545~~
Undistributed partnership income included in the
Company's retained earnings at the end of each period								$ 1219,~~156~~458	$ 62,~~015~~780	~~$ 12,156~~	~~$ 6,015~~

~~(1) The~~- ~~Company~~20 ~~liquidated its investment in Peoples NGV Corp. in the first quarter of fiscal 2003.~~-

5.Notes ~~ENVIRONMENTAL~~to ~~MATTERS~~Consolidated Financial Statements (Unaudited)

~~Former~~6: ~~Manufactured~~ENVIRONMENTAL ~~Gas Plant Operations~~MATTERS

~~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~~A. InFormer ~~connection~~Manufactured ~~with~~Gas ~~manufacturing~~Plant and storing gas, various by-products and waste materials were produced, some of which might have been disposed of rather than sold. 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. Operations

~~Peoples~~The ~~Gas~~Company's isutility ~~addressing~~subsidiaries, 29their predecessors and certain former affiliates operated facilities in the past at multiple sites for the purpose of manufacturing gas and storing manufactured gas. ~~sites~~In connection with manufacturing and storing gas, ~~including~~waste ~~two~~materials ~~sites~~were ~~described~~produced that may have resulted in ~~more~~soil ~~detail~~and ~~below~~groundwater contamination at these sites. ~~Investigations~~Under ~~have~~certain ~~been~~laws ~~completed~~and atregulations ~~all~~relating orto ~~portions~~the protection of 23the ~~sites.~~environment, ~~Remediations~~the ~~have~~subsidiaries ~~been~~might ~~completed~~be atrequired ~~all~~to orundertake ~~portions~~remedial action with respect to some of ~~four~~these ~~sites~~materials. The subsidiaries are addressing these sites under a program supervised by the Illinois Environmental Protection Agency (IEPA).

Peoples Gas is addressing 29 manufactured gas sites, including two sites described in more detail below. Investigations have been completed at all or portions of 23 sites. Remediations have been completed at all or portions of five 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. Remediations have not yet been completed at these 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, ~~OMC,~~and ~~Elgin~~certain ~~Joliet~~other ~~and~~parties ~~Eastern~~as ~~Railway~~PRPs ~~Company,~~at ~~Larsen~~the ~~Marine~~Waukegan ~~Service~~Site. ~~and~~The ~~the~~EPA ~~City~~has issued a record of ~~Waukegan~~decision as(ROD) ~~PRPs~~selecting atthe remedial action for the Waukegan Site. ~~OMC~~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 ~~filed~~been ~~for~~entered ~~bankruptcy~~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. Remedial activities have commenced.

InThe ~~September~~current ~~1999~~owner of a site in Chicago, ~~the~~formerly ~~EPA~~called ~~issued~~Pitney aCourt ~~record~~Station, offiled ~~decision~~suit ~~(ROD)~~under ~~selecting~~CERCLA ~~the~~against ~~remedial~~Peoples ~~action~~Gas ~~for~~in the ~~Waukegan Site~~U.S. ~~The~~District ~~selected~~Court ~~remedy~~for ~~consists~~the Northern District of ~~on-site~~Illinois, ~~treatment~~Continental ofTitle ~~groundwater~~Company ~~and~~v. ~~off-site~~The ~~disposal~~Peoples ofGas ~~soil~~Light ~~containing~~and ~~polynuclear~~Coke ~~aromatic~~Company, ~~hydrocarbons~~96 ~~and~~C ~~arsenic~~3257. The ~~EPA~~suit ~~has~~seeks ~~estimated~~recovery of the ~~present~~past ~~worth~~and future costs of ~~the~~investigating ~~remedy~~and toremediating bethe ~~$26~~site.5 ~~million~~In ~~(representing~~ruling ~~the~~on ~~present~~cross ~~worth~~motions offor ~~estimated~~summary ~~capital~~judgment, ~~costs~~the ~~and~~court ofdetermined ~~estimated~~that ~~operation~~Peoples ~~and~~Gas ~~maintenance~~is ~~costs).~~a ~~North~~liable ~~Shore~~party ~~Gas~~under CERCLA and that the ~~other~~owner ~~PRPs~~has ~~(except~~established ~~for~~certain, ~~the~~but ~~City~~not all, elements of ~~Waukegan)~~a ~~are~~defense ~~conducting~~to ~~the~~liability. ~~remedial~~Further ~~design~~proceedings ~~for~~have ~~the~~been ~~Waukegan~~stayed ~~Site~~pending settlement discussions between the parties.

21The owners of another property in the vicinity of the former Pitney Court Station and the current site owner have filed suit against Peoples Gas in the U.S. 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 Co., 04 C 3392, seeks an order directing Peoples Gas to remediate the site.

InWith ~~July~~respect ~~2004,~~to ~~North~~portions ~~Shore~~of certain other sites in Chicago, Peoples Gas has received demands from site owners and ~~the~~others ~~other~~asserting ~~PRPs~~standing ~~executed~~regarding athe ~~remedial~~investigation ~~action~~or ~~consent~~remediation ~~decree~~of their parcels. ~~The~~Some ~~consent~~of ~~decree~~these isdemands ~~currently~~seek ~~undergoing~~to ~~review~~require byPeoples ~~EPA~~Gas ~~and~~to ~~other~~perform ~~government~~extensive ~~agencies~~investigations or remediations. IfThese ~~approved~~demands include notice letters sent to Peoples Gas by ~~the~~River ~~government~~Village ~~agencies~~West. ~~and~~These ~~lodged~~letters ~~with~~informed ~~and~~Peoples ~~entered~~Gas byof ~~the~~River ~~federal~~Village ~~district~~West's ~~court,~~intent ~~the~~to ~~consent~~file ~~decree~~suit ~~will~~under ~~require~~RCRA ~~North~~seeking ~~Shore~~an ~~Gas~~order ~~and~~directing ~~General~~Peoples ~~Motors~~Gas to ~~perform~~remediate ~~the~~seven ~~remedial~~former ~~action~~manufactured ~~and~~gas ~~establish~~plant ~~and~~sites ~~maintain~~located ~~financial~~on ~~assurance~~or ofnear ~~$27~~the ~~million~~Chicago River. Peoples Gas is evaluating these demands.

~~The~~- ~~current~~21 owner of a site in the City of Chicago, Illinois (Chicago), formerly called Pitney Court Station, filed suit against Peoples Gas in federal district court under CERCLA. The suit seeks recovery of the past and future costs of investigating and remediating the site. The owners of another property in the vicinity of the former Pitney Court Station have filed suit against Peoples Gas in federal district court under the Resource Conservation and Recovery Act (RCRA). The suit seeks an order directing Peoples Gas to remediate the site. Peoples Gas is contesting both suits. -

~~The~~Notes ~~current owner of a portion of another site in Chicago, formerly called the 22nd Street Station, has notified Peoples Gas that it intends~~ to ~~file~~Consolidated ~~suit~~Financial ~~under~~Statements ~~RCRA seeking an order directing Peoples Gas to remediate the site.~~(Unaudited)

The utility subsidiaries are accruing and deferring liabilities and costs incurred in connection with all of the manufactured gas sites, including related legal expenses, pending recovery through rates or from other entities. At ~~June~~December 3031, 2004, the total of these deferred liabilities and costs (stated in current year dollars) for Peoples Gas was $~~134~~171.6 million; for North Shore Gas the total was $3653.74 million; and for the Company on a consolidated basis, the total deferred was $~~171~~225.30 million. Each of these deferred 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 ($146.2 ~~Management~~million ~~also estimates that additional costs in the following amounts are reasonably possible:~~ for Peoples Gas,; $7354.1 million; for North Shore Gas,; and $27200.3 million; ~~and~~ for the Company on a consolidated basis~~, $100 million~~). Management's also estimates ~~are~~that ~~based~~additional ~~upon an ongoing review by management and its outside consultants of potential~~ costs ~~associated~~in ~~with~~the ~~conducting~~following ~~investigative~~amounts ~~and~~are ~~remedial~~reasonably ~~actions~~possible: atfor ~~the~~Peoples ~~manufactured gas sites~~Gas, ~~and~~$133.2 ofmillion; ~~the~~for ~~likelihood~~North ofShore ~~incurring~~Gas, ~~such costs~~$32.5 ~~While~~million; ~~each~~and ~~subsidiary intends to seek contribution from other entities~~ for the ~~costs~~Company ~~incurred~~on ata ~~the~~consolidated ~~sites~~basis, ~~the~~$165.7 ~~full extent of such contributions cannot be determined at this time~~million.

Management's ~~believes~~estimates ~~that~~are developed with the ~~liabilities~~aid ~~incurred~~of byprobabilistic ~~Peoples~~modeling. ~~Gas~~They are based upon an ongoing review and judgement by ~~North~~management ~~Shore~~and ~~Gas~~its ~~for~~outside ~~environmental~~consultants ~~activities~~of ~~relating~~potential tocosts ~~former~~associated with conducting investigative and remedial actions at the manufactured gas ~~operations~~sites, ~~are~~and ~~recoverable~~of ~~through~~the ~~rates~~likelihood ~~for~~of ~~utility~~incurring ~~service~~such costs. Actual costs, which may differ materially from ~~insurance~~these ~~carriers~~estimates, orwill ~~other~~depend ~~entities.~~on ~~Accordingly~~several factors, ~~management~~including ~~believes~~whether ~~that~~contamination ~~the~~exists ~~costs~~at ~~incurred~~all bysites, the ~~subsidiaries~~nature inand ~~connection~~extent ~~with~~of ~~former~~contamination ~~manufactured~~and ~~gas~~the ~~operations~~type ~~will~~of ~~not~~remediation ~~have~~that amay ~~material~~be ~~adverse~~required. ~~effect~~As ondiscussed ~~the~~above, ~~financial~~with ~~position~~respect orto ~~results~~a offew ~~operations~~sites or portions of sites, the ~~utilities.~~subsidiaries ~~Peoples~~have ~~Gas~~received demands to investigate and ~~North~~remediate ~~Shore~~to ~~Gas~~extensive ~~are~~levels. ~~recovering~~While management does not believe that the ~~costs~~utility ofsubsidiaries ~~environmental~~are ~~activities~~legally ~~relating~~required to comply with such demands, should the ~~utilities'~~subsidiaries ~~former~~be ~~manufactured~~required ~~gas~~to ~~operations,~~investigate ~~including~~and ~~carrying~~remediate ~~charges~~to onextensive levels at all of the ~~unrecovered~~sites ~~balances,~~that ~~under~~have ~~rate~~not ~~mechanisms~~yet ~~approved~~been byremediated, the ~~Illinois~~Company's ~~Commerce~~aggregate ~~Commission~~maximum ~~(Commission)~~potential liability could be substantially higher than the estimates indicated above.

~~Former~~Each ~~Mineral~~subsidiary ~~Processing~~intends ~~Site~~to inseek ~~Denver~~contribution from other entities for the costs incurred at the sites, ~~Colorado~~but the full extent of such contributions cannot be determined at this time.

InManagement ~~1994,~~believes ~~North~~that ~~Shore~~any ~~Gas~~costs ~~received~~incurred aby ~~demand~~Peoples ~~from~~Gas ~~the~~and ~~S.W.~~by ~~Shattuck~~North ~~Chemical~~Shore ~~Company,~~Gas ~~Inc. (Shattuck), a responsible party under CERCLA,~~ for ~~reimbursement,~~environmental ~~indemnification~~activities ~~and~~relating ~~contribution~~to ~~for~~former ~~response~~manufactured ~~costs~~gas ~~incurred~~operations atthat aare ~~former~~not ~~mineral~~recoverable ~~processing~~through ~~site~~contribution infrom ~~Denver,~~other ~~Colorado~~entities ~~(Denver~~or ~~site).~~from ~~Shattuck~~insurance iscarriers aare ~~wholly-owned~~recoverable ~~subsidiary~~through ofrates ~~Salomon,~~for ~~Inc.~~utility ~~(Salomon)~~service. ~~The~~Accordingly, ~~demand~~management ~~alleges~~believes that ~~North Shore Gas is a successor to~~ the ~~liability~~costs ofincurred aby ~~former entity that was allegedly responsible during~~ the ~~period~~subsidiaries ~~1934-1941~~in ~~for~~connection ~~the~~with ~~disposal~~former ofmanufactured ~~mineral~~gas ~~processing~~operations ~~wastes~~will ~~containing~~not ~~radium~~have ~~and~~a ~~other~~material ~~hazardous~~adverse ~~substances~~effect aton the ~~site.~~financial Inposition ~~1992,~~or ~~the~~results ~~EPA~~of ~~issued~~operations ~~the~~of ~~ROD for~~ the ~~Denver site~~utilities. ~~The~~Peoples ~~remedy~~Gas ~~selected~~and inNorth ~~the~~Shore ~~ROD~~Gas ~~consisted~~are ofrecovering the ~~on-site~~costs ~~stabilization,~~of ~~solidification~~environmental ~~and~~activities ~~capping~~relating ofto ~~soils~~the ~~containing~~utilities' ~~radioactive~~former ~~wastes.~~manufactured Ingas ~~1997~~operations, ~~the~~including ~~remedial~~carrying ~~action~~charges ~~was~~on ~~completed. The cost of~~ the ~~remedy~~unrecovered atbalances, ~~the~~under ~~site~~rate ~~has~~mechanisms ~~been~~approved ~~estimated~~ by ~~Shattuck to be approximately $31 million. Salomon has provided financial assurance for~~ the ~~performance~~Illinois ofCommerce ~~the~~Commission ~~remediation of the site~~(Commission).

~~North~~B. ~~Shore~~Former ~~Gas~~Mineral ~~filed~~Processing aSite ~~declaratory judgment action against Salomon~~ in ~~the 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~~ Colorado

22In 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.

~~1997,~~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,~~22 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.-

Notes to Consolidated Financial Statements (Unaudited)

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).

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.

6.7: 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. 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 typically initiated shortly after the close of the fiscal year and take at least a year to 18 months to complete.

