UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2007
For the quarterly period ended March 31, 2009
OR
[ ]	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ________ to ________

Commission File Number	Registrant; State of Incorporation; Address; and Telephone Number	IRS Employer Identification No.
2-35965	NORTH SHORE GAS COMPANY	36-1558720
	(An Illinois Corporation)
	130 East Randolph Drive
	24th Floor
	Chicago, Illinois 60601-6207
	(312) 240-4000

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by acheck mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). (Registrant is not yet required to provide financial disclosure in an Interactive Data File format.) Yes [ ] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer, or a smaller reporting company. See ~~definition~~the definitions of “"large accelerated filer," "accelerated filer," and ~~large~~"smaller ~~accelerated~~reporting ~~filer”~~company" in Rule 12b-2 of the Exchange Act. ~~(Check One):~~ Large accelerated filer [ ] Accelerated filer [ ] Non-accelerated filer [X] Smaller reporting company [ ] Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). 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: 3,625,887 shares of common stock, without par value, outstanding at ~~April~~May 306, ~~2007~~2009, all of which were held, beneficially and of record, by Peoples Energy Corporation, a wholly owned subsidiary of Integrys Energy Group, Inc.

NORTH SHORE GAS COMPANY

FORM 10-Q ~~FOR THE QUARTER ENDED MARCH 31, 2007~~

~~CONTENTS~~FOR THE QUARTER ENDED MARCH 31, 2009

		Page
	FORWARD-LOOKING STATEMENTS	4
PART I.	FINANCIAL INFORMATION
Item 1.	FINANCIAL STATEMENTS (Unaudited)
	Condensed Consolidated Statements of Income	5
	Condensed Consolidated Balance Sheets	6
	Condensed Consolidated Statements of Capitalization	7
	Condensed Consolidated Statements of Cash Flows	8
	CONDENSED NOTES TO FINANCIAL STATEMENTS	9
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	28
Item 4.	Controls and Procedures	28
PART II.	OTHER INFORMATION
Item 1.	Legal Proceedings	29
Item 1A.	Risk Factors	29
Item 6.	Exhibits	29
Signature		30

TABLE OF CONTENTS

EXHIBIT INDEX		31
				Page
12	North Shore Gas Company Ratio of Earnings to Fixed Charges
	COMMONLY USED ACRONYMS			2
31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 for North Shore Gas Company
	FORWARD-LOOKING STATEMENTS			3
31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 for North Shore Gas Company
PART I.	FINANCIAL INFORMATION			4
32	Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 for North Shore Gas Company
Item 1.	FINANCIAL STATEMENTS (Unaudited)			4
	Condensed Statements of Income			4
	Condensed Balance Sheets			5
	Condensed Statements of Capitalization			6
	Condensed Statements of Cash Flows			7
	CONDENSED NOTES TO FINANCIAL STATEMENTS			8-15
			Page
	Note 1	Financial Information	8
	Note 2	Cash and Cash Equivalents	8
	Note 3	Risk Management Activities	8
	Note 4	Natural Gas in Storage	9
	Note 5	Asset Retirement Obligations	9
	Note 6	Income Taxes	9
	Note 7	Commitments and Contingencies	10
	Note 8	Employee Benefit Plans	12
	Note 9	Fair Value	13
	Note 10	Regulatory Environment	14
	Note 11	Segments of Business	14
	Note 12	New Accounting Pronouncements	14
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations			16-22
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			23
Item 4.	Controls and Procedures			23
PART II.	OTHER INFORMATION			24
Item 1.	Legal Proceedings			24
Item 1A.	Risk Factors			24
Item 6.	Exhibits			24
Signatures				25

- 2 -



		Page
EXHIBIT INDEX		26

12	Ratio of Earnings to Fixed Charges

31.1	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 for North Shore Gas Company

31.2	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 for North Shore Gas Company

32	Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 for North Shore Gas Company

Commonly Used Acronyms

AG	Illinois Attorney General
CERCLA	The Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended
EPA	United States Environmental Protection Agency
FASB	Financial Accounting Standards Board
FIN	FASB Interpretation
ICC	Illinois Commerce Commission
IEPA	Illinois Environmental Protection Agency
LIFO	Last in, first out
MD&A	Management’s Discussion and Analysis of Financial Condition and Results of Operations
MTM	Mark-to-market
OMC	Outboard Marine Corporation
NSG	North Shore Gas Company
PCB	Polychlorinated biphenyl
PEC	Peoples Energy Corporation
PGL	The Peoples Gas Light and Coke Company
PRP	Potentially Responsible Party
RAKTL	Ronald A. Katz Technology Licensing, L.P.
ROD	Record of decision
SEC	Securities and Exchange Commission
SFAS	Statement of Financial Accounting Standards

EPA	United States Environmental Protection Agency
FASB	Financial Accounting Standards Board
FERC	Federal Energy Regulatory Commission
GAAP	United States Generally Accepted Accounting Principles
IBS	Integrys Business Support, LLC
ICC	Illinois Commerce Commission
IRS	United States Internal Revenue Service
LIFO	Last in, first out
N/A	Not Applicable
NSG	North Shore Gas Company
NYMEX	New York Mercantile Exchange
PEC	Peoples Energy Corporation
PGL	The Peoples Gas Light and Coke Company
SEC	United States Securities and Exchange Commission
SFAS	Statement of Financial Accounting Standards
VBA	Volume Balancing Adjustment

- 3 2 -

Forward-Looking Statements

In this report, NSG ~~and~~makes ~~its subsidiary make~~ statements concerning expectations, beliefs, plans, objectives, goals, strategies, and future events or performance. Such statements are "forward-looking statements" within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended. ~~Although NSG and its subsidiary believe that these forward~~ Forward-looking statements ~~and~~are ~~the~~subject ~~underlying~~ to assumptions ~~are~~and uncertainties; ~~reasonable~~therefore, itactual ~~cannot~~results ~~provide~~may ~~assurance~~differ ~~that~~materially ~~they~~from ~~will prove~~those ~~correct.~~expressed ~~Except~~or toimplied ~~the extent required~~ by ~~the~~such ~~federal~~forward-looking ~~securities~~statements. Although ~~laws,~~ NSG ~~and its~~believes ~~subsidiary~~that ~~undertake~~these noforward-looking ~~obligation~~statements toand ~~publicly~~the ~~update~~underlying ~~or revise any~~assumptions ~~forward-looking~~are ~~statements~~reasonable, ~~whether~~it ascannot aprovide ~~result~~assurance ofthat ~~new~~such ~~information,~~statements ~~future events~~will ~~or otherwise~~prove correct.

InForward-looking ~~addition~~statements toinclude, among other things, statements concerning management's expectations and projections regarding ~~trends~~earnings, orregulatory ~~estimates~~matters, infuel ~~MD&A~~costs, ~~forward-looking~~natural ~~statements~~gas ~~included~~deliveries, orremediation ~~incorporated~~costs, inenvironmental ~~this~~and ~~report~~other ~~include,~~capital ~~but are~~expenditures, ~~not~~liquidity ~~limited~~and tocapital ~~statements~~resources, ~~regarding~~trends, ~~future:~~estimates, and other matters.

·Forward-looking statements ~~Revenues~~involve ora ~~expenses~~number of risks and uncertainties. Some risk factors that could cause results to differ from any forward-looking statement include those described in Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2008. Other factors include:

·● ~~Capital~~Resolution ~~expenditure~~of ~~projections~~pending and future rate cases and negotiations (including the recovery of deferred costs) and other regulatory decisions impacting NSG; ● The impact of recent and future federal, state, and local regulatory changes, including legislative and regulatory initiatives regarding deregulation and restructuring of the natural gas utility industry and possible future initiatives to address concerns about global climate change, changes in environmental, tax, and other laws and regulations to which NSG is subject, as well as changes in the application of existing laws and regulations; ● Current and future litigation, regulatory investigations, proceedings, or inquiries, including but not limited to, manufactured gas plant site cleanup and reconciliation of revenues from the Gas Charge and related natural gas costs; ● The impacts of changing financial market conditions, credit ratings, and interest rates on the liquidity and financing efforts of NSG; ● The risks associated with changing commodity prices (particularly natural gas), and available sources of natural gas; ● Resolution of audits or other tax disputes with the IRS, Illinois state revenue agencies, or other taxing authorities; ● The effects, extent, and timing of additional competition or regulation in the markets in which NSG operates; ● Investment performance of employee benefit plan assets; ● Advances in technology; ● Effects of and changes in political and legal developments, as well as economic conditions and the related impact on customer demand; ● Potential business strategies, including construction or disposition of assets, which cannot be assured to be completed timely or within budgets; ● The direct or indirect effects of terrorist incidents, natural disasters, or responses to such events; ● The effectiveness of risk management strategies and the use of financial and derivative instruments; ● The risks associated with the inability of NSG's counterparties, affiliates, and customers to meet their obligations; ● The effect of accounting pronouncements issued periodically by standard-setting bodies; and ● Other factors discussed elsewhere herein and in other reports filed by NSG and/or Integrys Energy Group from time to time with the SEC.

·Except to ~~Financing~~the ~~sources~~extent required by the federal securities laws, NSG undertakes no obligation to publicly update or revise any forward-looking statements, whether as a result of new information, future events, or otherwise.

~~Forward~~-~~looking statements~~ ~~involve~~3 a number of risks and uncertainties. There are many factors that could cause actual results to differ materially from those expressed or implied in this report. Some risk factors that could cause results different from any forward-looking statement include those described in Item 1A of our combined PEC, PGL and NSG Annual Report on Form 10-K, as amended, for the fiscal year ended September 30, 2006 and as such may be amended or supplemented in Part II, Item 1A of this report. Other factors include:

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

PART 1. FINANCIAL INFORMATION

ITEM 1. Financial Statements

NORTH SHORE GAS COMPANY


CONDENSED STATEMENTS OF INCOME (Unaudited)	Three Months Ended
	March 31
(Millions)	2009			2008

Natural gas operating revenues	$	116.6		$	131.7

Natural gas purchased for resale		93.1			106.7
Operating and maintenance expense		15.8			13.9
Depreciation and amortization expense		1.5			1.6
Taxes other than income taxes		0.7			0.6
Operating income		5.5			8.9

Miscellaneous income		0.1			0.2
Interest expense		(1.1	)		(1.0	)
Other expense		(1.0	)		(0.8	)

Income before taxes		4.5			8.1
Provision for income taxes		1.6			2.6
Net income	$	2.9		$	5.5

The accompanying condensed notes are an integral part of these statements.

· Unexpected costs or liabilities related to the merger between a subsidiary of Integrys and PEC;

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

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

· The impact of recent and future federal and state regulatory change, including changes in environmental, tax and other laws and regulations to which NSG and its subsidiary are subject, as well as changes in application of existing laws and regulations;

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

· The credit ratings of NSG could change in the future;

· Resolution of audits by the Internal Revenue Service and Illinois state revenue agencies;

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

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

· The effectiveness of NSG’s derivative instruments and hedging activities and their impact on its future results of operations;

· Available sources and costs of natural gas;

· Investment performance of employee benefit plan assets;

· Advances in technology;

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

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

· Financial market conditions and the results of financing efforts, including risks associated with commodity prices (particularly natural gas), interest rates and counter-party credit;

· Weather and other natural phenomena, in particular the effect of weather on natural gas sales;

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

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

Forward-looking statements are subject to assumptions and uncertainties, therefore actual results may differ materially from those expressed or implied by such forward-looking statements.

- 4 -

PART I. FINANCIAL INFORMATION

NORTH SHORE GAS COMPANY


CONDENSED BALANCE SHEETS (Unaudited)	March 31			December 31
(Millions)	2009			2008

Assets
Cash and cash equivalents	$	0.1		$	0.1
Accounts receivable and accrued unbilled revenues, net of reserves of $2.1 and $1.7, respectively		55.0			63.5
Notes receivable from related parties		31.7			-
Natural gas in storage, primarily at LIFO		1.9			8.8
Assets from risk management activities		0.2			1.8
Regulatory assets		27.5			32.3
Other current assets		1.6			1.6
Current assets		118.0			108.1

Property, plant, and equipment, net of accumulated depreciation of $161.7 and $160.2, respectively		246.4			245.8
Regulatory assets		128.5			128.3
Other		1.3			1.4
Total assets	$	494.2		$	483.6

Liabilities and Shareholder's Equity
Accounts payable	$	16.6		$	26.6
Payables to related parties		6.0			6.7
Notes payable to related parties		-			9.0
Liabilities from risk management activities		21.7			26.7
Accrued taxes		5.3			6.1
Customer credit balances		2.2			6.5
Regulatory liabilities		13.7			8.1
Temporary LIFO liqidation credit		29.2			-
Other current liabilities		8.7			7.8
Current liabilities		103.4			97.5

Long-term debt		75.3			75.3
Deferred income taxes		42.0			41.0
Environmental remediation liabilities		101.5			101.4
Pension and other postretirement benefit obligations		33.3			32.5
Asset retirement obligations		24.6			24.2
Other		10.3			9.6
Long-term liabilities		287.0			284.0

Commitments and contingencies

Common stock - without par value, 5,000,000 shares authorized; 3,625,887 shares issued and outstanding		24.8			24.8
Retained earnings		79.1			77.4
Accumulated other comprehensive loss		(0.1	)		(0.1	)
Total liabilities and shareholder's equity	$	494.2		$	483.6

The accompanying condensed notes are an integral part of these statements.

Item 1. Financial Statements

NORTH SHORE GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF INCOME (Unaudited)		Three Months Ended
	March 31,
(Millions)		2007		2006
Gas operating revenues		$124.6		$121.6
Operating expenses
Gas purchased for resale		99.8		98.3
Operating and maintenance expenses		11.2		10.5
Gas charge settlement (credit)		-		(12.7	)
Depreciation and amortization		1.5		1.4
Taxes, other than income taxes		1.0		0.9
Operating income		11.1		23.2
Miscellaneous income		0.2		0.2
Interest expense		(1.0	)	(1.0	)
Other (expense) income		(0.8	)	(0.8	)
Income before taxes		10.3		22.4
Provision for Income taxes		3.7		8.6
Net Income		$6.6		$13.8
The accompanying condensed notes are an integral part of these statements.

