ITEM 1. Business
GENERAL
	Peoples Energy Corporation (the Company or Peoples Energy) is solely a holding company and does not engage directly in any business of its own. Income is derived principally from the Company's regulated utility subsidiaries, The Peoples Gas Light and Coke Company (Peoples Gas) and North Shore Gas Company (North Shore Gas). The Company also derives income from its other subsidiaries, Peoples Energy Resources Company, LLC (Peoples Energy Resources), Peoples Energy Services Corporation (Peoples Energy Services), Peoples Energy Production Company (Peoples Energy Production), Peoples District Energy Corporation (Peoples District Energy), Peoples Energy Ventures, LLC (Peoples Energy Ventures) and Peoples NGV Corp. (Peoples NGV). The Company and its subsidiaries had 2,396 employees at September 30, 2003.
	The Company was incorporated in 1967 under the Illinois Business Corporation Act and has its principal executive offices at 130 East Randolph Drive, Chicago, Illinois 60601-6207 (Telephone 312-240-4000).
	The Company has six business segments: Gas Distribution, Power Generation, Midstream Services, Retail Energy Services, Oil and Gas Production and Other. (See Note 2 of the Notes to Consolidated Financial Statements.)
1. GAS DISTRIBUTION SEGMENT
Principal Products and Markets
	The Gas Distribution segment is the Company's core business. Its two regulated utilities (Peoples Gas and North Shore Gas) purchase, store, distribute, sell and transport natural gas to approximately one million customers through a 6,000-mile distribution system serving the City of Chicago, Illinois (Chicago) and 54 communities in northeastern Illinois. The customer base includes residential, commercial and industrial retail sales and transportation accounts which provide a broad and diversified foundation for the utilities' business.
	For fiscal 2003 and on September 30, 2003, the Gas Distribution segment accounted for 70.7 percent of revenues, 83.2 percent of operating income and 84.4 percent of capital assets.
	Peoples Gas was formed in 1855 and had 1,632 employees at September 30, 2003, of which 891 are union employees. It has approximately 825,000 residential, commercial and industrial retail sales and transportation customers in Chicago.
	North Shore Gas was formed in 1900 and had 212 employees at September 30, 2003, of which 145 are union employees. It has approximately 150,000 residential, commercial and industrial retail sales and transportation customers within its service area of approximately 275 square miles, located in northeastern Illinois.
	The basic marketing plans of Peoples Gas and North Shore Gas are to maintain their existing shares in traditional market segments, which include space-heating, water heating, clothes drying and cooking. They also seek opportunities emerging from changes in the utility environment and technological equipment advances for new, expanded or current natural gas applications, including cogeneration, prime movers, microturbines, natural gas-fueled vehicles and natural gas air-conditioning. North Shore Gas' service territory has potential for expansion through increasing population density.
Competition
	Since 2002, all customers have had the opportunity to choose a gas supplier. The utilities derive their income on the transportation of natural gas including the transportation of gas that customers choose to purchase from an entity other than the utility. Competition in varying degrees exists between natural gas and other fuels or forms of energy available to consumers in the Midwest and the utilities' respective service territories. The utilities have a natural monopoly on the distribution of natural gas within their areas as discussed in the Importance of Regulatory Environment section.
	A substantial portion of the gas that Peoples Gas and North Shore Gas deliver to their customers consists of gas that the subsidiaries' customers purchase directly from producers and marketers rather than from the utilities. These direct customer purchases have little effect on net income because the utilities provide transportation service for such gas volumes and recover margins similar to those applicable to conventional gas sales.
Current Sources and Availability of Natural Gas
	Peoples Gas and North Shore Gas have each entered into various long-term and short-term firm gas supply contracts. When used in conjunction with contract peaking and contract storage, Peoples Gas' company-owned storage and the peak-shaving facilities of the utilities, such supply is deemed sufficient to meet current and foreseeable peak and annual market requirements.
