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, 2010
For the quarterly period ended June 30, 2010
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
	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 check 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). Yes [ ] No [ ] Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer," and "smaller reporting company" in Rule 12b-2 of the Exchange Act. 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 ~~May~~August 54, 2010, 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~~JUNE 3130, 2010

TABLE OF CONTENTS

				Page
	COMMONLY USED ACRONYMS			2
	FORWARD-LOOKING STATEMENTS			3
PART I.	FINANCIAL INFORMATION			4
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			8-16
			Page
	Note 1	Financial Information	8
	Note 2	Cash and Cash Equivalents	8
	Note 3	Risk Management Activities	8
	Note 4	Restructuring Expense	10
	Note 5	Natural Gas in Storage	10
	Note 6	Asset Retirement Obligations	10
	Note 7	Income Taxes	10
	Note 8	Commitments and Contingencies	11
	Note 9	Employee Benefit Plans	13
	Note 10	Fair Value	14
	Note 11	Regulatory Environment	15
	Note 12	Segments of Business	16
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations			17-2324
Item 3.	Quantitative and Qualitative Disclosures About Market Risk			2425
Item 4.	Controls and Procedures			2425
PART II.	OTHER INFORMATION			2425
Item 1.	Legal Proceedings			2425
Item 1A.	Risk Factors			2425
Item 6.	Exhibits			2425
Signature				2526

		Page
EXHIBIT INDEX		2627
12	Computation of 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

ASC	Accounting Standards Codification
EEP	Enhanced Efficiency Program
EPA	United States Environmental Protection Agency
FASB	Financial Accounting Standards Board
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

- 2 -

Forward-Looking Statements

In this report, NSG makes 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. 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. Although NSG believes that these forward-looking statements and the underlying assumptions are reasonable, it cannot provide assurance that such statements will prove correct.

Forward-looking statements include, among other things, statements concerning management's expectations and projections regarding earnings, regulatory matters, natural gas costs, natural gas deliveries, remediation costs, environmental and other capital expenditures, liquidity and capital resources, trends, estimates, and other matters.

Forward-looking statements involve a number of risks and uncertainties. Some risks that could cause results to differ from any forward-looking statement include those described in Item 1A of NSG's Annual Report on Form 10-K for the year ended December 31, 2009, as may be amended or supplemented in Part II, Item 1A of NSG’s subsequently filed Quarterly Reports on Form 10-Q (including this report). Other factors include:

● Resolution of pending and future rate cases and negotiations (including the recovery of deferred costs) and other regulatory decisions impacting NSG; ● The individual and cumulative impact of recent and future federal and state regulatory changes, including legislative and regulatory initiatives regarding deregulation and restructuring of the natural gas utility industry, financial reform, changes in environmental and other regulations, including but not limited to, greenhouse gas emissions, energy efficiency mandates, and reliability standards, and changes in tax and other laws and regulations to which NSG is subject; ● Current and future litigation and regulatory ~~investigations~~proceedings, enforcement actions or inquiries, including but not limited to, manufactured gas plant site cleanup, third-party intervention in permitting and licensing projects, and prudence and reconciliation of costs recovered in revenues through an automatic gas cost recovery mechanism; ● 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 the available sources of natural gas; ● Resolution of audits or other tax disputes with the IRS, Illinois state revenue agencies, or other revenue agencies; ● The effects, extent, and timing of additional competition or regulation in the markets in which NSG operates; ● Investment performance of employee benefit plan assets and the related impact on future funding requirements; ● 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 acquisitions and construction or disposition of assets or businesses, 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, the use of financial and derivative instruments, and the ability to recover costs from customers in rates associated with the use of those strategies and financial instruments; ● The risk of financial loss associated with the inability of NSG's counterparties and affiliates to meet their obligations; ● Customer usage, weather, and other natural phenomena; ● 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 the 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.

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PART 1. FINANCIAL INFORMATION
ITEM 1. Financial Statements
NORTH SHORE GAS COMPANY
CONDENSED STATEMENTS OF INCOME (Unaudited)	Three Months Ended						Six Months Ended
	March 31
	June 30						June 30
(Millions)	2010			2009			2010			2009
Natural gas operating revenues	$	9530.91		$	~~116~~28.60		$	126.0		$	144.6
Natural gas purchased for resale		7011.09			9313.16			81.9			106.7
Operating and maintenance expense		1511.38			1511.86			27.1			27.4
Depreciation and amortization expense		2.13			1.56			4.4			3.1
Taxes other than income taxes		0.75			0.76			1.2			1.3
Operating income		73.86			50.56			11.4			6.1
Miscellaneous income		0.1			0.1			0.2			0.2
Interest expense		(1.01	)		(1.10	)		(2.1	)		(2.1	)
Other expense		(01.90	)		(1.0.9	)		(1.9	)		(1.9	)
Income before taxes		6.9			4.5
Income (loss) before taxes		2.6			(0.3	)		9.5			4.2
Provision for income taxes		3.2			1.6
Provision (benefit) for income taxes		1.0			(0.1	)		4.2			1.5
Net income	$	3.7		$	2.9
Net income (loss)	$	1.6		$	(0.2	)	$	5.3		$	2.7
The accompanying condensed notes are an integral part of these statements.

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NORTH SHORE GAS COMPANY
CONDENSED BALANCE SHEETS (Unaudited)	~~March~~June 3130			December 31
(Millions)	2010			2009
Assets
Cash and cash equivalents	$	2318.47		$	0.6
Accounts receivable and accrued unbilled revenues, net of reserves of $1.3 and $0.9, respectively		45.4			36.9
Accounts receivable and accrued unbilled revenues, net of reserves of $1.5 and $0.9, respectively		18.0			36.9
Natural gas in storage, primarily at LIFO		25.15			9.7
Regulatory assets		1715.75			15.3
Prepaid federal income tax		-2.0			4.1
Other current assets		1.87			2.9
Current assets		9061.4			69.5
Property, plant, and equipment, net of accumulated depreciation of $162.2 and $163.5, respectively		248.7			248.2
Property, plant, and equipment, net of accumulated depreciation of $164.0 and $163.5, respectively		248.4			248.2
Regulatory assets		~~135~~134.92			134.5
Other long-term assets		1.34			1.5
Total assets	$	~~476~~445.34		$	453.7
Liabilities and Shareholder's Equity
Accounts payable	$	16.63		$	21.7
Payables to related parties		7.6.3			7.3
Notes payable to related parties		-			7.6
Liabilities from risk management activities		7.4.2			4.1
Accrued taxes		62.0			3.9
Customer credit balances		2.3.1			6.7
Regulatory liabilities		129.03			10.4
Temporary LIFO liquidation credit		2612.26			-
Other current liabilities		75.03			5.9
Current liabilities		8559.1			67.6
Long-term debt		75.0			75.0
Deferred income taxes		49.26			48.2
Environmental remediation liabilities		~~105~~104.8			106.8
Pension and other postretirement benefit obligations		3329.4			32.4
Asset retirement obligations		20.47			20.1
Other long-term liabilities		11.1			8.7
Long-term liabilities		~~294~~290.96			291.2
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		71.60			70.2
Accumulated other comprehensive loss		(0.1	)		(0.1	)
Total liabilities and shareholder's equity	$	~~476~~445.34		$	453.7
The accompanying condensed notes are an integral part of these statements.

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NORTH SHORE GAS COMPANY
CONDENSED STATEMENTS OF CAPITALIZATION (Unaudited)						~~March 31~~				~~December 31~~		June 30			December 31
(Millions, except share amounts)						~~2010~~				~~2009~~		2010			2009
Common stock equity
Common stock, without par value, 5,000,000 shares authorized,
3,625,887 shares outstanding					$	~~24.8~~			$	~~24.8~~		$	24.8		$	24.8
Accumulated other comprehensive loss						~~(0.1~~	)			~~(0.1~~	)		(0.1	)		(0.1	)
Retained earnings						~~71.6~~				~~70.2~~			71.0			70.2
Total common stock equity						~~96.3~~				~~94.9~~			95.7			94.9
Long-term debt
First mortgage bonds
	~~Series~~	~~Year Due~~Series						Year Due
M	~~5.000%~~M	~~2028~~	5.000	%		~~28.5~~			2028	~~28.5~~			28.5			28.5
~~N-2~~	~~4.625%~~N-2	~~2013~~	4.625	%		~~40.0~~			2013	~~40.0~~			40.0			40.0
O	~~7.000%~~O	~~2013~~	7.000	%		~~6.5~~			2013	~~6.5~~			6.5			6.5
Total long-term debt						~~75.0~~				~~75.0~~			75.0			75.0
Total capitalization					$	~~171.3~~			$	~~169.9~~		$	170.7		$	169.9
The accompanying condensed notes are an integral part of these statements.