Proceedings regarding Peoples Gas and North Shore Gas for fiscal 2001 costs are currently pending before the Commission. ~~Three~~In August 2003, three intervenors (Citizens Utility Board (CUB), Illinois Attorney General (AG) and City of Chicago (Chicago)) filed direct testimony in Peoples Gas' proceeding and one intervenor (CUB) filed testimony in North Shore Gas' proceeding. In January 2005, CUB and Chicago jointly filed additional direct testimony in the Peoples Gas proceeding. No intervenor filed additional direct or rebuttal testimony in the North Shore Gas proceeding. Issues raised by the intervenors in the Peoples Gas proceeding related primarily to not having financially hedged gas costs during the winter of 2000-2001, ~~and~~ the use of its Manlove storage field to support transactions with third parties ("hub" transactions), its gas purchase agreement with Enron North America Corp. (Enron), transactions conducted and income earned by an affiliated company (enovate L.L.C. (enovate)) and the level of lost and unaccounted for gas costs Peoples Gas recovered through its Gas Charge. Each of the intervenors requested disallowances, which vary in amount depending upon the issues raised and the assumptions and methodologies used to measure the impact of the issues. In the Peoples Gas proceeding, the AGintervenors ~~and CUB~~ have requested disallowances, ~~which~~on a variety of issues other than financial hedging, that range in their initial testimony from $8 million to $56 million, ~~covering~~and ain ~~variety~~their ofadditional ~~alleged~~testimony ~~issues~~from ~~other~~$8 ~~than~~million ~~financial~~to ~~hedging~~$150 million. CUB has requested an additional disallowance of $53 million and Chicago has requested a disallowance of $230 million based on the financial hedging issue. In the North Shore Gas proceeding, CUB raised only the hedging issue and recommended a disallowance of $10 million. The Commission's Staff (the Staff), ~~requested~~based aon ~~disallowance~~additional ofdirect ~~$31~~and ~~million~~rebuttal intestimony ~~the~~submitted ~~Peoples~~in ~~Gas~~January ~~proceeding~~2005, ~~and~~increased ~~$1.4 million in~~ the ~~North~~requested ~~Shore~~disallowance ~~Gas~~from ~~proceeding~~$31 ~~covering~~million ato ~~variety~~$92 ofmillion ~~alleged issues, none of which relate to hedging.~~

~~Peoples~~- ~~Gas~~23 and North Shore Gas submitted rebuttal testimony in response to the Staff and the intervenors on November 13, 2003. In that testimony, Peoples Gas stated that it would not oppose two disallowances proposed by the Staff, totaling approximately $5.2 million. One of these proposed disallowances, totaling $4.7 million, results -

23Notes to Consolidated Financial Statements (Unaudited)

in ~~a change in~~ the ~~treatment for accounting and rate making purposes of gas used to support operational capabilities of~~ Peoples Gas' ~~underground~~proceeding ~~storage. During the first quarter, this amount was capitalized as property, plant~~ and ~~equipment~~from ~~and will be depreciated over the asset's useful life~~$1.4 Anmillion ~~offsetting liability for this amount, which is expected~~ to ~~be refunded to customers, was recorded. During the first quarter, Peoples Gas also recorded property, plant and equipment and liabilities totaling~~ $54.90 million ~~for similar amounts recovered through the Gas Charge~~ in ~~fiscal 2003 and fiscal 2002. A liability was also established for~~ the ~~second proposed disallowance of $0.5 million resulting in a charge to income. Peoples Gas opposed all other proposed disallowances and~~ North Shore Gas ~~opposed~~proceeding ~~all~~covering ~~disallowances in its case. At~~ a ~~status~~variety ~~hearing~~of onalleged ~~June 23~~issues, ~~2004,~~none ~~the~~of ~~Administrative~~which ~~Law~~relate ~~Judge~~to ~~established~~hedging. aStaff ~~schedule~~stated ~~for testimony and hearings~~ in ~~the~~both ~~fiscal 2001 cases. The schedule provides for~~ the ~~Staff and intervenors to file supplemental direct testimony on September 8, 2004, and~~ Peoples Gas and North Shore Gas toproceedings ~~file~~that ~~rebuttal~~it ~~testimony~~did onnot ~~October~~recommend 6,a ~~2004.~~disallowance ~~Hearings~~based ~~in both cases are scheduled to commence~~ on ~~November~~allegations 3,related ~~2004. The schedule also provides for other routine procedural dates, including status hearings, prior~~ to ~~the~~financial ~~hearings~~hedging. ~~An order from the Commission is not expected before the third quarter of fiscal 2005.~~

InPeoples Gas and North Shore Gas submitted additional rebuttal testimony on January ~~2004~~28, 2005, which rejected the ~~Company~~proposed ~~received~~disallowances contained in intervenor and Staff additional direct and rebuttal testimony. Peoples Gas' additional rebuttal testimony responded to aall ~~subpoena~~issues ~~from~~raised by Staff and intervenors, including countering criticisms of the AGgas ~~requesting~~purchase agreement with Enron, ~~among~~defending ~~other~~the ~~things~~operation of the storage field as prudent, ~~information~~explaining ~~regarding~~why enovate transactions ~~between~~are unrelated to this proceeding and pointing out numerous errors in the ~~Company~~proposed disallowance related to lost and ~~Enron~~unaccounted for gas. North ~~America~~Shore ~~Corp.~~Gas' oradditional ~~its~~rebuttal ~~affiliates~~testimony ~~related~~responded to ~~certain~~all issues raised by ~~the~~ Staff, ~~and~~in ~~intervenors~~particular, incountering criticisms of the ~~2001~~gas ~~Gas~~purchase ~~Charge~~agreement ~~reconciliation~~with ~~proceedings~~Enron.

Peoples Gas and North Shore Gas previously submitted rebuttal testimony in response to the Staff and the intervenors on November 13, 2003. In that testimony, Peoples Gas stated that it would not oppose two disallowances proposed by the Staff, totaling approximately $5.2 million. One of these proposed disallowances, totaling $4.7 million, results in a change in the treatment for accounting and rate making purposes of gas used to support operational capabilities of Peoples Gas' underground storage. During the first quarter of fiscal 2004, this amount was capitalized as property, plant and equipment and will be depreciated over the asset's useful life. An offsetting liability for this amount, which is expected to be refunded to customers, was recorded. During the first quarter of fiscal 2004, Peoples Gas also recorded property, plant and equipment and liabilities totaling $5.9 million for similar amounts recovered through the Gas Charge in fiscal 2003 and fiscal 2002. A liability was also established for the second proposed disallowance of $0.5 million, resulting in a charge to income. Peoples Gas opposed all other proposed disallowances and North Shore Gas opposed all disallowances in its case.

At a status hearing on September 27, 2004, the Administrative Law Judge established a revised schedule for testimony and hearings in the fiscal 2001 cases. The schedule provides for Staff and intervenors to file rebuttal testimony on February 18, 2005, and Peoples Gas and North Shore Gas to file surrebuttal testimony on March 4, 2005. Hearings in both cases are scheduled to commence on March 14, 2005. On September 29, 2004, Peoples Gas and North Shore Gas each filed a motion for summary disposition on the issue of financial hedging. The administrative law judge denied the motion in the Peoples Gas case on January 21, 2005 and in the North Shore Gas case on January 27, 2005. An order from the Commission related to the fiscal 2001 Gas Charge reconciliation proceedings is not expected before the fourth quarter of fiscal 2005.

In January 2004, the Company received and responded to a subpoena from the AG requesting, among other things, information regarding transactions between the Company and Enron or its affiliates related to certain issues raised by the Staff and intervenors in the 2001 Gas Charge reconciliation proceedings.

The Company believes that its fiscal 2001 purchasing practices were consistent with the standards applied by the Commission in its past orders and upheld by the Illinois courts and that it conducted business prudently and in the best interest of customers within these established standards. However, management cannot predict the outcome of these proceedings or the potential resulting exposure and has not recorded a liability associated with this contingency other than with respect to the disallowances that Peoples Gas did not oppose as described above.

Fiscal 2002 Gas Charge reconciliation cases were initiated on November 7, 2002. Peoples Gas and North Shore Gas each filed direct testimony on August 1, 2003. A status hearing is scheduled for ~~November~~February 1623, ~~2004~~2005. Fiscal 2003 Gas Charge reconciliation cases were initiated on November 12, 2003. Peoples Gas and North Shore Gas each filed direct testimony on April 1, 2004. A status hearing is scheduled for March 10, 2005. Fiscal 2004 Gas Charge reconciliation cases were initiated on November 910, 2004. A status hearing is scheduled for June 14, 2005.

~~Separately,~~- in24 February 2004 a purported class action was filed against the Company and Peoples Gas by a Peoples Gas customer alleging, among other things, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act related to matters at issue in Peoples Gas' gas reconciliation proceedings. The suit seeks unspecified compensatory and punitive damages. The Company and Peoples Gas deny the allegations made in the suit and intend to vigorously defend against the suit. Management cannot predict the outcome of this litigation or the potential exposure resulting from it and has not recorded a liability associated with this contingency.-

24Notes to Consolidated Financial Statements (Unaudited)

7Separately, 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' gas reconciliation proceedings. ~~COMPREHENSIVE~~The ~~INCOME~~suit seeks unspecified compensatory and punitive damages. The Company and Peoples Gas deny the allegations made in the suit and intend to vigorously defend against the suit. On September 22, 2004, the Court granted a motion to dismiss all counts against Peoples Gas. On October 21, 2004, the plaintiffs filed an amended complaint against the Company. On November 22, 2004, the Company filed a motion to dismiss the amended complaint. Management cannot predict the outcome of this litigation or the potential exposure resulting from it and has not recorded a liability associated with this contingency.

8: NEW MATTERS

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 the royalty 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 royalty agreements (which were assigned to a subsidiary of Peoples Energy Production Company pursuant to an acquisition) the Company was required to pay the claim 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 Company believes that the lawsuit and the matters asserted by the claimant are not consistent with the terms of the royalty agreements or applicable laws. The Company 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. The Company intends to vigorously defend the suit.

Chicago Municipal Tax Audit

In December, 2004, the City of Chicago served Peoples Gas with a Notice of Tax Determination and Assessment alleging that Peoples Gas owes approximately $9.4 million, inclusive of interest and penalties, with respect to the Chicago's Natural Gas Occupation Tax for the period January 1, 1998 through June 30, 2002. The Natural Gas Occupation Tax is a tax on gross receipts attributable to distributing, supplying, furnishing or selling gas for use or consumption in the City of Chicago and on gross receipts of all related services. The city's assessment is primarily based on its assertion that the tax applies to various types of midstream gas transactions, an assertion that is not consistent with past practices. Peoples Gas believes the tax does not apply to such transactions because among other things, they involve (1) services related to gas resold before it is consumed, and/or (2) services that are not rendered in connection with distributing, supplying, furnishing or selling gas for use or consumption in the City of Chicago. Peoples Gas believes it has meritorious defenses which it will aggressively assert, but Peoples Gas cannot predict the outcome of the proceeding . No amounts have been recorded for this assessment, pending the outcome of the proceeding.

- 25 -

Notes to Consolidated Financial Statements (Unaudited)

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 the unrealized hedge gain or loss on derivative instruments. Total comprehensive income for the Company is summarized below.

	Three Months Ended		~~Nine Months Ended~~
	June 30,		June 30,
	December 31,
(In Thousands)	2004	2003	~~2004~~	~~2003~~
Comprehensive income
Net income	$ 522,~~623~~476	$ 831,~~013~~351	~~$ 91,877~~	~~$ 102,495~~
Other comprehensive income (loss), net of tax	(46,~~885)~~410	(38,~~283~~333)	~~(24,635)~~	~~(17,992)~~
Total comprehensive income	$ ~~738~~28,886	$ 423,~~730~~018	~~$ 67,242~~	~~$ 84,503~~

~~Peoples~~10: ~~Gas~~RETIREMENT ~~and~~AND ~~North~~POSTRETIREMENT ~~Shore Gas recorded an insignificant amount of other comprehensive income related to the amortization of interest rate lock cash flow hedges.~~ BENEFITS

8The Company and its subsidiaries participate in two noncontributory defined benefit pension plans, the Retirement Plan and the Service Annuity System, covering substantially all employees. ~~RETIREMENT~~These ~~AND~~plans ~~POSTRETIREMENT~~provide ~~BENEFITS~~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. Retiring employees have the option of receiving retirement benefits in the form of an annuity or a lump sum payment.

The Company ~~and~~follows ~~its~~the ~~subsidiaries~~procedures ~~participate~~specified in ~~two~~SFAS ~~defined~~No. ~~benefit~~88 ~~pension~~to ~~plans,~~account ~~the~~for ~~Retirement~~unrecognized ~~Plan~~gains and ~~the~~losses ~~Service~~related ~~Annuity~~to ~~System,~~the ~~covering~~settlement ~~substantially~~of ~~all~~its ~~employees. These plans provide~~ pension ~~benefits that generally are based on an employee~~plans's ~~length~~Projected ofBenefit ~~service,~~Obligations ~~compensation~~(PBO). ~~during~~During the ~~five~~first ~~years~~quarter ~~preceding~~of ~~retirement~~fiscal ~~and~~2005, ~~social~~as ~~security benefits. Employees who began participation~~ in ~~the~~past ~~Retirement~~fiscal ~~Plan July 1~~periods, ~~2001~~a ~~and~~portion ~~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~~plans' ofPBO ~~their~~was ~~participation.~~settled ~~The~~by ~~Company and its subsidiaries make contributions to~~ the ~~plans~~payment ~~based~~of ~~upon~~lump ~~actuarial~~sum ~~determinations~~benefits, ~~and~~resulting in ~~consideration of tax regulations and funding requirements under federal law. The Company also has~~ a ~~nonqualified~~settlement ~~pension~~cost ~~plan~~ (~~Supplemental Plan~~credit) ~~that~~under ~~provides~~SFAS ~~certain employees with pension benefits in excess of qualified plan limits imposed by federal tax law~~No. ~~Retiring~~88 ~~employees~~for ~~have~~ the ~~option~~Retirement ofPlan, ~~receiving~~Service ~~retirement~~Annuity ~~benefits~~System inand ~~the~~Supplemental ~~form of an annuity or a lump sum payment~~Plan.

~~The~~In ~~Company~~addition, ~~follows~~ the ~~procedures~~Company ~~specified~~and inits ~~SFAS~~subsidiaries ~~No.~~currently 88provide tocertain ~~account~~contributory ~~for~~health ~~unrecognized~~care ~~gains~~ and ~~losses~~life ~~related~~insurance tobenefits ~~the~~for ~~settlement~~retired ofemployees. ~~its~~Substantially ~~pension~~all ~~plans'~~employees ~~Projected~~may ~~Benefit~~become ~~Obligations~~eligible ~~(PBO).~~for ~~During~~such ~~fiscal~~benefit ~~2004,~~coverage asif inthey ~~past~~reach ~~fiscal~~retirement ~~years,~~age awhile ~~portion~~working offor ~~each~~the Company. These plans', ~~PBO~~like ~~was~~the ~~settled~~pension byplans, ~~the~~are ~~payment~~funded ofbased ~~lump~~upon ~~sum~~actuarial ~~benefits~~determinations, ~~resulting~~consideration inof atax ~~settlement~~regulations ~~cost~~and ~~(credit)~~the ~~under~~Company's ~~SFAS~~funding Nopolicy. 88The ~~for~~Company accrues the ~~Retirement~~expected ~~Plan,~~costs ~~Service~~of ~~Annuity~~such ~~System~~benefits ~~and~~over ~~Supplemental~~the ~~Plan~~service lives of all employees.

In- ~~addition,~~26 the Company and its subsidiaries currently provide certain health care and life insurance benefits for retired employees. Substantially all employees may become eligible for such benefit coverage if they reach retirement age while working for the Company. 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 average remaining service lives of all employees.-

25Notes to Consolidated Financial Statements (Unaudited)

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

			Other Postretirement
	Pension Benefits		Benefits
	Three Months Ended June 30,
	Three Months Ended December 31,
(In Millions)	2004	2003	2004	2003
Service cost	$ 4.50	$ 3.4.5	$ 1.46	$ 01.64
Interest cost	6.98	76.39	12.91	1.98
Expected return on plan assets (gain)	(11.7)	(13.0)	(1.0)	(1.1)
Expected return on plan assets	(10.8)	(11.7)	(0.9)	(1.0)
Amortization of:
Net transition (asset) obligation	(0.32)	(0.3)	0.54	0.85
Prior service costs	0.87	0.8	-	-
Net (gain) loss	0.45	(0.1)4	0.25	-0.2
Net periodic benefit cost (credit)	01.60	(10.9)6	3.07	2.29
Effect of lump sum settlements upon retirement	2.3	0.2	-	-
Effect of lump sum settlements upon retirement-restructuring (See Note 4)	8.0	-	-	-
Net cost (credit)	$ 2.9	$ (1.7)	$ 3.0	$ 2.2
Effect of lump sum settlements upon retirement-other	1.4	2.3	-	-
			Other Postretirement
Curtailment cost-restructuring (See Note 4)	5.1	-	0.4	-
	Pension Benefits		Benefits
Net benefit cost (credit)	$ 15.5	$ 2.9	$ 4.1	$ 2.9
	Nine Months Ended June 30,
Amounts recognized in the Company's consolidated
(In Millions)	2004	2003	2004	2003
balance sheets consist of:
Service cost	$ 13.5	$ 10.2	$ 3.8	$ 2.9
Prepaid pension cost	$ 148.6	$ 144.8	$ -	$ -
Interest cost	20.7	21.9	5.7	5.7
Accrued benefit cost	(51.0)	(37.3)	(44.9)	(31.5)
Expected return on plan assets (gain)	(35.1)	(39.0)	(3.0)	(3.3)
Intangible asset	22.9	30.5	-	-
Amortization of:
Accumulated other comprehensive income	35.7	39.7	-	-
Net transition (asset) obligation	(0.9)	(0.9)	1.5	2.4
Net amount recognized	$ 156.2	$ 177.7	$ (44.9)	$ (31.5)
Prior service costs	2.4	2.4	-	-
Net (gain) loss	1.2	(0.3)	0.6	-
Net periodic benefit cost (credit)	1.8	(5.7)	8.6	7.7
Effect of lump sum settlements upon retirement	6.9	5.3	-	-
Net cost (credit)	$ 8.7	$ (0.4)	$ 8.6	$ 7.7

9The Company expects to contribute approximately $4.0 ~~SUBSEQUENT~~million ~~EVENTS~~to its pension plans and does not expect to make contributions to its post-retirement ~~STRATEGIC~~plans ~~RESTRUCTURING~~for the remainder of fiscal 2005. For the first quarter of fiscal 2005, the Company contributed $1.2 million to its pension plans.