- 5 -

NORTH SHORE GAS COMPANY
CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)			March 31,		December 31,	March 31,
CONDENSED STATEMENTS OF CAPITALIZATION (Unaudited)						March 31			December 31
(Millions)			2007		2006	2006
(Millions, except share amounts)						2009			2008
Assets
Common stock equity
Current assets
Common stock, without par value, 5,000,000 shares authorized,
Cash and cash equivalents			$0.8		$0.1	$23.3
3,625,887 shares outstanding						$	24.8		$	24.8
Short-term investments			-		-	7.0
Accumulated other comprehensive loss							(0.1	)		(0.1	)
Customer and other receivables, net of reserves of $1.8, $1.4, and
Retained earnings							79.1			77.4
$2.2 at March 31, 2007, December 31, 2006 and March 31, 2006			40.8		24.2	43.6
Total common stock equity							103.8			102.1
Receivables from related parties			27.9		0.4	0.4
Long-term debt
Accrued unbilled revenues			14.7		20.6	17.3
First mortgage bonds
Natural gas in storage, primarily at last-in, first-out cost			2.9		10.0	3.6
		Series			Year Due
Materials and supplies, at average cost			1.1		1.0	1.2
	M		5.000	%	2028		28.8			28.8
Regulatory assets			2.3		21.5	12.0
	N-2		4.625	%	2013		40.0			40.0
Assets from risk management activities			1.2		-	-
	O		7.000	%	2013		6.5			6.5
Deferred income taxes			2.2		1.9	-
Total long-term debt							75.3			75.3
Prepayments and other			5.2		1.3	0.4
Total capitalization						$	179.1		$	177.4
Total current assets			99.1		81.0	108.8
The accompanying condensed notes are an integral part of these statements.
Property, plant, and equipment, net of accumulated depreciation of $152.4, $151.2, and
$146.4 at March 31, 2007, December 31, 2006 and March 31, 2006, respectively			225.0		224.6	219.7
Noncurrent regulatory assets			102.9		103.6	66.5
Investments and other assets			1.7		1.7	2.9
Long-term assets from risk management activities			0.1		-	-
Total assets			$428.8		$410.9	$397.9
Liabilities and Capitalization
Current liabilities
Accounts payable			$24.3		$25.0	$19.4
Payables to related parties			4.6		23.3	13.8
Current liabilities from risk management activities			1.6		3.2	-
Accrued interest and taxes			9.4		5.4	11.7
Gas costs refundable through rate adjustments			1.6		2.7	8.2
Customer credit balances			3.7		12.2	3.1
Current accumulated deferred income taxes			-		-	2.2
Temporary LIFO liquidation credit			38.3		-	40.5
Other			5.3		4.5	10.3
Total current liabilities			88.8		76.3	109.2
Long-term liabilities and deferred credits
Deferred income taxes			44.8		45.2	38.6
Deferred investment tax credits			2.8		2.8	2.8
Noncurrent regulatory liabilities			2.1		2.1	1.9
Environmental remediation liability			70.3		70.4	64.6
Pension and postretirement benefit obligations			23.3		22.5	11.5
Asset retirement obligations			19.8		19.5	-
Other			0.8		0.3	-
Total long-term liabilities and deferred credits			163.9		162.8	119.4
Commitments and contingencies
Capitalization
Common stock equity			107.0		102.7	100.1
Long-term debt			69.1		69.1	69.2
Total capitalization			176.1		171.8	169.3
Total liabilities and capitalization			$428.8		$410.9	$397.9
The accompanying condensed notes are an integral part of these statements.

- 6 -

NORTH SHORE GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CAPITALIZATION (Unaudited)					March 31,		December 31,		March 31,
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)		Three Months Ended
(Millions, except share amounts)					2007		2006		2006
		March 31
Long-term debt
(Millions)		2009			2008
First mortgage bonds
Operating Activities
	Series		Year Due
Net income		$	2.9		$	5.5
	M	5.00%	2028		$ 29.1		$ 29.1		$ 29.3
Adjustments to reconcile net income to net cash provided by operating activities
	N-2	4.625%	2013		40.0		40.0		40.0
Depreciation and amortization expense			1.5			1.6
Total first and refunding mortgage bonds and adjustable rate bonds					69.1		69.1		69.3
Bad debt expense			0.8			0.9
Unamortized (discount) premium on long-term debt, net					-		-		(0.1	)
Deferred income taxes			0.8			0.4
Total long-term debt					69.1		69.1		69.2
Pension and other postretirement expense			1.2			1.1
Common stock equity
Pension and other postretirement funding			(0.2	)		-
Common stock, without par value—
Other, net			3.2			-
Authorized 5,000,000 shares
Changes in -
Outstanding 3,625,887 shares					24.8		24.8		24.8
Accounts receivable and accrued unbilled revenues			7.5			(17.2	)
Accumulated other comprehensive loss					(0.1	)	(0.1	)	(2.4	)
Natural gas in storage			6.9			6.9
Retained earnings					82.3		78.0		77.7
Other current assets			(0.2	)		(2.0	)
Total common stock equity					107.0		102.7		100.1
Accounts payable			(10.5	)		3.4
Total capitalization					$176.1		$171.8		$169.3
Accrued taxes			(0.8	)		3.8
The accompanying condensed notes are an integral past of these statements.
Temporary LIFO liquidation			29.2			46.9
Other current liabilities			2.6			(10.5	)
Net cash provided by operating activities			44.9			40.8
Investing Activities
Capital expenditures			(2.9	)		(1.8	)
Notes receivable from related parties			(31.7	)		-
Other			(0.1	)		-
Net cash used for investing activities			(34.7	)		(1.8	)
Financing Activities
Payments of notes payable to related parties			(9.0	)		(11.9	)
Dividends to parent			(1.2	)		(0.8	)
Net cash used for financing activities			(10.2	)		(12.7	)
Net change in cash and cash equivalents			0.0			26.3
Cash and cash equivalents at beginning of period			0.1			-
Cash and cash equivalents at end of period		$	0.1		$	26.3
The accompanying condensed notes are an integral part of these statements.

- 7 -

NORTH SHORE GAS COMPANY
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)	Three Months Ended
	March 31,
(Millions)	2007		2006
Operating Activities:
Net income (loss)	$6.6		$13.8
Adjustments to reconcile net income to cash provided by operations:
Depreciation	1.7		1.6
Deferred income taxes and investment tax credits—net	(0.6	)	2.6
Pension funding less than expense	0.8		0.9
Gas charge settlement credit	-		(12.7	)
Other adjustments	0.2		1.8
Net changes in:
Receivables—net	(13.0	)	7.9
Receivables from related parties	(0.1	)	(9.9	)
Gas in storage	7.1		5.8
Gas costs recoverable/refundable through rate adjustments	(5.0	)	7.0
Accounts payable	(0.7	)	(26.2	)
Payables to related parties	0.8		10.3
Accrued interest	0.8		0.8
Accrued taxes	3.2		6.1
Temporary LIFO liquidations	38.3		36.8
Customer credit balances	(8.5	)	(3.4	)
Other	0.9		(0.2	)
Net cash provided by (used in) operating activities	32.5		43.0
Investing Activities:
Capital spending	(2.1	)	(2.5	)
Short-term investments	-		(7.0	)
Intercompany loan receivable	(27.4	)	-
Net cash provided by (used in) investing activities	(29.5	)	(9.5	)
Financing Activities:
Intercompany loan payable	-		(9.9	)
Dividends paid on common stock	(2.3	)	(1.5	)
Net cash provided by (used in) financing activities	(2.3	)	(11.4	)
Net increase (decrease) in cash and cash equivalents	0.7		22.1
Cash and cash equivalents at beginning of period	0.1		1.2
Cash and cash equivalents at end of period	$0.8		$23.3
The accompanying condensed notes are an integral part of these statements.

- 8 -

NORTH SHORE GAS COMPANY

CONDENSED NOTES TO FINANCIAL STATEMENTS

March 31, ~~2007~~2009

NOTE 1--FINANCIAL INFORMATION

WeThe Condensed Financial Statements of NSG have been prepared pursuant to the ~~condensed~~rules and regulations of the SEC for Quarterly Reports on Form 10-Q and in accordance with GAAP. Accordingly, ~~consolidated~~these ~~financial~~Condensed ~~statements~~Financial Statements do not include all of ~~NSG~~the information and footnotes required by GAAP for annual ~~its~~financial statements. These Condensed Financial Statements should be ~~wholly-owned~~read ~~subsidiary~~in ~~under~~conjunction with the ~~rules~~Financial Statements and ~~regulations~~Notes ofin the ~~SEC.~~NSG Annual Report on Form 10-K for the year ended December 31, 2008.

~~This~~The Condensed ~~Quarterly Report~~Financial onStatements ~~Form~~are ~~10-Q~~unaudited, ~~is for NSG~~but, ain ~~wholly-owned~~management’s ~~indirect~~opinion, ~~subsidiary of Integrys. These financial statements have not been audited. Management believes that these financial statements~~ include all adjustments (which, unless otherwise noted , include only normal recurring adjustments) necessary for a fair presentation of ~~the~~ such financial statements. Financial results for ~~each~~this interim period ~~shown~~are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2009.

Effective February 21, 2007, the previously announced merger between a wholly-owned subsidiary of Integrys and PEC was consummated. NSG and PGL are wholly-owned by PEC. The merger was accounted for under the purchase method of accounting with Integrys treated as the acquirer. Effective with the merger, NSG adopted the financial statement presentation policies of Integrys. Certain items previously reported for the prior periods have been reclassified to conform to the presentation in the current period:

Condensed Consolidated Statements of Income

Revenues and taxes, other than income taxes, are presented net of pass-through taxes. (See Note 3--Revenue Recognition for further discussion.)

Condensed Consolidated Balance Sheets:

Accrued unbilled revenues are shown separately from customer receivables, net of reserve for uncollectible accounts.

Accrued interest and accrued taxes have been combined as one line item.

Certain current liabilities have been aggregated into other current liabilities as a single line item.

Postretirement benefit obligations have been reclassified from other long-term liabilities to pension and postretirement benefit obligations.

Condensed Consolidated Statements of Cash Flows:

Changes in cash overdraft balances within net changes in accounts payable are presented as an operating activity rather than as a financing activity.

Changes in margin account balances as part of deposits with a broker are presented as an operating activity rather than as a investing activity.

The NSG condensed consolidated financial statements do not reflect, and are not required to reflect, any push down basis of accounting as a result of the PEC merger.

We have condensed or omitted certain financial information and footnote disclosures normally included in our annual audited financial statements. These condensed consolidated financial statements should be read along with the audited financial statements and notes thereto included in the combined PEC, PGL and NSG Annual Report on Form 10-K, as amended, for the fiscal year ended September 30, 2006. Due

- 9 -

to a number of factors, including seasonality of NSG's 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 results to be expected for the year as a whole.

As previously disclosed in the combined PEC, PGL and NSG Transition Report on Form 10-Q for the Transition Period from October 1, 2006 to December 31, 2006, NSG changed its fiscal year from September 30 to December 31.

NOTE 2--CASH AND CASH EQUIVALENTS

Short-term investments with an original maturity of three months or less are reported as cash equivalents.

The following is supplemental disclosure to the NSG Condensed ~~Consolidated~~ Statements of Cash Flows:

	Three Months Ended March 31,
		Three Months Ended March 31
(Millions)	~~2007~~	2009	~~2006~~	2008
Cash paid for interest	~~$0.3~~	$	$0.1	$	0.1
Cash paid for income taxes	$2.4		$0.5
Cash paid (received) for income taxes			2.4		(0.5	)

~~Under NSG's~~NOTE ~~cash management practices, accounting overdraft cash balances of $0.~~3--RISK ~~million at March~~MANAGEMENT ~~31, 2007 were reclassified to accounts payable. NSG had no overdraft balance at December 31, 2006 or March 31, 2006.~~ACTIVITIES

~~NOTE~~NSG uses derivative ~~3--REVENUE~~instruments ~~RECOGNITION~~to manage commodity costs. None of these derivatives are designated as hedges for accounting purposes. The derivatives listed in the table below include natural gas purchase contracts as well as financial derivative contracts (commodity swaps and options) used to manage volatility in natural gas supply costs.

Natural gas sales and transportation revenues are recorded on the accrual basis for all gas delivered during the month, including an estimate for gas delivered but unbilled at the end of each month.

		Risk Management Assets
		March 31, 2009			December 31, 2008
(Millions)	Classification	Gross Derivative Position	Netting *	Balance Sheet Presentation	Gross Derivative Position	Netting *	Balance Sheet Presentation
Non-hedge derivatives
Commodity contracts	Current	$0.7	$0.5	$0.2	$4.3	$2.5	$1.8
Total		$0.7	$0.5	$0.2	$4.3	$2.5	$1.8

In Illinois, delivering, supplying, furnishing or selling gas for use or consumption and not for resale is subject to state and, in some cases, municipal taxes (revenue taxes). The Illinois Public Utilities Act provides that the tax may be recovered from utility customers by adding an additional charge to customers’ bills. These pass-through taxes are due only to the extent they are collected as cash receipts as opposed to amounts billed. The revenues presented on the Condensed Consolidated Statements of Income exclude the billings to customers for these pass-through taxes. For the three months ended March 31, 2006, NSG previously reported most revenue taxes on a gross basis, whereby the billed amounts for the recovery of these taxes were included in revenues, and an offsetting expense amount (net of an administrative fee) representing the expected cash payment of the taxes was included in taxes, other than income taxes on the statement of income. Effective with the February 21, 2007 merger between a wholly-owned subsidiary of Integrys and PEC, NSG adopted the accounting policy of excluding such pass-through taxes from both revenues and taxes, other than income taxes. Revenue tax amounts excluded from revenues and taxes, other than income taxes for the three-month period ended March 31, 2006 were $5.6 million.

		Risk Management Liabilities
		March 31, 2009			December 31, 2008
(Millions)	Classification	Gross Derivative Position	Netting *	Balance Sheet Presentation	Gross Derivative Position	Netting *	Balance Sheet Presentation
Non-hedge derivatives
Commodity contracts	Current	$22.3	$0.6	$21.7	$29.2	$2.5	$26.7
Commodity contracts	Other Long-term	1.6	-	1.6	1.7	-	1.7
Total		$23.9	$0.6	$23.3	$30.9	$2.5	$28.4

~~NOTE 4--GAS IN~~* ~~STORAGE~~FASB Interpretation No. 39, “Offsetting of Amounts Related to Certain Contracts," as amended, permits the netting of risk management assets and liabilities when a legally enforceable netting agreement exists, and, when assets and liabilities are netted, requires the netting of related cash collateral positions against the net derivative positions.

~~NSG prices~~- ~~storage injections,~~8 except for liquid propane, at the fiscal year average of the costs of natural gas supply purchased. Withdrawals from storage, except for liquid propane, are priced on the LIFO cost method. NSG accounts for liquid propane inventory using the average 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, NSG expects interim reductions in LIFO layers to be replenished by year end.-

Assets and liabilities from risk management activities are classified as current or long-term based upon the maturities of the underlying contracts.

NSG's tariffs allow for full recovery from its customers of prudently incurred natural gas supply costs, including gains or losses on derivative instruments. These derivatives are marked to fair value pursuant to SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," and are offset with a corresponding regulatory asset or liability, per the provisions of SFAS No. 71, "Accounting for the Effects of Certain Types of Regulation." Management believes any gains or losses resulting from the eventual settlement of these derivative instruments will be collected from or refunded to customers.

The table below shows the net gains recorded on the balance sheet related to derivatives at NSG.

		Net Gain During
(Millions)	Balance Sheet Presentation	Three Months Ended March 31, 2009
Commodity contracts	Balance Sheet – Regulatory assets – current	$	3.9
Commodity contracts	Balance Sheet – Regulatory assets – long-term		0.2

At March 31, 2009, NSG had the following notional volumes of outstanding derivative contracts:

Commodity	Volume
(Millions)	Purchases	Sales
Natural gas (therms)	189.0	11.0

Certain of NSG's derivative commodity instruments contain provisions that could require the posting of additional collateral for instruments in net liability positions, if triggered by a decrease in credit ratings. The aggregate fair value of all derivative instruments with credit-risk related contingent features that were in a liability position at March 31, 2009, was $23.8 million, for which NSG had posted cash collateral of $0.1 million in the normal course of business. If all of the credit-risk related contingent features contained in commodity instruments had been triggered at March 31, 2009, NSG would have been required to post additional collateral of $19.9 million.

NOTE 4--NATURAL GAS IN STORAGE

NSG prices natural gas storage injections at the calendar year average of the cost of natural gas supply purchased. Withdrawals from storage are priced on the LIFO cost method. For interim periods, the difference between current projected replacement cost and the LIFO cost for quantities of natural gas temporarily withdrawn from storage is recorded as a temporary LIFO liquidation credit. Due to seasonality requirements, NSG expects interim reductions in LIFO layers to be replenished by year-end.

NOTE 5--ASSET RETIREMENT OBLIGATIONS

The following table shows changes to the asset retirement obligations of NSG through March 31, 2009.

(Millions)
Asset retirement obligations at December 31, 2008	$	24.2
Accretion		0.4
Asset retirement obligations at March 31, 2009	$	24.6

NOTE 6--INCOME TAXES

NSG’s effective tax rates for the three months ended March 31, 2009, and 2008 were 35.6% and 32.1%, respectively. NSG’s provision for income taxes was calculated in accordance with Accounting Principles

- 9 -

Board Opinion No. 28, "Interim Financial Reporting." Accordingly, NSG's interim effective tax rate reflects its projected annual effective tax rate. The effective tax rate for the three months ended March 31, 2009, and March 31, 2008, differs from the federal tax rate of 35% primarily due to state income taxes and the impact of certain permanent book to tax differences related to employee benefits.