- 6 -

NORTH SHORE GAS COMPANY
CONDENSED STATEMENTS OF CASH FLOWS (Unaudited)	~~Three~~Six Months Ended
	March 31
	June 30
(Millions)	2010			2009
Operating Activities
Net income	$	35.73		$	2.97
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization expense		24.14			13.51
Bad debt expense		01.61			01.81
Deferred income taxes		01.90			01.87
Pension and other postretirement expense		1.19			12.2
Pension and other postretirement funding		-			(0.2	)
Pension and other postretirement contributions		(4.8	)		(0.4	)
Other, net		1.0			32.30
Changes in working capital
Collateral on deposit		-			(1.0	)
Accounts receivable and accrued unbilled revenues		18.1			41.3
Accounts receivable and accrued unbilled revenues		(9.2	)		8.4
Natural gas in storage		4.2			3.3
Natural gas in storage		7.6			6.9
Other current assets		3.0			(3.2	)
Other current assets		5.6			(0.2	)
Accounts payable		(5.2	)		(10.5	)
Accounts payable		(4.4	)		(10.5	)
Accrued taxes		(1.9	)		(4.7	)
Accrued taxes		2.1			(0.8	)
Temporary LIFO liquidation		12.6			13.7
Temporary LIFO liquidation		26.2			29.2
Other current liabilities		(5.1	)		(0.7	)
Other current liabilities		(1.6	)		2.6
Net cash provided by operating activities		35.6			51.6
Net cash provided by operating activities		35.7			44.9
Investing Activities
Capital expenditures		(35.06	)		(25.92	)
Note receivable from related parties		-			(3110.74	)
Other		-0.2			~~(0.1~~-	)
Net cash used for investing activities		(35.04	)		(3415.76	)
Financing Activities
Net payments of related-party short-term debt		(7.6	)		(9.0	)
Dividends to parent		(24.36	)		(17.20	)
Net cash used for financing activities		(9.9	)		(10.2	)
Other		0.1			-
Net change in cash and cash equivalents		22.8			-
Net cash used for financing activities		(12.1	)		(16.0	)
Net change in cash and cash equivalents		18.1			20.0
Cash and cash equivalents at beginning of period		0.6			0.1
Cash and cash equivalents at end of period	$	2318.47		$	020.1
The accompanying condensed notes are an integral part of these statements.

- 7 -

NORTH SHORE GAS COMPANY

CONDENSED NOTES TO FINANCIAL STATEMENTS

~~March 31~~June 30, 2010

NOTE 1--FINANCIAL INFORMATION

The condensed financial statements of NSG have been prepared pursuant to the rules and regulations of the SEC for Quarterly Reports on Form 10-Q and in accordance with GAAP. Accordingly, these condensed financial statements do not include all of the information and footnotes required by GAAP for annual financial statements. These condensed financial statements should be read in conjunction with the financial statements and notes in the NSG Annual Report on Form 10-K for the year ended December 31, 2009.

The condensed financial statements are unaudited, but, in management’s opinion, include all adjustments (which, unless otherwise noted, include only normal recurring adjustments) necessary for a fair presentation of such financial statements. Financial results for this interim period are not necessarily indicative of results that may be expected for any other interim period or for the year ending December 31, 2010.

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 Statements of Cash Flows:

	Three Months Ended March 31
	Six Months Ended June 30
(Millions)	2010			2009
Cash paid for interest	$	-1.9		$	02.10
Cash (received) paid for income taxes		(3.6	)		2.4
Cash paid for income taxes		0.4			3.4

Construction costs funded through accounts payable and treated as non-cash investing activities totaled $0.81 million, and $0.12 million at ~~March~~June 3130, 2010, and 2009, respectively.

NOTE 3--RISK MANAGEMENT ACTIVITIES

NSG uses derivative instruments to manage commodity costs. None of these derivatives are designated as hedges for accounting purposes. The derivatives include natural gas purchase contracts as well as financial derivative contracts (commodity swaps and options) used to mitigate the risks associated with the market price volatility of natural gas supply costs. NSG ~~and~~also utilizes financial option contracts to mitigate the risks associated with the costs of gasoline and diesel fuel used by ~~NSG’s~~its utility vehicles. The fair value of these financial option contracts was not significant at June 30, 2010.

NSG will separately disclose risk management assets and liabilities for natural gas and petroleum products as a result of the implementation of FASB Accounting Standards Update (ASU) 2010-06, "Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value Measurements."

- 8 -

In the three months ended March 31, 2010, NSG identified additional classes of risk management assets and liabilities as a result of the implementation of FASB Accounting Standards Update (ASU) 2010-06, "Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value Measurements." As required, this ASU was only applied for the quarter ended March 31, 2010, and therefore, prior periods do not reflect the expanded disclosure requirements.

The following tables show NSG’s assets and liabilities from risk management activities.

		March 31, 2010
		June 30, 2010
		Assets							Liabilities
(Millions)	Classification *(1)	Gross Derivative Position		Netting (2)		Balance Sheet Presentation			Gross Derivative Position		Netting (2)		Balance Sheet Presentation
Natural gas contracts	Current ~~Risk Management Liabilities~~	$	~~N/A~~0.2	$	~~N/A~~-	$	~~N/A~~0.2	(3)	$	7.4.3	$	-0.1	$	7.4.2
Natural gas contracts	Other ~~Current~~Long-term	$	0.13	$	-	$	0.13			~~N/A~~0.5		~~N/A~~-		~~N/A~~0.5
Natural gas contracts	Other Long-term		0.1		-		0.1			0.9		-		0.9
Total		$	0.5	$	-	$	0.5		$	4.8	$	0.1	$	4.7
Total		$	0.2	$	-	$	0.2		$	8.3	$	-	$	8.3

*(1) All derivatives are recognized on the balance sheet at their fair value unless they qualify for the normal purchases and sales exception. NSG continually assesses its contracts designated as normal and will discontinue the treatment of these contracts as normal if the required criteria are no longer met. Assets and liabilities from risk management activities are classified as current or long-term based upon the maturities of the underlying contracts.

		December 31, 2009
		Assets						Liabilities
(Millions)	Classification *	Gross Derivative Position		Netting		Balance Sheet Presentation		Gross Derivative Position		Netting		Balance Sheet Presentation
Commodity contracts	Current Risk Management Liabilities		N/A		N/A		N/A	$	4.2	$	0.1	$	4.1
Commodity contracts	Other Current	$	0.8	$	0.1	$	0.7		N/A		N/A		N/A
Commodity contracts	Other Long-term		0.4		0.1		0.3		0.3		0.1		0.2
Total		$	1.2	$	0.2	$	1.0	$	4.5	$	0.2	$	4.3

(2)	FASB ASC 815-10-45 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.

*(3) ~~All~~This ~~derivatives~~amount ~~are~~is ~~recognized~~reflected onin ~~the~~other ~~balance~~current ~~sheet~~assets aton ~~their fair value unless they qualify for the normal purchases and sales exception.~~ NSG’s ~~continually~~Condensed ~~assesses~~Balance ~~its contracts designated as normal and will discontinue the treatment of these contracts as normal if the required criteria are no longer met~~Sheets. ~~Assets and liabilities from risk management activities are classified as current or long-term based upon the maturities of the underlying contracts.~~

		December 31, 2009
		Assets							Liabilities
(Millions)	Classification (1)	Gross Derivative Position		Netting (2)		Balance Sheet Presentation			Gross Derivative Position		Netting (2)		Balance Sheet Presentation
Natural gas contracts	Current	$	0.7	$	0.1	$	0.6	(3)	$	4.2	$	0.1	$	4.1
Natural gas contracts	Other Long-term		0.4		0.1		0.3			0.3		0.1		0.2
Petroleum product contracts	Current		0.1		-		0.1			-		-		-
Total		$	1.2	$	0.2	$	1.0		$	4.5	$	0.2	$	4.3

(1)

All derivatives are recognized on the balance sheet at their fair value unless they qualify for the normal purchases and sales exception. NSG continually assesses its contracts designated as normal and will discontinue the treatment of these contracts as normal if the required criteria are no longer met. Assets and liabilities from risk management activities are classified as current or long-term based upon the maturities of the underlying contracts.

(2)	FASB ASC 815-10-45 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.

(3)	This amount is reflected in other current assets on NSG’s Condensed Balance Sheets.

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; the resulting risk management assets are offset with regulatory liabilities or decreases to regulatory assets, and risk management liabilities are offset with regulatory assets or decreases to regulatory liabilities. Management believes any gains or losses resulting from the eventual settlement of these derivative instruments will be collected from or refunded to customers in rates.

The table below shows the net unrealized gains (losses) recorded on the balance sheet related to derivatives at NSG. The unrealized gains (losses) recorded on the income statement related to the petroleum product contracts were not significant.