~~Subsequent~~- to27 the close of the third quarter, the Company announced that it has initiated a strategic restructuring plan, which includes key senior management changes affecting the Company and its utility subsidiaries, Peoples Gas and North Shore Gas. William E. Morrow, 48, was elected Executive Vice President of Operations for Peoples Energy. Desiree G. Rogers, 45, was elected President of Peoples Gas and North Shore Gas, succeeding Donald M. Field, who will retire on October 1, 2004.-

~~Additionally,~~ITEM the Company announced it is offering an enhanced severance package to non-union employees of Peoples Energy, Peoples Gas, North Shore Gas and employees of its diversified Power Generation and Midstream Services business who elect a voluntary resignation of employment2. Management's ~~The~~Discussion ~~enhanced severance offer can be accepted by employees from the vice president level~~ and ~~below~~Analysis ~~through August 30, 2004. The cost~~ of ~~this~~Results ~~program will be expensed in the fourth quarter~~ of ~~fiscal~~Operations ~~2004~~ and ~~the~~Financial ~~related pension settlement cost will be expensed in fiscal 2005.~~Condition

26
Item 2. Management's Discussion and Analysis of Results of Operations and Financial Condition
EXECUTIVE SUMMARY

~~Peoples~~Fiscal ~~Energy~~2005 isfirst aquarter ~~diversified~~net ~~energy~~income ~~company~~totaled ~~comprised~~$22.5 ofmillion, ~~five~~or ~~main~~$0.59 ~~business~~per ~~segments:~~diluted share. Operating income for the ~~core~~quarter ~~business~~totaled -$46.4 ~~Gas~~million. ~~Distribution,~~First ~~and~~quarter ~~diversified~~results ~~businesses~~included a non-cash, ~~Oil~~pension-related ~~and~~charge ~~Gas~~of ~~Production~~$11.2 million, ~~Power~~or ~~Generation,~~$0.18 ~~Midstream~~per ~~Services~~diluted ~~and~~share ~~Retail~~after ~~Energy~~taxes, ~~Services.~~associated ~~The~~with the Company's ~~Gas~~recent ~~Distribution~~organizational ~~segment~~restructuring. ~~consists~~First quarter ongoing net income (non-GAAP), defined as GAAP net income adjusted to exclude the effects of ~~two~~the ~~regulated~~restructuring-related ~~utilities~~pension charge, ~~Peoples~~was ~~Gas~~$29.2 million, or $0.77 per diluted share, and ~~North~~ongoing ~~Shore~~operating ~~Gas.~~income ~~This~~(non-GAAP), ~~segment~~which ~~has~~also excludes the ~~most~~restructuring ~~significant~~charge, ~~impact~~was on$57.6 million. Net income for the ~~consolidated~~prior ~~financial~~year ~~results~~first ofquarter ~~Peoples~~was ~~Energy~~$31.4 million, ~~accounting~~or ~~for~~$0.85 aper ~~major~~diluted ~~portion~~share, ofand operating income was $60.2 ~~Since~~million. ~~1998,~~Management ~~the~~believes ~~Company~~that ~~has~~ongoing ~~developed~~net aincome ~~portfolio~~(non-GAAP) ofand ~~complementary~~ongoing ~~energy~~operating ~~businesses~~income ~~that~~(non-GAAP) ~~help~~are touseful ~~diversify~~for ~~the~~year ~~sources~~over year comparisons since restructuring related charges of ~~consolidated~~this magnitude are infrequent and affect the comparability of operating ~~income~~results. ~~The~~Ongoing ~~Company~~net ~~expects~~income ~~these~~and ~~businesses~~ongoing tooperating ~~provide~~income ~~increasing~~are ~~contributions~~used internally to ~~its~~measure ~~long-term~~performance ~~growth~~against budget and in reports for management and the Board of Directors.

~~Net~~The ~~income~~primary cause for the ~~fiscal~~decline ~~2004~~in ~~third~~quarterly ~~quarter~~earnings ~~and fiscal year-to-date~~ was ~~down~~the ~~$0.07~~charge ~~and~~related ~~$0.39~~to ~~per share, respectively, from~~ the ~~same~~Company's ~~periods~~recent ~~last~~organizational ~~year~~restructuring. ~~Both~~However, the ~~quarter~~Company ~~and~~is ~~year-to-date~~encouraged ~~comparisons with the year-ago periods were negatively affected~~ by ~~lower gas deliveries in~~ the ~~Gas~~early ~~Distribution~~results ~~business. The decline in deliveries reflects the impacts~~ of ~~both~~that ~~warmer~~action ~~weather~~ and ~~lower non-weather related demand. In terms of~~ the ~~non~~labor-~~weather~~ related ~~component,~~savings itgenerated ~~became more apparent~~ in the ~~third~~first quarter. ~~that~~Ongoing ~~customers~~operating ~~are~~income ~~responding~~was toslightly ~~the~~lower ~~current~~than ~~high~~a ~~gas~~year ~~price environment by lowering their energy usage~~ago. ~~Natural~~The ~~gas~~largest ~~prices~~factor ~~are~~was ~~not~~lower ~~expected~~Gas toDistribution ~~decline significantly anytime soon~~deliveries, ~~and~~due ~~it is anticipated they will continue~~ to ~~have~~ a ~~dampening~~combination ~~effect~~of onwarmer ~~gas~~than ~~distribution~~normal ~~demand~~weather ~~over~~and ~~the next year. These negative effects were partially offset by~~ lower ~~provision~~weather ~~for~~normalized ~~uncollectible accounts compared to the three- and nine-month periods of the previous fiscal year~~demand.

The ~~Oil~~table ~~and~~below ~~Gas~~summarizes ~~Production~~first ~~segment~~quarter ~~is progressing toward another year of significant production growth and increased profitability, with fiscal 2004~~ operating ~~income~~results ~~expected~~for toPeoples beEnergy's upbusiness 35segments ~~to 40 percent from the prior year. However, in the third quarter, higher exploration expense~~ and ~~lower~~provides ~~than expected production volumes resulted in~~ a ~~decline~~reconciliation ~~in operating income compared to a year ago. In terms~~ of ~~production~~GAAP ~~levels, several operational~~ and ~~timing issues resulted in third quarter production volumes that were essentially flat with the year~~Non-~~ago~~GAAP ~~period~~Earnings: and less than had been anticipated. Fourth quarter production is expected to increase from third quarter levels. Operating income from the other diversified businesses as a group is up over last year with mixed results from each segment in the quarter and year-to-date periods.

In July, Peoples Energy announced a strategic reorganization of the utilities and corporate support organization. The objectives of this reorganization are to streamline the Company's management structure and to refocus on new sources of efficiency and revenue. The Company believes that a rough estimate of fiscal 2005 cost savings is $8 million to $12 million.

	Three Months Ended December 31,
	Before
	Restructuring		Restructuring-		As Reported
(In Thousands)	(non-GAAP)		Related Charges		(GAAP)
Operating Income (Loss)	2004	2003	2004	2003	2004	2003
Gas Distribution	$ 47,739	$ 51,538			$ 47,739	$ 51,538
Oil and Gas Production	8,591	9,415			8,591	9,415
Power Generation	(965)	(1,290)			(965)	(1,290)
Midstream Services	2,469	3,544			2,469	3,544
Retail Energy Services	3,263	3,149			3,263	3,149
Corporate and Other	(3,477)	(6,204)	(11,207)		(14,684)	(6,204)
Total Operating Income (Loss)	$ 57,620	$ 60,152	$(11,207)	$ -	$ 46,413	$ 60,152

Net Income (Loss)	$ 29,229	$ 31,351	$ (6,753)	$ -	$ 22,476	$ 31,351

Net Income (Loss) per diluted share	$ 0.77	$ 0.85	$ (0.18)	$ -	$ 0.59	$ 0.85

~~Management~~Absent ~~now estimates that fiscal 2004 earnings will be in~~ the ~~range of~~ $211.~~60 to $~~2~~.70~~ ~~per~~million ~~diluted~~pension-related ~~share,~~restructuring ~~excluding~~charge ~~any~~discussed ~~expenses~~earlier, incorporate ~~the~~and ~~fourth~~other ~~quarter~~expenses ~~related~~totaled to$3.5 ~~the above mentioned restructuring~~million. ~~This~~Corporate ~~estimate~~and ~~includes~~other ~~fourth~~costs ~~quarter gains on asset sales~~ in the ~~Power~~year-ago ~~Generation~~period ~~and~~were ~~Gas Distribution segments totaling approximately~~ $06.102 ~~per share~~million. ~~Although~~Results ~~discussions~~were ~~are~~favorably ~~continuing~~impacted onby ~~those~~lower ~~potential~~labor-related ~~sales,~~expenses ~~the~~related ~~timing is difficult~~ to ~~predict~~last ~~and~~fall's ~~they could potentially extend into fiscal 2005~~restructuring. ~~(See Forward-Looking Information).~~

- 28 -

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

RESULTS OF OPERATIONS

Net income for the third quarter was $5.6 million, or $0.15 per diluted share, compared to $8.0 million, or $0.22 per diluted share in the year-ago quarter. Fiscal year-to-date net income was $91.9 million, or $2.46 per diluted share, compared to $102.5 million, or $2.85 per diluted share a year ago. Operating income for the current quarter and fiscal year-to-date totaled $17.1 million and $172.2 million, respectively, versus $24.4 million and $199.3 million in the same periods last year.
27
Financial results for the three months ended June 30, 2004 reflect lower operating results primarily due to lower deliveries in the Gas Distribution segment resulting from weather that was 18 percent warmer than the same period last year and customer conservation. Lower performance in the third quarter by the Oil and Gas Production segment also affected the quarterly results, primarily as a result of increased exploration expense due to an unsuccessful well in Louisiana. Financial results for the nine months ended June 30, 2004 reflect the adverse impact of lower deliveries resulting from weather that was nine percent warmer than the same period last year and customer conservation. Continued strong growth from the diversified energy businesses partially offset the negative delivery impact. The Oil and Gas Production segment benefited from higher production volumes and higher realized natural gas and oil prices than a year ago.
Income Statement Variations

The Company's revenues and cost of energy sold increased $3132.05 million and $9128.13 million, respectively, for the three-month ~~period~~periods primarily due to higher commodity prices at most segments and increased ~~$82.0~~sales ~~million~~volumes in the Midstream Services and ~~$94~~Retail Energy Services segments.4 ~~million,~~These ~~respectively,~~increases ~~for~~were partially offset by a six percent decrease in Gas Distribution deliveries and a six percent decrease in production volumes in the ~~nine~~Oil and Gas Production segment in the three-month period ~~due to:~~.

~~higher~~In ~~realized~~the ~~commodity~~first ~~prices;~~quarter ~~and~~of fiscal 2005, the Company recorded an $11.2 million pension-related charge as part of its organizational restructuring commenced last fall (as described in Note 4 of the Notes to Consolidated Financial Statements).

~~increased~~Operation ~~sales~~and ~~volumes~~maintenance inexpense for the ~~Oil~~three-month ~~and~~period, ~~Gas~~excluding ~~Production~~the ~~and~~above ~~Retail~~restructuring-related ~~Energy~~pension ~~Services~~charge ~~segments~~of $11.2 million (non-GAAP), increased $1.0 million, or one percent. Significant items to note in this period are:

~~These~~Decreased ~~increases~~direct ~~were~~labor ~~offset~~costs byprimarily aat 10Corporate ~~percent~~ and ~~eight~~the ~~percent decrease in~~ Gas Distribution ~~deliveries~~segment in($4.5 ~~the~~million) ~~three-~~as ~~and~~a ~~nine-month~~result ~~periods,~~of ~~respectively,~~the ~~resulting~~organizational ~~from~~restructuring; ~~warmer weather and lower normalized deliveries.~~
~~Operation~~Higher ~~and~~utility ~~maintenance~~environmental ~~expense~~costs ~~for~~of ~~the~~$4.2 ~~three-month~~million ~~period~~(which ~~decreased~~are ~~slightly~~recovered through the utilities' rate mechanism and ~~increased~~a ~~$8.5~~like ~~million~~amount ~~for~~is ~~the~~included ~~nine-month~~in ~~period.~~revenues, ~~Significant~~therefore ~~items~~these tocosts ~~note~~do innot ~~both~~affect ~~periods~~operating ~~were:~~income).

~~higher~~Depreciation, ~~pension~~depletion ~~expense of $4.3 million~~ and ~~$8.0~~amortization ~~million.~~(DD&A) ~~Pension~~for ~~expense~~the ~~related~~three-month toperiod ~~normal~~increased ~~activity~~$1.4 ~~increased~~million, asmainly ~~expected~~resulting ~~due~~from toa ~~the~~higher ~~ongoing~~Gas ~~effects~~Distribution ofsegment ~~both~~property, ~~lower~~plant ~~pension~~and ~~plan~~equipment ~~returns~~balance in ~~recent~~2004 ~~years~~ and a ~~lower~~higher ~~discount~~DD&A rate. ~~The~~at ~~prior~~the ~~nine-month~~Oil ~~period~~and ~~included~~Gas aProduction ~~$4.7~~segment, ~~million~~partially ~~impact~~offset onby ~~pension~~lower ~~expense~~oil ~~related~~and togas aproduction ~~retiring executive officer~~volumes.

~~higher~~Taxes, ~~outside~~other ~~professional~~than ~~services~~income ~~($3.2~~taxes ~~million~~increased ~~and~~for the three-month period by $5.54 million), ~~mainly~~due ~~related~~primarily to ~~higher~~the ~~legal~~increase ~~costs~~in ~~associated~~utility ~~with~~revenues and higher production taxes in the ~~utilities~~Oil ~~ongoing~~and ~~gas~~Gas ~~reconciliation~~Production ~~case~~segment ~~before~~due ~~the~~to ~~Commission;~~higher wellhead gas prices.

~~higher~~Equity ~~expense~~investment inincome ~~the~~increased ~~Oil~~$1.1 ~~and~~million ~~Gas~~primarily ~~Production~~due ~~segment~~to ~~($5.2~~a ~~million~~gain ~~and~~on ~~$6.8~~the ~~million)~~sale ~~resulting~~of ~~primarily~~certain ~~from~~properties anby ~~increase~~the inEnerVest ~~lease~~partnership. ~~operating~~Other ~~expense~~income and ~~exploration~~ expense; - net increased slightly due to higher interest income.