	Effective April 1, 2002, Occidental Energy Marketing, Inc. acquired from Enron North America Corp. (Enron) gas supply agreements with Peoples Gas and North Shore Gas under which the utilities purchase a substantial amount of their supplies. The Company believes the utilities have contracted for adequate gas to meet supply needs for fiscal 2004.
	Although the Company believes North American gas supply to be sufficient to meet current and prospective United States market demands, it is unable to quantify or otherwise make specific representations regarding national supply availability and the cost of that supply.
	The following tabulation shows the expected design peak-day availability of gas in thousands of dekatherms (MDth)* during the 2003-2004 heating season for Peoples Gas and North Shore Gas:
	Peoples Gas and North Shore Gas forecast maximum peak day demands of 2,351 MDth and 410 MDth, respectively.
	The sources of gas supply (including gas transported for customers) in MDth for Peoples Gas and North Shore Gas were as follows:
Importance of Regulatory Environment
Influence of Regulation. Peoples Gas and North Shore Gas are authorized, by statute and/or certificates of public convenience and necessity, to conduct operations in the territories they serve. In addition, these subsidiaries operate under franchises and license agreements granted to them by the municipalities they serve. Peoples Gas holds a perpetual, nonexclusive franchise to serve Chicago. North Shore Gas' franchises with municipalities within its service territory are of various terms and expiration dates.
* All volumes of natural gas set forth in this report relating to the Company's Gas Distribution segment are stated on the billing basis of 1,000 Btu per cubic foot.
(100 cubic feet = 1 therm; 10 therms = 1 Dekatherm - Dth; 1,000 Dekatherms = 1 MDth)
	Absent extraordinary circumstances, potential competitors are barred from constructing competing gas distribution systems in the utility subsidiaries' service territories by a judicial doctrine known as the "first in the field" doctrine. In addition, the high cost of installing duplicate distribution facilities would render the construction of a competing system impractical.
	A pipeline may seek to provide transportation service directly to end-users. Such direct service by a pipeline to an end-user would bypass the local distributor's service and reduce the distributor's earnings. No Peoples Gas customers have been lost to bypass service; only one end-user in North Shore Gas' service territory is served directly by a pipeline supplier. Both utility subsidiaries have a bypass rate approved by the Illinois Commerce Commission (Commission), which allows the utilities to negotiate rates with customers that are potential bypass candidates.
	Both Federal and State governments have legislation that provides for additional funding for assistance to low-income energy users, including customers of the Company's utility subsidiaries. The state legislation creates a fund, financed by charges to electric and gas customers of public utilities, participating municipal utilities and electric co-ops, which supplements currently available federal energy assistance.
Impact on Sales and Rates. Peoples Gas and North Shore Gas sell natural gas having an average heating value of approximately 1,000 Btus per cubic foot. Sales are made and service rendered by Peoples Gas and North Shore Gas pursuant to rate schedules on file with the Commission containing various service classifications largely reflecting customers' different uses and levels of consumption. The Gas Charge is determined in accordance with the provisions in Rider 2, Gas Charge, to recover the costs incurred by Peoples Gas and North Shore Gas to purchase, transport and store gas supplies. The level of the Gas Charge under both subsidiaries' rate schedules is adjusted monthly to reflect increases or decreases in natural gas supplier charges, gains, losses and costs incurred under its hedging program, purchased storage service costs, transportation charges and liquefied petroleum gas costs. In addition, under the tariffs of Peoples Gas and North Shore Gas, the difference for any month between costs recoverable through the Gas Charge and revenues billed to customers under the Gas Charge is refundable to or recoverable from customers. (See Note 1K of the Notes to Consolidated Financial Statements.)
Legislation and Regulation at State Level. Peoples Gas and North Shore Gas are subject to the jurisdiction of and regulation by the Commission, which has general supervisory and regulatory powers over practically all phases of the public utility business in Illinois. These include rates and charges, issuance of securities, services and facilities, systems of accounts, investments, safety standards, transactions with affiliated interests and other matters.