		Three Months Ended March 31
(Millions)	Financial Statement Presentation	Three Months Ended June 30, 2010			Six Months Ended June 30, 2010
(Millions)	Balance Sheet Presentation	2010			2009
Natural gas contracts	Balance Sheet – Regulatory assets (current)	$	3.4		$	(0.8	)
Natural gas contracts	Balance Sheet – Regulatory assets (~~current~~long-term)	$	(40.24	)	$	3(0.94	)
Natural gas contracts	Balance Sheet – Regulatory assets (long-term)		(0.8	)		0.2

- 9 -

NSG had the following notional volumes of outstanding derivative contracts:

(Millions)	Financial Statement Presentation	Three Months Ended June 30, 2009		Six Months Ended June 30, 2009
Natural gas contracts	Balance Sheet – Regulatory assets (current)	$	7.2	$	11.0
Natural gas contracts	Balance Sheet – Regulatory assets (long-term)		0.7		0.8

	March 31, 2010		December 31, 2009
	Purchases		Purchases
Natural gas (millions of therms)		90.9		128.4
Petroleum products (barrels)		2,540		3,414

NSG had the following notional volumes of outstanding derivative purchase contracts:

Certain of NSG's derivative and nonderivative commodity instruments contain provisions that could require "adequate assurance" in the event of a material adverse change in NSG’s creditworthiness, or 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, 2010, and December 31, 2009, was $8.3 million, and $4.4 million, respectively. At March 31, 2010, and December 31, 2009, NSG had not posted any cash collateral related to the credit-risk related contingent features of these commodity instruments. If all of the credit-risk related contingent features contained in commodity derivative instruments had been triggered at

	June 30, 2010		December 31, 2009
Natural gas (millions of therms)		88.8		128.4
Petroleum products (barrels)		5,081		3,414

~~March~~Certain ~~31,~~of ~~2010,~~NSG's derivative and ~~December~~nonderivative ~~31,~~commodity ~~2009,~~instruments contain provisions that could require "adequate assurance" in the event of a material adverse change in NSG’s ~~would~~creditworthiness, ~~have~~or ~~been~~the ~~required~~posting toof ~~post~~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 June 30, 2010, and December 31, 2009, was $64.78 million, and $34.34 million, respectively. At June 30, 2010, and December 31, 2009, NSG had not posted any cash collateral related to the credit-risk related contingent features of these commodity instruments. If all of the credit-risk related contingent features contained in commodity derivative instruments had been triggered at

~~NSG's~~June ~~cash~~30, ~~collateral~~2010, ~~amounts~~and ~~that~~December ~~were~~31, ~~netted~~2009, ~~against~~NSG ~~the~~would ~~related~~have ~~derivative~~been ~~positions~~required ~~were~~to ~~insignificant~~post atcollateral ~~March~~of ~~31,~~$3.5 ~~2010~~million, and ~~December~~$3.3 31million, ~~2009~~respectively.

NSG's cash collateral amounts that were netted against the related derivative positions were insignificant at June 30, 2010, and December 31, 2009.

NOTE 4--RESTRUCTURING EXPENSE

In an effort to permanently remove costs from its operations, Integrys Energy Group developed a ~~strategy~~plan at the end of 2009 that included a reduction in the workforce supporting NSG, as well as Integrys Energy Group’s other subsidiaries. The following table summarizes the activity related to restructuring costs incurred in connection with this ~~strategy~~plan:

(Millions)	Three Months Ended ~~March~~June 3130, 2010			Six Months Ended June 30, 2010
Accrued restructuring costs at beginning of period	$	~~0.4~~-		$	0.4
Payments to IBS for allocated restructuring costs		~~(0.4~~-	)		(0.4	)
Accrued restructuring costs at end of period	$	-		$	-

NOTE 5--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 debit or credit. Due to seasonality requirements, NSG expects interim reductions in LIFO layers to be replenished by year-end.

NOTE 6--ASSET RETIREMENT OBLIGATIONS

The following table shows changes to the asset retirement obligations of NSG through ~~March~~June 3130, 2010.

(Millions)
Asset retirement obligations at December 31, 2009	$	20.1
Accretion		0.36
Asset retirement obligations at March 31, 2010	$	20.4
Asset retirement obligations at June 30, 2010	$	20.7

NOTE 7--INCOME TAXES

NSG’s effective tax rate for the quarter ended March 31, 2010, and 2009, was 46.4% and 35.6%, respectively.

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NOTE 7--INCOME TAXES

NSG’s effective tax rate for the three and six months ended June 30, 2010, was 38.5% and 44.2%, respectively. The effective rate for the three and six months ended June 30, 2009, was 33.3% and 35.7%, respectively.

NSG calculates its provision for income taxes based on an interim effective tax rate that reflects its projected annual effective tax rate before certain discrete items.

The effective tax rate for the three months ended ~~March 31~~June 30, 2010, was higher than the federal tax rate of 35%, primarily due to state income taxes. The effective tax rate for the six months ended June 30, 2010, was higher than the federal tax rate of 35%, primarily due to the elimination of the deductibility of prescription drug payments to retirees, to the extent those payments will be offset by the receipt of the Medicare Part D subsidy, as mandated in the federal Patient Protection and Affordable Care Act and Health Care and Education Reconciliation Act of 2010 (HCR). As a result of the legislation, NSG expensed $0.5 million of deferred income tax benefits during the first quarter ~~ended~~of ~~March 31,~~ 2010, which were previously recognized as a reduction of provision for income taxes. ~~This additional provision for income taxes will not reoccur in future periods.~~

~~For~~The effective tax rate for the ~~quarter~~three months ended ~~March~~June 30, 312009, ~~2010~~was lower than the federal tax rate of 35%, ~~there~~primarily ~~was~~due noto ~~significant~~the ~~change~~impact inof ~~NSG’s~~certain ~~liability~~permanent ~~for~~book ~~unrecognized~~to tax ~~benefits~~return differences and tax credit amortization, partially offset by state income taxes.

For the three and six months ended June 30, 2010, there were no significant changes in NSG's liability for uncertain tax positions.

NOTE 8--COMMITMENTS AND CONTINGENCIES

General

Amounts ultimately paid as penalties, or eventually determined to be paid in lieu of penalties, may not be deductible for income tax purposes.

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~~June 3130, 2010, NSG had obligations of $79.1 million related to natural gas supply and transportation contracts ~~totaling~~that ~~$83.1 million, some of which~~ extend through 2017.

NSG also has commitments of $9.7 million in the form of purchase orders issued to various vendors, ~~which totaled $7.0 million~~ at ~~March~~June 3130, 2010.

Environmental

Manufactured Gas Plant Remediation

NSG, its predecessors, and certain former affiliates operated facilities in the past at multiple sites for the purpose 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 located in Illinois, 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 $~~105~~104.8 million of future undiscounted investigation and cleanup costs for all sites as of March 31, 2010. 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 $112.2 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, 2010.

Until July 2007, NSG was addressing four of the five sites under a program supervised by the Illinois Environmental Protection Agency (IEPA). In July 2007, NSG transferred two of these four sites 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.

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investigation and cleanup costs for all sites as of June 30, 2010. 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 $112.0 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 June 30, 2010.

NSG is coordinating the investigation and cleanup of its manufactured gas plant sites subject to EPA jurisdiction 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.

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 (GM), and certain other parties as PRPs at the Waukegan Site. NSG and the other PRPs are parties to a consent decree that requires NSG and GM, jointly and severally, to perform the remedial action and establish and maintain financial assurance of $27.0 million. The EPA reduced the financial assurance requirement to $21.0 million to reflect completion of the soil component of the remedial action in August 2005. NSG has met its financial assurance requirement in the form of a net worth test while GM met the requirement by providing a performance and payment bond in favor of the EPA. As a result of the GM bankruptcy ~~filing~~, the EPA ~~has~~ contacted the surety and the surety ~~has~~ stated that it will provide the EPA access to the surety bond funds which are expected to fund a significant portion of GM’s liability. The potential exposure related to the GM bankruptcy that is not expected to be covered by the bond proceeds has been reflected in the accrual identified above.

Management believes that any costs incurred for environmental activities relating to former manufactured gas plant operations that are not recoverable through contributions from other entities or from insurance carriers have been prudently incurred and are, therefore, recoverable through rates for NSG. Accordingly, management believes that the costs incurred in connection with former manufactured gas plant operations will not have a material adverse effect on the condensed financial statements of NSG. However, any changes in NSG’s approved rate mechanisms for recovery of these costs, or any adverse conclusions by the ICC with respect to the prudence of costs actually incurred, could materially adversely affect NSG’s recovery of such costs through rates.

Natural Gas Charge Reconciliation Proceedings and Related 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 weatherization programs for which NSG may not seek rate recovery. NSG’s portion of the conservation and weatherization funding that remained unpaid as of March 31, 2010, was $0.6 million, of which $0.4 million was included in other current liabilities, and $0.2 million was included in other long-term liabilities. PEC also agreed to implement a reconnection program for certain NSG customers. NSG took all steps required by the settlement agreement with respect to the reconnection program. In April 2010, NSG, the AG, the Citizens Utility Board, and Chicago resolved a disagreement concerning the scope of the reconnection program. Finally, PEC agreed to internal audits and an external audit of natural gas supply practices. Four of the five annual internal audits required by the settlement agreement have been completed. An auditor hired by the ICC conducted the external audit and filed its report on April 10, 2008. On March 31, 2009, NSG completed its responses to the external auditor’s recommendations.