~~decreased~~Income ~~provision~~tax expense for ~~uncollectible~~the ~~accounts~~three-month ~~($5.5~~period ~~million~~decreased ~~and~~ $54.28 million), ~~mainly~~primarily asdue ato ~~result~~lower ofpre-tax ~~improving credit and collection metrics in its Gas Distribution businesses;~~ income.

~~lower~~Interest ~~corporate~~expense ~~expenses~~for ~~resulting~~the ~~from~~quarter ~~the~~was ~~impact~~up ofslightly acompared ~~lower~~to ~~Peoples~~the ~~Energy~~year-ago ~~stock~~period ~~price~~due onprimarily ~~the~~to ~~value~~higher ofinterest ~~stock~~rates, ~~appreciation~~partially ~~rights~~offset ~~($2.8~~by ~~million~~lower ~~and~~average ~~$2.7~~seasonal ~~million);~~borrowing ~~and~~balances.

lower utility environmental costs of $0.2 million and $5.0 million, respectively. (These costs are recovered through the utilities' rate mechanism and a like amount is included in revenues; therefore, these costs do not affect operating income).
Depreciation, depletion and amortization for the three- and nine-month periods increased $2.1 million and $6.5 million, respectively, mainly resulting from higher production and a higher depletion rate in the Oil and Gas Production segment and from higher depreciable property in the Gas Distribution segment.
Taxes, other than income taxes, which are typically directly related to the level of utility revenues, increased for the three- and nine-month periods by $2.0 million and $3.7 million, respectively, due to adjustments to reduce municipal and state utility tax accruals recorded in the previous periods. For the three- and nine-month periods, these adjustments were $5.6 million and $9.7 million, respectively. Absent this impact, these taxes declined due to lower levels of utility revenues. The period-to-period comparison was also affected by a change in the state revenue tax law that resulted in the Company recording more taxes as a direct liability to the state where previous period amounts were included in both revenue and revenue tax expense.
28
Income tax expense for the three- and nine-month periods decreased $4.4 million and $15.0 million, respectively, primarily from lower pre-taxable income. The fiscal year-to-date period also benefited from a lower effective tax rate due to prior fiscal 2004 adjustments in accrued income taxes and due to the ability under recent tax legislation to realize tax benefits from dividends reinvested in Peoples Energy stock under the Company's Employee Stock Ownership Plan.
Segment Discussion

AThe ~~summary of the~~ Company's financial results and applicable operating ~~income~~statistics by segment, ~~and~~are ~~variations~~discussed ~~between~~in ~~periods,~~this ~~is presented below~~section.

	Three Months Ended		Nine Months Ended		Increase/(Decrease)
	June 30,		June 30,		Three Months	Nine Months
(In Thousands)	2004	2003	2004	2003	Ended	Ended
Operating income (loss):
Gas Distribution	$ 11,261	$ 19,121	$ 142,009	$ 177,603	$ (7,860)	$ (35,594)
Oil and Gas Production	7,390	10,168	31,287	23,839	(2,778)	7,448
Power Generation	1,695	1,704	(954)	(740)	(9)	(214)
Midstream Services	835	(800)	7,642	9,827	1,635	(2,185)
Retail Energy Services	833	792	8,802	5,100	41	3,702
Other	(116)	(79)	111	15	(37)	96
Corporate and Adjustments	(4,814)	(6,485)	(16,721)	(16,376)	1,671	(345)
Total operating income	$ 17,084	$ 24,421	$ 172,176	$ 199,268	$ (7,337)	$ (27,092)

- 29 -

29ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition
Gas Distribution Segment.
The following table summarizes revenue, deliveries and other statistics for the Gas Distribution segment.

Gas Distribution Statistics

Three Months Ended

~~Nine Months Ended~~

~~Increase/(Decrease)~~

Margin Data

~~June~~December 3031,

~~June 30,~~Increase/

~~Three Months~~

~~Nine Months~~

(In Thousands)

2004

2003

~~2004~~(Decrease)

~~2003~~

~~Ended~~

Gas Distribution revenues:

Sales

Residential

$ ~~176~~404,~~009~~876

$ ~~200~~340,~~072~~467

$1 64,~~041,623~~409

~~$1,046,277~~

~~$ (24,063)~~

~~$ (4,654)~~

Commercial

2762,~~624~~904

2953,~~571~~348

~~165~~9,~~288~~556

~~158,467~~

~~(1,947)~~

~~6,821~~

Industrial

411,~~504~~603

48,~~495~~374

273,~~391~~229

~~29,068~~

~~(1,677)~~

Total sales

~~208~~479,~~137~~383

~~234~~402,~~138~~189

177,~~234,302~~194

~~1,233,812~~

~~(26,001)~~

~~490~~

Transportation

Residential

59,~~878~~677

79,~~229~~699

~~28,449~~(22)

~~33,297~~

~~(1,351)~~

~~(4,848)~~

Commercial

814,~~468~~221

913,~~114~~779

~~40,830~~442

~~44,428~~

~~(646)~~

~~(3,598)~~

Industrial

35,~~841~~475

35,~~540~~807

~~15,954~~(332)

~~16,937~~

~~301~~

~~(983)~~

Contract pooling

34,~~914~~021

82,~~433~~339

121,~~135~~682

~~19,335~~

~~(4,519)~~

~~(7,200)~~

Total transportation

2233,~~101~~394

2831,~~316~~624

971,~~368~~770

~~113,997~~

~~(6,215)~~

~~(16,629)~~

Other Gas Distribution revenues

45,~~373~~003

4,~~577~~598

~~12,340~~405

~~12,014~~

~~(204)~~

~~326~~

Total Gas Distribution revenues

~~234~~517,~~611~~780

~~267~~438,~~031~~411

179,~~344,010~~369

~~1,359,823~~

~~(32,420)~~

~~(15,813)~~

Less: Gas costs

~~118~~329,~~637~~604

~~140~~254,~~187~~987

~~799~~74,~~756~~617

~~783,391~~

~~(21,550)~~

~~16,365~~

Gross margin (1)

~~115~~188,~~974~~176

~~126~~183,~~844~~424

~~544~~4,~~254~~752

~~576,432~~

~~(10,870)~~

~~(32,178)~~

Less: Revenue taxes

2245,~~257~~964

1941,~~921~~335

~~125~~4,~~548~~629

~~121,824~~

~~2,336~~

~~3,724~~

Environmental costs recovered

38,~~052~~982

34,~~262~~788

154,~~142~~194

~~20,119~~

~~(210)~~

~~(4,977)~~

Net margin (1)

$ 90133,~~665~~230

$ ~~103~~137,~~661~~301

$ ~~403~~(4,~~564~~071)

~~$ 434,489~~

~~$ (12,996)~~

~~$ (30,925)~~

Gas Distribution deliveries (MDth):

Gas sales

Residential

1535,~~279~~037

1737,~~753~~215

~~109~~(2,~~271~~178)

~~120,356~~

~~(2,474)~~

~~(11,085)~~

Commercial

25,~~731~~793

26,~~990~~313

~~18,598~~(520)

~~19,445~~

~~(259)~~

~~(847)~~

Industrial

~~503~~1,146

~~503~~1,056

~~3,302~~90

~~3,878~~

~~(576)~~

Total gas sales

1841,~~513~~976

2144,~~246~~584

~~131~~(2,~~171~~608)

~~143,679~~

~~(2,733)~~

~~(12,508)~~

Transportation

Residential

36,~~236~~217

46,~~190~~674

~~19,552~~(457)

~~22,173~~

~~(954)~~

~~(2,621)~~

Commercial

712,~~219~~489

713,~~397~~027

~~38,491~~(538)

~~39,631~~

~~(178)~~

~~(1,140)~~

Industrial

46,~~864~~162

46,~~969~~607

~~19,318~~(445)

~~20,542~~

~~(105)~~

~~(1,224)~~

Total transportation

1524,~~319~~868

1626,~~556~~308

77(1,~~361~~440)

~~82,346~~

~~(1,237)~~

~~(4,985)~~

Total Gas Distribution deliveries

3366,~~832~~844

3770,~~802~~892

~~208~~(4,~~532~~048)

~~226,025~~

~~(3,970)~~

~~(17,493)~~

Gross margin per Dth delivered

$ 32.4382

$ 32.3659

$ 20.6123

~~$ 2.55~~

~~$ 0.07~~

~~$ 0.06~~

Net margin per Dth delivered

$ 21.6899

$ 21.7494

$ 10.9405

~~$ 1.92~~

~~$ (0.06)~~

~~$ 0.02~~

Average cost per Dth of gas sold

$ 67.4185

$ 65.6072

$ 62.1013

~~$ 5.45~~

~~$ (0.19)~~

~~$ 0.65~~

Actual heating degree days (HDD)

~~692~~2,083

~~845~~2,115

~~6,002~~(32)

~~6,567~~

~~(153)~~

~~(565)~~

Normal heating degree days (2)

~~752~~2,279

~~774~~2,279

~~6,307~~

Actual heating degree days as a percent

of normal (actual/normal)

9291

~~109~~93

~~104~~

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

(2) Normal heating degree days are based on a 30-year average of monthly temperatures at Chicago's O'Hare Airport for the years 1970-1999. ~~The difference between fiscal 2004 and 2003 third quarter normal degree days is caused by a shift of one heating season day from the third quarter to the second quarter due to leap year.~~

- 30 -

~~Revenues~~ITEM ~~for the Gas Distribution segment for the three- and nine-month periods decreased $32~~2.4 Management's ~~million~~Discussion and ~~$15.8~~Analysis million, respectively, from the previous periods. The decreases were mainly due to a decline in deliveries ($40.9 million and $100.9 million) resulting from weather that was 18 percent and nine percent warmer than the previous periods and conservation. Partially offsetting these effects was higher realized gas prices ($8.5 million and $85.1 million). Operating income for the three- and nine-month periods decreased $7.8 million and $35.6 million, respectively, compared with the previous periods due mainly to the effects of ~~weather~~Results ($1.6 million and $14.1 million) and lower non-weather related delivery variations ($5.4 million and $9.2 million). Also contributing to lower operating income were reductions in municipal and state utility tax accruals recorded in the previous periods ($5.6 million and $9.7 million) and higher pension expense ($3.9 million and $7.1 million). Partially offsetting these effects was a decrease in the provision for uncollectible accounts ($5.5 million and $5.0 million) mainly as a result of ~~improved~~Operations ~~credit~~ and ~~collection~~Financial ~~experience.~~Condition

~~The~~Revenues ~~Company~~for ~~expects~~ the ~~provision~~Gas Distribution segment for ~~uncollectibles~~the tothree-month beperiod ~~lower~~increased ~~for~~$79.4 million from the ~~full~~previous ~~fiscal~~period. ~~year~~The asincrease ~~compared~~was mainly due to ~~fiscal~~higher ~~2003~~gas prices ($94.6 ~~The~~million), ~~utilities~~partially ~~continue~~offset toby ~~improve~~a ~~the~~decrease ~~collection~~in ofdeliveries ~~accounts~~resulting ~~receivable.~~from ~~Peoples~~weather ~~Gas~~warmer ~~and~~than ~~North~~the ~~Shore~~previous ~~Gas~~period ~~believe~~($2.3 ~~that~~million) ~~their~~and ~~reserves~~decreases ~~are~~in ~~adequate~~non-weather ~~given~~related ~~what~~deliveries is($12.9 ~~known~~million). atDeliveries ~~this~~declined ~~time~~4 MMDth from a year ago. ~~The~~Weather ~~reserve~~was ~~for~~9 ~~uncollectible~~percent ~~accounts~~or ~~remains~~196 andegree ~~estimate~~days warmer than normal and ~~could~~2 ~~require~~percent ~~future~~or ~~adjustments~~32 degree days warmer than the same period last year. The ~~following~~Company ~~table~~accrued ~~summarizes~~$1.1 ~~collection~~million ~~statistics~~of ~~for~~weather ~~Peoples~~insurance ~~Gas~~recoveries, which partially offset the impact of warmer than normal weather. Assuming normal weather the remainder of the fiscal year, this first quarter accrual will reverse in subsequent quarters.

	Peoples Gas
	Accounts Receivable Balance
	At June 30,
(Dollars in Millions)	2004	2003	2002
Current	$ 61.3	$ 74.5	$ 81.0
30-89 days	60.0	75.7	55.1
90-149 days	41.1	48.3	31.6
150 days - active	11.4	19.5	32.0
150 days - terminated	17.0	18.0	30.0
Total 150 days	28.4	37.5	62.0
Accounts receivable	$ 190.8	$ 236.0	$ 229.7
Reserve balance	$ 27.4	$ 29.5	$ 36.0
Reserve to accounts receivable ratio	14.4%	12.5%	15.7%
Reserve to 90 days +	39.4%	34.4%	38.5%
Days sales outstanding	56	69	83

Operating income was $47.7 million for the first quarter, compared to $51.5 million in the year-ago period. Other non-weather related delivery decreases ($3.4 million), higher group insurance expense ($0.5 million), higher real estate tax expense ($1.0 million) and increased bad debt expense ($0.7 million) contributed to the decrease in operating income. These items were partially offset by a $2.2 million decline in direct labor costs as a result of the organizational restructuring last fall.

The Company's ~~weather~~expects ~~insurance~~the ~~policy~~provision ~~expires~~for onuncollectibles ~~September~~to ~~30,~~be ~~2004.~~approximately ~~The~~$2 ~~Company~~million ~~has~~higher ~~obtained~~overall afor ~~new~~the ~~insurance~~full ~~policy~~fiscal ~~for~~year as compared to fiscal ~~year~~2004. In fiscal 2005, ~~through~~the aCompany ~~subsidiary~~lowered ofits Xbad debt provision rate from 2.L.5 ~~America,~~percent ~~Inc~~to 2.25 ~~Under~~percent ~~this~~based ~~policy~~on improved experience and credit collection results in 2004. However, the Company ~~will~~expects ~~receive~~bad ~~$20,000~~debt expense will increase for ~~each~~the ~~heating~~full ~~degree~~year ~~day~~on inan ~~fiscal~~absolute ~~year~~basis ~~2005~~due ~~below~~to ~~6,100~~higher ~~(i.e.,~~revenues ~~approximately~~resulting ~~five~~from ~~percent~~higher ~~warmer~~gas ~~than~~prices. ~~normal)~~Overall, upPeoples toGas aand ~~maximum~~North ofShore ~~$10~~Gas ~~million.~~believe Iftheir ~~total~~reserves ~~heating~~for ~~degree~~uncollectible ~~days~~accounts ~~during~~are ~~fiscal~~adequate ~~year~~given ~~2005~~what ~~exceed~~is ~~6,800~~known (iat this time.~~e.,~~ ~~approximately~~The ~~six~~reserves ~~percent~~for ~~colder~~uncollectible ~~than~~accounts ~~normal),~~remain ~~the~~estimates ~~Company~~and ~~will~~could ~~pay~~require anfuture ~~additional~~adjustments. ~~premium~~The tofollowing ~~the~~table ~~insurer~~summarizes ofcollection ~~$10,000~~statistics for ~~each~~Peoples ~~heating~~Gas ~~degree~~and ~~day~~North ~~above~~Shore ~~6,800~~Gas combined.