For the quarter ended March 31, 2009, there were no significant changes in NSG’s liability for uncertain tax positions.

NOTE 7--COMMITMENTS AND CONTINGENCIES

Commodity Purchase Obligations and Purchase Order Commitments

NSG routinely enters into long-term purchase and sale commitments that have various quantity requirements and durations. NSG has obligations to distribute and sell natural gas to customers, and expects to recover costs related to these obligations in future customer rates. As of March 31, 2009, NSG had obligations related to natural gas supply and transportation contracts totaling $104.1 million, some of which extend through 2017.

NSG also has commitments in the form of purchase orders issued to various vendors, which totaled $4.5 million at March 31, 2009.

Environmental

Manufactured Gas Plant Remediation

NSG, its predecessors, and certain former affiliates operated facilities in the past at multiple sites for the purposes of manufacturing and storing manufactured gas. In connection with manufacturing and storing manufactured gas, waste materials were produced that may have resulted in soil and groundwater contamination at these sites. Under certain laws and regulations relating to the protection of the environment, NSG is required to undertake remedial action with respect to some of these materials.

NSG is addressing five manufactured gas plant sites, including one site described in more detail below. All are former regulated utility sites and are being remediated, with costs charged to existing ratepayers at NSG. NSG estimated and accrued for $101.5 million of future undiscounted investigation and cleanup costs for all sites as of March 31, 2009. NSG may adjust these estimates in the future, contingent upon remedial technology, regulatory requirements, remedy determinations, and any claims of natural resource damages. NSG recorded a regulatory asset of $104.7 million, which is net of insurance recoveries received of $8.3 million, related to the expected recovery of both deferred expenditures and estimated future expenditures as of March 31, 2009.

NSG is coordinating the investigation and cleanup of the Illinois manufactured gas plant sites under what is called a “multi-site” program. This program involves prioritizing the work to be done at the sites, preparation and approval of documents common to all of the sites, and utilization of a consistent approach in selecting remedies.

Until July 2007, NSG was addressing four of the five sites under a program supervised by the Illinois Environmental Protection Agency (IEPA). As discussed below, in July 2007, NSG transferred two of these four sites to a program administered by the EPA. Investigations have been completed at all or portions of four of the five sites. NSG has determined that cleanup is not required at one of these four sites. Cleanups have not yet been completed at any of the other three sites.

The EPA identified NSG 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 identified OMC, General Motors Corporation, and certain other parties as PRPs at the Waukegan Site. NSG and the other PRPs are

- 10 -

~~NOTE~~parties to a ~~5--RISK~~consent ~~MANAGEMENT~~decree ~~ACTIVITIES~~that requires NSG and General Motors, jointly and severally, to perform the remedial action and establish and maintain financial assurance of $27.0 million (in the form of certain defined net worth levels that NSG has met). The soil component of the remedial action was completed in August 2005. Operation of the groundwater treatment unit began in September 2008 and is expected to be up to full capacity during the second quarter of 2009. The EPA reduced the financial assurance requirement to $21.0 million to reflect completion of the soil component of the remedial action.

~~Derivative~~In ~~Instruments~~July ~~and~~2007, ~~Hedging~~NSG ~~Activities~~transferred two of its largest manufactured gas plant sites which were being addressed under IEPA supervision to the EPA Superfund Alternative Sites Program. Under the EPA’s program, the remedy decisions at these sites will be based on risk-based criteria typically used at Superfund sites.

~~NSG's~~Management believes ~~gas~~that ~~supply~~any costs ~~may~~ ~~vary~~incurred ~~due~~for toenvironmental ~~changes~~activities inrelating ~~commodity~~to ~~prices~~former manufactured ~~that~~gas ~~affect~~plant ~~its~~ operations. ~~To manage~~that ~~this~~are ~~volatility,~~not ~~NSG~~recoverable ~~uses~~through ~~forward~~contributions from ~~contracts~~other ~~and~~entities ~~financial~~or ~~instruments, including~~from ~~swaps~~insurance ~~and~~carriers ~~options.~~have Itbeen isprudently ~~the~~incurred ~~policy~~and are, oftherefore, ~~NSG~~recoverable tothrough ~~use~~rates ~~these~~for ~~instruments~~NSG. Accordingly, ~~solely~~management ~~for~~believes that the ~~purpose~~costs ofincurred ~~managing~~in ~~volatility~~connection ~~and~~with ~~not~~former manufactured ~~for~~gas ~~any~~plant ~~speculative purpose.~~operations ~~NSG~~will ~~accounts~~not ~~for~~have ~~derivative~~a ~~financial~~material ~~instruments~~adverse ~~pursuant~~effect toon ~~SFAS~~the ~~No. 133~~financial ~~“Accounting~~position ~~for~~or ~~Derivatives~~results ~~and~~of ~~Hedging~~operations ~~Activities”~~of NSG. However, ~~as amended and~~any ~~interpreted~~changes ~~("SFAS~~in ~~No.~~NSG’s ~~133").~~approved ~~Under~~rate ~~the~~mechanisms ~~provisions~~for recovery of ~~SFAS~~these ~~No. 133~~costs, ~~all~~or any ~~derivatives~~adverse ~~are~~conclusions ~~recognized~~by on the ~~balance~~ICC ~~sheet~~with atrespect ~~their~~to ~~fair~~the ~~value~~prudence ~~unless~~of costs actually ~~they qualify~~incurred, ~~for~~could ~~the~~materially ~~normal~~adversely ~~purchases~~affect ~~and~~NSG’s ~~sales~~recovery ~~exception~~of such costs through rates.

~~Mark-To-Market Derivative~~Former ~~Instruments.~~Mineral ~~NSG~~Processing ~~uses~~Site ~~derivative instruments~~in to manage its cost of gas supply and mitigate price volatility. All such derivative instruments are measured at fair value. NSG's tariffs allow for full recovery from its customers of prudently incurred gas supply costsDenver, ~~including~~ gains or losses on these derivative instruments. As a result, SFAS No. 71, “Accounting for the Effects of Certain Types of Regulation” ("SFAS No. 71"), allows for these MTM derivative gains or losses to be recorded as regulatory assets or regulatory liabilities. Realized gains or losses are recorded as an adjustment to the cost of gas supply in the period that the underlying gas purchase transaction takes place. The costs and benefits of this activity are passed through to customers under the tariffs of NSG.Colorado

~~The~~In ~~MTM~~1994, ~~asset~~NSG received a demand for reimbursement, indemnification, and contribution ~~(liability)~~for ~~value~~response costs incurred with respect to the cleanup of a former mineral processing site in Denver, Colorado. The demand from the ~~above~~S.W. Shattuck ~~contracts~~Chemical ~~for~~Company, Inc. alleges that NSG is a successor to the liability of a former entity that was allegedly responsible during the period 1934 through 1941 for the disposal of mineral processing wastes containing radium and other hazardous substances at ~~March~~the ~~31,~~site. In ~~2007~~1992, ~~December~~the EPA issued a Record of 31Decision (ROD) for the Denver site and remediation work began. The remedy selected in the ROD consisted of the on-site stabilization, ~~2006~~solidification, and ~~March~~capping ~~31,~~of ~~2006~~soils ~~were~~containing ~~zero~~radioactive wastes. In 1998, ~~$(20~~the remedial action under the 1992 ROD was completed.2) In ~~million~~2002, the EPA issued an amended ROD that required removing the monolith cap and ~~$(9~~undertaking additional soil excavation.0) The ~~million,~~work performed under the amended ROD began in ~~respectively~~September 2002 and was completed in September 2006.

~~Cash Flow Hedges.~~NSG ~~During the~~does ~~fiscal~~not ~~year~~believe ~~ended~~that ~~September~~it ~~30,~~has ~~2003,~~liability ~~NSG~~for ~~entered~~the ~~into~~costs ~~treasury~~related ~~lock~~to ~~agreements that hedged~~this ~~the~~site, ~~10-year~~but ~~treasury~~cannot determine ~~component~~the ofmatter awith ~~portion~~certainty. At ofthis ~~the~~time, ~~total~~NSG ~~anticipated~~cannot ~~fiscal~~reasonably ~~2003~~estimate ~~debt~~what ~~financings.~~range Onof ~~April 24~~loss, ~~2003~~if any, inmay ~~connection~~occur. In ~~with~~ the ~~issuance~~ ofevent ~~the~~that ~~new debt,~~ NSG ~~unwound~~incurs ~~its~~liability, ~~treasury~~it ~~lock~~would ~~positions~~pursue ~~resulting~~reimbursement infrom ~~a $0.4~~insurance ~~million~~carriers ~~loss~~and ~~recorded to accumulated~~ other ~~comprehensive~~responsible ~~income.~~parties, ~~This~~if ~~amount is being amortized as interest expense over the 10-year term of the debt~~any.

~~The~~Natural ~~portion~~Gas ~~of accumulated~~Charge ~~other~~Reconciliation ~~comprehensive~~Proceedings ~~income~~and ~~(loss)~~Related at March 31, 2007 that is expected to be reclassified to earnings during the next 12 months is $(23,000). The maximum term of accumulated other comprehensive income (loss) expected to be reclassified is 73 months.Matters

Natural Gas Charge Settlement

For NSG, the ICC conducts annual proceedings regarding the reconciliation of revenues from the natural gas charge and related natural gas costs. The natural gas charge represents the cost of natural gas and transportation and storage services purchased by NSG, as well as gains, losses, and costs incurred under NSG’s hedging program (Gas Charge). In these proceedings, interested parties review the accuracy of the reconciliation of revenues and costs and the prudence of natural gas costs recovered through the Gas Charge. If the ICC were to find that the reconciliation was inaccurate or any natural gas costs were imprudently incurred, the ICC would order NSG to refund the affected amount to customers through subsequent Gas Charge filings.

In March 28, 2006 orders, the ICC adopted a settlement agreement related to fiscal years 2001 through 2004 natural gas costs. Under certain provisions of the settlement agreement, PEC agreed to provide the Illinois Attorney General (AG) and the City of Chicago (Chicago) up to $30.0 million for conservation and

- 11 -

~~Summary.~~weatherization ~~The~~programs ~~following table~~for ~~shows~~which NSG’s ~~assets~~may ~~and~~not ~~liabilities~~seek ~~from~~rate ~~all risk management activities~~recovery. ~~Certain commodity financial instruments are executed by~~ NSG ~~and~~also ~~shown~~agreed asto ~~assets/liabilities~~implement ~~from~~a ~~risk~~reconnection ~~management~~program ~~activities.~~for ~~Other~~customers ~~commodity~~identified ~~financial instruments were previously executed by PEC on behalf of NSG and are represented on NSG's balance sheet~~ as ~~payables~~hardship tocases ~~related parties. Unrealized gains or losses~~ on ~~certain mark-to-market commodity contracts related to deposits~~ ~~with brokers~~the ~~are~~date ~~included~~of ~~within~~the ~~other receivables~~agreement. Finally, ~~Premiums~~NSG ~~paid~~agreed ~~on certain mark-~~to~~-market~~ ~~commodity~~internal ~~option~~audits ~~contracts at inception that are recoverable~~and ~~from customers~~an ~~through~~external ~~rates~~audit ~~are~~of ~~recorded~~natural asgas ~~regulatory~~supply ~~assets~~practices.

	Assets				Liabilities
	March 31,		December 31,	March 31,	March 31,		December 31,	March 31,
(Millions)	2007		2006	2006	2007		2006	2006
Commodity contracts	$1.5		$2.5	$0.9	$1.5		$22.7	$9.9
Balance Sheet Presentation
Current
Assets/liabilities from risk management activities	$1.2		$ -	$ -	$1.6		$3.2	$ -
Other receivables	(0.2	)	2.1	-	-		-	-
Payables to related parties	-		-	-	-		18.9	9.9
Regulatory assets	0.4		0.4	0.9	-		-	-
Total current	$1.4		$2.5	$0.9	$1.6		$22.1	$9.9
Long-term
Assets/liabilities from risk management activities	$0.1		$ -	$ -	$ -		$ -	$ -
Payables to related parties	-		-	-	-		0.6	-
Regulatory assets/liabilities	-		-	-	(0.1	)	-	-
Total long-term	0.1		-	-	(0.1	)	0.6	-
Total	$1.5		$2.5	$0.9	$1.5		$22.7	$9.9

With respect to the conservation and weatherization funding, as of March 31, 2009, $1.4 million remained unpaid, of which $0.6 million was included in other current liabilities, and $0.8 million was included in other long-term liabilities. Under the reconnection program, NSG reconnected customers who participated in the program and took other steps NSG believed were required by the agreement. The AG and Chicago have indicated that they believe the terms of the reconnection program are broader than what NSG implemented. Management believes that NSG has fully complied with the reconnection program obligations of the settlement agreement.

~~NOTE~~Two of the five ~~6--ASSET~~annual internal audits required by the settlement agreement have been ~~RETIREMENT~~completed. An ~~OBLIGATIONS~~auditor hired by the ICC conducted the external audit, and the report was filed on April 10, 2008. The report included 32 recommendations, none of which quantified natural gas costs that the auditor believed should not be recovered by NSG. On March 31, 2009, NSG completed its responses to the 25 recommendations it agreed to implement in a June 30, 2008 response to the audit.

~~Under~~Class the provisions of SFAS No. 143, “Accounting for Asset Retirement Obligations” ("SFAS No. 143"), and Interpretation No. 47, “Accounting for Conditional Asset Retirement Obligations” ("FIN 47"), NSG has recorded liabilities for legal obligations associated with the retirement of tangible long-lived assets. NSG identified asset retirement obligations primarily related to distribution pipe removal (including asbestos and PCBs in pipes), asbestos and PCBs in buildings and removal of above ground storage tanks. In accordance with SFAS No. 71, NSG establishes regulatory assets and liabilities to record the differences between ongoing expense recognition under SFAS No. 143 and FIN 47 and the rate making practices for retirement costs authorized by the applicable regulators. All asset retirement obligations are recorded as other long-term liabilities on the balance sheet of NSG.Action

~~The~~In ~~following~~February ~~table~~2004, a purported class action suit was filed in Cook County Circuit ~~shows~~Court ~~all~~against ~~changes~~PEC, PGL, and NSG by customers of PGL and NSG, alleging among other things, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act related to matters at issue in the ~~asset~~utilities’ ~~retirement~~fiscal ~~obligation~~year ~~liabilities~~2001 ofGas Charge reconciliation proceedings. In the suit, Alport et al. v. Peoples Energy Corporation, the plaintiffs seek disgorgement and punitive damages. PGL and NSG have been dismissed as defendants and the only remaining counts of the suit allege violations of the Consumer Fraud and Deceptive Business Practices Act by PEC and that PEC acted in concert with others to commit a tortious act. PEC denies the allegations and is vigorously defending the suit. On July 30, 2008, the plaintiffs filed a motion for class certification and PEC responded in opposition of this motion. On October 31, 2008, PEC filed a motion for summary judgment. The plaintiffs requested postponement of their reply to PEC's class certification response until a decision is made on PEC's motion for summary judgment. A hearing on the motion for summary judgment is scheduled for June 3, 2009.