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~~For~~programs for which NSG may not seek rate recovery. NSG’s ~~2006~~portion ~~Gas~~of ~~Charge~~the ~~reconciliation~~conservation ~~case~~and weatherization funding that remained unpaid as of June 30, ~~there~~2010, ~~were~~was no$0.4 ~~contested~~million, ~~issues~~of which $0.2 million was included in other current liabilities, and ~~the~~$0.2 ~~parties~~million ~~filed~~was anincluded in other long-term liabilities. PEC also agreed ~~form~~to implement a reconnection program for certain NSG customers, and NSG implemented this program. Finally, PEC agreed to internal audits and an external audit of ~~order~~natural ingas ~~January~~supply ~~2009~~practices. ~~Reconciliations~~Four of ~~subsequent~~the ~~periods~~five annual internal audits required by the settlement agreement have been ~~opened~~completed. The ~~but~~external ~~are~~audit ~~being~~was ~~held~~completed in ~~abeyance~~April ~~pending~~2008, ~~the~~and ~~outcome~~NSG ofcompleted its responses to the ~~fiscal~~external ~~2006~~auditor’s ~~Gas~~recommendations ~~Charge~~in ~~reconciliation~~March ~~case~~2009.

For NSG’s fiscal 2006 Gas Charge reconciliation case, there were no contested issues and the ICC issued an order on May 25, 2010. Reconciliations of subsequent periods had been held in abeyance pending the outcome of the fiscal 2006 Gas Charge reconciliation case, but a procedural schedule has been set for the 2007 Gas Charge reconciliation case.

Class Action

In February 2004, a purported class action suit 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. 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 November 19, 2009, the Court entered an order certifying a class composed of customers of PGL and NSG during the period April 26, 2000, through September 30, 2002. On ~~March~~May 26, 2010, ~~PEC~~the ~~filed~~Illinois aSupreme Court denied PEC’s Petition for Leave to Appeal tochallenging ~~the~~class ~~Illinois~~certification. The ~~Supreme~~case ~~Court~~remains ~~challenging~~pending ~~class~~in ~~certification~~the Circuit Court and the ~~petition~~parties isare currently ~~pending~~engaged in settlement discussions.

NOTE 9--EMPLOYEE BENEFIT PLANS

The following table shows the components of NSG's net periodic benefit cost ~~for the three months ended March 31~~:

	Pension Benefits						~~Other Benefits~~						Other Postretirement Benefits
(Millions)	2010			2009			2010			2009
	Three Months						Six Months						Three Months					Six Months
Service cost	$	0.4		$	0.3		$	0.3		$	0.2
	Ended June 30						Ended June 30						Ended June 30					Ended June 30
Interest cost		0.5			0.5			0.3			0.3
(Millions)	2010			2009			2010			2009			2010		2009			2010			2009
Expected return on plan assets		(0.4	)		(0.3	)		(0.1	)		-
Service cost	$	0.3		$	0.3		$	0.7		$	0.6		$	0.2	$	0.2		$	0.5		$	0.4
Amortization of net actuarial loss		0.1			0.1			-			-
Interest cost		0.5			0.5			1.0			1.0			0.2		0.1			0.5			0.4
Net periodic benefit cost		0.6			0.6			0.5			0.5
Expected return on plan assets		(0.4	)		(0.3	)		(0.8	)		(0.6	)		-		(0.1	)		(0.1	)		(0.1	)
Effect of lump sum settlements upon retirement		-			0.1			-			-
Amortization of transition obligation		-			-			-			-			-		0.1			-			0.1
Net benefit cost	$	0.6		$	0.7		$	0.5		$	0.5
Amortization of prior service cost		-			0.1			-			0.1			-		-			-			-
Amortization of net actuarial loss		-			-			0.1			0.1			-		-			-			-
Net periodic benefit cost		0.4			0.6			1.0			1.2			0.4		0.3			0.9			0.8
Effect of lump sum settlements upon retirement		-			0.1			-			0.2			-		-			-			-
Net benefit cost	$	0.4		$	0.7		$	1.0		$	1.4		$	0.4	$	0.3		$	0.9		$	0.8

NSG records transition 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.

Retiring employees have the option of receiving retirement benefits in the form of an annuity or a lump sum payment. During 2009, a portion of each pension plan's projected benefit obligation was settled by the payment of lump sum benefits, resulting in a settlement cost. Effective with the 2010 rate order, NSG only recognizes settlement costs if the cost is greater than or equal to the sum of the service and interest cost components of the net periodic benefit cost for the year.

Effective with the 2010 rate order, NSG reflects pension and other postretirement benefit costs in rates using Integrys Energy Group's accounting basis, which was established at the time of the February 2007 PEC merger. Pursuant to the 2010 rate order, a regulatory asset was established for the remaining cumulative difference that existed between the accounting bases of NSG and Integrys Energy Group in NSG's pension and other postretirement benefit obligations. The amortization of this regulatory asset over the average remaining service lives of the participating employees is not included as a component of net periodic benefit cost.

Contributions to the plans are made in accordance with legal and tax requirements and do not necessarily occur evenly throughout the year. For the three months ended March 31, 2010, no contributions were made to the pension and other postretirement benefit plans. NSG expects to contribute $4.8 million to its pension plans and $2.3 million to its other postretirement benefit plans during the remainder of 2010.

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Contributions to the plans are made in accordance with legal and tax requirements and do not necessarily occur evenly throughout the year. For the six months ended June 30, 2010, $4.8 million of contributions were made to the pension plans, and contributions made to the other postretirement benefit plans were not significant. NSG does not expect to contribute additional amounts to its pension plans during the remainder of 2010. NSG expects to contribute $2.2 million to its other postretirement benefit plans during the remainder of 2010.

NOTE 10--FAIR VALUE

Fair Value Measurements

~~In the three months ended March 31, 2010,~~ NSG ~~identified~~will ~~additional~~separately ~~classes~~disclose of risk management assets and liabilities for natural gas and petroleum products as a result of the implementation of FASB Accounting Standards Update (ASU) 2010-06, "Fair Value Measurements and Disclosures (Topic 820), Improving Disclosures about Fair Value Measurements." ~~As required, this ASU was only applied for the quarter ended March 31, 2010, and therefore, prior periods do not reflect the expanded disclosure requirements.~~

The following table shows NSG's financial assets and liabilities that were accounted for at fair value on a recurring basis, categorized by level within the fair value hierarchy.

	March 31, 2010
	June 30, 2010
(Millions)	Level 1		Level 2		Level 3		Total		Netting *		Balance Sheet Presentation
Risk management assets
Natural gas contracts	$	-	$	0.25	$	-	$	0.25	$	-	$	0.25
Risk management liabilities
Natural gas contracts		-		84.38		-		84.38		-0.1		84.37

	December 31, 2009
(Millions)	Level 1		Level 2		Level 3		Total		Netting *		Balance Sheet Presentation
Risk management assets	$	0.1	$	1.1	$	-	$	1.2	$	0.2	$	1.0
Risk management liabilities		-		4.5		-		4.5		0.2		4.3

*	FASB ASC 815-10-45 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.

* FASB ASC 815-10-45 permits the netting of risk management assets and liabilities when a legally enforceable netting agreement exists, and requires the netting of related cash collateral positions against the net derivative positions.

	December 31, 2009
(Millions)	Level 1		Level 2		Level 3		Total		Netting *		Balance Sheet Presentation
Risk management assets
Natural gas contracts	$	-	$	1.1	$	-	$	1.1	$	0.2	$	0.9
Petroleum product contracts		0.1		-		-		0.1		-		0.1
Risk management liabilities
Natural gas contracts		-		4.5		-		4.5		0.2		4.3

~~NSG~~* ~~determined~~FASB ~~the~~ASC ~~fair~~815-10-45 ~~values~~permits ~~above~~the ~~using~~netting aof ~~market~~risk ~~based~~management ~~approach~~assets ~~that incorporates observable market inputs where available,~~ and ~~internally~~liabilities ~~developed~~when ~~inputs~~a ~~where~~legally ~~observable~~enforceable ~~market~~netting ~~data~~agreement isexists, ~~not readily available. For the unobservable inputs~~and, ~~consideration~~when isassets ~~given~~and toliabilities ~~the~~are ~~assumptions~~netted, ~~that~~requires ~~market participants would use in valuing~~ the ~~asset~~netting ~~or liability. These factors include not only the credit standing~~ of ~~the~~related ~~counterparties~~cash ~~involved,~~collateral ~~but~~positions ~~also~~against the ~~impact~~net ofderivative ~~NSG's nonperformance risk on its liabilities~~positions.

~~The~~NSG ~~risk~~determined ~~management assets and liabilities listed in~~ the ~~tables~~fair ~~include~~values ~~swaps,~~above options, and natural gas purchase contracts used to manage volatility in natural gas supply costs and the costs of gasoline and diesel fuel used by NSG’s utility vehicles. NYMEX contracts are valued using ~~the NYMEX end-of-day settlement price, which is~~ a ~~Level 1~~market ~~input. Certain~~based ~~derivative~~approach ~~instruments~~that ~~are~~incorporates ~~valued~~observable ~~using~~market ~~broker quotes or prices for similar contracts at the reporting date, which are Level 2~~ inputs~~. The~~ ~~valuation~~where ~~of certain contracts also includes an adjustment related to transportation~~available, and ~~NSG's~~internally ~~financial~~developed ~~fixed~~inputs ~~price~~where ~~options~~observable ~~are valued using the Black-76 model, incorporating mid-~~market ~~prices~~data ~~obtained~~is ~~from~~not ~~the~~readily ~~NYMEX~~available. ~~These contracts are also classified in Level 2.~~ For ~~more~~the ~~information~~unobservable ~~on NSG's derivative instruments~~inputs, ~~see~~consideration ~~Note 3,~~is ~~"Risk~~given ~~Management~~to ~~Activities." There were no transfers between~~ the ~~levels~~assumptions ofthat ~~the fair value hierarchy during the three months ended March 31, 2010.~~market

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participants would use in valuing the asset or liability. These factors include not only the credit standing of the counterparties involved, but also the impact of NSG's nonperformance risk on its liabilities.