	Gas Distribution
	Accounts Receivable Balance
	At December 31,
(Dollars in Millions)	2004	2003	2002
Current	$ 307.4	$ 246.5	$ 218.8
30-89 days	26.6	28.9	33.5
90-149 days	6.7	11.7	10.1

150 days - active	9.4	13.9	13.9
150 days - terminated	20.4	25.4	25.8
Total 150 days	29.8	39.3	39.7

Accounts receivable	$ 370.5	$ 326.4	$ 302.1

Reserve balance	$ 24.3	$ 26.7	$ 24.9
Reserve to accounts receivable ratio	6.6%	8.2%	8.2%
Reserve to 90 days +	66.6%	52.4%	50.0%
Days sales outstanding	87	78	95

Oil and Gas Production Segment.
Revenues for the three-month period increased $0.6 million compared with the same period last year due to higher net realized commodity prices offset by lower production due primarily to timing delays associated with the segment's drilling program, well performance and curtailments. The Company estimates production to grow steadily during the remainder of fiscal 2005, resulting in a five to ten percent annual growth over fiscal 2004.

~~Several operational and timing issues resulted in third quarter production volumes that were essentially flat with the year~~-~~ago~~ ~~period~~31 and less than had been anticipated. Production was hampered by a pipeline force majeure that resulted in 4 MMcfe per day of net production being shut in for nearly the entire month of June. The Company experienced a number of smaller production disruptions due to mechanical problems or well work operations during the quarter, all of which have been rectified going into the fiscal fourth quarter. Combined, these shut-ins resulted in nearly 3 MMcfe per day being off production for the quarter. The Company drilled 15 wells during the third quarter (of which 93 percent were successful), but only six of these wells produced for a portion of the quarter due to timing delays of getting the wells completed and ready for production. Over 2 MMcfe per day of net production for the quarter was delayed as a result. The Company expects to have these wells and a substantial portion of the fourth quarter program on line for a large part of the fourth quarter. The Company still expects solid production growth of 10 percent over fiscal 2003.

~~The~~ITEM ~~following~~2. Management's ~~table~~Discussion ~~summarizes hedges in place for the remaining fiscal 2004 (July through September)~~ and ~~2005~~Analysis ~~for the Oil and Gas Production segment as~~ of ~~July~~Results ~~22, 2004 (date~~ of ~~information~~Operations ~~used~~and inFinancial ~~the Company's third quarter earnings release).~~Condition

	Remaining Fiscal 2004	Fiscal 2005
Gas hedges in place (MMbtus)	6,549,000	22,143,500
Gas hedges as a percent of estimated fiscal production (1)	95%	75%
Percent of gas hedges that are swaps	52%	38%
Average swap price ($/MMbtu)	$ 4.14	$ 4.10
Percent of gas hedges that are no cost collars	48%	62%
Weighted average floor price ($/MMbtu)	$ 4.76	$ 4.37
Weighted average ceiling price ($/MMbtu)	$ 5.61	$ 5.45
Oil hedges in place (MBbls)	113	418
Oil hedges as a percent of estimated fiscal production (1)	80%	70%
Average hedge price ($/Bbl)	$ 26.60	$ 26.94

Operating income declined $0.8 million to $8.6 million. Lower production volumes, higher lease operating expenses and higher production taxes (associated with higher wellhead gas prices) negatively impacted operating income compared to the prior year period. Depletion expense also increased with higher rates due primarily to the creation of additional DD&A pools, production mix and the addition of unproved capital and costs associated with the development of proved undeveloped reserves. Lower exploration expense positively impacted the quarter and equity investment income increased $1.1 million primarily due to a gain on the sale of certain properties by the EnerVest Partnership.

Based on expected production for fiscal 2004 and assumes fiscal 2005 production increases 10 percent over fiscal 2004 levels.

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

	Three Months Ended June 30,		Nine Months Ended June 30,
	Three Months Ended December 31,
	2004	2003	~~2004~~	~~2003~~
Total production - gas equivalent (MMcfe)(1)	6,~~649~~501	6,~~574~~911	~~21,089~~	~~19,138~~
Daily average gas production (MMcfd)	6462.25	6466.42	~~67.9~~	~~62.5~~
Daily average oil production (MBd)	1.54	1.35	~~1.5~~	~~1.3~~
Daily average production - gas equivalent (MMcfed)(1)	7370.17	7275.21	~~77.0~~	~~70.1~~
Gas production as a percentage of total production	88.0	8988.0	~~88.0~~	~~89.0~~
Percent of production hedged during the period - gas	~~100~~96.0	7879.0	~~91.0~~	~~78.0~~
Percent of production hedged during the period - oil	83.0	5565.0	~~75.0~~	~~60.0~~
Net realized gas price received ($/Mcf)	$ 4.6042	$ 4.3114	~~$ 4.46~~	~~$ 4.12~~
Net realized oil price received ($/Bbl)	$ 2730.1903	$ 2224.7293	~~$ 26.27~~	~~$22.53~~
Depreciation, depletion and amortization rate ($/Mcfe)	$ 1.7293	$ 1.6369	~~$ 1.70~~	~~$ 1.62~~
Average lease operating expense ($/Mcfe)	$ 0.5846	$ 0.4233	~~$ 0.43~~	~~$ 0.41~~
Average production taxes ($/Mcfe)	$ 0.4344	$ 0.3627	~~$ 0.34~~	~~$ 0.38~~

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

~~Certain~~The ~~producing~~following ~~properties~~table ~~owned~~summarizes byhedges ~~Peoples~~in ~~Energy~~place ~~Production Company qualified~~ for ~~income~~fiscal ~~tax~~2005 ~~credits~~and as2006 ~~defined~~for inthe ~~Section~~Oil 29and ofGas ~~the~~Production ~~Internal~~segment ~~Revenue~~as ~~Code~~ of ~~1986.~~January ~~These credits expired on December 31~~26, ~~2002.~~2005 ~~The~~(date ~~amount~~of ~~recorded~~information toused ~~income~~in ~~for~~ the ~~nine~~Company's ~~months~~first ~~ended~~quarter ~~June~~earnings ~~30, 2003 was $1~~release).~~1 million.~~

On December 31, 2003, the Company acquired, through a series of transactions, certain oil and gas properties located in Texas for approximately $33.1 million. The acquired reserves, 88 percent of which are natural gas, contributed approximately 3.2 MMcfe per day of production to the Company's fiscal year-to-date production. The majority of the acquired properties are located adjacent to or in close proximity to existing holdings of the Company, and each of the acquired properties are operated by the Company.

	Remaining Fiscal 2005	Fiscal 2006

Gas hedges in place (MMbtus)	17,063,000	17,055,000
Gas hedges as a percent of estimated fiscal production ⁽¹⁾	75-80%	60-65%
Percent of gas hedges that are swaps	40%	63%
Average swap price ($/MMbtu)	$4.36	$5.02
Percent of gas hedges that are no cost collars	60%	37%
Weighted average floor price ($/MMbtu)	$4.51	$4.34
Weighted average ceiling price ($/MMbtu)	$5.45	$5.56
Oil hedges in place (MBbls)	338	365
Oil hedges as a percent of estimated fiscal production ⁽¹⁾	80-85%	65-70%
Average hedge price ($/Bbl)	$28.26	$28.26

On(1) ~~July~~Based ~~30,~~on ~~2004,~~expected ~~subsequent~~production ~~to the end of the third quarter, the Company acquired certain oil and gas properties in east Texas from a private entity~~ for ~~approximately~~fiscal ~~$9.5~~2005 ~~million. The acquisition includes approximately 5,300 gross acres~~ and ~~estimated~~assumes ~~proved~~fiscal ~~undeveloped~~2006 ~~reserves~~production ofis ~~approximately~~flat ~~10 Bcfe,~~ with ~~an additional 10 to 20 Bcfe of low risk, upside reserve potential. Initial development of the acquired reserves will begin in~~ fiscal 2005 ~~with anticipated capital spending on these properties of between $10 million to $15 million of a planned fiscal 2005 capital program~~levels. ~~The acquired properties, which will be operated by the Company, are located in close proximity to the existing Peoples Energy Production holdings in east Texas.~~

Power Generation Segment.
The operating loss in the first quarter was $(1.0) million, compared with a loss of $(1.3) million in the year-ago period. Most of the capacity revenues in the Power Generation segment are recognized in the June to September period, resulting in seasonal operating losses for this segment during the first two fiscal quarters.

~~This~~- ~~segment~~32 is engaged in the development of power generation sites. The costs of activities related to these sites are either expensed as incurred or are capitalized as specific site development assets, as appropriate. Included in other investment at June 30, 2004 was $9.3 million related to this activity. The Company is actively pursuing the sale of one its power generation sites under development in the western United States. -

~~The~~ITEM ~~electric capacity of Elwood has been sold through long-term contracts with Exelon Generation Company, LLC, Engage Energy America LLC and Aquila, Inc~~2. ~~(Aquila). Standard & Poor~~ Management's ~~Rating~~Discussion ~~Services (S&P) recently downgraded Aquila's senior unsecured debt rating to CCC+~~ and ~~placed~~Analysis ~~the~~of ~~rating~~Results onof ~~CreditWatch~~Operations ~~with developing implications. In fiscal 2003, Moody's Investor Services (Moody's) downgraded Aquila's senior unsecured debt rating to Caa1 with a negative outlook. S&P~~ and ~~Moody's~~Financial ~~have lowered the ratings on Elwood's bonds to B+ with a negative outlook and Ba2 with a stable outlook, respectively. As a result of earlier downgrading in Aquila's credit~~ Condition

33This segment is engaged in the development of power generation sites. The costs of activities related to these sites are either expensed as incurred or are capitalized as specific site development assets, as appropriate. At December 31, 2004, $10.2 million related to this activity was capitalized or deferred as investments. The Company continues to work towards monetizing its western power sites.

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 will be purchased by Exelon. In August 2004, Standard & Poor's Rating Services (S&P) upgraded Aquila's senior unsecured debt rating to B- with a negative outlook. In September 2004, Moody's Investor Services (Moody's) upgraded Aquila's senior unsecured debt rating to B2 with a stable outlook. S&P and Moody's ratings on Elwood's bonds remain at B+ with a negative outlook and Ba2 with a stable outlook, respectively. As a result of earlier downgrading in Aquila's credit ratings, Aquila provided Elwood with security in the form of letters of credit and a cash escrow equal to one year of capacity payments of approximately $37.76 million. The letters of credit and the cash escrow agreement were both recently renewed and expire in March of 2006. In the event Aquila does not fulfill its payment obligations or terminates its ~~power~~PSAs ~~sales agreements~~ and Elwood cannot make adequate alternate arrangements, Elwood could suffer a revenue shortfall or an increase in its costs that could adversely affect the ability of Elwood to fully perform its obligations under the indenture related to its outstanding bonds. If Elwood is adversely affected by the failure of Aquila to make payments under its ~~power sales agreements~~PSAs, the Company may receive substantially reduced or no investment income from Elwood. At this time, the Company cannot determine whether or to what extent Aquila's failure to pay Elwood would result in a material adverse effect on the Company.

Midstream Services Segment.
Revenues for the three-month period increased $43.5 million or 67 percent compared with the previous period due to higher commodity prices and increased volumes in the wholesale marketing business.

Operating income fell to $2.5 million, a decrease of approximately $1.0 million from last year. The decline was driven by lower operating results from wholesale marketing due to a combination of timing of sales and unfavorable basis differentials, partially offset by improved performance from hub and NGL activity.

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

	Three Months Ended December 31,
	2004	2003
Wholesale volumes sold (MDth)	14,492	12,966
Hub volumes delivered (MDth)	6,745	4,581
Number of hub customers	20	18

Retail Energy Services Segment.
The following table summarizes operating statistics for Peoples Energy Services Corporation.

	Three Months Ended June 30,		Nine Months Ended June 30,
	Three Months Ended December 31,
(In Thousands, Except Customers)	2004	2003	~~2004~~	~~2003~~
Gas sales sendout (MDth)	814,~~525~~788	713,~~919~~965	~~41,638~~	~~35,780~~
Number of gas customers	2024,~~554~~663	1624,~~798~~563	~~20,554~~	~~16,798~~
Electric sales sendout (Mwh)	~~267~~333	~~216~~252	~~759~~	~~656~~
Number of electric customers	1,~~794~~954	1,~~377~~559	~~1,794~~	~~1,377~~

~~Revenues for the three~~- ~~and~~33 ~~nine~~-month periods increased from last year by $12.5 million and $58.7 million, respectively, primarily due to continued customer growth and higher gas and energy prices. Operating income for the three-month period increased slightly, with customer and volume growth offset by higher operating expenses. Operating income increased by $3.7 million in the fiscal year-to-date period due to customer growth and enhanced gas margin.

~~Peoples~~ITEM ~~Gas~~2. Management's Discussion and Analysis of Results of Operations and Financial Condition

~~Most~~Revenues offor ~~Peoples~~the ~~Gas'~~three-month ~~results~~period ~~are~~increased ~~recorded~~from inlast ~~the~~year ~~Gas~~by ~~Distribution~~$29.8 ~~segment~~million, ~~with~~primarily ~~some~~due ~~activity~~to ingas ~~the~~and ~~Midstream~~electric ~~Services~~sales ~~and~~volumes ~~Corporate~~increasing ~~segments.~~by ~~The~~approximately ~~following~~6 ~~discussion~~percent ~~supplements~~and ~~Peoples~~32 ~~Gas~~percent, ~~information~~respectively. ~~included~~The inrevenue ~~the~~increase ~~Company's~~was ~~Gas~~mostly ~~Distribution~~offset ~~discussion~~by ~~within~~declines ~~this~~in ~~Management's~~average ~~Discussion~~margins. ~~and~~As ~~Analysis~~a ofresult, ~~Results~~operating ofincome ~~Operations~~was ~~and~~basically ~~Financial~~flat ~~Condition~~compared ~~(MD&A)~~to the year-ago quarter.