(Millions)
Asset retirement obligations at December 31, 2006		$19.5
Accretion		0.3
Asset retirement obligations at March 31, 2007		$19.8

NOTE 8--EMPLOYEE BENEFIT PLANS

The following table shows the components of NSG's net pension and other postretirement benefit costs:

	Pension Benefits						Other Benefits
	Three Months Ended March 31						Three Months Ended March 31
(Millions)	2009			2008			2009		2008
Service cost	$	0.3		$	0.3		$	0.2	$	0.2
Interest cost		0.5			0.4			0.3		0.2
Expected return on plan assets		(0.3	)		(0.3	)		-		-
Amortization of net actuarial loss		0.1			0.1			-		0.1
Net periodic benefit cost		0.6			0.5			0.5		0.5
Effect of lump sum settlements upon retirement		0.1			0.1			-		-
Net benefit cost	$	0.7		$	0.6		$	0.5	$	0.5

Retiring employees have the option of receiving retirement benefits in the form of an annuity or a lump sum payment. During the three months ended March 31, 2009, and 2008, a portion of each pension plan's projected benefit obligation was settled by the payment of lump sum benefits, resulting in a settlement cost under SFAS No. 88, "Employer's Accounting for Settlements and Curtailments of Defined Benefit Plans and for Termination Benefits."

- 12 -

~~NOTE~~NSG records ~~7--INCOME~~transition ~~TAXES~~obligations, prior service costs, and net actuarial losses that have not yet been recognized as a component of net periodic benefit cost as net regulatory assets, pursuant to SFAS No. 71.

~~The effective~~Contributions ~~tax~~to ~~rates for~~ the ~~three~~plans ~~months~~are ~~ended~~made ~~March~~in ~~31,~~accordance ~~2007~~with legal and ~~2006~~tax ~~were~~requirements ~~35.9%~~ and ~~38.4%,~~do not ~~respectively.~~necessarily ~~NSG's~~occur ~~provision~~evenly ~~for~~throughout ~~income~~the ~~taxes~~year. For isthe ~~calculated~~three ~~in accordance~~months ~~with APB~~ended ~~Opinion~~March 31, ~~No. 28~~2009, ~~"Interim~~no ~~Financial~~contributions ~~Reporting."~~were ~~Accordingly,~~made ~~NSG's~~to ~~interim effective~~the ~~tax~~pension ~~rate~~benefit plans ~~reflects~~and ~~its~~$0.2 ~~projected~~million ~~annual~~of ~~effective~~contributions ~~tax~~were ~~rate.~~made ~~The effective~~to ~~tax~~the ~~rate~~other ~~differs~~postretirement benefit ~~from~~plans. NSG ~~the~~expects ~~federal~~to ~~tax~~contribute ~~rate~~$4.0 ofmillion ~~35%~~and ~~primarily due~~$1.8 million to ~~the effect~~its ofpension ~~state~~and ~~income~~other ~~taxation~~postretirement ~~offset~~benefit byplans, respectively, during the ~~permanent~~remainder ~~tax effects~~ of ~~employee benefit-related deductions~~2009.

~~Effective January 1,~~NOTE ~~2007, NSG adopted the provisions of FASB Interpretation No. 48 ("FIN 48"), “Accounting for Uncertainty in Income Taxes~~ 9--FAIR an interpretation of FASB Statement No. 109.” The cumulative effect of adopting FIN 48 was an increase of less than $0.1 million to the January 1, 2007 retained earnings balance.VALUE

~~At January~~The ~~1, 2007, the amount of unrecognized tax benefits was $0.1 million.~~following ~~No unrecognized~~tables ~~tax~~show ~~benefits would affect~~ NSG's ~~effective~~assets tax rate if recognized in subsequent periods. At the beginning of 2007, approximately $0.1 million was included in the liability for uncertain tax positions for the possible payment of interest and ~~penalties.~~liabilities ~~There~~that were noaccounted ~~significant~~for ~~changes~~at tofair ~~any of the~~value ~~unrecognized~~on ~~tax~~a ~~benefit~~recurring ~~balances~~basis, ~~during~~categorized ~~the~~by ~~first~~level ~~quarter of 2007 and NSG does not expect any significant increases or decreases to the total amount of unrecognized tax benefits~~ within the ~~next~~fair ~~twelve months~~value hierarchy.

NSG records penalties and accrued interest related to uncertain tax positions in income tax expense.

	March 31, 2009
(Millions)	Level 1		Level 2		Level 3		Total		Netting *		Balance Sheet Presentation
Assets
Risk management assets	$	-	$	0.7	$	-	$	0.7	$	0.5	$	0.2
Liabilities
Risk management liabilities		-		23.9		-		23.9		0.6		23.3

NSG files income tax returns in the U.S. federal jurisdiction, and in various U.S. state jurisdictions. With a few exceptions (major exceptions listed below), NSG is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years prior to 2002.

	December 31, 2008
(Millions)	Level 1		Level 2		Level 3		Total		Netting *		Balance Sheet Presentation
Assets
Risk management assets	$	-	$	4.3	$	-	$	4.3	$	2.5	$	1.8
Liabilities
Risk management liabilities		-		30.9		-		30.9		2.5		28.4

·* ~~Illinois~~FASB ~~Department~~Interpretation No. 39, as amended, permits the netting of ~~Revenue~~risk -management ~~NSG~~assets ~~has~~and ~~agreed~~liabilities towhen ~~statute~~a ~~extensions~~legally ~~for~~enforceable ~~tax~~netting ~~years~~agreement ~~covering~~exists, ~~2001-2003~~and, when assets and liabilities are netted, requires the netting of related cash collateral positions against the net derivative positions.

·The ~~United~~determination of ~~States~~the ~~Internal~~fair ~~Revenue~~values ~~Service~~incorporates -various ~~NSG~~factors ~~has~~required ~~agreed~~under toSFAS No. 157, ~~statute~~“Fair ~~extensions~~Value ~~for~~Measurements.” These ~~tax~~factors ~~years~~include ~~covering~~not only ~~1999-2003~~the credit standing of the counterparties involved, but also the impact of NSG's nonperformance risk on its liabilities.

~~NSG~~The risk management ~~has~~assets ~~closed~~and liabilities listed in the tables include swaps, options, and natural ~~examinations~~gas purchase contracts used to manage volatility in natural gas supply costs. Certain derivative instruments are valued using broker quotes or prices for similar contracts at the ~~following~~reporting ~~major~~date, ~~jurisdictions~~which ~~for~~are Level 2 inputs. The valuation of certain contracts also includes an adjustment related to transportation, and NSG's financial fixed price options are valued using a model, incorporating mid-market prices obtained from the NYMEX. These ~~following~~contracts ~~tax~~are also classified in Level 2. All ~~years:~~of NSG's risk management assets and liabilities are offset by regulatory assets or liabilities, pursuant to SFAS No. 71, as NSG's tariffs allow for full recovery from customers of prudently incurred natural gas supply costs.

· United States Internal Revenue Service - NSG has a partially agreed to audit report and closing statement for an IRS examination of the 1999-2003 tax years, but one un-agreed issue from the agents report has been protested by NSG and has been sent to IRS appeals for potential resolution.

NSG has open examinations for the following major jurisdictions for the following tax years:

· United States Internal Revenue Service - NSG has an open examination for the 2004-2005 tax years.

· Illinois Department of Revenue - NSG has an open examination for the 2001-2003 tax years.

NOTE 8--COMMITMENTS AND CONTINGENCIES

Commodity and Purchase Order Commitments

NSG has obligations at March 31, 2007 related to natural gas supply and transportation contracts with total estimated demand payments of $68.7 million through 2017. NSG expects to recover these costs in future customer rates. Additionally, NSG has contracts to sell natural gas to customers.

NSG also has commitments in the form of purchase orders issued to various vendors totaling $1.8 million at March 31, 2007.

- 13 -

~~Environmental~~NOTE 10--REGULATORY ENVIRONMENT

~~Former Manufactured Gas Plant~~2010 Rate ~~Sites~~Case

~~NSG,~~On ~~its predecessors~~February ~~and~~25, ~~certain~~2009, ~~former~~NSG ~~affiliates~~filed ~~operated~~a ~~facilities~~request inwith the ~~past at multiple~~ICC ~~sites~~to ~~for~~increase ~~the~~natural ~~purposes~~gas distribution ofrates ~~manufacturing~~by ~~gas~~$22.0 ~~and~~million ~~storing~~for ~~manufactured gas~~2010. The Infiling ~~connection~~includes ~~with~~a 12.0% ~~manufacturing~~return ~~and~~on ~~storing~~common ~~gas,~~equity ~~waste~~and ~~materials~~a ~~were produced~~common ~~that~~equity ~~may~~ratio ~~have~~of ~~resulted~~56% in ~~soil~~its ~~and groundwater contamination at~~regulatory ~~these sites~~capital structure. The ~~Under~~filing ~~certain~~also ~~laws~~includes ~~and~~an ~~regulations~~overall ~~relating~~return ~~to the protection~~ of ~~the~~ ~~environment,~~9.18%. The ~~NSG~~proposed ~~might~~rate beincrease is required to ~~undertake~~allow ~~remedial~~NSG ~~action~~to ~~with respect~~recover ~~to some~~its offorecasted ~~these~~2010 ~~materials.~~cost ~~NSG~~of isservice ~~addressing~~and ~~these~~to ~~sites~~earn ~~under~~ a ~~program supervised~~reasonable byreturn ~~the~~on ~~IEPA~~its investment. NSG Asrequested isapproval ~~discussed~~of ~~below,~~a ~~NSG~~mechanism isfor ~~pursuing~~cost ~~the transfer~~recovery of ~~certain~~ ofthe ~~these~~natural ~~sites~~gas tocost acomponent ~~program~~of ~~administered~~bad bydebt ~~the EPA~~expense.

~~NSG is~~The ~~addressing five~~Illinois ~~manufactured gas plant sites, including one site described in more detail~~rate ~~below.~~case ~~Investigations~~process ~~have~~requires ~~been~~receipt ~~completed at all or portions~~ of ~~four~~a ~~sites. Remediations~~written ~~have~~order ~~not~~from ~~yet~~the ~~been~~ICC ~~completed~~within at11 ~~any of these four sites. NSG~~months ~~has determined~~from ~~that~~the ~~remediation~~filing isdate, ~~not~~which ~~required~~would atbe ~~one~~January ~~of these four sites~~2010.

~~The EPA~~2008 ~~has~~Rate identified NSG as a PRP under CERCLA at the Waukegan Coke Plant Site located in Waukegan, Illinois ("Waukegan Site"). The Waukegan Site is part of the OMC Superfund Site. The EPA also identified OMC, General Motors Corporation and certain other parties as PRPs at the Waukegan Site. The EPA has issued a ROD selecting the remedial action for the Waukegan Site. The selected remedy consists of on-site treatment of groundwater and off-site disposal of soil containing polynuclear aromatic hydrocarbons and arsenic. NSG and the other PRPs have executed a remedial action consent decree which has been entered by the federal district court. The consent decree requires NSG and General Motors, jointly and severally, to perform the remedial action and establish and maintain financial assurance of $27 million. The soil component of the remedial action was completed in August 2005. The final design for the groundwater component of the remedial action has been completed and construction of the groundwater treatment plant has commenced. The EPA has agreed to reduce the financial assurance requirement to $21 million to reflect completion of the soil component of the remedial action.Case

~~NSG~~On isFebruary ~~also pursuing~~5, 2008, the ~~transfer~~ICC ofissued ~~two~~a ~~additional~~final ~~manufactured~~written order requiring a retail natural gas ~~plant~~rate ~~sites~~decrease ~~which~~of $0.2 million for NSG, effective February 14, ~~are~~2008. The rates for NSG reflect a 9.99% return on common equity and a ~~presently~~common ~~being~~equity ~~addressed~~ratio ~~under~~of ~~IEPA~~56% ~~supervision~~in toits regulatory capital structure. The order included approval of a decoupling mechanism, effective March 1, 2008, as a four-year pilot program, ~~administered~~which allows NSG to adjust rates going forward to byrecover or refund the difference between the actual and authorized margin impacts of variations in volumes. Legislation was introduced at the Illinois ~~EPA~~state legislature to roll back decoupling but never reached a vote. This ~~Under~~legislation ~~EPA~~was ~~supervision,~~introduced again in the ~~remedy~~first ~~decisions~~quarter atof 2009. NSG ~~these~~actively ~~sites~~supports ~~will~~the ICC’s decision to approve this rate besetting mechanism. The order also approved an Enhanced Efficiency ~~based~~Program, onwhich ~~risk-based~~allows ~~criteria~~NSG ~~typically~~to ~~used~~recover atup ~~Superfund~~to ~~sites~~$1.1 million per year of energy efficiency costs.

~~NSG~~On isMarch ~~accruing liabilities~~26, ~~and~~2008, ~~deferring~~the ~~costs~~ICC ~~(recorded~~denied asNSG's ~~regulatory~~request ~~assets)~~for ~~incurred in connection~~rehearing ~~with all~~ of ~~the~~its ~~manufactured~~rate ~~gas plant sites~~order, ~~including related~~ ~~legal expenses,~~and ~~pending~~all ~~recovery~~but ~~through~~one ~~rates~~such orrequest from ~~other entities~~interveners. On AtJune 6, ~~March 31~~2008, ~~2007,~~several ~~regulatory~~parties ~~assets~~filed ~~(stated~~a instipulation ~~current~~to ~~year~~resolve ~~dollars)~~the ~~were~~single ~~$71.1~~issue ~~million. The foregoing~~on ~~amount~~which ~~reflects~~ the ~~net amount of (1) costs incurred to date, (2)~~ICC ~~carrying~~granted ~~costs~~rehearing, ~~(3)~~but ~~amounts~~the ~~recovered~~resolved ~~from~~issue ~~insurance~~only ~~companies,~~affects ~~other~~PGL. The ~~entities~~ICC ~~and~~approved ~~customers~~the stipulation, ~~and~~effective ~~(4)~~November ~~management’s~~1, ~~best~~2008, ~~estimates~~as ofwell ~~the~~as ~~costs~~a ~~NSG will spend~~rehearing inorder. Following the ~~future~~stipulation ~~for~~approval, ~~investigating~~NSG ~~and~~filed ~~remediating~~an ~~the~~appeal ~~manufactured~~in ~~gas plant~~the ~~sites.~~second ~~Management~~district ~~has~~of ~~recorded~~the ~~liabilities~~Illinois ~~for~~appellate ~~the~~court ~~amounts~~and ~~described~~four inother ~~clause~~parties filed ~~(4)~~appeals ofin the ~~preceding~~first ~~sentence~~district of ~~$70.3~~the ~~million.~~Illinois ~~Management~~appellate ~~also estimates~~court. NSG’s ~~that additional~~appeal ~~costs~~was insubsequently ~~excess~~transferred ofto the ~~recorded~~first ~~liabilities~~district of ~~$79.1~~the ~~million are~~Illinois ~~reasonably~~appellate ~~possible~~court. On ~~The~~appeal, ~~foregoing~~parties ~~estimates~~may doonly ~~not~~raise ~~reflect~~issues ~~the~~on ~~impact, if~~which ~~any, of~~they ~~placing~~sought ~~certain~~rehearing ~~manufactured~~at ~~gas~~the ~~plant~~ICC. These ~~sites~~issues ~~under~~include the ~~EPA-administered~~decoupling ~~program~~mechanism. No ~~referred~~decision toon ~~above.~~the Ifappeal ~~these~~is ~~sites~~expected ~~are~~until ~~addressed~~at ~~under~~least ~~EPA supervision,~~ the second ~~foregoing~~half ~~estimates~~of ~~may change~~2009.

~~Actual costs,~~NOTE ~~which may~~11--SEGMENTS ~~differ~~OF materially from these estimates, will depend on several factors including whether contamination exists at all sites, the nature and extent of contamination and the level of remediation that may be required. Other factors that may affect such costs include, but are not limited to, changes in remediation technology, fluctuations in unit costs and changes in environmental laws and regulations.BUSINESS

NSG ~~intends~~ tohas ~~seek~~two ~~contribution~~business ~~from~~segments. NSG's ~~other~~results ~~entities~~of operations, including allocations for ~~the~~corporate ~~costs~~activities, ~~incurred~~are atreported in the ~~sites~~Natural Gas Utility segment, ~~but~~with non-utility operations reported in the Other segment. No items were ~~full~~reported ~~extent~~in ofthe ~~such~~Other ~~contributions~~segment ~~cannot~~for beany ~~determined~~of atthe ~~this~~periods ~~time~~presented.