Legislation and Regulation at Federal Level. The Company is a holding company as defined in the Public Utility Holding Company Act of 1935 (1935 Act). By Order entered on December 6, 1968 (Holding Company Act Release No. 16233), the Securities and Exchange Commission (SEC), pursuant to Section 3(a)(1) of the 1935 Act, exempted the Company and its subsidiary companies as such from the provisions of the 1935 Act, other than Section 9(a)(2) thereof.
	Most of the gas distributed by Peoples Gas and North Shore Gas is transported to the utilities' distribution systems by interstate pipelines. The pipelines' services (transportation and storage service) are regulated by the Federal Energy Regulatory Commission (FERC) under the Natural Gas Act and the Natural Gas Policy Act of 1978. (See Impact on Sales and Rates and Current Sources and Availability of Natural Gas.)
	Under United States Department of Transportation regulations, the Commission is responsible for monitoring Peoples Gas' and North Shore Gas' safety compliance program for its pipelines under 49 CFR Part 192 (Transportation of Natural and Other Gas by Pipeline: Minimum Federal Safety Standards) and 49 CFR Part 195 (Transportation of Hazardous Liquids by Pipeline).
	The Pipeline Safety Improvement Act makes numerous changes to pipeline safety law, the most significant of which is the requirement that operators of pipeline facilities implement written integrity management
programs. Such programs must include a baseline integrity assessment of an operator's transmission facilities that must be completed within 10 years after enactment of the legislation. Peoples Gas owns and operates 429 miles of pipelines subject to this requirement, and North Shore Gas owns and operates 95 miles of pipelines subject to this requirement. Implementation of this legislation is not expected to have a material adverse effect on the financial condition or operations of the Company.
	While the Sarbanes-Oxley Act of 2002 has not resulted in any material substantive changes in the Company's internal control practices, the Company has formalized many of its corporate governance and internal control related procedures and will continue this process through fiscal 2004 when certain additional provisions of the act become effective. Implementation of this legislation has not had, and is not expected to have in the future, a material adverse effect on the financial condition or results of operations of the Company.
Seasonality
	The business of the Company's utility subsidiaries is influenced by seasonal weather conditions because a large element of the subsidiaries' customer load consists of space heating. Therefore, weather-related deliveries can have a significant positive or negative impact on net income. (For discussion of the effect of the seasonal nature of gas revenues on cash flow, see Management's Discussion and Analysis of Results of Operations and Financial Condition (MD&A) - Liquidity and Capital Resources.)
	During fiscal 2003, the Gas Distribution segment recorded 66 percent of its revenues from November through March. This revenue included the effect of the Company's weather insurance policy.
Practices Relating to Working Capital
	The seasonality of revenues causes the timing of cash collections to be concentrated from January through June. A portion of the winter gas supply needs is typically purchased and stored from April through November. Also, planned capital spending on the Gas Distribution facilities is concentrated in April through November. Because of these timing differences, the cash flow from customers is likely to be supplemented with temporary increases of short-term commercial paper during the late summer and fall. Short-term debt is then reduced over the January through June period.
Effects of Environmental Legislation
	The Company and its subsidiaries are subject to federal and state environmental laws. Peoples Gas and North Shore Gas are conducting environmental investigations and remedial work at the sites of former manufactured gas plant operations. (See Note 5A of the Notes to Consolidated Financial Statements.) In 1994, North Shore Gas received a demand for payment of environmental response costs at a former mineral processing site in Denver, Colorado. North Shore Gas does not believe that it has liability for the response costs but cannot determine the matter with certainty. (See Note 5B of the Notes to Consolidated Financial Statements.)
	The Company did not and does not anticipate any material expenditures to construct environmental control facilities due to normal operations of the Company.