Revenues for Peoples Gas for the three- and nine-month periods decreased approximately $26.2 million and $9.1 million, respectively, from the previous periods. The decrease was mainly due to a decline in deliveries ($35.1 million and $90.8 million) resulting from weather that was 18 percent and nine percent warmer than the previous periods and conservation. Partially offsetting these effects were higher realized gas prices ($9.1 million and $84.7 million). Operating income for the three-and nine-month periods decreased $9.7 million and $37.6 million compared with the previous periods due mainly to the effects of weather ($1.4 million and $12.3 million), lower non-weather related deliveries ($4.5 million and $8.1 million) and lower hub results ($0.4 million and $3.2 million). Also negatively impacting operating income were reductions in municipal and state utility tax accruals recorded in the previous periods ($5.6 million and $9.7 million) and increases in pension expense ($3.7 million and $6.4 million) and other non-labor operating costs. Partially offsetting these effects was a decrease in the provision for uncollectible accounts ($5.0 million and $4.5 million).
34
Interest expense for the three- and nine-month periods decreased $0.4 million and $1.5 million, respectively, compared with the previous periods primarily due to lower interest rates. The reduction was due to the impact of lower interest rates on variable rate debt and the retirement or refinancing of higher cost bonds.
North Shore Gas Discussion
Most of North Shore Gas' results are recorded in the Gas Distribution segment, with some activity in the Corporate segment. The following discussion supplements North Shore Gas information included in the Company's Gas Distribution discussion within this MD&A.
Revenues for North Shore Gas for the three- and nine-month periods decreased $6.6 million and $9.7 million over the previous periods resulting from a decrease in deliveries ($5.8 million and $10.1 million) due primarily to warmer weather. Operating income for the three- and nine-month periods decreased $0.4 million and $4.1 million compared with the previous periods due mainly to the effects of weather ($0.2 million and $1.8 million) and lower non-weather related deliveries ($0.9 million and $1.0 million). Also contributing to lower operating income were increases in pension expense, group insurance expense and outside services expense, partially offset by a gain on the sale of property and a decrease in the provision for uncollectible accounts.
35
The Peoples Gas Light and Coke Company
Gas Distribution Statistics
Three Months Ended Nine Months Ended Increase/(Decrease)
Margin Data June 30, June 30, Three Months Nine Months
(In Thousands) 2004 2003 2004 2003 Ended Ended
Gas Distribution revenues:
Sales
Residential $ 149,910 $ 169,042 $ 885,293 $ 882,741 $ (19,132) $ 2,552
Commercial 23,540 24,505 139,681 131,316 (965) 8,365
Industrial 3,775 3,624 21,489 23,077 151 (1,588)
Total sales 177,225 197,171 1,046,463 1,037,134 (19,946) 9,329
Transportation
Residential 5,559 6,944 26,978 32,041 (1,385) (5,063)
Commercial 7,306 7,946 35,572 39,381 (640) (3,809)
Industrial 3,221 2,884 13,757 14,579 337 (822)
Contract pooling 3,633 7,588 11,056 17,120 (3,955) (6,064)
Total transportation 19,719 25,362 87,363 103,121 (5,643) (15,758)
Other Gas Distribution revenues 3,989 4,185 11,359 11,042 (196) 317
Total Gas Distribution revenues 200,933 226,718 1,145,185 1,151,297 (25,785) (6,112)
Less: Gas costs 98,929 115,317 668,427 645,474 (16,388) 22,953
Gross margin (1) 102,004 111,401 476,758 505,823 (9,397) (29,065)
Less: Revenue taxes 20,162 17,542 113,679 109,323 2,620 4,356
Environmental costs recovered 2,933 3,092 14,066 19,434 (159) (5,368)
Net margin (1) $ 78,909 $ 90,767 $ 349,013 $ 377,066 $ (11,858) $ (28,053)
Gas Distribution deliveries (MDth):
Gas sales
Residential 12,705 14,578 90,925 100,005 (1,873) (9,080)
Commercial 2,305 2,433 15,449 15,895 (128) (446)
Industrial 419 401 2,523 3,041 18 (518)
Total gas sales 15,429 17,412 108,897 118,941 (1,983) (10,044)
Transportation
Residential 3,108 4,065 18,766 21,476 (957) (2,710)
Commercial 6,127 6,391 32,872 34,510 (264) (1,638)
Industrial 3,551 3,785 14,891 16,300 (234) (1,409)
Total transportation 12,786 14,241 66,529 72,286 (1,455) (5,757)
Total Gas Distribution deliveries 28,215 31,653 175,426 191,227 (3,438) (15,801)
Gross margin per Dth delivered $ 3.62 $ 3.52 $ 2.72 $ 2.65 $ 0.10 $ 0.07
Net margin per Dth delivered $ 2.80 $ 2.87 $ 1.99 $ 1.97 $ (0.07) $ 0.02
Average cost per Dth of gas sold $ 6.41 $ 6.62 $ 6.14 $ 5.43 $ (0.21) $ 0.71
Actual heating degree days (HDD) 692 845 6,002 6,567 (153) (565)
Normal heating degree days (2) 752 774 6,307 6,307
Actual heating degree days as a percent
of normal (actual/normal) 92 109 95 104
(1) As used above, net margin is not a financial measure computed under GAAP. Gross margin is the GAAP measure most closely related to net margin. Management believes net margin to be useful in understanding the Gas Distribution segment's operations because the utility subsidiaries are allowed, under their tariffs, to recover gas costs, revenue taxes and environmental costs from their customers on a dollar-for-dollar basis.
(2) Normal heating degree days are based on a 30-year average of monthly temperatures at Chicago's O'Hare Airport for the years 1970-1999. The difference between fiscal 2004 and 2003 third quarter normal degree days is caused by a shift of one heating season day from the third quarter to the second quarter due to leap year.
36
North Shore Gas Company
Gas Distribution Statistics
Three Months Ended Nine Months Ended Increase/(Decrease)
Margin Data June 30, June 30, Three Months Nine Months
(In Thousands) 2004 2003 2004 2003 Ended Ended
Gas Distribution revenues:
Sales
Residential $ 26,099 $ 31,030 $ 156,330 $ 163,536 $ (4,931) $ (7,206)
Commercial 4,084 5,066 25,607 27,151 (982) (1,544)
Industrial 729 871 5,902 5,991 (142) (89)
Total sales 30,912 36,967 187,839 196,678 (6,055) (8,839)
Transportation
Residential 319 285 1,471 1,256 34 215
Commercial 1,162 1,168 5,258 5,047 (6) 211
Industrial 620 656 2,197 2,358 (36) (161)
Contract pooling 281 845 1,079 2,215 (564) (1,136)
Total transportation 2,382 2,954 10,005 10,876 (572) (871)
Other Gas Distribution revenues 384 392 981 972 (8) 9
Total Gas Distribution revenues 33,678 40,313 198,825 208,526 (6,635) (9,701)
Less: Gas costs 19,708 24,870 131,329 137,917 (5,162) (6,588)
Gross margin (1) 13,970 15,443 67,496 70,609 (1,473) (3,113)
Less: Revenue taxes 2,095 2,379 11,869 12,501 (284) (632)
Environmental costs recovered 119 170 1,076 685 (51) 391
Net margin (1) $ 11,756 $ 12,894 $ 54,551 $ 57,423 $ (1,138) $ (2,872)
Gas Distribution deliveries (MDth):
Gas sales
Residential 2,574 3,175 18,346 20,351 (601) (2,005)
Commercial 426 557 3,149 3,550 (131) (401)
Industrial 84 102 779 837 (18) (58)
Total gas sales 3,084 3,834 22,274 24,738 (750) (2,464)
Transportation
Residential 128 125 786 697 3 89
Commercial 1,092 1,006 5,619 5,121 86 498
Industrial 1,313 1,184 4,427 4,242 129 185
Total transportation 2,533 2,315 10,832 10,060 218 772
Total Gas Distribution deliveries 5,617 6,149 33,106 34,798 (532) (1,692)
Gross margin per Dth delivered $ 2.49 $ 2.51 $ 2.04 $ 2.03 $ (0.02) $ 0.01
Net margin per Dth delivered $ 2.09 $ 2.10 $ 1.65 $ 1.65 $ (0.01) $ 0.00
Average cost per Dth of gas sold $ 6.39 $ 6.49 $ 5.90 $ 5.58 $ (0.10) $ 0.32
Actual heating degree days (HDD) 692 845 6,002 6,567 (153) (565)
Normal heating degree days (2) 752 774 6,307 6,307
Actual heating degree days as a percent
of normal (actual/normal) 92 109 95 104
(1) As used above, net margin is not a financial measure computed under GAAP. Gross margin is the GAAP measure most closely related to net margin. Management believes net margin to be useful in understanding the Gas Distribution segment's operations because the utility subsidiaries are allowed, under their tariffs, to recover gas costs, revenue taxes and environmental costs from their customers on a dollar-for-dollar basis.
(2) Normal heating degree days are based on a 30-year average of monthly temperatures at Chicago's O'Hare Airport for the years 1970-1999. The difference between fiscal 2004 and 2003 third quarter normal degree days is caused by a shift of one heating season day from the third quarter to the second quarter due to leap year.
37
Fiscal 2004 and 2005 Outlook
While operating income from the diversified energy businesses is expected to be up 25 to 30 percent over last year, this strong performance will not overcome the negative effects of lower Gas Distribution deliveries. As a result, the Company now expects that fiscal 2004 earnings will be in the range of $2.60 to $2.70 per share, excluding the charge expected to be incurred in the fourth fiscal quarter associated with the Company's restructuring, which cannot be estimated at this time. This range is based on several factors, including a return to normal weather for the rest of the fiscal year, an assumed average NYMEX price for gas of $5.90 per MMbtu, ongoing cost control measures, pension expense of approximately $10 million, and a higher average number of shares outstanding of approximately 37.5 million. Also included in this estimate are expected gains on the sale of assets in the Power Generation and Gas Distribution segments totaling approximately $0.10 per share. Although progress continues in moving toward those sales, the timing is difficult to predict and these transaction could potentially occur in fiscal 2005. The current estimate for fiscal 2004 capital spending is $190 million. (See Forward-Looking Information.)
The Company is optimistic that fiscal 2005 results will improve over fiscal 2004. The Gas Distribution business remains fundamentally strong, and the Company is confident that the recently announced strategic reorganization and other ongoing cost reduction initiatives within the utilities and corporate support organization will provide immediate savings in fiscal 2005. In addition, the Company expects to achieve 10 percent or better growth from the diversified businesses. Although the Company currently is in the process of preparing the budget for fiscal 2005, on a preliminary basis, the July 22, 2004 First Call range of analysts' estimates of $2.70 to $2.88 per share is reasonable, assuming normal weather. (See Forward-Looking Information.)
Critical Accounting Policies

See the Management's Discussion and Analysis of Results of Operations and Financial Condition (MD&A) in the Company's Annual Report on Form 10-K for the fiscal year ended September 30, ~~2003~~2004 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. In May 2004, the FASB issued FSP No. 106-2, "Accounting and Disclosure Requirements Related to the Medicare Prescription Drug Improvement and Modernization Act of 2003." (See Note 2 of the Notes to Consolidated Financial Statements.)

~~Other~~New ~~Matters~~Accounting Standard

~~Strategic~~On ~~Restructuring~~December 16, 2004, the FASB issued Statement No. 123 (revised 2004), "Share-based Payment" (SFAS 123 (R)), that will require compensation costs related to share-based payment transactions to be recognized in the financial statements. With limited exceptions, the amount of compensation cost will be measured based on the grant-date fair value of the equity or liability instrument issued. In addition, liability awards will be remeasured each reporting period. Compensation cost will be recognized over the period that the employee provides service in exchange for the award. SFAS 123 (R) replaces SFAS No. 123, "Accounting for Stock-Based Compensation" and supersedes APB Opinion No, 25, Accounting for Stock Issued to Employees". SFAS 123 (R) is effective as of the first interim or annual reporting period that begins after June 15, 2005. The Company is evaluating the impact of SFAS 123 (R) on accounting for its compensation plans, but does not expect SFAS 123 (R) to significantly affect the Company's financial condition or results of operations.

LIQUIDITY AND CAPITAL RESOURCES

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

	Nine Months Ended June 30,
	Three Months Ended December 31,
(In Thousands)	2004	2003
Net cash provided by operating activities	$ 262,167	$ 237,675
Net cash (used in) operating activities	$ (67,392)	$ (59,599)
Net cash used in investing activities	$ (128,234)	$ (117,636)
Net cash (used in) investing activities	$ (25,099)	$ (74,578)
Net cash used in financing activities	$ (71,681)	$ (73,465)
Net cash provided by financing activities	$ 101,765	$ 123,155

Cash ~~provided~~used byin operating activities ~~increased~~remained relatively consistent for the ~~nine~~three months ended ~~June~~December 3031, 2004 as compared to the ~~nine~~three months ended ~~June~~December 3031, 2003, ~~primarily~~except ~~due~~largely tofor ~~favorable~~the ~~net~~effect ~~changes~~of tohigher ~~working~~gas ~~capital~~prices ~~that~~driving ~~were~~up ~~partially~~balances ~~offset~~in bycustomer ~~lower~~receivables ~~net~~and ~~income~~accounts payable. ~~The~~Net ~~increase in net~~ cash used in investing activities ~~was~~decreased primarily due to ~~increased~~a decline in capital spending, as spending in the ~~Oil~~first ~~and~~quarter ~~Gas~~of ~~Production~~fiscal ~~segment.~~2004 ~~While~~included ~~the~~approximately ~~change~~$35 million in acquisitions of certain oil and gas properties located in Texas. As a result, net cash ~~used~~provided inby financing activities ~~was~~also ~~relatively flat~~declined, as demonstrated by lower levels of commercial paper issued in the first quarter of fiscal 2005.

notable activity included lower retirements of short-term debt and commercial paper in the current period and lower net issuance of long-term debt in the current period.

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

- 34 -

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

Balance Sheet Variations

Total assets at ~~June~~December 3031, 2004 increased $~~126~~135.56 million as compared to ~~September~~December 3031, 2003 primarily due to ~~the~~increases ~~seasonal increase~~ in ~~the Gas Distribution and Retail Energy Services segments~~cash, ~~customer~~ accounts receivable, ~~additional~~and ~~capital~~gas ~~investment~~ in ~~the~~storage, ~~Gas~~reflecting ~~Distribution~~the ~~and~~impact ~~Oil~~of ~~and~~higher ~~Gas~~gas ~~Production segments~~prices, ~~receivables~~as ~~from~~well ~~hedges~~as ~~and~~increases ~~increased cash and cash equivalents. These items were offset,~~ in ~~part,~~regulatory byassets ~~normal~~reflecting ~~seasonal~~increases ~~changes~~ in ~~gas~~environmental ~~inventory levels~~costs. ~~The~~Deferred ~~Company's~~credits ~~decrease~~and inother ~~current~~ liabilities ~~was~~were ~~driven~~higher ~~primarily~~due byto ~~refinancing short-term debt with long-term debt and by having no commercial paper outstanding, partially offset by~~ increases in ~~liabilities~~environmental ~~related to normal seasonal LIFO gas inventory adjustment, liabilities related to hedging, revenue tax and income tax accruals and accounts payable~~costs. The Company's capitalization increased as a result of ~~the~~ refinancing ~~of a portion of~~ short-term debt with long-term debt, ~~fiscal~~and ~~year-to-date~~common ~~earnings,~~stock ~~net~~issuances ofprimarily ~~dividends~~through ~~declared,~~its ~~and~~Long-Term ~~common~~Compensation, ~~stock~~Direct ~~issued~~Purchase ~~through~~and ~~the~~Investment ~~continuous~~and ~~equity~~Employee ~~program,~~Stock ~~dividend~~Purchase ~~reinvestments~~Plans and ~~long-term~~the ~~incentive~~continuous ~~compensation~~equity ~~plans~~program.

Total assets at ~~June~~December 3031, 2004 increased $~~118~~225.75 million compared to ~~June~~September 30, ~~2003~~2004 ~~reflecting~~primarily ~~the~~due ~~Company's~~to ~~continued~~increases ~~capital investment~~ in ~~its~~cash ~~Gas Distribution~~ and ~~Oil~~accounts ~~and~~receivable ~~Gas~~due ~~Production~~to ~~segments.~~seasonality ~~The~~and ~~Company's~~due ~~inventory~~to ~~increase~~increases ~~can~~in beregulatory ~~attributed~~assets toreflecting ~~higher~~increases ~~gas~~in ~~prices~~environmental ~~and 5~~costs.8 ~~Bcf~~Current ~~higher~~liabilities ~~inventory~~increased ~~volume~~primarily in the ~~Gas~~areas ~~Distribution,~~of ~~Midstream~~commercial ~~Services~~paper and ~~Retail Energy Services segments. Offsetting these increases were lower customer~~ accounts ~~receivable~~payable ~~balances~~as ~~resulting~~seasonal ~~from~~working ~~the~~capital ~~Company's~~needs ~~continuing collection efforts~~increased. ~~Long-term~~Deferred ~~assets,~~credits ~~long-term liabilities~~ and ~~accumulated~~ other ~~comprehensive~~liabilities ~~income~~increased ~~(AOCI)~~with ~~were~~increases ~~affected by a pension adjustment recorded~~ in ~~September~~environmental ~~2003 caused by lower discount rates and returns on pension assets~~costs. The Company's capitalization increased as a result of ~~refinancing a portion of short-term debt with long-term debt and ongoing~~ common stock issuances through the ~~continuous~~Long-Term ~~equity~~Incentive ~~program~~Compensation, ~~dividend~~Direct ~~reinvestments~~Purchase and ~~long-term~~Investment ~~incentive~~and ~~compensation~~Employee ~~plans~~Stock Purchase Plans.