NOTE 12--NEW ACCOUNTING PRONOUNCEMENTS

FASB Staff Position (FSP) No. FAS 157-4, "Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly," was issued in April 2009 and reaffirms what SFAS No. 157 states is the objective of fair value measurement, which is to reflect how much an asset would be sold for in an orderly transaction (as opposed to a distressed or forced transaction) at the date of the financial statements. Specifically, it reaffirms the need to use judgment to ascertain if a formerly active market has become inactive and in determining fair values when markets have become inactive. This guidance is effective for NSG for the period ending June 30, 2009, and NSG anticipates it will have no impact on its fair value measurements.

- 14 -

~~NSG is~~FSP ~~recovering~~No. FAS 115-2 ~~the~~and ~~costs~~FAS 124-2, "Recognition and Presentation of ~~environmental~~Other-Than-Temporary Impairments," ~~activities~~was ~~relating~~issued in April 2009 and is intended to ~~its~~ bring greater ~~former manufactured~~consistency ~~gas~~to ~~operations,~~the ~~including~~timing ~~carrying~~of ~~charges~~impairment onrecognition ~~the~~and ~~unrecovered balances,~~provide ~~under~~greater ~~rate~~clarity ~~mechanisms approved~~to byinvestors about the ~~ICC, which authorize~~credit ~~recovery~~ and noncredit components of ~~prudently~~impaired debt ~~incurred costs~~securities that are not expected to be sold. ~~Costs incurred~~ The inFSP ~~each~~also ~~fiscal~~requires increased ~~year~~disclosures ~~are~~regarding ~~subject~~expected tocash aflows ~~prudence~~and ~~review~~credit bylosses, ~~the~~as ~~ICC~~well ~~during a~~as ~~reconciliation~~an ~~proceeding~~aging ~~for~~of ~~such~~securities ~~fiscal~~with ~~year~~unrealized losses. This ~~Costs~~FSP is ~~are~~effective ~~expensed~~for in NSG for the ~~statement~~period ofending ~~income~~June in30, ~~the~~2009, ~~same~~and ~~period~~NSG ~~they~~anticipates ~~are~~it will ~~billed~~have tono ~~customers~~impact ~~and recognized~~on asits ~~revenues~~Condensed Financial Statements.

~~Management believes that~~FSP ~~any~~No. ~~costs~~FAS ~~incurred~~107-1 and byAPB ~~NSG~~28-1, ~~for~~"Interim ~~environmental~~Disclosures ~~activities~~about ~~relating~~Fair toValue ~~former manufactured~~of ~~gas~~Financial ~~operations that are not recoverable through contributions~~Instruments," ~~from other~~was ~~entities~~issued orin ~~from~~April ~~insurance~~2009. This ~~carriers~~FSP ~~have~~amends ~~been~~SFAS ~~prudently incurred and are therefore recoverable through rates for utility service~~No. ~~Accordingly~~107, ~~management~~"Disclosures ~~believes~~about ~~that~~Fair ~~the~~Value ~~costs~~of ~~incurred~~Financial byInstruments," ~~NSG~~to inrequire ~~connection~~fair ~~with~~value ~~former~~disclosures ~~manufactured~~in ~~gas~~interim ~~operations~~periods. Previously, ~~will~~these ~~not~~disclosures ~~have~~were aonly ~~material adverse effect on the financial position~~required ~~or results of operations of NSG~~annually. This ~~However,~~FSP ~~any~~is ~~changes~~effective infor NSG’s ~~approved~~for ~~rate mechanisms~~the ~~for recovery~~reporting ofperiod ~~these~~ending ~~costs~~June 30, or2009, ~~any~~and ~~adverse~~will ~~conclusions by~~result ~~the ICC with~~in ~~respect~~additional todisclosures ~~the~~about ~~prudence~~the offair ~~costs actually incurred, could~~value ~~materially affect~~of NSG’s ~~recovery~~financial ~~of such costs through rates~~instruments.

Former Mineral Processing Site in Denver, Colorado

In 1994, NSG received a demand from the S.W. Shattuck Chemical Company, Inc., a responsible party under CERCLA, for reimbursement, indemnification and contribution for the response costs incurred at Shattuck’s Denver site. Shattuck is a wholly owned subsidiary of Salomon, Inc. (“Shattuck”). The demand alleges that NSG is a successor to the liability of a former entity that was allegedly responsible during the period 1934 through 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.

NSG filed a declaratory judgment action against Salomon in the United States District Court for the Northern District of Illinois. The suit asked the court to declare that NSG 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 NSG's motion for summary judgment, declaring that NSG is not liable for any response costs in connection with the Denver site.

In 1998, the United States Court of Appeals for the 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 NSG 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.

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 United States District Court for the District of Colorado. Under the terms of the agreement, Shattuck agreed to 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.

The EPA’s website indicates that the remediation of the site was completed in July 2006 and that all radioactive waste has been removed. The website further indicates that the site has been deemed protective of human health and the environment. According to a published news report, the EPA has stated that the total cost of the remedy was $57 million.

- 15 -

~~NSG does~~Item ~~not believe that it has liability for the response costs, but cannot determine the matter with certainty~~2. AtManagement's ~~this~~Discussion ~~time,~~and ~~NSG~~Analysis ~~cannot reasonably estimate what range~~ of ~~loss,~~Financial ifCondition ~~any, may occur. In the event that NSG incurs liability, it would pursue reimbursement from insurance carriers~~ and ~~other~~Results ~~responsible~~of ~~parties, if any.~~Operations

~~Gas~~The following ~~Charge~~discussion should be read in conjunction with the accompanying Condensed ~~Reconciliation~~Financial ~~Proceedings~~Statements and ~~Related~~related ~~Matters~~Notes and NSG’s Annual Report on Form 10-K for the year ended December 31, 2008.

For NSG, the ICC conducts annual proceedings regarding the reconciliation of revenues from the gas charge and related gas costs. The gas charge represents the cost of gas and transportation and storage services purchased ("Gas Charge"). 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 ICC were to find that the reconciliation was inaccurate or any gas costs were imprudently incurred, the ICC would order NSG to refund the affected amount to customers through subsequent Gas Charge filings. The proceedings are initiated shortly after the close of the fiscal year and historically take at least a year to 18 months to complete.

The ICC issued orders on March 28, 2006, approving a settlement that resolved all proceedings regarding NSG for fiscal 2001 - 2004 costs. The recommendation that proceedings for NSG's fiscal 2000 be reopened was made moot by approval of the settlement. The orders, which became publicly available March 30, adopted a January 17, 2006 Settlement Agreement and Release among and between NSG, the People of the State of Illinois through the AG, the City of Chicago ("Chicago") and the Citizens Utility Board, as amended by an Amendment and Addendum dated March 6, 2006 (the "Agreement").

In its orders approving the Agreement, the ICC determined that $4 million should be refunded to customers of NSG. In April 2006, the refund was credited to customer accounts.

Pursuant to the Agreement, NSG also paid $0.2 million jointly to Chicago and the AG in 2006. PEC also agreed to pay up to $5 million per year over the next five years (the “Subsequent Payments”) towards the funding of conservation and weatherization programs for low and moderate-income residential dwellings (the “Conservation Programs”). The five Subsequent Payments of up to $5 million shall be paid based upon Conservation Programs to be developed by Chicago and/or the AG. NSG will not seek recovery in any future rate or reconciliation cases of any amounts associated with the Conservation Programs. As of March 31, 2007, no liability for Subsequent Payments was recorded by NSG. On an ongoing basis and at least quarterly, NSG will continue to evaluate whether amounts should be recorded for probable and reasonably estimable liabilities for some or all of the remaining $25 million in Subsequent Payments related to the Conservation Programs. Triggering events that would lead us to conclude that the liabilities are probable and estimable for the Subsequent Payments include evidence that Chicago and the AG have established or are taking steps to develop valid Conservation Programs and have provided the estimated costs for those programs as required under the Agreement.

Under the Agreement, NSG agreed to forgive all outstanding bad debt from fiscal years 2000-2005 existing as of March 6, 2006, remove the bad debt from customers’ records and to not use any forgiven indebtedness as a reason to deny gas service. NSG had written off an estimated $7 million in prior periods.

The Agreement provides that NSG will cooperate with Chicago and the AG to identify those customers of NSG who were not receiving gas as of the date of the Agreement that are financial hardship cases. The hardship cases were identified by the utilities, the AG and Chicago. Following identification, NSG reconnected the hardship cases. NSG forgave all outstanding debt for reconnected customers.

The Agreement also provides that NSG agrees to implement recommendations proposed by the ICC’s Staff and the intervenors to conduct internal and external audits of its gas procurement practices. A gas supply management audit performed by a consulting firm retained by the ICC is in progress. No findings or recommendations have yet been communicated.

- 16 -

A $4.3 million charge was allocated to NSG in accordance with the orders. In anticipation of the March 28, 2006 orders from the ICC, NSG recorded estimated gas charge settlement costs for the three-month period ended December 31, 2005 of $17.0 million. As a result, a $12.7 million credit adjustment to the gas charge settlement was recorded in the three-month period ended March 31, 2006.

Amounts refunded in connection with the Gas Charge reconciliation cases for fiscal years 2001 through 2004 relate to specific issues that occurred during that period and NSG does not believe them to be indicative of future actions that may be taken by the ICC with respect to current outstanding and future gas charge reconciliation cases.

The fiscal 2005 Gas Charge reconciliation case was initiated in November 2005 and NSG filed direct testimony. The settlement of the prior fiscal years’ Gas Charge reconciliation proceedings does not affect these cases. ICC Staff and intervenor direct testimony was filed January 18, 2007. Staff witnesses recommended a disallowance of approximately $1.1 million for NSG. An intervenor witness (on behalf of the Citizens Utility Board) recommended a disallowance of approximately $1.1 million for NSG. The majority of the proposed disallowances are for a one-time adjustment by NSG to transportation customers’ bank (storage) gas liability balances. NSG filed its rebuttal testimony on February 22, 2007, and Staff and intervenors filed their rebuttal testimony on April 25, 2007. In their rebuttal testimony, the Staff witnesses reduced their recommended disallowance to about $1 million. Management cannot predict the outcome of these cases but has recorded as of March 31, 2007 a $0.4 million liability primarily related to the Staff’s proposed disallowance associated with the Gas Purchase and Agency Agreement that was at issue in the fiscal 2001-2004 cases, which NSG stated in its rebuttal testimony it is not contesting and which is inclusive of accrued interest.

The hearing for this reconciliation case is scheduled for May 30, 2007.

The fiscal 2006 Gas Charge reconciliation case was initiated on November 21, 2006. NSG filed its direct testimony on April 10, 2007. Staff and intervenors are required to file a pleading by August 1, 2007, identifying their issues, if any.

Class Action

In February 2004, a purported class action was filed in Cook County Circuit Court against PEC, PGL and NSG by customers of PGL and NSG alleging, among other things, violation of the Illinois Consumer Fraud and Deceptive Business Practices Act related to matters at issue in the utilities’ fiscal year 2001 Gas Charge reconciliation proceedings. The suit, Alport et al. v. Peoples Energy Corporation, seeks unspecified compensatory and punitive damages. PGL and NSG have been dismissed as defendants and the only remaining counts of the suit allege violations of the Consumer Fraud and Deceptive Business Practices Act and that PEC acted in concert with others to commit a tortious act. PEC denies the allegations and is vigorously defending the suit.

Based upon the settlement and dismissal of NSG's fiscal years 2001 through 2004 reconciliation cases by the ICC, the court on September 25, 2006 granted in part PEC's motion to dismiss the case by limiting the potential class members in the suit to those persons who were customers during the time that PEC’s joint venture with Enron was in operation and did not receive part of the settlement proceeds from the reconciliation cases. However, the court denied PEC’s motion to dismiss the case to the extent that the complaint seeks punitive damages (regardless of whether such customers received part of the settlement proceeds from the reconciliation cases). The plaintiffs filed a third amended complaint and a motion for class certification, to which PEC provided an opposing answer. On April 25, 2007, the court denied, without prejudice, plaintiffs’ motion for class certification. The court set the case for a status hearing on May 16, 2007. Management cannot predict the outcome of this litigation and has not recorded a liability associated with this contingency.

- 17 -

Builders Class Action

In June 2005, a purported class action was filed against PEC and its utility subsidiaries, including NSG, by Birchwood Builders, LLC in the Circuit Court of Cook County, Illinois alleging that NSG was fraudulently and improperly charging fees to customers with respect to utility connections, disconnections, reconnections, relocations, extensions of gas service pipes and extensions of distribution gas mains and failing to return related customer deposits. NSG filed two motions to dismiss the lawsuit. On January 25, 2007, the judge entered an order dismissing the complaint, but allowing the plaintiffs the option of filing an amended complaint (except as to the plaintiffs’ seeking of declaratory relief, which was dismissed with prejudice). The judge also ruled that the plaintiffs could file their claims directly with the ICC. The plaintiffs have not yet filed a new complaint with the court nor have they filed complaints at the ICC. NSG continues to believe it has meritorious defenses and intends to vigorously defend against the class action lawsuit. Management cannot predict the outcome of this litigation and has not recorded a liability associated with this contingency.

Technology License

RAKTL has offered PEC a license to a portfolio of patents, claiming that certain products and services utilized by PEC or its utility subsidiaries, including NSG, may infringe the patents. The patents purportedly relate to various aspects of telephone call processing in PEC’s customer call center. Discussions with RAKTL are ongoing, and no legal proceedings have been instituted against PEC or NSG. Based on its current analysis of this matter, PEC has decided to seek a license from RAKTL. Based on the information available at this time, management does not believe resolution of this matter will have a material adverse impact on NSG's financial position or results of operations.

NOTE 9--COMPREHENSIVE INCOME

SFAS No. 130, “Reporting Comprehensive Income,” requires the reporting of other comprehensive income in addition to net income (loss). Total comprehensive income includes all changes in equity during a period except those resulting from investments by NSG's shareholder and distributions to NSG's shareholder. NSG’s total comprehensive income (loss) is equal to its net income of $6.6 million and $13.8 million for the three months ended March 31, 2007 and 2006, respectively.

Changes to accumulated other comprehensive income (loss) from December 31, 2006 to March 31, 2007 were not significant.

NOTE 10-- EMPLOYEE BENEFIT PLANS

The following table provides the components of allocated net periodic benefit cost to NSG for PEC’s benefit plans for the three months ended March 31, 2007 and 2006:

					Other Postretirement
	Pension Benefits				Benefits
Three Months Ended March 31, (Millions)	2007		2006		2007	2006
Service cost	$0.3		$0.4		$0.2	$0.1
Interest cost	0.4		0.4		0.2	0.1
Expected return on plan assets	(0.3	)	(0.3	)	-	-
Amortization of:
Net transition (asset)/obligation	-		-		-	-
Prior service cost	0.1		-		-	-
Net actuarial (gain)/loss	0.1		0.2		-	0.1
Net periodic benefit cost	0.6		0.7		0.4	0.3
Effect of lump sum settlements upon retirement	0.2		0.2		-	-
Net benefit cost	$0.8		$0.9		$0.4	$0.3

- 18 -

Retiring employees have the option of receiving retirement benefits in the form of an annuity or a lump sum payment. NSG follows SFAS No. 88, "Employer's Accounting for Settlements and Curtailments of Defined Benefit Plans and for Termination Benefits" ("SFAS No. 88"), to account for unrecognized gains and losses related to the settlement of its pension plans' projected benefit obligations ("PBO"). During the three-month periods ended March 31, 2007 and 2006, a portion of each pension plan's PBO was settled by the payment of lump sum benefits, resulting in a settlement cost under SFAS No. 88.