The risk management assets and liabilities listed in the tables include swaps, options, and natural gas purchase contracts used to manage volatility in natural gas supply costs. NSG also utilizes financial option contracts to manage volatility in the costs of gasoline and diesel fuel used by its utility vehicles. The fair value of these financial option contracts was not significant at June 30, 2010. NYMEX contracts are valued using the NYMEX end-of-day settlement price, which is a Level 1 input. Certain derivative instruments are valued using broker quotes or prices for similar contracts at the reporting date, which 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 the Black-76 model, incorporating mid-market prices obtained from the NYMEX. These contracts are also classified in Level 2. For more information on NSG's derivative instruments, see Note 3, "Risk Management Activities." There were no transfers between the levels of the fair value hierarchy during the three and six months ended June 30, 2010.

Fair Value of Financial Instruments

The following table shows the financial instruments included on NSG’s Condensed Balance Sheets that are not recorded at fair value.

	March 31, 2010				December 31, 2009
	June 30, 2010				December 31, 2009
(Millions)	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Long-term debt	$	75.0	$	7778.6	$	75.0	$	76.6

The fair value of long-term debt is estimated based on the quoted market price for the same or similar issues or on the current rates offered to NSG for debt of the same remaining maturity.

Due to the short-term nature of cash and cash equivalents, accounts receivable, accounts payable, notes payable, and outstanding commercial paper, the carrying amount approximates fair value.

NOTE 11--REGULATORY ENVIRONMENT

2010 Rates

On January 21, 2010, the ICC issued a final ~~written~~ order authorizing a retail natural gas rate increase of $13.9 million for NSG, effective January 28, 2010. The rates for NSG reflect a 10.33% return on common equity and a common equity ratio of 56% in its regulatory capital structure. The rate order also approved the recovery of net dismantling costs of property, plant, and equipment over the life of the asset rather than when incurred. NSG, as well as the AG and the Citizens Utility Board, filed requests for rehearing in February 2010. On March 10, 2010, the ICC denied all rehearing requests related to NSG. The AG, the Citizens Utility Board, and NSG filed appeals with the Illinois appellate court ~~of the ICC's order denying rehearing on certain issues~~.

Recent Illinois Legislation

In July 2009, Illinois Senate Bill (SB) 1918 was signed into law. SB 1918 contains a provision that allows NSG to file a rider to recover (or refund) the incremental difference between the rate case authorized uncollectible expense and the actual uncollectible expense reported to the ICC each year. NSG filed this rider with the ICC in September 2009, and began recording the effects of this provision at that time. The ICC approved the rider in February 2010. SB 1918 also requires a percentage of income payment plan for low-income utility customers that NSG is offering as a transition program in 2010 and 2011, with a permanent program to begin no later than September 1, 2011. Additionally, asSB ~~well~~1918 asrequires an on-bill financing program that NSG filed in February 2010, with a requested June 2011 effective date, that the ICC approved in June 2010. The on-bill financing program will allow certain residential customers of NSG to borrow funds from a third party lender to purchase energy efficiency measures and pay back the borrowed funds over time through a charge on their utility bill. No later than October 1, 2010, NSG must file an EEP to meet specified energy efficiency standards, with the first program year beginning June 2011. The legislation did not have a significant impact on NSG during the quarter ended March 31, 2010.

2008 Rates

On February 5, 2008, the ICC issued a final written order requiring a retail natural gas rate decrease of $0.2 million for NSG, effective February 14, 2008. The rates for NSG reflected a 9.99% return on common equity and a common equity ratio of 56% in its regulatory capital structure. The order included approval of a decoupling mechanism, effective March 1, 2008, as a four-year pilot program, which allows NSG to adjust rates going forward to recover or refund the difference between the actual and authorized margin impacts of variations in volumes. Legislation was introduced, but not enacted, at the Illinois state legislature to roll back decoupling. NSG actively supports the ICC’s decision to approve this rate setting mechanism. The order also approved an EEP, which allows NSG to recover up to $1.1 million per year of energy efficiency costs. This EEP is separate from, and will be replaced by, the SB 1918 required EEP.

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to borrow funds from a third party lender to purchase energy efficiency measures and pay back the borrowed funds over time through a charge on their utility bill. NSG must file an EEP to meet specified energy efficiency standards no later than October 1, 2010, with the first program year beginning June 2011.

2008 Rates

On February 5, 2008, the ICC issued a final order requiring a retail natural gas rate decrease of $0.2 million for NSG, effective February 14, 2008. The rates for NSG reflected a 9.99% return on common equity and a common equity ratio of 56% in its regulatory capital structure. The order included approval of a decoupling mechanism, effective March 1, 2008, as a four-year pilot program, which allows NSG to adjust rates going forward to recover or refund the difference between the actual and authorized margin impacts of variations in volumes. Legislation was introduced, but not enacted, at the Illinois state legislature to roll back decoupling. NSG actively supports the ICC’s decision to approve this rate setting mechanism. The order also approved an EEP, which allows NSG to recover up to $1.1 million per year of energy efficiency costs. This EEP is separate from, and will be replaced by, the SB 1918 required EEP.

On March 26, 2008, the ICC denied NSG's request for rehearing of its rate order, and all but one such request from interveners, which only affected PGL. The ICC approved a stipulation resolving the rehearing issue. Following the stipulation approval, NSG and four other parties filed appeals with the Illinois appellate court. Issues on appeal include the decoupling mechanism.

NOTE 12--SEGMENTS OF BUSINESS

NSG has two reportable segments. NSG's results of operations, including allocations for corporate activities, are reported in the Natural Gas Utility segment, with nonutility operations reported in the Other segment. No significant items were reported in the Other segment for any of the periods presented.

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

The following discussion should be read in conjunction with the accompanying condensed financial statements and related notes and NSG’s Annual Report on Form 10-K for the year ended December 31, 2009.

SUMMARY

NSG, an indirect wholly owned subsidiary of Integrys Energy Group, Inc., is a regulated natural gas utility, which purchases, stores, distributes, sells, and transports natural gas to customers in 54 communities in 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 public utilities in Illinois.

RESULTS OF OPERATIONS

First Quarter 2010 Compared with First Quarter 2009

	Three Months Ended		Change in	Six Months Ended		Change in 2010 Over 2009
	June 30		2010 Over	June 30
(Millions)	2010	2009	2009	2010	2009

Net income (loss)	$1.6	$(0.2)	N/A	$5.3	$2.7	96.3%

					Change in
	Three Months Ended March 31				2010 Over
(Millions)	2010		2009		2009
Net income	$	3.7	$	2.9		27.6	%

Summary of Financial Results – Second Quarter 2010 Compared with Second Quarter 2009

~~Earnings~~Financial ~~Summary~~results at NSG improved $1.8 million, to net income of $1.6 million for the quarter ended June 30, 2010, from a net loss of $0.2 million for the same quarter in 2009. The significant factor contributing to the increase in earnings was an increase in rates implemented in the first quarter of 2010.

~~Net~~Summary income at NSG increased $0.8 million, to $3.7 million for the quarter ended March 31, 2010, from $2.9 million for the same quarter in 2009. The significant factors contributing to the increase in net income were a $1.8 million after-tax increase in margin related to a new rate order, effective January 28, 2010, and a $0.6 million after-tax decrease in injuries and damages expense and workers compensation claims. These positive impacts were partially offset by a $0.6 million after-tax decrease in margin related to lower quarter-over-quarter volumes, net of ~~decoupling,~~Financial ~~and~~Results a– ~~$0.4~~Six ~~million~~Months ~~after-tax increase in depreciation and amortization expense related to recovery under a new rate order. Federal health care legislation enacted in March~~ 2010 ~~also~~Compared ~~had~~with aSix ~~non-recurring~~Months $0.5 million negative impact on natural gas earnings as a result of an increase in provision for income taxes, since payments for retiree prescription drugs subject to a federal subsidy will no longer be deductible under the new legislation.2009

Earnings at NSG increased $2.6 million, to $5.3 million for the six months ended June 30, 2010, from $2.7 million for the same period in 2009. The significant factor contributing to the increase in earnings was a $3.7 million after-tax increase in margins primarily related to an increase in rates implemented in the first quarter of 2010. This positive impact was partially offset by a $0.8 million after-tax increase in depreciation and amortization expense primarily related to a change in recovery method under a recent rate order. Federal health care legislation enacted in the first quarter of 2010 also had a $0.5 million non-cash negative impact on earnings.