Changes in Debt Securities

~~There~~As ~~were~~part noof ~~changes~~its continuing program to ~~the~~reduce ~~Company's~~long-term ~~debt~~financing ~~securities~~costs ~~during~~and ~~the~~manage ~~third~~interest ~~quarter~~rate risk, in January of ~~fiscal~~2005, ~~2004~~Peoples Gas entered into agreements to issue $50 million principal amount of Series RR first mortgage bonds due June 1, 2035. The ~~following~~bonds ~~table~~will ~~summarizes~~be ~~the~~issued ~~changes~~on ~~that~~or ~~have~~about ~~occurred~~June 1, 2005 and will initially be in Term Rate mode at a rate of 4.30 percent until June 1, 2016. Proceeds from the ~~composition~~issuance of the ~~Company's~~Series ~~debt~~RR ~~during~~bonds will be used to redeem $50 million principal amount of its Series FF first mortgage bonds at a price of 102 percent of principal, plus accrued interest as soon as practical following issuance of the ~~current~~Series ~~fiscal~~RR ~~year~~first mortgage bonds.

(Dollars In Millions) Issuances Retirements
Peoples Gas $ 51.0 (1) Auction Rate 34-year, $ 27.0 (1)(3) Variable rate, Series EE
Series OO (2) 37.5 (1)(3) Variable rate, Series II
51.0 (1) Auction Rate 34-year, 37.5 (1)(3) Variable rate, Series JJ
Series PP (2) 75.0 (1) 5.75%, Series DD
75.0 (1) Variable rate, 35-year (4.875%
fixed 15 years), Series QQ
Total $177.0 $177.0
(1) Tax Exempt
(2) Current Mode Auction Rate 35-day period
(3) Classified as short-term debt
In addition, subsequent to the close of the quarter, the Company fixed the interest rate for the Peoples Gas $50 million Series HH bonds at 4.75% until July 2014. Due to the tender provisions of the Series HH Bonds and the remarketing periods being less than one year, at June 30, 2004 the debt was classified as short term. Since the new remarketing period exceeds one year, beginning in the fourth quarter the debt will be classified as long term.
39
Financial Sources

In addition to cash generated internally by operations, as of ~~June~~December 3031, 2004, the Company had committed credit facilities of $~~392~~425.50 million (Peoples Energy, $225.0 million; Peoples Gas, $~~167~~200.~~5 million, of which $37.~~0 million ~~could be utilized by North Shore Gas~~). These various facilities primarily support the Company's ability to borrow using commercial paper. As of ~~June~~December 3031, 2004, ~~all~~$167.9 million of Peoples Energy's ~~$225.0 million~~ facilities were available and $~~167~~85.0 million of ~~the $167.5 million~~ Peoples Gas ~~and North Shore Gas~~ facilities were available. The Peoples Energy credit facilities expire in March 2007 and are expected to be renewed.

~~On August 4, 2004, Peoples Gas replaced the $167.5 million of bilateral credit facilities available to Peoples Gas and~~ North Shore Gas ~~with a $200.0 million 364-day syndicated facility available to Peoples Gas that will expire in August 2005. North Shore Gas~~ intends to meet its future short-term borrowing requirements through loans from Peoples Energy or Peoples Gas. The banks that are party to Peoples Gas' syndicated facility are ABN AMRO Bank, N.V. (Agent), Harris Nesbitt Financing, Inc., JPMorgan Chase Bank, The Northern Trust Company, Sumitomo Mitsui Banking Corporation, KBC Bank N.V., U.S. Bank National Association, The Bank of New York, Merill Lynch Bank USA and Fifth Third Bank (Chicago) a Michigan Banking Corporation.

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 percent. ~~The~~At ~~current~~December 31, 2004, the Company's ratio of total debt-to-total ~~capital~~debt ~~ratio~~plus ~~for~~equity ~~the~~was ~~Company~~55 percent, ~~Peoples~~down ~~Gas~~from 56 percent a year ago and ~~North~~reflecting ~~Shore~~peak ~~Gas~~seasonal isworking 50capital ~~percent,~~requirements 44in ~~percent~~the ~~and~~Gas 39Distribution, ~~percent~~Midstream, ~~respectively~~and Retail Energy Services segments. The current debt-to-total capital ratio for Peoples Gas is 49 percent.

In addition to the committed credit facilities discussed above, the Company has an uncommitted line of credit and letter of credit backup of $1525.0 million, of which $23.0 million was unused as of ~~June~~December 3031, 2004. Peoples Gas and North Shore Gas also have the authority to borrow up to $150.0 million and $50.0 million, respectively, from Peoples Energy. As of ~~June 30~~December 31, 2004, ~~neither~~North ~~Peoples~~Shore Gas ~~nor~~had ~~North~~$7.8 ~~Shore~~million in loans and Peoples Gas had ~~any~~no loans outstanding from Peoples Energy.

~~The~~- ~~current~~35 ~~credit ratings for the Company, Peoples Gas and North Shore Gas have not changed since the filing of the September 30, 2003 Annual Report on Form 10~~-K.

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

During December of 2004, Peoples Gas and North Shore Gas were given approval from the Commission to loan between themselves as utilities up to $50.0 million. As of December 31, 2004, no loans were outstanding between Peoples Gas and North Shore Gas.

The current credit ratings for the Company, Peoples Gas and North Shore Gas have not changed since the filing of the September 30, 2004 Annual Report on Form 10-K.

Changes in Equity Securities

~~During~~The ~~fiscal 2003 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. Since inception of this plan, the Company has issued 1,235,700 shares with proceeds, net of issuance costs, totaling $47.9 million. No shares have been issued subsequent to March 31, 2004. This and other common stock activity related to various Company plans is summarized in the table below.

	Three Months Ended		~~Nine Months Ended~~
	June 2004		June 2004
	December 31, 2004
(Dollars in Thousands)	Shares	Dollars	~~Shares~~	~~Dollars~~
Beginning balance	37,~~502~~733,~~425~~894	$ ~~371~~381,~~621~~168	~~36,689,968~~	~~$ 339,785~~
Shares issued:
Employee Stock Purchase Plan	65,~~937~~924	~~258~~237	~~13,244~~	~~487~~
Long-Term Incentive Compensation
Plan - net	867,~~081~~305	~~542~~2,279	~~305,212~~	~~11,179~~
Continuous equity offerings	-	(8)	377,400	15,450
Direct Purchase and Investment Plan	60,424	2,550
Directors Stock and Option Plan	-	-	766	32
Total activity for the period	133,653	5,066
Direct Purchase and Investment Plan	65,511	2,774	196,364	8,254
Ending balance	37,867,547	$ 386,234
Total activity for the period	80,529	3,566	892,986	35,402
Ending balance	37,582,954	$ 375,187	37,582,954	$ 375,187

40
Financial Uses

Capital Spending.
In the three-month period ended December 31, 2004, the Company spent $31.3 million on capital projects. The Gas Distribution segment spent $17.7 million on property, plant and equipment of which $15.7 million was spent by Peoples Gas and $1.9 million was spent by North Shore Gas. The majority of the remaining $13.6 million was spent by the Oil and Gas Production segment, which spent $13.0 million on drilling projects and the exploitation of existing assets. Management currently estimates that capital spending for fiscal 2005 will total approximately $160 million (including $85 million for Gas Distribution and $70 million for Oil and Gas Production).

Dividends
. On February 4, 2005, the Company's Board of Directors voted to raise the regular quarterly dividend on the Company's common stock from 54 cents per share to 54 1/2 cents per share. The first payment at this new level will be made on April 15, 2005 to shareholders of record at the close of business on March 22, 2005.

Commitments, Contractual Obligations and ~~Contingencies~~Uncertainties

~~The Company has certain contractual obligations directly related to the Company's operations and unconsolidated equity investees. The majority of these are long~~Off-~~term~~balance ~~debt~~Sheet ~~related with other substantial commitments for gas supply, transportation and storage contracts~~Arrangements.
Off-balance sheet debt at December 31, 2004 and 2003 consists of the Company's pro rata share of nonrecourse debt of various equity investments, including Trigen-Peoples District Energy Company (Trigen-Peoples) ($14.9 million and $15.3 million), EnerVest ($2.5 million and $2.7 million) and Elwood ($182.7 million and $190.0 million). The Company believes this off-balance sheet financing will not have a material effect on the Company's future financial condition. The Company also has commercial obligations of $57.8 million in guarantees and $10.1 million in letters of credit at December 31, 2004.

~~Contractual~~- ~~Obligations~~36 ~~and Other Commitments.~~-

~~Off-balance~~ITEM ~~Sheet Financing~~2. Management's Discussion and Analysis of Results of Operations and Financial Condition

~~Environmental~~Contractual ~~Matters~~Obligations.
Since the filing of the September 30, 2004 Annual Report on Form 10-K there have been no significant changes to contractual obligations with the exception that the Oil and Gas Production segment has entered into a long term drilling contract to drill wells in East Texas. The term of the contract is one year and the total commitment exceeds $4 million.

InEnvironmental ~~1994, North Shore Gas received a demand from a responsible party under CERCLA for environmental costs associated with a former mineral processing site in Denver, Colorado~~Matters. The demand alleged that North Shore Gas is a successor to the liability of a former entity that allegedly disposed of mineral processing wastes there between 1934 and 1941. (See Note 5 of the Notes to Consolidated Financial Statements.)
Peoples Gas and North Shore Gas are conducting environmental investigations and remedial work at certain sites that were the locations of former manufactured gas operations. (See Note 6A of the Notes to Consolidated Financial Statements.)

In 1994, North Shore Gas ~~Charge~~received ~~Reconciliation~~a ~~Proceedings~~demand from a responsible party under CERCLA for environmental costs associated with the Denver Site. The demand alleged that North Shore Gas is a successor to the liability of a former entity that allegedly disposed of mineral processing wastes there between 1934 and ~~Related~~1941. ~~Matters~~(See Note 6B of the Notes to Consolidated Financial Statements.)

41Gas Charge Reconciliation Proceedings.
For each utility subsidiary, the Commission conducts annual proceedings regarding the reconciliation of revenues from the Gas Charge and related gas costs. In these proceedings, the accuracy of the reconciliation of revenues and costs is reviewed and the prudence of gas costs recovered through the Gas Charge is examined by interested parties. Proceedings regarding Peoples Gas and North Shore Gas for fiscal 2004, 2003, 2002 and 2001 costs are currently pending before the Commission. In February 2004, a purported class action was filed against the Company and Peoples Gas by a Peoples Gas customer alleging, among other things, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act related to matters at issue in Peoples Gas' gas reconciliation proceedings. On September 22, 2004, the Court granted a motion to dismiss all counts against Peoples Gas. On October 21, 2004, the plaintiffs filed an amended complaint against the Company. On November 22, 2004, the Company filed a motion to dismiss the amended complaint. (See Note 7 of the Notes to Consolidated Financial Statements.)

New Matters.
See Note 8 of the Notes to Consolidated Financial Statements for discussions regarding proceedings related to a municipal tax audit conducted by the City of Chicago and proceedings related to a royalty dispute of the Oil and Gas Production segment.

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 ~~June~~December 3031, 2004, such restrictions amounted to $6.9 million of North Shore Gas' total retained earnings of $8481.84 million.

Peoples District Energy Corporation owns a 50 percent equity interest in Trigen-Peoples. The Construction and Term Loan Agreement between Trigen-Peoples and Prudential Insurance Company of America related to Trigen-Peoples' project financing prohibits any distribution that would result in the partners' total capital account in Trigen-Peoples being less than $7.0 million. At ~~June~~December 3031, 2004, the partners' capital account was $7.35 million. The Construction and Term Loan Agreement also prohibits any distribution unless the partnership's debt service coverage ratio for the four fiscal quarters prior to the distribution was at least 1.25 to 1.0. Trigen-Peoples' debt service coverage ratios for the last four fiscal quarters starting with the most recent quarter were 12.8502 to 1.0, 21.0997 to 1.0, 1.7285 to 1.0, and 12.9009 to 1.0.

Peoples Energy Resources Company, LLC owns a 50 percent equity interest in Elwood. Elwood's trust indenture and other agreements related to its project financing prohibit Elwood from making distributions, unless Elwood has maintained certain minimum historic and projected debt service coverage ratios. At ~~July~~January 65, ~~2004,~~2005 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.

- 37 -

ITEM 2. Management's Discussion and Analysis of Results of Operations and Financial Condition
PEOPLES GAS AND NORTH SHORE GAS DISCUSSIONS

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

	The Peoples Gas Light and Coke Company				North Shore Gas Company
	Gas	Midstream			Gas
(In Thousands)	Distribution	Services	Corporate	Total	Distribution	Corporate	Total
For the Three Months Ended
December 31, 2004 (GAAP)	$ 39,399	$ 1,935	$ (8,970)	$ 32,364	$ 8,144	$ (790)	$ 7,354
December 31, 2004 (non-GAAP) (1)	39,399	1,935	(2,015)	39,319	8,144	(269)	7,875
December 31, 2003	43,832	824	(2,158)	42,498	8,274	(273)	8,001

(1) 2004 ongoing income (non-GAAP) is defined as GAAP operating income adjusted to exclude the effects of a pension expense related restructuring charge of $7.0 million and $0.5 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 2004 GAAP and non-GAAP earnings.

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

Peoples Gas Discussion

Revenues for Peoples Gas for the three-month period increased approximately $63.2 million from the previous period. The increase was mainly due to higher gas prices ($76.5 million), offset by a decrease in deliveries in the three-month period resulting from warmer weather ($2.4 million) and lower normalized deliveries ($11.4 million). Operating income for the three-month period decreased $10.1 million compared with the previous period due mainly to the $7.0 million restructuring-related pension charge. Also negatively impacting operating income were effects of warmer weather and lower normalized deliveries ($4.2 million), offset by higher hub results ($1.1 million).

Interest expense for the three-month period increased $0.4 million as compared to the previous period. The increase was the result of higher interest rates associated with long-term variable rate debt, short-term borrowings, and refinancing variable rate debt with fixed term debt. The impact of higher interest rates was partially offset by lower average borrowing requirements and the refinancing of callable debt.

North Shore Gas Discussion

Revenues for North Shore Gas for the three-month period increased $16.2 million over the previous period resulting from higher gas prices ($17.9 million), offset by a decrease in deliveries in the three-month period resulting from warmer weather and lower normalized deliveries ($1.6 million). Operating income for the three-month period decreased $0.6 million compared with the previous period due mainly to the $0.5 million restructuring-related pension charge. Also negatively impacting operating income were effects of warmer weather and lower normalized deliveries ($0.3 million).

For North Shore Gas, interest expense changes for the three-month period were not significant.

- 38 -

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

The Peoples Gas Light and Coke Company
Gas Distribution Statistics

	Three Months Ended
Margin Data	December 31,		Increase/
(In Thousands)	2004	2003	(Decrease)
Gas Distribution revenues:
Sales
Residential	$ 340,976	$ 289,944	$ 51,032
Commercial	52,820	45,364	7,456
Industrial	9,169	6,576	2,593
Total sales	402,965	341,884	61,081

Transportation
Residential	9,193	9,188	5
Commercial	12,427	11,993	434
Industrial	4,727	5,058	(331)
Contract pooling	3,674	2,160	1,514
Total transportation	30,021	28,399	1,622

Other Gas Distribution revenues	3,588	4,265	(677)

Total Gas Distribution revenues	436,574	374,548	62,026
Less: Gas costs	272,433	213,949	58,484
Gross margin ⁽¹⁾	164,141	160,599	3,542
Less: Revenue taxes	41,655	37,461	4,194
Environmental costs recovered	8,606	4,367	4,239
Net margin ⁽¹⁾	$ 113,880	$ 118,771	$ (4,891)

Gas Distribution deliveries (MDth):
Gas sales
Residential	28,954	30,973	(2,019)
Commercial	4,799	5,278	(479)
Industrial	891	805	86
Total gas sales	34,644	37,056	(2,412)

Transportation
Residential	5,967	6,399	(432)
Commercial	10,675	11,129	(454)
Industrial	4,710	5,122	(412)
Total transportation	21,352	22,650	(1,298)

Total Gas Distribution deliveries	55,996	59,706	(3,710)

Gross margin per Dth delivered	$ 2.93	$ 2.69	$ 0.24

Net margin per Dth delivered	$ 2.03	$ 1.99	$ 0.04

Average cost per Dth of gas sold	$ 7.86	$ 5.77	$ 2.09

Actual heating degree days (HDD)	2,083	2,115	(32)
Normal heating degree days⁽²⁾	2,279	2,279

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

(2) Normal heating degree days are based on a 30-year average of monthly temperatures at Chicago's O'Hare Airport for the years 1970-1999.