Under the provisions of SFAS No. 71, amounts otherwise charged/credited to other comprehensive income upon application of SFAS No. 158, "Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans - an amendment of FASB Statements No. 87, 88, 106, and 132(R)" ("SFAS No. 158"), should be recorded as a regulatory asset or liability if the utility has historically recovered or currently recovers pension expense under SFAS No. 87, “Employers’ Accounting for Pensions”, and other postretirement benefit expense under SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions,” in rates and there is no negative evidence that the existing regulatory treatment will change. In accordance with SFAS No. 71, NSG recorded in regulatory assets and regulatory liabilities the net impact of recognizing the funded status of its plans upon implementation of SFAS No. 158 on December 31, 2006.

The amount of pension and other postretirement benefit costs deferred as a net regulatory asset at March 31, 2007 was $11.3 million and $2.8 million, respectively. Deferred amounts are expected to be recovered in rates over the employees' average remaining service period.

Contributions to the plans are made in accordance with legal and tax requirements and do not necessarily occur evenly throughout the year. NSG does not expect to make contributions to either its pension plans or its other postretirement benefit plans during the year ending December 31, 2007. As of March 31, 2007, no contributions have been made.

NSG also has defined contribution plans that allow eligible employees to contribute a portion of their income in accordance with specified guidelines. NSG matches a percentage of the employee contribution up to certain limits. The cost of the NSG matching contribution to the plans for the three-month periods ended March 31, 2007 and 2006 totaled $0.1 million and $0.1 million, respectively.

NOTE 11--REGULATORY ENVIRONMENT

Merger

Effective February 21, 2007, the previously announced merger between a subsidiary of Integrys and PEC was consummated. NSG and PGL are wholly-owned by PEC.

On February 7, 2007, the ICC approved the merger by accepting an agreed upon order among the active parties to the merger case. The order included Conditions of Approval regarding:

· commitments by the applicants to provide certain reports,

· promote and hire a limited number of union employees in specific areas,

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

· file a plan for formation and implementation of a services company,

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

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

The Conditions of Approval also include commitments with respect to the pending rate cases of PGL and NSG. These are the inclusion of combined merger synergy savings of $1.6 million at NSG) in the proposed test year, the recovery of $0.8 million at NSG of the merger-related costs in the test year (reflecting recovery of $4.2 million for NSG of costs over 5 years), proposing a combined PGL and NSG $7.5 million energy efficiency program which will be contingent on receiving cost recovery in the rate case

- 19 -

orders, and filing certain changes to the small volume transportation service programs. Finally, the order provides authority for PGL and NSG to recover from ratepayers in a future rate case after the pending rate cases up to an additional $9.9 million of merger costs, for a maximum potential recovery of $44.9 million. PGL and NSG must demonstrate in the future that merger synergy savings realized have exceeded the merger costs.

Rate Case

On March 9, 2007, Integrys filed a request with the ICC to increase natural gas rates for NSG by $6.3 million for 2008. The proposed rate increase is required to allow NSG to recover its current cost of service and to earn a reasonable rate of return on its investment. The filing includes an 11.06% return on common equity and a common equity ratio of 56% in its regulatory capital structure.

The rate case process in Illinois requires receipt of a written order from the ICC within 11 months from the date of filing, which would be February 6, 2008. Testimony of the various parties will be filed during the summer of 2007 with hearings scheduled for the second and third weeks of September 2007.

NOTE 12--SEGMENTS OF BUSINESS

Prior to the merger between a subsidiary of Integrys and PEC, NSG reported all of its utility and non-utility operations within the Gas Distribution segment and reported general corporate allocations to it under the Corporate and Other segment.

Effective with the quarter ended March 31, 2007, NSG’s results of operations, including allocations for corporate activities, are reported in the Gas Utility segment with non-utility operations reported in the Other segment. Corresponding items for the prior year have been restated for the change in segment reporting. No material items were reportable for the Other segment for either period.

Segments of Business	Gas		NSG
(Millions)	Utility(1)	Other(2)	Consolidated
Three Months Ended
March 31, 2007
Revenues	$124.6	$ -	$124.6
Operating expenses	113.5	-	113.5
Operating income	11.1	-	11.1
Net income	6.6	-	6.6
Three Months Ended
March 31, 2006
Revenues	$121.6	$ -	$121.6
Operating expenses	98.4	-	98.4
Operating income	23.2	-	23.2
Net income	13.8	-	13.8
(1) Includes only utility operations.
(2) Nonutility operations are included in the Other column. Amounts for all categories rounded to less than $0.1 million.

- 20 -

NOTE 13--NEW ACCOUNTING PRONOUNCEMENTS

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” ("SFAS No. 157"). SFAS No. 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles, and expands disclosures about fair value measurements. SFAS No. 157 emphasizes that fair value is a market-based measurement, not an entity-specific measurement, and states that a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. The standard eliminates the current requirement for deferring "day one" gains on energy contracts that are not evidenced by quoted market prices or other current market transactions. The standard will be effective for NSG beginning January 1, 2008. NSG is currently evaluating the impact that SFAS No. 157 will have on its financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” ("SFAS No. 159"). This standard permits entities to choose to measure many financial instruments and certain other items at fair value, following the provisions of SFAS No. 157. Included within the scope of the standard are all recognized financial assets and financial liabilities, except consolidated investments, consolidated interests in a variable interest entity, obligations for pension and certain other benefits, leases, and financial instruments that are classified as a component of shareholder's equity. Also included in the scope of the standard are firm commitments that would otherwise not be recognized at inception and that involve only financial instruments, nonfinancial insurance contracts and warranties that the insurer can settle by paying a third party to provide those goods or services, and host financial instruments resulting from separation of an embedded nonfinancial derivative instrument from a nonfinancial hybrid instrument. SFAS No. 159 is effective for NSG beginning January 1, 2008. NSG is currently evaluating the impact that SFAS No. 159 will have on its financial statements.

- 21 -

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

INTRODUCTION

NSG, an indirect wholly owned subsidiary of Integrys Energy Group, is a regulated natural gas utility, which purchases, stores, distributes, sells, and transports natural gas to about ~~157~~158,000 customers in 54 communities in ~~northeastern~~the northern suburbs of Chicago. NSG is subject to the jurisdiction of and regulation by the ICC, which has general supervisory and regulatory powers over practically all phases of the public utility business in Illinois.

Strategic Overview

The ~~focal~~ ~~point~~focus of NSG's business plan is the creation of long-term value for Integrys ~~and~~Energy ~~its~~Group’s shareholders and ~~for~~ NSG's customers through growth, operational excellence, customer focus, asset management, risk management, and the continued emphasis on safe, reliable, competitively priced, and environmentally sound ~~energy~~natural ~~and~~gas delivery ~~energy~~services. A ~~related~~discussion ~~services~~of the essential components of NSG's business strategy is set forth below.

AMaintain and Grow a Strong Regulated Utility Base – A strong regulated utility base is important in order to maintain a strong balance sheet, predictable cash flows, a desired risk profile, ~~attractive dividends,~~ and quality credit ratings, which are critical to ~~our~~NSG's success. To this end, NSG ~~believes~~continues ~~the~~to ~~merger~~upgrade ~~between~~its anatural ~~subsidiary~~gas ofdistribution ~~Integrys~~facilities, related systems, and ~~PEC~~processes, seeking ~~will~~to ~~help~~enhance ~~maintain~~safety, reliability, and ~~grow~~value for NSG's customers and ~~its regulated~~Integrys ~~utility~~Energy ~~base~~Group's shareholders.

~~Rate~~Integrate ~~Case~~Resources to Provide Operational Excellence – NSG is committed to integrating resources and finding the best, most efficient processes while adhering to any and all applicable regulatory and legal requirements. Through innovative ideas, embracing change, leveraging individual capabilities and expertise, and utilizing creative solutions to meet and exceed its customers' expectations, NSG strives to provide value to Integrys Energy Group's shareholders and NSG's customers and assist in lowering costs.

OnPlace Strong ~~March~~Emphasis 9,on ~~2007,~~Risk ~~Integrys~~Management ~~filed~~– aNSG's ~~request~~risk ~~with~~management strategy includes the management ~~ICC~~of tomarket, ~~increase~~credit, ~~natural gas rates~~and ~~for~~operational ~~NSG~~risk bythrough ~~$6.3~~the ~~million~~normal ~~for~~course ~~2008~~of business. Forward ~~The~~purchases ~~proposed~~and ~~rate~~sales ~~increase~~of isnatural ~~required to~~gas ~~allow~~and ~~NSG~~the touse ~~recover~~of derivative ~~its~~financial ~~current~~instruments, ~~cost~~including ofcommodity ~~service~~swaps and options, allow for opportunities to ~~earn~~reduce athe ~~reasonable rate~~risk ofassociated ~~return~~with onprice ~~its~~movement ~~investment~~in a volatile energy market. Overview ~~The~~of ~~filing~~the ~~includes~~risk anprofile ~~11.06%~~related ~~return~~to onthese ~~common equity~~instruments ~~and~~is amonitored ~~common~~consistent ~~equity~~with ~~ratio~~NSG's ofrisk ~~56%~~management inpolicy, ~~its~~which ~~regulatory capital~~is ~~structure~~approved by the Integrys Energy Group Board of Directors.

~~NSG~~Continued ~~has~~Emphasis ~~also~~on Safe, Reliable, Competitively Priced, and Environmentally Sound ~~proposed~~Natural ~~three~~Gas ~~"riders"~~Services ~~that~~– NSG's ~~would~~mission ~~allow~~is ~~changes~~to provide customers with the best value in ~~costs~~natural gas services. By effectively operating its natural gas distribution facilities, while maintaining or exceeding environmental standards, NSG seeks to beprovide ~~passed~~a ~~through~~safe, reliable, and ~~between~~value ~~rate~~priced ~~cases~~service to its customers. NSG ~~The~~concentrates ~~three~~its ~~riders~~efforts on ~~are:~~improving and operating efficiently and effectively in order to reduce costs and maintain a low risk profile, as well as managing its operations to reduce the impact it might have on the environment.

~~· a "decoupling" mechanism that would allow NSG to adjust rates going forward to recover or refund the difference between actual recovered non~~-~~gas~~ ~~cost~~16 ~~revenue and authorized non~~-~~gas cost revenue;~~

· a mechanism to recover the gas cost portion of uncollectible expense based on current gas prices; and

· a mechanism to recover $1.1 million of energy efficiency costs under a program to be approved by the ICC.

NSG is also seeking modifications of tariffs, primarily to reflect current operating conditions in the transportation service riders.

- 22 -

RESULTS OF OPERATIONS

First Quarter 2007 Compared with First Quarter 2006

	Three Months Ended
	March 31		% Increase
(Millions)	2009	2008	(Decrease)
Net income	$2.9	$5.5	(47.3)%

~~Overview~~NSG's net income decreased $2.6 million quarter-over-quarter. As discussed in more detail below, this decrease was driven by the $2.2 million ($1.3 million after-tax) negative impact of a new rate design and the $0.9 ~~Operations~~million ($0.5 million after-tax) negative impact of decreased volumes.

NSG's ~~net~~ ~~income was~~results ~~$6.6 million for the three-month~~of ~~period ended~~operations ~~March 31, 2007, compared to $13.8 million~~ for the ~~same quarter in 2006.~~periods ~~Results for the three-month period~~ ended March 31, ~~2006~~are ~~were~~shown ~~positively impacted~~in ~~by a pretax credit adjustment of $12.7 million related to~~ the ~~settlement~~ ~~of gas charge proceedings for fiscal years 2001 through 2004.~~following Due to a number of factors, including seasonality of NSG's businesses and market price volatility, the quarterly results of operations should not be considered indicative of the results to be expected for the year as a whole.table:

Revenues for the three-month period ended March 31, 2007 increased $3.0 million compared with the same year-ago period. These results reflected the impact on revenues of increased deliveries due to weather (approximately $14 million) that was 14.2% colder compared with the same year-ago period. The increase was partially offset by the impact on revenues of lower natural gas prices (approximately $11 million) that are recovered on a dollar-for-dollar basis. Natural gas costs were 11.1% lower (on a per-unit basis) during the quarter ended March 31, 2007, compared to the same quarter in 2006. Following regulatory practice, changes in the total cost of natural gas are passed on to customers.

	Three Months Ended
	March 31						% Increase
(Millions, except heating degree days)	2009			2008			(Decrease)

Natural gas operating revenues	$	116.6		$	131.7			(11.5	)%
Natural gas purchased for resale		93.1			106.7			(12.7	)%
Margins		23.5			25.0			(6.0	)%

Operating and maintenance expense		15.8			13.9			13.7	%
Depreciation and amortization expense		1.5			1.6			(6.3	)%
Taxes other than income taxes		0.7			0.6			16.7	%
Operating income		5.5			8.9			(38.2	)%

Miscellaneous income		0.1			0.2			(50.0	)%
Interest expense		(1.1	)		(1.0	)		10.0	%
Other expense		(1.0	)		(0.8	)		25.0	%

Income before taxes		4.5			8.1			(44.4	)%
Provision for income taxes		1.6			2.6			(38.5	)%
Net Income	$	2.9		$	5.5			(47.3	)%

Throughput in therms
Residential		93.0			98.7			(5.8	)%
Commercial and industrial		20.4			21.9			(6.8	)%
Transport		48.8			50.8			(3.9	)%
Total sales in therms		162.2			171.4			(5.4	)%

Weather
Heating degree days		3,318			3,416			(2.9	)%

~~NSG's~~First ~~margin increased~~Quarter ~~$1.5~~2009 ~~million~~Compared (6.4%) for the quarter ended March 31, 2007, compared to the same quarter in 2006, primarily due to the impact of increased deliveries due to weather (approximately $1.7 million) that was 14.2% colder compared with ~~the~~ ~~same~~First ~~year-ago~~Quarter ~~period.~~2008

See Notes 1 and 3 of the Condensed Notes to Financial Statements for a discussion of a change in accounting policy with regards to presenting both revenues and taxes, other than income taxes, net of certain taxes on the Condensed Consolidated Statements of Income.Revenue

~~NSG's results~~Revenues ofdecreased ~~operations~~$15.1 million for the ~~quarters~~quarter ended March 31, ~~are~~2009, ~~shown~~compared inwith the ~~following~~same ~~table~~quarter last year. The major factors contributing to the quarter-over-quarter change in revenues were as follows:

	Three Months Ended March 31,
NSG Results (Millions)	2007	2006	Change
Revenues	$124.6	$121.6	2.5	%
Purchased gas costs	99.8	98.3	1.5	%
Margins	$24.8	$23.3	6.4	%
Throughput in therms
Residential	91.2	79.9	14.1	%
Commercial and industrial	20.2	17.6	14.8	%
Transport	46.1	44.0	4.8	%
Total sales in therms	157.5	141.5	11.3	%
Weather
Heating degree days - actual	3,131	2,741	14.2	%

·	The per-unit cost of natural gas decreased 7.4% quarter-over-quarter. This drove a $7.7 million decrease in revenues, as decreases in natural gas commodity costs are passed directly through to customers in rates.

- 23 17 -

~~Operating Expenses~~· Revenues decreased $3.8 million quarter-over-quarter due to the impact of weather that was 2.9% warmer than the first quarter of 2008. · A decrease in revenues of $3.4 million resulted from a decrease in weather-normalized volumes, which we believe is primarily due to customer conservation efforts related to a general slowdown in the economy. · Revenues decreased $2.2 million due to a change in the rate design related to the rate order effective February 14, 2008. The new rate design incorporates higher fixed customer charges and lower volumetric rates. · Partially offsetting the decreases above was an increase of $1.5 million due to NSG's recovery of higher quarter-over-quarter expenditures related to the cleanup of former manufactured gas plant sites. This increase in revenues was offset by an increase in operating expenses due to the amortization of the related regulatory asset.