2. POWER GENERATION SEGMENT
	The Power Generation segment, through Peoples Energy Resources, is engaged in the development, construction, operation and ownership of electric generation facilities for sales to electric utilities and marketers. Currently, the Company has an ownership interest in two electric generation facilities. The Company and Dominion Energy, Inc. (Dominion) are equal investors in Elwood Energy LLC (Elwood), which owns and operates a 1,400-megawatt peaking facility near Chicago, Illinois. The plant capacity has been sold through long-term contracts with Exelon Generation Company, LLC (Exelon), Engage Energy America LLC (Engage) and Aquila, Inc. (Aquila). Due to the structure of these contracts and the fact that Elwood is a peaking facility, the majority of Elwood's revenues and the Company's equity earnings in this investment are recognized in the Company's third and fourth fiscal quarters. Peoples Energy Resources is also a 27 percent owner of Southeast Chicago Energy Project, LLC (SCEP), a 350-megawatt peaking facility on Chicago's southeast side. Power generated by SCEP is sold through a long-term contract with Exelon and revenue is recognized evenly throughout the year.
	Peoples Energy Resources is also involved in developing three power generation projects in the western United States. The projects, which are in the early stages of development, are located in New Mexico, Oregon and Texas. The proposed project in New Mexico is a 280-megawatt gas-fired peaking facility. The proposed Oregon project is a 1,150-megawatt gas-fired combined cycle facility located near Klamath Falls, Oregon, near the California-Oregon Border trading hub. The Texas project activity to date consists primarily of acquiring land options.
	The investments in the New Mexico and Oregon facilities have been limited to permitting work and buying land and water options. No major equipment will be ordered or purchased until Peoples Energy Resources has a high degree of confidence that a long-term offtake agreement with a creditworthy customer is feasible. Negotiations are underway to secure a long-term power sales agreement for the New Mexico project.
	Peoples Energy Resources also evaluates opportunities to acquire or construct power generation assets that would be strategic additions to its portfolio.
	Under the 1935 Act, an exempt wholesale generator (EWG) is exempt from being deemed a public utility for purposes of the 1935 Act and no company will become a holding company under the 1935 Act as a result of owning an interest in an EWG. To qualify as an EWG, an entity must be engaged exclusively in the business of owning or operating an eligible facility and selling electricity at wholesale. An eligible facility is a generating facility used solely to produce electricity exclusively for sale at wholesale. Elwood was first certified as an EWG by FERC in 1999 and SCEP was first certified as an EWG by FERC in fiscal 2002.
	Both Elwood and SCEP are public utilities under the Federal Power Act and subject to the jurisdiction of FERC with respect to wholesale electric rates and other matters. Elwood has received authority from FERC to make wholesale sales of electricity at market-based rates. The FERC's order, as is customary with market-based rate schedules, reserves the right to revoke Elwood's market-based rate authority if it is subsequently determined that Elwood or its affiliates possess excessive market power. SCEP has on file with the FERC a cost-based wholesale power sales agreement with Exelon.
	Air quality regulations of the United States Environmental Protection Agency (EPA) and the Illinois Environmental Protection Agency (IEPA) in accordance with the federal Clean Air Act and the Clean Air Act Amendments of 1990 require permits to construct and operate certain emission sources and impose restrictions on the emission of certain pollutants, including sulfur dioxide and nitrogen oxide. Elwood and SCEP are currently in compliance with these permitting requirements. The 1990 Amendments require the reduction of sulfur dioxide emissions from electric generating utilities to reduce acid rain. Elwood and SCEP comply with the sulfur dioxide emission limitations by purchasing sulfur dioxide allowances. The price of sulfur dioxide allowances is not expected to fluctuate in a manner that would have a material effect on Elwood or SCEP. Illinois has adopted regulations requiring reductions in nitrogen oxide emissions to begin in 2004. Elwood and SCEP will comply
with these reductions by purchasing any necessary nitrogen oxide emission allowances from the allowance market. Management is unable at this time to determine the amount, if any, of nitrogen oxide emission allowances that will be purchased from the allowance market.
	Illinois has enacted "multi-pollutant" legislation that establishes a rulemaking process that could lead to emission reduction requirements for nitrogen oxide, sulfur dioxide and mercury from certain electric generating units such as Elwood and SCEP and authorizes IEPA to establish a voluntary program for reducing greenhouse gas emissions. IEPA has not promulgated regulations implementing this legislation. Accordingly, management is not able to evaluate the impact, if any, of the legislation.