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							Change in
	Three Months Ended June 30						Change in 2010 Over			Six Months Ended June 30						Change in 2010 Over
	Three Months Ended March 31						2010 Over
(Millions, except heating degree days)	2010			2009			2009			2010			2009			2009
(Millions, except heating degree days)	2010			2009			2009
Natural gas operating revenues	$	30.1		$	28.0			7.5	%	$	126.0		$	144.6			(12.9	%)
Natural gas operating revenues	$	95.9		$	116.6			(17.8	)%
Natural gas purchased for resale		11.9			13.6			(12.5	%)		81.9			106.7			(23.2	%)
Natural gas purchased for resale		70.0			93.1			(24.8	)%
Margins		18.2			14.4			26.4	%		44.1			37.9			16.4	%
Margins		25.9			23.5			10.2	%
Operating and maintenance expense		11.8			11.6			1.7	%		27.1			27.4			(1.1	%)
Operating and maintenance expense		15.3			15.8			(3.2	)%
Depreciation and amortization expense		2.3			1.6			43.8	%		4.4			3.1			41.9	%
Depreciation and amortization expense		2.1			1.5			40.0	%
Taxes other than income taxes		0.5			0.6			(16.7	%)		1.2			1.3			(7.7	%)
Taxes other than income taxes		0.7			0.7			-
Operating income		3.6			0.6			500.0	%		11.4			6.1			86.9	%
Operating income		7.8			5.5			41.8	%
Miscellaneous income		0.1			0.1			-	%		0.2			0.2			-	%
Miscellaneous income		0.1			0.1			-
Interest expense		(1.1	)		(1.0	)		10.0	%		(2.1	)		(2.1	)		-	%
Interest expense		(1.0	)		(1.1	)		(9.1	)%
Other expense		(1.0	)		(0.9	)		11.1	%		(1.9	)		(1.9	)		-	%
Other expense		(0.9	)		(1.0	)		(10.0	)%
Income (loss) before taxes		2.6			(0.3	)		N/A			9.5			4.2			126.2	%
Income before taxes		6.9			4.5			53.3	%
Provision (benefit) for income taxes		1.0			(0.1	)		N/A			4.2			1.5			180.0	%
Provision for income taxes		3.2			1.6			100.0	%
Net income (loss)	$	1.6		$	(0.2	)		N/A		$	5.3		$	2.7			96.3	%
Net income	$	3.7		$	2.9			27.6	%
Throughput in therms
Throughput in therms
Residential		20.5			26.9			(23.8	%)		106.2			119.9			(11.4	%)
Residential		85.7			93.0			(7.8	)%
Commercial and industrial		3.9			4.9			(20.4	%)		22.0			25.3			(13.0	%)
Commercial and industrial		18.1			20.4			(11.3	)%
Transport		23.6			26.3			(10.3	%)		72.8			75.1			(3.1	%)
Transport		49.2			48.8			0.8	%
Total sales in therms		48.0			58.1			(17.4	%)		201.0			220.3			(8.8	%)
Total sales in therms		153.0			162.2			(5.7	)%
Weather
Weather
Heating degree days		527			766			(31.2	%)		3,651			4,084			(10.6	%)
Heating degree days		3,124			3,318			(5.8	)%

~~First~~Second Quarter 2010 Compared with ~~First~~Second Quarter 2009

Revenues

~~Natural~~Revenues ~~gas~~increased ~~utility segment revenue decreased~~ $202.71 million quarter-over-quarter, ~~resulting~~driven ~~primarily from~~by:

·	An approximate $3 million increase resulting from the ICC's final rate order for a retail natural gas distribution rate increase effective January 28, 2010. See Note 11, "Regulatory Environment," for more information on this rate order.	An approximate $17 million decrease in revenue as a result of an approximate 18% decrease in the average per-unit cost of natural gas sold during the quarter ended March 31, 2010, compared with the same quarter in 2009. Prudently incurred natural gas commodity costs are passed directly through to customers in current rates.
·	An approximate $2 million increase as a result of an approximate 13% increase in the average per-unit cost of natural gas sold by the regulated natural gas utility during the quarter ended June 30, 2010, compared with the same quarter in 2009. Prudently incurred natural gas commodity costs are passed directly through to customers in current rates.	~~An approximate $7 million decrease in revenue as a result of lower natural gas throughput volumes, driven by:~~
			-	An approximate $4 million decrease from warmer quarter-over-quarter weather during the first quarter heating season, evidenced by the 5.8% decrease in heating degree days.
·	The increase in revenues was partially offset by an approximate $3 million decrease in revenues as a result of lower natural gas throughput volumes, related to:
	-	An approximate $2 million decrease driven by lower weather normalized volumes. Residential customer volumes decreased, resulting from customer conservation, efficiency efforts, and general economic conditions. Commercial and industrial customers volumes also decreased, resulting from reduced demand related to changes in customers' business operations attributed to general economic conditions.	-	An approximate $3 million decrease related to lower overall volumes, including residential customer volumes, resulting from customer conservation and efficiency efforts. Lower volumes were also experienced by commercial and industrial customers, resulting from reduced demand related to changes in customers' plant operations, which NSG attributed to the general economic slowdown.
·		The decrease in revenue was partially offset by an approximate $3 million increase in revenue resulting from the ICC's final rate order for a retail natural gas distribution rate increase effective January 28, 2010. See Note 11, "Regulatory Environment," for more information on this rate order.
	-	An approximate $2 million decrease as a result of warmer quarter-over-quarter weather, evidenced by the 31.2% decrease in heating degree days.

- 18 -

Partially offsetting these decreases was an approximate $1 million positive quarter-over-quarter impact of a decoupling mechanism for residential, small commercial and industrial, and transportation customers. Under decoupling, NSG is allowed to defer the difference between the actual and rate case authorized delivery charge components of margin from certain customers and adjust future rates.

Margins

~~Natural~~NSG’s ~~gas~~margins ~~utility segment margin~~ increased $23.48 million quarter-over-quarter, and was driven primarily ~~due~~by ~~to:~~the positive impact of the rate order, effective January 28, 2010.

	·		An approximate $3 million positive impact resulting from the new rate order, effective January 28, 2010.
	·		The increase in margin was partially offset by an approximate $1 million decrease in margin resulting from a 5.7% decrease in natural gas throughput volumes attributed to warmer quarter-over-quarter weather, customer conservation and efficiency efforts, and the negative impact of the general economic slowdown. This decrease in margin includes the impact of a decoupling mechanism, which allows NSG to adjust rates going forward to recover or refund the difference between the actual and authorized margin per customer impact of variations in volumes. The mechanism does not adjust for changes in volumes resulting from changes in customer counts.

Operating Income

Operating income ~~at the natural gas utility segment~~ increased $2.3.0 million quarter-over-quarter, driven by the $23.48 million increase in ~~margin~~margins, partially offset by a $0.18 million increase in operating expenses. The $0.8 million quarter-over-quarter increase in operating expenses was driven by: an increase in depreciation and amortization expense, primarily related to the rate order, effective January 28, 2010, which allows up front recovery in rates for net dismantling costs by including them as a component of depreciation rates applied to natural gas distribution assets.

·Six AMonths ~~$0.6 million increase in depreciation and amortization expense, primarily related to the new rate order effective January 28,~~ 2010, ~~which~~Compared ~~allows~~with ~~recovery~~Six ofMonths net dismantling costs by including it as a component of depreciation rates applied to natural gas distribution assets. · A $0.5 million increase in both the amortization of the regulatory asset related to environmental cleanup expenditures of former manufactured gas plant sites and EEP expenses. These costs were recovered from customers in rates and, therefore, had no impact on earnings. · The increase in operating expense was partially offset by a $1.0 million decrease in injuries and damages expense and workers compensation claims.2009

~~Provision for Income Taxes~~Revenues

	Three Months Ended March 31
	2010			2009
Effective Tax Rate		46.4	%		35.6	%

Revenues decreased $18.6 million period-over-period, driven by:

First Quarter 2010 Compared with First Quarter 2009

·	An approximate $14 million decrease in revenues as a result of an approximate 13% decrease in the average per-unit cost of natural gas sold by the regulated natural gas utility during the six months ended June 30, 2010, compared with the same period in 2009. Prudently incurred natural gas commodity costs are passed directly through to customers in current rates.

·	An approximate $12 million decrease in revenues as a result of lower natural gas throughput volumes, related to:

	-	An approximate $6 million decrease as a result of warmer period-over-period weather during the heating season, evidenced by the 10.6% decrease in heating degree days.

	-	An approximate $6 million decrease driven by lower weather normalized volumes. Residential customer volumes decreased, resulting from customer conservation, efficiency efforts, and general economic conditions. Commercial and industrial customers’ volumes also decreased, resulting from reduced demand related to changes in customers' business operations attributed to general economic conditions.

·	The decrease in revenues was partially offset by an approximate $6 million increase in revenues resulting from the ICC's final rate order for a retail natural gas distribution rate increase effective January 28, 2010. See Note 11, "Regulatory Environment," for more information on this rate order.