	Three Months Ended March 31,
NSG's Operating Expenses (Millions)	2007	2006		Change
Operating and maintenance expenses	$11.2	$10.5		6.7	%
Gas charge settlement (credit)	-	(12.7	)	-100.0	%
Depreciation and amortization	1.5	1.4		7.1	%
Taxes, other than income taxes	1.0	0.9		11.1	%

Margin

~~Operating~~NSG's margin decreased $1.5 million quarter-over-quarter, primarily due to the $2.2 million negative impact of the new rate design and a negative $0.9 ~~Maintenance~~million ~~Expenses~~quarter-over-quarter impact of a decrease in volumes due to conservation and warmer weather conditions in the first quarter of 2009. The quarter-over-quarter decrease in margin includes the impact of the decoupling mechanisms that were implemented on March 1, 2008. Partially offsetting these decreases was the $1.5 million quarter-over-quarter increase in the recovery of environmental costs in rates, as well as an increase in the recovery of enhanced efficiency program (EEP) expenses.

Operating and maintenance expenses increased $0.7 million (6.7%), to $11.2 million during the first quarter of 2007, from $10.5 million during the first quarter of 2006, driven by the following: Income

·Operating ~~Increased~~income decreased ~~injuries~~$3.4 million, ~~and~~driven ~~damages~~by ~~expense~~the $2.2 million negative impact of the new rate design and the $0.59 million impact of decreased volumes.

·Operating ~~Increased~~and maintenance ~~employee benefits~~ expense ofincreased $01.39 million, primarily driven by the $1.5 million increase in the amortization of the regulatory asset related to cleanup costs of manufactured gas plant sites, as well as higher EEP expenses. Both the amortization of the regulatory asset and the increased EEP costs are offset by an equal amount recovered in revenues. Therefore, these items had no impact on operating income.

~~· Accrued expenses of $0.4 million in connection with the fiscal 2005 Gas Charge reconciliation case as discussed in Note 8 of the Condensed Notes to Financial Statements.~~Other Expense

·Other ~~Decreased~~expense increased ~~utility environmental costs of~~ $0.3 2 million ~~related~~quarter-over-quarter, toprimarily ~~investigation~~due ~~and remediation activities at multiple sites that formerly had operations for gas manufacturing and the storage of manufactured gas (see Note 8 of the Condensed Notes~~ to ~~Financial~~decreased interest ~~Statements~~income ~~for~~on ~~further~~cash ~~discussion)~~investments. ~~These costs are recovered through the utility’s rate mechanism and a similar amount is included in revenues, therefore these costs do not affect operating income.~~

· Decreased bad debt expense of $0.2 million due primarily to lower weather-normalized deliveries and lower natural gas prices, as well as improved credit and collection experience.

Gas Charge Settlement (Credit)

In the three-month period ended March 31, 2006, NSG recorded a pretax credit adjustment of $12.7 million related to a settlement of NSG's gas charge proceedings for 2001 through 2004 with the ICC, as discussed in Note 8 of the Condensed Notes to Financial Statements.

Depreciation and Amortization

Depreciation and amortization expense for the three-month period increased $0.1 million (7.1%) mainly due to the impacts of a higher year-over-year property, plant and equipment balance.

Taxes Other Than Income

Taxes other than income for the three-month period increased $0.1 million (11.1%) primarily due to higher payroll-related taxes resulting from increased labor expenses.

Provision for Income Taxes

Income tax expense for the three-month period decreased $4.9 million primarily due to lower pretax income. The overall effective tax rates for the three-month periods ended March 31, 2007 and 2006 were 35.9% and 38.4%, respectively. The effective tax rate differs from the federal tax rate of 35% primarily due to the effect of state income taxation, offset by the permanent tax effects of employee benefit-related deductions.

	Three Months Ended March 31
	2009			2008
Effective Tax Rate		35.6	%		32.1	%

Quarter-over-quarter 24changes in the effective tax rate occur as a result of adjustments required by generally accepted accounting principles to ensure the year-to-date interim effective tax rate reflects the projected annual effective tax rate. The first quarter 2009 effective tax rate was higher than the first quarter 2008 effective tax rate due to the impact of consistent permanent tax benefits on higher projected annual pretax income in 2009.

- 18 -

LIQUIDITY AND CAPITAL RESOURCES

~~We believe~~NSG believes that its ~~our~~ cash balances, liquid assets, operating cash flows, ~~access to capital markets,~~ and ~~borrowing~~available borrowing capacity (~~intercompany~~related party and third- party) ~~made available because of strong credit ratings, when taken together,~~ provide adequate resources to fund ongoing operating requirements and future capital expenditures. However, ~~our~~NSG's operating cash flows and access to capital markets can be impacted by macroeconomic factors outside of ~~our~~ its control. In addition, ~~our~~ its borrowing costs can be impacted by short-term and long-term debt ratings assigned by independent ~~rating~~credit rating agencies.

Cash Flows Variations

The following is a summary of cash flows for NSG:

(Millions)	Three Months Ended March 31, 2007		Three Months Ended March 31, 2006
Net cash provided by (used in) operating activities	$32.5		$43.0
Net cash provided by (used in) investing activities	$(29.5	)	$(9.5	)
Net cash provided by (used in) financing activities	$(2.3	)	$(11.4	)

Operating Cash Flows

~~Cash~~During the three months ended March 31, 2009, net cash provided by operating activities ~~decreased~~was $44.9 million, compared with $40.8 million for the ~~three-month~~ same period in ~~ended~~2008. The ~~March~~$4.1 ~~31,~~million ~~2007~~quarter-over-quarter asincrease ~~compared~~was largely driven by a $3.4 million decrease in working capital requirements, primarily due to a $7.5 million decrease in accounts receivable and accrued unbilled revenues during the three~~-month period~~ months ended March 31, ~~2006~~2009, ~~primarily due~~compared towith a $17.2 million ~~unfavorable~~increase ~~net~~during ~~changes~~the insame ~~working~~period ~~capital~~in 2008. This Indifference ~~the~~was ~~accompanying~~driven by ~~cash~~lower ~~flow statements,~~revenues ~~balance~~in ~~sheet~~March ~~changes~~2009 incompared ~~current~~with ~~deferred~~March ~~tax~~2008, ~~assets~~primarily ~~and~~the ~~other~~result ~~receivables~~of ~~exclude~~lower ~~certain~~natural ~~noncash~~gas ~~transactions~~prices. Partially ~~(primarily~~offsetting ~~the~~this ~~effects~~change ofwas a ~~MTM accounting).~~decrease ~~For~~in accounts payable during the three~~-month~~ ~~period~~months ended March 31, ~~2007~~ 2009, ~~balance~~compared ~~sheet~~with ~~changes~~an increase in ~~intercompany~~accounts ~~assets/liabilities~~payable ofover ~~NSG~~the ~~exclude~~same ~~the noncash~~period ~~effects~~in of2008, primarily ~~derivative~~the ~~activity~~result ~~previously~~of ~~conducted~~lower onnatural ~~its~~gas ~~behalf by PEC~~prices.

Investing Cash Flows

Net cash used infor investing activities increased ~~primarily~~$32.9 asmillion, afrom ~~result~~$1.8 ofmillion anfor ~~intercompany~~the ~~loan~~three months ended March 31, 2008, to $34.7 million for the three months ended March 31, 2009, primarily due to a $31.7 million increase in notes receivable from PGL.

Financing Cash Flows

Net cash used infor financing activities decreased $2.5 million, from $12.7 million during the three months ended March 31, 2008, to $10.2 million during the three months ended March 31, 2009. The decrease was primarily due to the repayment ~~reduction~~of a greater amount of related-party loans in the ~~intercompany~~three ~~loan~~months ~~payable~~ended toMarch ~~PGL~~ 31, 2008, compared with the same period in ~~2006~~2009. The repayments of related-party loans were made possible by cash provided by operating activities.

Credit Ratings

The current credit ratings for NSG ~~have~~are ~~not~~listed ~~changed~~in ~~since~~ the ~~filing~~table ~~of the combined PEC, PGL and NSG Annual Report on Form 10-K, as amended for the fiscal year ended September 30, 2006~~below.

Balance Sheet Variations

	Standard & Poor's	Moody's
Issuer credit rating	BBB+	N/A
Senior secured debt	A	A1

~~Total assets~~Credit atratings are ~~March~~not ~~31,~~recommendations ~~2007 increased $17.9 million compared~~ to ~~December~~buy ~~31,~~or ~~2006,~~sell ~~due to~~securities ~~a seasonal increase in customer receivables~~ and ~~a loan~~are ~~receivable due~~subject ~~from PGL for $27.5 million. These increases were partially offset by decreases in regulatory assets (related primarily~~ to ~~MTM~~change, ~~accounting for the utility gas costs hedging program)~~ and ~~a seasonal~~ ~~decrease~~each inrating ~~natural~~should ~~gas~~be inevaluated ~~storage.~~independently The increase in current liabilities was driven by a seasonal increase in the temporary LIFO liquidation credit, partially offset by a decrease in payables to related parties due primarily to the transfer of ~~remaining~~any ~~derivative~~other ~~contracts from PEC to NSG)~~rating. ~~NSG’s long-term liabilities and deferred credits and total capitalization did not change significantly.~~

-On 25March -9, 2009, Moody’s placed the ratings of NSG under review for possible downgrade. This action follows the review of Integrys Energy Group’s consolidated 2008 financial performance, as well as Integrys Energy Group’s strategic decision to divest or scale back its nonregulated energy services business.

~~Total~~On ~~assets at~~ March 315, ~~2007 increased $30.9 million compared to March 31~~2009, ~~2006,~~Standard ~~due~~& ~~to an increase~~Poor’s inlowered ~~regulatory~~the ~~assets~~corporate ~~(related~~credit ~~primarily~~rating ~~to MTM accounting~~ for ~~the~~NSG utility gas costs hedging program) and the recognition of asset retirement obligations required under FIN 47 as of September 30, 2006. Also contributing to the increase in total assets at March 31, 2007 is a loan receivable due from ~~PGL for~~ ~~$27.5 million. These increases were partially offset by a combined decrease in cash and cash equivalents and short~~“A-~~term~~“ ~~investments. The decrease in current liabilities was driven by a decrease in payables~~ to ~~related parties due primarily to the transfer of some derivative contracts from PEC to NSG and a decrease in gas costs refundable to customers~~“BBB+.” According ~~Long-term liabilities and deferred credits increased due~~ to ~~increases~~Standard ~~in deferred income taxes~~ and ~~environmental~~ ~~remediation liabilities~~Poor’s, the ~~recognition of asset retirement~~downgrade ~~obligations~~reflects ~~under~~Integrys ~~FIN~~Energy 47Group’s ~~and~~weak ~~the~~financial ~~increase~~measures inthat ~~pension~~do ~~and~~not ~~other~~support ~~postretirement~~an ~~benefits~~‘A’ ~~liabilities~~category ~~with~~credit ~~the adoption of SFAS No~~profile. Standard ~~158~~and ~~at December 31, 2006. NSG~~Poor’s ~~total~~also ~~capitalization~~stated ~~did~~that ~~not change significantly.~~the

- 19 -

downgrade reflects the changes to Integrys Energy Group’s business and financial risk profiles. Standard & Poor’s revised Integrys Energy Group’s business risk profile to excellent from strong and changed its financial risk profile to aggressive from intermediate. The change in the business risk profile reflected Integrys Energy Group’s strategy change with respect to Integrys Energy Services and helped to moderate the downgrade.

Future Capital Requirements and Resources

Contractual Obligations

The following table shows the contractual obligations of NSG as of March 31, ~~2007~~2009:

	Payments Due by Period
				Payments Due By Period
				2008-		2010-	2012 and
(Millions)	Total Amounts Committed			2009				2010-2011		2012-2013	2014 and Thereafter
(Millions)	Total		2007	2009		2011	Thereafter
Long-term debt principal and interest payments (1)	$	113.3		$	2.8		$	7.5	$	52.7	$	50.3
Total debt	$69.1		$ -	$ -		$ -	$69.1
Commodity purchase obligations (2)		104.1			16.7			37.5		32.5		17.4
Estimated interest payments on debt	44.0		3.3	6.6		6.6	27.5
Purchase orders (3)		4.5			4.5			-		-		-
Operating leases	-		-	-		-	-
Pension and other postretirementfunding obligations (4)		26.7			5.9			9.3		6.0		5.5
Purchase obligations	70.4		13.6	25.2		9.8	21.8
Total contractual cash obligations	$	248.6		$	29.9		$	54.3	$	91.2	$	73.2
Total contractual cash obligations	$183.5		$16.9	$31.8		$16.4	$118.4

~~The~~(1) ~~table~~Represents ~~above~~bonds ~~does~~issued ~~not~~by ~~reflect any payments related to the manufactured gas plant remediation liability of $70~~NSG.3 NSG ~~million~~records atall ~~March~~principal ~~31,~~obligations ~~2007~~on as the ~~amount and timing of~~balance ~~payments are uncertain~~sheet. ~~See Note 8 of the Condensed Notes to Financial Statements for more information about NSG’s environmental liabilities.~~

~~As of March 31, 2007, NSG had issued surety bonds totaling $0.~~(2 ~~million and~~) ~~has authorized~~The ~~the~~costs ~~issuance~~ of commodity apurchase ~~standby~~obligations ~~letter~~are ofexpected ~~credit~~to bybe arecovered ~~financial institution~~ in ~~the~~future ~~amount of $10,000~~customer rates.

(3) Includes obligations related to normal business operations and construction obligations.

(4) Obligations for certain pension and postretirement benefit plans cannot be estimated beyond 2011.

The table above does not reflect any payments related to the manufactured gas plant remediation liability of $101.5 million at March 31, 2009, as the amount and timing of payments are uncertain. See Note 7, "Commitments and Contingencies," for more information. In addition, the table does not reflect any payments for the March 31, 2009, liability related to uncertain tax positions, as the amount and timing of payments are uncertain. See Note 6, "Income Taxes," for more information about this liability.

Capital Requirements

Net construction expenditures for NSG for the three-year period 2009 through 2011 are expected to ~~makes~~be ~~large~~$40.1 million. The largest of these expenditures relates to ~~investments~~NSG's innatural ~~capital~~gas ~~assets~~pipe distribution system. All ~~Net~~projected ~~construction~~capital and investment expenditures are ~~expected~~ subject to ~~be $33~~periodic ~~million~~review inand ~~the~~may ~~aggregate~~vary significantly ~~for~~from the ~~2007~~estimates ~~through~~depending ~~2009~~on ~~period.~~a ~~The~~number ~~largest~~ of factors, including, ~~these~~but ~~expenditures~~not islimited ~~for~~to, ~~the~~industry ~~pipe~~restructuring, ~~distribution~~regulatory ~~system~~constraints, market volatility, and economic trends.

Capital Resources

~~NSG~~As ~~has~~of ~~the~~March 31, ~~ability to~~2009, ~~borrow~~NSG upwas toin ~~$50~~compliance ~~million~~with ~~from~~all ~~PEC~~covenants ~~and~~relating to outstanding ~~loan~~long-term todebt orand ~~borrow~~expects ~~from PGL up~~ to ~~$50 million.~~ Asbe ofin ~~March 31, 2007,~~compliance ~~there~~with ~~were no~~all ~~loans~~such ~~from PEC or PGL to NSG. As of March 31,~~debt ~~2007,~~covenants ~~there~~for ~~were loans~~the offoreseeable ~~$27~~future.~~5 million from NSG to PGL.~~

NSG's ~~indenture~~ ~~relating~~long-term todebt ~~its~~obligations ~~first~~contain ~~mortgage~~covenants ~~bonds~~related ~~contains~~to ~~provisions and covenants restricting the~~ payment of ~~cash~~principal ~~dividends~~ and ~~the purchase or redemption of capital stock.~~interest ~~At March 31,~~when ~~2007,~~due ~~such~~and ~~restrictions~~various ~~amounted~~financial toreporting $6obligations.~~9 million~~ Failure ~~of NSG's~~to ~~total~~comply ~~retained~~with ~~earnings~~these ofcovenants ~~$82.3 million.~~could Asresult ~~of March 31, 2007, NSG was~~ in ~~compliance~~ ~~with~~an ~~all~~event of ~~the~~default ~~covenants~~which, ~~under~~if ~~its credit facilities and other~~not ~~obligations.~~cured ~~For~~or ~~the period 2007 through 2009~~waived, ~~NSG~~could ~~plans~~result toin ~~use~~the ~~internally generated~~acceleration ~~funds net~~ of ~~forecasted~~outstanding ~~dividend payments,~~ debt ~~financings and~~ ~~equity infusions to fund capital requirements. NSG plans to~~

- 26 20 -

~~maintain~~obligations. In ~~current debt~~addition, tocovenants ~~equity~~and ~~ratios~~other atprovisions ~~appropriate~~restrict ~~levels~~the topayment ~~support~~of ~~current~~cash ~~credit ratings~~dividends and ~~corporate~~the ~~growth.~~purchase ~~Management~~or ~~believes~~redemption ~~NSG~~of ~~has~~capital ~~adequate~~stock. At ~~financial flexibility~~March 31, ~~and~~2009, ~~resources~~such restrictions amounted to ~~meet~~$6.9 million ~~its~~of ~~future~~NSG's ~~needs~~total retained earnings of $79.1 million.