- 39 -

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

North Shore Gas Company
Gas Distribution Statistics

	Three Months Ended
Margin Data	December 31,		Increase/
(In Thousands)	2004	2003	(Decrease)
Gas Distribution revenues:
Sales
Residential	$ 63,900	$ 50,523	$ 13,377
Commercial	10,084	7,984	2,100
Industrial	2,434	1,798	636
Total sales	76,418	60,305	16,113

Transportation
Residential	484	511	(27)
Commercial	1,794	1,786	8
Industrial	748	749	(1)
Contract pooling	347	179	168
Total transportation	3,373	3,225	148

Other Gas Distribution revenues	305	333	(28)

Total Gas Distribution revenues	80,096	63,863	16,233
Less: Gas costs	57,171	41,038	16,133
Gross margin ⁽¹⁾	22,925	22,825	100
Less: Revenue taxes	4,309	3,874	435
Environmental costs recovered	376	421	(45)
Net margin ⁽¹⁾	$ 18,240	$ 18,530	$ (290)

Gas Distribution deliveries (MDth):
Gas sales
Residential	6,083	6,242	(159)
Commercial	994	1,035	(41)
Industrial	255	251	4
Total gas sales	7,332	7,528	(196)

Transportation
Residential	250	275	(25)
Commercial	1,814	1,898	(84)
Industrial	1,452	1,485	(33)
Total transportation	3,516	3,658	(142)

Total Gas Distribution deliveries	10,848	11,186	(338)

Gross margin per Dth delivered	$ 2.11	$ 2.04	$ 0.07

Net margin per Dth delivered	$ 1.68	$ 1.66	$ 0.02

Average cost per Dth of gas sold	$ 7.80	$ 5.45	$ 2.35

Actual heating degree days (HDD)	2,083	2,115	(32)
Normal heating degree days⁽²⁾	2,279	2,279

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

(2) Normal heating degree days are based on a 30-year average of monthly temperatures at Chicago's O'Hare Airport for the years 1970-1999.

- 40 -

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

FORWARD-LOOKING INFORMATION

This ~~MD&A~~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, financing activities, market risk, the insignificant effect on income arising from changes in revenue from customers' gas purchases from entities other than the Gas Distribution subsidiaries, the adequacy of the Gas Distribution segment's reserves for uncollectible accounts, capital expenditures of the Company's subsidiaries, and environmental matters. These statements speak of the Company's plans, goals, beliefs, or expectations, refer to estimates or use similar terms. Generally, the words "may," "could," "project," "believe," "anticipate," "estimate," "plan," "forecast," "will be" and similar words identify forward-looking statements. Actual results could differ materially, because the realization of those results is subject to many uncertainties including:

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

the effects of the Company's ~~announced~~organizational ~~strategic reorganization~~restructuring;

the future health of the United States and Illinois economies;

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

adverse resolution of material litigation;

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

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

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

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

operational factors affecting the Company's Gas Distribution, Oil and Gas Production and Power Generation segments;

Aquila's financial ability to perform under its ~~power~~PSAs ~~sales agreements~~ with Elwood;

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

42 weather related energy demand; and

weather and price effects on energy demand; and
terrorist activities.

- 41 -

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

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 and ITEM 7 - MD&A, in the combined Annual Report on Form 10-K 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.

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

~~The~~In ~~Company,~~accordance ~~Peoples~~with ~~Gas~~Exchange ~~and~~Act ~~North~~Rules ~~Shore Gas maintain disclosure controls and procedures (as defined in Rule~~ 13a-~~15e~~15 ofand ~~the Securities Exchange Act of 1934~~15d-15, ~~as amended) which are designed to ensure that information required to be disclosed by~~ the Company, Peoples Gas and North Shore Gas incarried ~~the~~out ~~reports~~an ~~that~~evaluation, ~~are~~under ~~submitted~~the orsupervision ~~filed~~and with the ~~SEC~~participation isof ~~recorded~~management, ~~processed,~~including ~~summarized and reported within the time periods specified in the SEC's rules and forms.~~ Thomas M. Patrick, our principal executive officer, and Thomas A. Nardi, our principal financial officer, of the ~~Company,~~effectiveness ~~Peoples~~of ~~Gas~~our ~~and North Shore Gas, have evaluated the~~ disclosure controls and procedures as of the end of the period covered by this report. ~~Based upon that evaluation, Messrs. Patrick and Nardi have concluded that the disclosure controls and procedures are effective.~~

~~During~~Thomas M. Patrick and Thomas A. Nardi concluded that our disclosure controls and procedures were effective for the period covered by this report on Form 10-Q to provide reasonable assurance that information required to be disclosed and filed or submitted under the Exchange Act is recorded, ~~there~~processed, ~~was~~summarized noand ~~change~~reported within the time periods specified in the ~~companies~~SEC's rules and forms. Other than as described in the next paragraph below, there have been no changes in internal control over financial reporting ~~identified~~that inoccurred ~~connection~~during ~~with~~ the ~~evaluation~~period ofcovered ~~the~~by ~~disclosure~~this ~~controls~~report ~~and~~on ~~procedures~~Form 10-Q that has materially affected, or is reasonably likely to materially affect, ~~the~~our ~~companies'~~ internal control over financial reporting.

43As disclosed in the Company's Form 10-K for the fiscal year ended September 30, 2004, in connection with the evaluation and audit of the Company's consolidated financial statements for fiscal year 2004, we reported to our audit committee and our independent auditors a material weakness in our internal controls that existed during 2004 and prior periods. The weakness related to ineffective account reconciliations between the detailed customer billing records and the general ledger accounting systems of the Company's two Gas Distribution utilities, Peoples Gas and North Shore Gas. The Company, Peoples Gas and North Shore Gas devoted significant resources and initiated corrective actions that addressed these deficiencies in internal controls. Corrective actions the companies implemented in the period covered by this report on Form 10-Q included a more comprehensive monthly account reconciliation between the customer and financial systems, monthly review of all activity not automatically interfaced between the systems, improved controls for reporting adjustments to customers' accounts, increased review of billing adjustments and enhanced training of personnel involved in the various processes. Management believes these actions have remediated the material weakness in internal controls.

Part II - Other Information

Item 1. Legal Proceedings

See Note 5 of the Notes to Consolidated Financial Statements - Environmental Matters for a discussion pertaining to environmental matters and Note 6 of the Notes to Consolidated Financial Statements - Gas Charge Reconciliation Proceedings and Other Matters pertaining to proceedings at the Commission regarding the prudency of gas purchases by Peoples Gas and North Shore Gas, which notes are incorporated herein by reference.

Item 2. Changes in Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

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

None.

Item 5. Other Information

None.

Item 6. Exhibits and Reports on Form 8-K

Peoples Energy Corporation:

a. Exhibits

Exhibit

Number

Description of Document

10(a)

Directors Deferred Compensation Plan, as amended April 7, 2004.

10(b)

Amendment No. 3 to FTS Service Agreement, Contract No. 113418 between Natural Gas Pipeline Company of America and Peoples Gas, dated February 18, 2004.

10(c)

FTS Service Agreement, Contract No. 130626 between Natural Gas Pipeline Company of America and Peoples Gas, dated February 18, 2004.

10(d)

FTS Service Agreement, Contract No. 130628 between Natural Gas Pipeline Company of America and Peoples Gas, dated February 18, 2004.

10(e)

Amendment No. 4 to DSS Storage Agreement, Contract No. 117164 between Natural Gas Pipeline Company of America and North Shore Gas, dated February 17, 2004.

10(f)

Amendment No. 2 to FTS Service Agreement, Contract No. 117117 between Natural Gas Pipeline Company of America and North Shore Gas, dated February 18, 2004.

- 42 -

44Part II - Other Information

10(g) Amendment No. 3 to FTS Service Agreement, Contract No. 113421 between Natural Gas Pipeline Company of America and North Shore Gas, dated February 18, 2004.
10(h) FTS Service Agreement, Contract No. 130625 between Natural Gas Pipeline Company of America and North Shore Gas, dated February 18, 2004.
10(i) FTS Service Agreement, Contract No. 130629 between Natural Gas Pipeline Company of America and North Shore Gas, dated February 18, 2004.
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.
ITEM 1. Legal Proceedings

		b. Reports on Form 8-K filed or furnished during the quarter ended June 30, 2004
			Date of Report - April 14, 2004
			Item 5 - Other Events
			Item 12 - Disclosure of Results of Operations and Financial Condition
			Analyst Presentation

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 Other 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- New Matters for a discussion of other events and proceedings, which notes are incorporated herein by reference.

~~Date~~On January 12, 2005, an explosion occurred in an underground tunnel beneath a shopping mall parking lot in Chicago. Peoples Gas' facilities were in close proximity to the explosion. Peoples Gas has no knowledge of ~~Report~~fatalities or life-threatening ~~April~~injuries. ~~23,~~There ~~2004~~was ~~Item~~property 9damage -to ~~Regulation~~automobiles FDin ~~Disclosure~~the ~~Item~~parking 12lot -and ~~Disclosure~~several ofmall ~~Results~~stores. The cause of ~~Operations~~the explosion is not known at this time. The Company has received one lawsuit related to this incident and ~~Financial~~notice ~~Condition~~that ~~Press~~five ~~Release~~additional ~~Date~~suits ofmay ~~Report~~be -filed. ~~April~~At 29this time, ~~2004~~the ~~Item~~Company 5cannot -predict ~~Other~~the ~~Events~~outcome ~~Conference~~of ~~Call~~any ~~Script~~pending ~~and~~or ~~Forward-Looking~~potential ~~Information~~litigation. ~~Date~~Based on the nature and extent of ~~Report~~the known damages, management believes that insurance will cover any liability above Peoples Gas' self-insured ~~April~~retention 30amount and, ~~2004~~accordingly, ~~Item~~does 9not -expect ~~Regulation~~that FDthis ~~Disclosure~~incident ~~Item~~will 12have -a ~~Disclosure~~material ofadverse ~~Results~~affect on the financial position or results of ~~Operations~~operation ~~and~~of ~~Financial~~the ~~Condition~~Company ~~Analyst~~or ~~Presentation~~Peoples Gas.

45ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

The Peoples Gas Light and Coke Company:
	a. Exhibits
		Exhibit
		Number	Description of Document
		10(b)	Amendment No. 3 to FTS Service Agreement, Contract No. 113418 between Natural Gas Pipeline Company of America and Peoples Gas, dated February 18, 2004.
		10(c)	FTS Service Agreement, Contract No. 130626 between Natural Gas Pipeline Company of America and Peoples Gas, dated February 18, 2004.
		10(d)	FTS Service Agreement, Contract No. 130628 between Natural Gas Pipeline Company of America and Peoples Gas, dated February 18, 2004.
		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.

None.

bITEM 3. ~~Reports~~Defaults onUpon ~~Form~~Senior ~~8-K filed during the quarter ended June 30, 2004 None.~~Securities

None.

46ITEM 4. Submission of Matters to a Vote of Security Holders

	10(g)	Amendment No. 3 to FTS Service Agreement, Contract No. 113421 between Natural Gas Pipeline Company of America and North Shore Gas, dated February 18, 2004.
	10(h)	FTS Service Agreement, Contract No. 130625 between Natural Gas Pipeline Company of America and North Shore Gas, dated February 18, 2004.
	10(i)	FTS Service Agreement, Contract No. 130629 between Natural Gas Pipeline Company of America and North Shore Gas, dated February 18, 2004.
	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.
b. Reports on Form 8-K filed during the quarter ended June 30, 2004
	None.

None.

47ITEM 5. Other Information

SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
		Peoples Energy Corporation
		(Registrant)
August 10, 2004		By: /s/ THOMAS A. NARDI
(Date)		Thomas A. Nardi
		Senior 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)
August 10, 2004		By: /s/ THOMAS A. NARDI
(Date)		Thomas. A. Nardi
		Senior 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)
August 10, 2004		By: /s/ THOMAS A. NARDI
(Date)		Thomas. A. Nardi
		Senior Vice President and Chief Financial Officer
		(Same as above)
		Principal Financial Officer

None.

ITEM 6. Exhibits

	Peoples Energy Corporation :

		Exhibit
		Number	Description of Document

		4(a)	Loan Agreement between Peoples Gas and Illinois Finance Authority dated as of January 1, 2005.

		4(b)	Peoples Gas Supplemental Indenture dated as of January 1, 2005, First and Refunding Mortgage Bonds, Series RR

		10(a)	Contract of Purchase between Peoples Gas and the Illinois Finance Authority dated January 19, 2005.

		10(b)	Insurance Agreement between Peoples Gas and Ambac dated as of January 1, 2005.

- 43 -

Part II - Other Information

		Exhibit
		Number		Description of Document

		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.

The Peoples Gas Light and Coke Company :
	Exhibit
	Number	Description of Document

	4(a)	Loan Agreement between Peoples Gas and Illinois Finance Authority dated as of January 1, 2005.

	4(b)	Peoples Gas Supplemental Indenture dated as of January 1, 2005, First and Refunding Mortgage Bonds, Series RR

	10(a)	Contract of Purchase between Peoples Gas and the Illinois Finance Authority dated January 19, 2005.

	10(b)	Insurance Agreement between Peoples Gas and Ambac dated as of January 1, 2005.

	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.

- 44 -

Part II - Other Information

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.

- 45 -

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)


February 9, 2005		By: /s/ THOMAS A. NARDI
(Date)		Thomas A. Nardi
		Senior 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)


February 9, 2005		By: /s/ THOMAS A. NARDI
(Date)		Thomas. A. Nardi
		Senior 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)


February 9, 2005		By: /s/ THOMAS A. NARDI
(Date)		Thomas. A. Nardi
		Senior Vice President and Chief Financial Officer

		(Same as above)
		Principal Financial Officer

(Dollars In Millions)	Issuances			Retirements
Peoples Gas	$ 51.0	(1)	Auction Rate 34-year,	$ 27.0	(1)(3)	Variable rate, Series EE
			Series OO (2)	37.5	(1)(3)	Variable rate, Series II
	51.0	(1)	Auction Rate 34-year,	37.5	(1)(3)	Variable rate, Series JJ
			Series PP (2)	75.0	(1)	5.75%, Series DD
	75.0	(1)	Variable rate, 35-year (4.875%
			fixed 15 years), Series QQ
Total	$177.0			$177.0
(1) Tax Exempt
(2) Current Mode Auction Rate 35-day period
(3) Classified as short-term debt

North Shore Gas Company:

a. Exhibits

Description of Document

Amendment No. 4 to DSS Storage Agreement, Contract No. 117164 between Natural Gas Pipeline Company of America and North Shore Gas, dated February 17, 2004.

Amendment No. 2 to FTS Service Agreement, Contract No. 117117 between Natural Gas Pipeline Company of America and North Shore Gas, dated February 18, 2004.

Filing Compare · PEOPLES GAS LIGHT & COKE CO