The increase in the effective tax rate for the quarter ended March 31, 2010, compared with the same quarter in 2009, was primarily due to the elimination of the deductibility of prescription drug payments to retirees, to the extent those payments will be offset by the receipt of the Medicare Part D subsidy, as mandated in the recently passed federal health care legislation. See "Other Future Considerations – Federal Health Care Reform" for more information. As a result of the legislation, NSG expensed $0.5 million of deferred income tax benefits during the quarter ended March 31, 2010, which were previously recognized as a reduction of provision for income taxes. This additional provision for income taxes will not reoccur in future periods.Margins

NSG’s margins increased $6.2 million period-over-period and was driven primarily by the positive impact of the rate order, effective January 28, 2010.

- 19 -

Operating Income

Operating income increased $5.3 million period-over-period, driven by the $6.2 million increase in margins, partially offset by a $0.9 million increase in operating expenses. The increase in operating expenses was driven by:

·	A $1.3 million increase in depreciation and amortization expense, primarily related to the rate order, effective January 28, 2010, which allows up front recovery in rates for net dismantling costs by including them as a component of depreciation rates applied to natural gas distribution assets.

·	A $0.7 million increase in employee benefit costs, partially related to an increase in pension and post-retirement medical expenses, driven by the amortization of negative investment returns from 2008.

·	The increase in operating expense was partially offset by a $1.0 million decrease in injuries and damages expense.

Provision for Income Taxes


	Three Months Ended June 30						Six Months Ended June 30
	2010			2009			2010			2009

Effective Tax Rate		38.5	%		33.3	%		44.2	%		35.7	%

Second Quarter 2010 Compared with Second Quarter 2009

The higher effective tax rate for the quarter ended June 30, 2010, compared with the same quarter in 2009, was driven by the effect of comparable quarter-over-quarter book to tax return differences in relation to higher net income in 2010.

Six Months 2010 Compared with Six Months 2009

The increase in the effective tax rate for the six months ended June 30, 2010, compared with the same period in 2009, was primarily related to the elimination of the deductibility of prescription drug payments to retirees, to the extent those payments will be offset by the receipt of the Medicare Part D subsidy, as mandated in the 2010 federal health care legislation. See "Liquidity and Capital Resources, Other Future Considerations – Federal Health Care Reform" for more information. As a result of the legislation, NSG expensed $0.5 million of non-cash deferred income tax benefits during the first quarter 2010, which were previously recognized as a reduction in provision for income taxes.

LIQUIDITY AND CAPITAL RESOURCES

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

Operating Cash Flows

During the ~~quarter~~six months ended ~~March~~June 3130, 2010, net cash provided by operating activities was $35.76 million, compared with $4451.96 million for the same ~~quarter~~period in 2009. The $916.20 million ~~quarter~~period-over-~~quarter~~period decrease in net cash provided by operating activities was largely driven by ana $813.35 million decrease in cash provided by working capital~~. Because~~, ~~natural~~primarily ~~gas prices dropped significantly during~~ the ~~first~~result ~~quarter~~ of ~~2009,~~a ~~accounts~~$23.2 ~~receivable~~million ~~and~~decrease ~~accrued~~in ~~unbilled~~cash ~~revenues~~due ~~also~~to ~~decreased~~a ~~during this~~ period,-over-period ~~generating~~decrease ~~cash. However, the first quarter of 2010 did not see the same change~~ in ~~prices, therefore~~ accounts receivable and accrued unbilled ~~revenues~~revenue ~~increased~~collections, ~~from~~partially ~~year-end~~offset asby a ~~result of high volumes experienced during the heating season. Partially offsetting these changes was a $6.1 million quarter-over-quarter decrease in cash used to pay accounts payable balances.~~

- 20 -

$5.3 million decrease in cash used for accounts payable, both driven by lower period-over-period natural gas prices. The decrease in accounts receivable and accrued unbilled revenue collections was also driven by lower volumes in 2010.

Investing Cash Flows

Net cash used for investing activities decreased $3110.72 million, from $3415.76 million for the ~~quarter~~six months ended ~~March~~June 3130, 2009, to $35.04 million for the ~~quarter~~six months ended ~~March~~June 3130, 2010, ~~due~~driven toby $3110.74 million loaned to PGL during the ~~first~~six ~~quarter~~months ofended ~~2009~~June ~~that~~30, ~~was not loaned during the first quarter of 2010~~2009.

Financing Cash Flows

Net cash used for financing activities decreased $0.3.9 million, from $1016.20 million during the ~~quarter~~six months ended ~~March~~June 3130, 2009, to $912.91 million during the ~~quarter~~six months ended ~~March~~June 3130, 2010, primarily due to a $2.4 million period-over-period decrease in dividends paid to NSG’s parent, as well as the repayment of a greater amount of related-party loans during the ~~quarter~~six months ended ~~March~~June 3130, 2009, compared with the same ~~quarter~~period in 2010.

Credit Ratings

The current credit ratings for NSG are listed in the table below.

	Standard & Poor's	Moody's
Issuer credit rating	BBB+	A3
Senior secured debt	A	A2A1

Credit ratings are not recommendations to buy or sell securities and are subject to change, and each rating should be evaluated independently of any other rating.

On ~~January 26~~May 27, 2010, ~~Standard and Poor'~~Moody’s revised the outlook for Integrys Energy Group and all of its subsidiaries to "stable" from "negative." ~~The~~According to Moody’s, the revised outlook reflected ~~Integrys~~a ~~Energy~~reduced ~~Group's~~business ~~decision~~risk toprofile ~~retain~~driven aby ~~selected~~the ~~portion~~recently completed restructuring of ~~its~~Integrys Energy Group’s nonregulated operations, ~~which~~into ~~resulted~~a insmaller asegment ~~revision~~with tosignificantly ~~Integrys~~reduced ~~Energy~~collateral ~~Group'~~requirements. Moody’s ~~business~~also ~~risk~~raised ~~profile~~the tosenior secured debt rating for NSG from "~~strong~~A2" ~~from~~to "~~excellent~~A1." ~~The~~According ~~revised~~to ~~outlook~~Moody’s, ~~also~~the ~~reflected~~upgrade ~~Integrys~~follows ~~Energy~~the ~~Group’s~~August ~~improved~~2009 ~~financial~~upgrade ~~measures~~of ~~and~~the ~~decreasing~~senior ~~regulatory~~secured ~~risk,~~ratings ~~which~~of ~~resulted~~the inmajority aof ~~change~~its ininvestment ~~its~~grade ~~financial~~regulated ~~risk~~utilities ~~profile~~(issuers towith ~~"significant"~~negative outlooks were excluded from ~~"aggressive~~the August 2009 upgrade)."

On ~~June 9~~January 26, ~~2009~~2010, ~~Moody’~~Standard and Poor's ~~lowered~~revised the ~~senior~~outlook ~~secured~~for ~~debt~~Integrys ~~rating~~Energy ~~for~~Group ~~NSG~~and ~~from~~all of its subsidiaries to "A1stable" tofrom "A2negative." According to ~~Moody~~Standard and Poor’s, the ~~downgrade~~revised ~~reflects~~outlook ~~the~~reflected ~~risk~~Integrys ~~that~~Energy ~~NSG’~~Group's ~~internal~~decision ~~cash~~to ~~flow~~retain ~~could~~a beselected ~~pressured~~portion toof ~~support~~its nonregulated operations, which resulted in a revision to Integrys Energy Group’'s ~~continuing~~business ~~cash~~risk ~~needs~~profile to "strong" from "excellent" and ~~that~~also ~~near-term~~reflected Integrys Energy Group’s improved financial ~~metrics~~measures ~~will~~and bedecreasing ~~negatively~~regulatory ~~impacted~~risk, bywhich ~~reduced~~resulted ~~demand~~in ~~for~~a ~~energy. Also,~~change ~~Moody’s~~in ~~assigned~~its ~~NSG~~financial anrisk profile to "A3significant" ~~issuer~~from ~~credit rating~~"aggressive."

- 2021 -

On March 5, 2009, Standard & Poor’s lowered the issuer credit rating for NSG from "A-" to "BBB+." According to Standard and Poor’s, the downgrade reflects Integrys Energy Group’s weak financial measures that do not support an "A" category credit profile. Standard and Poor’s also stated that the 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~~June 3130, 2010:

			Payments Due By Period
(Millions)	Total Amounts Committed		2010		2011 to 2012		2013 to 2014		2015 and Thereafter
Long-term debt principal and interest payments (1)	$	~~108~~107.9	$	21.89	$	7.54	$	50.3	$	48.3
Commodity purchase obligations (2)		8379.1		139.2		36.1		24.3		9.5
Purchase orders (3)		79.07		79.07		-		-		-
Pension and other postretirement funding obligations (4)		3231.32		72.12		1413.8		510.31		5.1
Total contractual cash obligations	$	~~231~~227.39	$	3023.10	$	5857.43	$	7984.97	$	62.9

(1)	Represents bonds issued by NSG. NSG records all principal obligations on the balance sheet.

(2)	The costs of commodity purchase obligations are expected to be recovered in future customer rates.

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

(4) Obligations for pension and other postretirement benefit plans, other than the Integrys Energy Group Retirement Plan, cannot reasonably be estimated beyond 2012.