NSG plans to meet its capital requirements for the period 2009 through 2011 primarily through internally generated funds, debt financings, and equity infusions. Management believes NSG has adequate financial flexibility and resources to meet its future needs. See Item 2, "Management’s Discussion and Analysis of Financial Condition and Results of Operations, Other Future Considerations," for additional information.

NSG has the ability to borrow up to $50.0 million from PEC and up to $50.0 million from PGL. At March 31, 2009, NSG had no borrowings outstanding with PEC or PGL under these debt agreements.

Other Future Considerations

~~Gas~~Impact ~~Charge Reconciliation~~of ~~Proceedings~~Financial ~~and~~Market ~~Related Matters~~Turmoil

~~For~~As ~~NSG~~widely reported, the ~~ICC conducts~~financial ~~annual~~markets ~~proceedings~~and ~~regarding~~overall economies in the ~~reconciliation~~United States ofand ~~revenues~~abroad ~~from the Gas~~are ~~Charge~~currently ~~and~~undergoing ~~related~~a ~~gas~~period ~~costs~~of significant uncertainty and volatility. As Ina ~~these~~result ~~proceedings~~of recent events, ~~the~~NSG's ~~accuracy~~management ofhas placed increased emphasis on monitoring the ~~reconciliation~~ ofrisks ~~revenues~~associated ~~and~~with ~~costs~~the iscurrent credit ~~reviewed~~market ~~and~~environment. While the ~~prudence~~impact of ~~gas~~continued market ~~costs recovered~~volatility ~~through~~and the ~~gas~~extent ~~charge~~and isimpacts ~~examined~~of byany ~~interested~~economic ~~parties.~~downturn ~~(See~~cannot be ~~Note~~predicted, 8management currently believes that NSG has sufficient operating offlexibility ~~the~~and ~~Condensed~~access ~~Notes~~to funding sources to ~~Financial~~maintain ~~Statements~~adequate amounts of liquidity.)

InThe recent ~~February~~volatility ~~2004,~~in aglobal ~~purported~~capital ~~class~~markets ~~action~~has ~~was~~led ~~filed~~to ~~against~~a ~~PEC,~~reduction ~~PGL~~in ~~and~~the ~~NSG~~current ~~by customers~~market value of ~~PGL and~~ NSG's ~~alleging,~~share ~~among~~of ~~other~~long-term ~~things,~~investments ~~violation~~held ofin the ~~Illinois~~pension benefit ~~Consumer~~plan ~~Fraud~~trusts ~~and~~sponsored ~~Deceptive~~by ~~Business~~IBS ~~Practices~~and ~~Act~~the ~~related~~other topostretirement ~~matters~~benefit atplan trusts ~~issue~~ sponsored by PEC. The recent decline in asset value of the ~~utilities'~~plans ~~gas~~will likely ~~charge~~result ~~reconciliation~~in ~~proceedings.~~higher ~~(See~~pension ~~Note~~and 8other ofpostretirement ~~the Condensed~~benefit ~~Notes~~expenses, toand additional ~~Financial~~future ~~Statements~~funding requirements.)

~~Environmental~~Reserve ~~Matters~~for Uncollectible Accounts

~~NSG is~~The ~~conducting~~reserve for ~~environmental~~uncollectible ~~investigations~~accounts ~~and~~reflects ~~remedial~~NSG's ~~work~~best atestimate ~~certain~~of ~~sites~~probable ~~that~~losses ~~were~~on its ~~the locations~~accounts ofreceivable ~~former~~balances. The ~~manufactured~~reserve ~~gas~~is ~~operations.~~based ~~NSG~~on ~~received~~known atroubled accounts, ~~demand~~historical ~~from a responsible~~experience, ~~party~~and ~~under~~other ~~CERCLA~~currently available evidence. Provisions for ~~environmental~~bad ~~costs~~debt ~~associated~~expense ~~with~~are ~~a site~~affected by changes in ~~Denver~~various factors, ~~Colorado.~~including ~~(See~~the ~~Note~~impacts 8 of the ~~Condensed~~economy, ~~Notes~~natural togas ~~Financial~~prices and ~~Statements~~weather.)

~~Proposed~~The impact of the ~~Illinois~~declining ~~Gross~~economic ~~Receipts~~environment ~~Tax~~on customers could cause more of NSG's accounts receivable to become uncollectible. Higher levels of uncollectible balances would negatively impact NSG's results of operations and could result in higher working capital requirements.

On March 7, 2007, Illinois' Governor, in his Budget Address, proposed replacing the corporate income tax with a gross receipts tax ("GRT"). Under this proposal, the GRT rate on goods would be 0.85% and the rate on services would be 1.95%; the GRT would not apply to businesses with sales of less than $2 million. It is not clear which rate NSG would be subject to. The tax would take effect on January 1, 2008, and the first full year of implementation would be the calendar year 2008. During this period, businesses would receive a 100% credit against corporate income taxes paid. The personal property replacement tax would remain intact and continue to apply to partnerships and corporations. It is unclear how existing Illinois net operating losses and Illinois corporate income tax credits will apply to the GRT. The proposed tax would require unitary filings only with members who have Illinois nexus and allow intercompany eliminations among these members only.Decoupling

~~Service~~In ~~Company~~the current political, economic, and regulatory environment, the focus on energy efficiency can lead to the implementation of decoupling mechanisms. Decoupling was approved for residential and small commercial sales by the ICC on a four-year trial basis, effective March 1, 2008. Under decoupling, NSG is allowed to adjust rates going forward to recover or refund the difference between the actual and authorized margin impact of variations in volumes. Interveners, including the Illinois Attorney General, oppose decoupling and have appealed the ICC's approval. NSG is actively supporting the ICC's decision to approve decoupling. See Note 10, "Regulatory Environment," for more information.

~~As part~~- of the regulatory approval process for the merger with PEC, Integrys agreed to formally propose the formation of a centralized service company to provide administrative support primarily to the Integrys six regulated utilities, which includes NSG and PGL. This includes services such as Legal, Accounting and Finance, Environmental, Information Technology, Purchasing and Warehousing, Human Resources, Administrative Services (e.g. Real Estate, Printing, etc.), Regulatory, Gas Services, and Gas Supply. In addition, some of these services will also be provided to the Integrys nonregulated companies. The creation of a centralized service company will require Integrys' subsidiaries to move many of the employees supporting these functions into the new service company, including employees from PEC and PGL. Certain assets will also be transferred by Integrys' subsidiaries to the service company. Integrys has 120 days from the February 21~~, 2007~~ merger closing date (until June 21, 2007) to file for approval of its service company plan with the Public Service Commission of Wisconsin and ICC, and related filings will also be made with the Michigan Public Service Commission and Minnesota Public Utility Commission. The requested approvals will relate to and include the categories of services to be delivered by the service company, the contracts and arrangements governing the provision of such inter-~~company~~

-American 27Recovery -and Reinvestment Act of 2009

~~services,~~In ~~and~~February 2009, the American Recovery and Reinvestment Act of 2009 (ARRA) was ~~methodologies~~signed ~~for~~into ~~allocating~~law. ARRA contains various provisions intended to stimulate the ~~costs~~economy. Included ~~for~~in ~~these~~ARRA ~~services~~are tomany ~~Integrys' subsidiaries~~tax ~~who~~provisions ~~use~~that may ~~these~~affect ~~services~~NSG. Most ~~The~~notably, ~~required~~a ~~regulatory~~provision ~~approvals~~of orARRA provides NSG with ~~waivers~~additional ~~will~~opportunities beto ~~requested~~claim ~~such~~tax ~~that~~deductions ~~the~~for bonus depreciation for certain assets placed in service ~~company~~during ~~can~~2009, ~~become~~extending ~~operational~~the bonus depreciation asperiod ~~early~~established asby ~~January~~the 1,Economic ~~2008.~~Stimulus Act of

2008. The additional first year deduction for bonus depreciation is estimated to be substantial, and depending on rules for qualification of certain property, can vary significantly.

CRITICAL ACCOUNTING POLICIES

~~See MD&A in the combined PEC, PGL and~~ NSG ~~Annual~~has ~~Report on Form 10-K, as amended, for the~~reviewed ~~fiscal year~~its ~~ended~~critical ~~September~~accounting ~~30,~~policies ~~2006~~ for anew ~~detailed~~critical ~~discussion~~accounting ofestimates ~~NSG's~~and ~~critical~~other ~~accounting~~significant ~~policies~~changes. NSG ~~These~~found ~~policies~~that ~~include~~the ~~Regulated~~disclosures ~~Operations,~~made ~~Environmental~~in its ~~Activities~~Annual ~~Relating~~Report toon ~~Former~~Form ~~Manufactured~~10-K ~~Gas~~for ~~Operations,~~the ~~Retirement~~year ~~and Postretirement~~ended ~~Benefits~~December 31, ~~Derivative~~2008, ~~Instruments~~are ~~and Hedging Activities,~~still ~~Provision~~current ~~for~~and ~~Uncollectible~~that ~~Accounts,~~there ~~and~~have ~~Depreciation~~been ~~and~~no ~~Amortization~~significant changes.

~~Item 3. Quantitative~~- ~~and~~22 ~~Qualitative Disclosures about Market Risk~~-

Item 3. Quantitative and Qualitative Disclosures About Market Risk

~~None~~NSG's market risks have not changed materially from the market risks reported in its Annual Report on Form 10-K for the year ended December 31, 2008.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

AsNSG's management, ofwith the ~~end~~participation of ~~the period covered by this Quarterly Report on Form 10-Q,~~ NSG's ~~management,~~ ~~including NSG's~~ Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of NSG’'s ~~disclosure~~ disclosure controls and procedures (as ~~defined~~such interm ~~the~~is ~~Securities~~defined ~~Exchange~~in ~~Act of 1934~~ Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report and has concluded that, as of the ~~date~~end of such ~~evaluation~~ period, NSG’'s disclosure controls and procedures were effective in ~~accumulating~~ recording, processing, summarizing, and ~~timely~~reporting, on ~~alerting~~a ~~management~~timely tobasis, information ~~relating~~required to be disclosed by NSG in the reports asthat it files or submits under the Exchange Act. Disclosure controls ~~appropriate~~and toprocedures ~~allow~~include, ~~timely~~without ~~decisions~~limitation, ~~regarding~~controls ~~required~~and ~~disclosure~~procedures designed to ensure that information required to be ~~included~~ indisclosed is accumulated and communicated to NSG's ~~periodic~~management, ~~Securities~~including ~~and~~its ~~Exchange~~Chief ~~Commission~~Executive ~~filings, particularly~~Officer ~~during~~and ~~the~~Chief ~~period~~Financial Officer, inas ~~which~~appropriate ~~this~~to ~~Quarterly~~allow ~~Report~~timely ondecisions ~~Form~~regarding ~~10-Q~~required ~~was being prepared~~disclosure.

Changes In in Internal Control

~~Other than~~There ~~the~~were no ~~merger~~changes ~~between~~in aNSG's ~~subsidiary~~internal ofcontrol ~~Integrys~~over ~~and~~financial ~~PEC~~reporting ~~discussed~~(as ~~below,~~such ~~there~~term ~~were~~is ~~no changes~~defined in ~~NSG's~~Rules ~~internal~~13a-15(f) ~~control~~and ~~over~~15d-15(f) ~~financial~~under ~~reporting~~the Exchange Act) that occurred during the ~~three-month~~ ~~period~~quarter ended March 31, ~~2007~~2009, that have materially affected, or are reasonably likely to materially affect, ~~NSG's~~its internal control over financial reporting.

Effective February 21, 2007, the merger mentioned above was consummated. Integrys is in the process of integrating PEC's operations and has included PEC's activity in its evaluation of internal control over financial reporting pursuant to Section 404 of the Sarbanes-~~Oxley~~ ~~Act~~23 ~~of 2002. See Notes 1, 3, 11 and 12 of the Condensed Notes to Financial Statements for additional information related to the merger.~~ -

~~- 28~~PART -II. OTHER INFORMATION

Part II - Other Information

Item 1. Legal Proceedings

See Note 87, of"Commitments ~~the~~and ~~Condensed~~Contingencies," ~~Notes~~and toNote ~~Financial~~10, ~~Statements~~"Regulatory ~~for~~Environment," for discussions pertaining to environmental matters, ~~and~~proceedings ~~other~~at ~~events~~the ~~and~~ICC, ~~proceedings~~a purported ~~and~~class ~~for~~action ~~matters pertaining~~suit tofiled ~~proceedings~~against atNSG ~~the~~by ~~ICC~~its ~~regarding~~customers ~~the~~alleging violation ~~prudency~~ of ~~gas~~the ~~costs recovered~~Illinois byConsumer ~~NSG~~Fraud ~~through~~and ~~the~~Deceptive ~~Gas~~Business ~~Charge~~Practices Act, and ~~which~~other ~~note~~events isand ~~incorporated herein by reference~~proceedings.

Item 1A. Risk Factors

There were no material changes to the risk factors pertaining to NSG as presented in the ~~combined~~ ~~PEC, PGL and~~ NSG Annual Report on Form 10-K~~, as~~ ~~amended,~~ for the fiscal year ended ~~September 30~~December 31, ~~2006~~ 2008.

Item 6. Exhibits

The ~~following~~ documents indicated in the Exhibit Index are attached as exhibits:.

	Exhibit
	Number		Description of Document
	12		North Shore Gas Company Ratio of Earnings to Fixed Charges
	31.1		Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 for North Shore Gas Company
	31.2		Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 for North Shore Gas Company
	32		Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 for North Shore Gas Company

- 24 -

- 29 -

SIGNATURE

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

	North Shore Gas Company
Date: May 9, 2007	/s/ Diane L. Ford
Date: May 6, 2009	/s/ Diane L. Ford
	Diane L. Ford
	Vice President and Corporate Controller
	(Duly Authorized Officer and
	Chief Accounting Officer)

- 30 25 -

NORTH SHORE GAS COMPANY

EXHIBIT INDEX TO FORM 10-Q

FOR THE QUARTER ENDED MARCH 31, ~~2007~~2009

Exhibit	~~Exhibit~~
Number	~~Number~~	Description of Document	~~Description of Document~~
12	12	Ratio of Earnings to Fixed Charges	~~North Shore Gas Company Ratio of Earnings to Fixed Charges~~
31.1	~~31.1~~	Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 for North Shore Gas Company	~~Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 for North Shore Gas Company~~
31.2	~~31.2~~	Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 for North Shore Gas Company	~~Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act and Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934 for North Shore Gas Company~~
32	32	Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 for North Shore Gas Company	~~Written Statement of the Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350 for North Shore Gas Company~~

- 31 26 -

Filing Compare · NORTH SHORE GAS CO /IL/