The table above does not reflect any payments related to the manufactured gas plant remediation liability of $~~105~~104.8 million at ~~March~~June 3130, 2010, as the amount and timing of payments are uncertain. NSG anticipates incurring costs annually to remediate these sites, but management believes that any costs incurred for environmental activities relating to former manufactured gas plant operations that are not recoverable through contributions from other entities or from insurance carriers have been prudently incurred and are, therefore, recoverable through rates. See Note 8, "Commitments and Contingencies," for more information. In addition, the table does not reflect any payments for the ~~March 31~~June 30, 2010, liability related to uncertain tax positions, as the amount and timing of payments are uncertain. ~~See Note 7, "Income Taxes," for more information about this liability.~~

Capital Requirements

~~Construction~~As of June 30, 2010, construction expenditures for NSG for the three-year period 2010 through 2012 are ~~expected~~anticipated to be $45.9 million. The largest of these expenditures relates to NSG's natural gas pipe distribution system. All projected capital and investment expenditures are subject to periodic review and may vary significantly from the estimates depending on a number of factors, including, but not limited to, industry restructuring, regulatory constraints and requirements, market volatility, and economic trends.

- 21 -

Capital Resources

As of ~~March 31~~June 30, 2010, NSG was in compliance with all covenants related to outstanding long-term debt and expects to be in compliance with all such debt covenants for the foreseeable future.

NSG's long-term debt obligations contain covenants related to payment of principal and interest when due and various financial reporting obligations. Failure to comply with these covenants could result in an event of default which, if not cured or waived, could result in the acceleration of outstanding debt obligations. In addition, covenants and other provisions restrict the payment of cash dividends and the purchase or redemption of capital stock. At ~~March~~June 3130, 2010, such restrictions require NSG to maintain a minimum balance in retained earnings of $6.9 million.

- 22 -

NSG plans to meet its capital requirements for the period 2010 through 2012 primarily through internally generated funds, debt financings, and equity infusions. NSG plans to maintain current debt to equity ratios at appropriate levels to support current credit ratings and corporate growth. Management believes NSG has adequate financial flexibility and resources to meet its future needs.

NSG has the ability to borrow up to $50.0 million from PEC and up to $50.0 million from PGL. At ~~March~~June 3130, 2010, NSG had no borrowings outstanding with PEC or PGL under these debt agreements.

Other Future Considerations

Customer Usage

Due to the general economic slowdown and the increased focus on energy efficiency, sales volumes excluding the impact of weather have been decreasing at NSG. Decoupling was approved for NSG’s residential and small commercial sales by the ICC on a four-year trial basis, effective March 1, 2008. Decoupling allows NSG to adjust rates going forward to recover or refund the differences between the actual and authorized margin per customer impact of variations in volumes. The mechanism does not adjust for changes in volume resulting from changes in customer count. 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 11, "Regulatory Environment," for more information.

Property Tax Assessment on Natural Gas

NSG purchases storage services from pipeline companies on the pipelines’ interstate natural gas storage and transmission systems. Once a shipper delivers natural gas to the pipeline’s system, that specific natural gas cannot be physically traced back to the shipper and the physical location of that specific natural gas is not ascertainable. Some states tax natural gas as personal property and have recently sought to assess personal property tax obligations against natural gas quantities held as working natural gas in facilities located in their states. Because the pipeline does not have title to the working natural gas inventory in these facilities, the state imposes the tax on the shippers as of the assessment date, based on allocated quantities. Shippers that are being assessed a tax are actively protesting these property tax assessments. As of ~~March~~June 3130, 2010, NSG had not been assessed such a tax.

Federal Health Care Reform

In March 2010, the Patient Protection and Affordable Care Act and the Health Care and Education Reconciliation Act of 2010 (HCR) were signed into law. HCR contains various provisions that will affect the cost of providing health care coverage to active and retired employees of NSG and their dependents. Although these provisions become effective at various times over the next 10 years, some provisions that affect the cost of providing benefits to retirees will be reflected starting in 2010.

Most notably, there is a provision of HCR that, beginning in 2013, eliminates the tax deduction for employer-paid postretirement prescription drug charges to the extent those charges will be offset by the receipt of a federal Medicare Part D subsidy. As a result, NSG was required to eliminate a portion of its deferred tax asset related to postretirement benefits. The total amount of the deferred tax asset that was reduced for the loss of the deduction was $0.5 million, all of which flowed through to income as a component of income tax expense in the first quarter of 2010. NSG intends to seek recovery in future rates for the income impacts of this tax law change, but at this time is not able to predict how much will ultimately be recovered in rates.

Other provisions of HCR include the elimination of certain annual and lifetime maximum benefits, elimination of pre-existing 22condition restrictions, an excise tax on high-cost health plans, changes to the Medicare Part D prescription drug program, and numerous other changes. NSG is currently evaluating what other impacts the health care legislation may have on its future results of operations, cash flows or financial position.

~~deferred~~- ~~tax~~23 asset related to postretirement benefits. The total amount of the deferred tax asset that was reduced for the loss of the deduction was $0.5 million, all of which flowed through to income as a component of income tax expense in the first quarter of 2010. This additional provision for income taxes will not reoccur in future periods. NSG intends to seek recovery in rates of the income impact of this tax law change, but at this time is not able to predict how much will ultimately be recovered in rates.-

~~Other provisions of HCR include the elimination of annual and lifetime maximum benefits, elimination of pre~~Dodd-~~existing~~Frank ~~condition~~Wall ~~restrictions,~~Street anReform ~~excise tax on high-cost health plans, changes to the Medicare Part D prescription drug program,~~ and ~~numerous~~Consumer ~~other~~Protection ~~changes. NSG~~Act is(Wall ~~currently~~Street ~~evaluating~~Reform what other impacts the health care legislation may have on its future results of operations, cash flows or financial positions, and if plan structure changes are necessary for its health care programs.Act)

Wall Street Reform Act was signed into law in July 2010. Certain provisions of the Act relating to derivatives could result in increased capital and/or collateral requirements. NSG is currently evaluating the impact that this Act will have on its financial statements.

CRITICAL ACCOUNTING POLICIES

NSG has reviewed its critical accounting policies for new critical accounting estimates and other significant changes. NSG found that the disclosures made in its Annual Report on Form 10-K for the year ended December 31, 2009, are still current and that there have been no significant changes.

- 2324 -

Item 3. Quantitative and Qualitative Disclosures About Market Risk

NSG's market risks have not changed materially from the market risks reported in its 2009 Annual Report on Form 10-K.

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

NSG's management, with the participation of NSG's Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the design and operation of NSG's disclosure controls and procedures (as such term is defined in 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 end of such period, NSG's disclosure controls and procedures were effective to ensure that information required to be disclosed by NSG in the reports that it files or submits under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms and is accumulated and communicated to NSG's management, including its Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding required disclosure.

Changes in Internal Control

~~There~~During ~~were~~the nosecond ~~changes~~quarter inof 2010, NSG's ~~internal~~implemented ~~control~~a ~~over~~new ~~financial~~version ~~reporting~~of ~~(as~~its ~~such~~existing ~~term~~finance isand ~~defined~~supply inchain ~~Rules~~Enterprise ~~13a-15~~Resource Planning (fERP) system, upgraded its asset management and ~~15d-15(f)~~tax ~~under~~provision ~~the~~systems, ~~Exchange~~and ~~Act)~~migrated ~~that~~its ~~occurred~~project ~~during~~costing ~~the~~tracking ~~quarter~~from ~~ended~~the ~~March~~ERP ~~31,~~system ~~2010,~~to ~~that~~the ~~have~~asset ~~materially~~management ~~affected~~system, orall ~~are~~of ~~reasonably~~which ~~likely~~are expected to ~~materially~~more ~~affect,~~fully automate and improve the efficiency of its financial reporting process. NSG updated its internal ~~control~~controls over financial reporting as necessary to accommodate the modifications to its business processes or accounting procedures caused by the system changes. These system changes were the result of an evaluation of the existing systems, which indicated a need to provide for increased functionality to meet evolving business needs and were not the result of any identified deficiencies in the previous systems.

Other than the matter noted above, there were no changes in NSG’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the quarter ended June 30, 2010, that have materially affected, or are reasonably likely to materially affect, its internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 8, "Commitments and Contingencies," and Note 11, "Regulatory Environment," for discussions pertaining to environmental matters, proceedings at the ICC, a purported class action suit filed against NSG by its customers alleging violation of the Illinois Consumer Fraud and Deceptive Business Practices Act, and other events and proceedings.

Item 1A. Risk Factors

There were no material changes in the risk factors previously disclosed in Part I, Item 1A of NSG’s 2009 Annual Report on Form 10-K, which was filed with the SEC on February 26, 2010.

Item 6. Exhibits

The documents listed in the Exhibit Index are attached as exhibits or incorporated by reference herein.

- 2425 -

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 5, 2010	/s/ Diane L. Ford
Date: August 4, 2010	/s/ Diane L. Ford
	Diane L. Ford
	Vice President and Corporate Controller
	(Duly Authorized Officer and Chief Accounting Officer)

- 2526 -

NORTH SHORE GAS COMPANY

EXHIBIT INDEX TO FORM 10-Q

FOR THE QUARTER ENDED ~~MARCH~~JUNE 3130, 2010

Exhibit
Number		Description of Document

12		Computation of 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

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