3. MIDSTREAM SERVICES SEGMENT
	The Midstream Services segment provides wholesale services to marketers, utilities, pipelines and gas-fired power generation facilities. Peoples Energy Resources and Peoples Gas engage in activities in this segment. This segment is focused on the Midwest by providing value added asset-based supply and services and is capitalizing on the reliability of hard assets and the strength of the Company's balance sheet to assure performance.
	"Asset based" means that the Midstream Services segment has the physical assets, either through direct ownership or through contractual transportation and storage agreements, to provide services to utilities, pipelines, power plants and gas marketers in the upper Midwest marketplace. These services include gas transportation, storage and supply services. The phrase "asset based" is intended to differentiate Peoples Energy Resources' business from that of certain marketers in the wholesale natural gas business who enter into gas supply and storage contracts without any means of delivering the physical commodity, intending instead to always settle with counterparties on the delivery date through the payment of money without delivery of gas.
	Currently, Peoples Energy Resources' ongoing business strategy is to focus on asset-based marketing of natural gas with financial trading used to optimize physical asset positions, i.e., the practice of using financial instruments to financially settle positions on units of gas under physical supply or storage arrangements to gain additional profit margins.
	Like many nonpipeline sellers, Peoples Energy Resources is authorized by the FERC to sell gas for resale at negotiated rates. The FERC conferred this authority in a rulemaking (Order 547), and Peoples Energy Resources did not need to seek specific approval to make sales for resale at negotiated rates. The FERC does not regulate the sales rates, nor are there any reporting requirements associated with these sales. The FERC, in November 2003, issued Order 644 in which it established a code of conduct applicable to entities making sales pursuant to Order 547 and required such sellers to report to the FERC whether they report prices to publications that publish natural gas price indices.
	Peoples Energy Resources owns a propane-based peaking plant and has several contractual assets of pipeline transportation and storage in the Midwest region which enables it to perform in other asset-based wholesale activities.
	As part of this segment, Peoples Gas utilizes its storage and pipeline supply assets as a natural gas hub. Hub activity is recorded as part of Midstream Services' results due to the nature of its service to wholesalers. This activity is regulated by FERC and consists of providing wholesale transportation and storage services in interstate commerce.
	Peoples Energy Resources and Enron Midwest LLC (Enron Midwest), a subsidiary of Enron were equal partners in enovate L.L.C. (enovate), which engaged in a comprehensive wholesale business for the Chicago marketplace including marketing and trading. Enron filed for protection from creditors under Chapter 11 of the United States Bankruptcy Code in December 2001. Subsequently, the Company acquired Enron Midwest's 50 percent interest in enovate and ceased operations under this entity. All remaining physical and contractual obligations of enovate were transferred to Peoples Energy Resources.
4. RETAIL ENERGY SERVICES SEGMENT
	Peoples Energy Services, which is the only substantial contributor to the Retail Energy Services segment provides gas, electricity and energy management services, to industrial, commercial and residential customers regionally within Illinois. Residential customer choice became available in Illinois during the period of March through May 2002, for both gas and electricity services.
	Peoples Energy Services' operating income can be influenced by seasonal weather conditions. Although margins per unit do not vary materially month-to-month, total margin can be impacted by usage. In addition, revenue sensitive items such as customer accounts receivable balances are typically impacted when natural gas or electric prices increase as certain products of the segment are tied to an index. However, some risk to accounts receivables and reserves for uncollectible accounts can be mitigated because of fixed price products. The quarterly results of operations and balances should not be considered indicative of the year as a whole.
	Peoples Energy Services is one of the largest nonutility energy marketers in the northern Illinois retail energy marketplace. It is certified by the Commission as an Alternative Retail Electric Supplier (ARES), authorizing it to be a nonutility marketer of electricity, and as an Alternative Gas Supplier (AGS), authorizing it to be a nonutility marketer of natural gas. As of September 30, 2003, there were a total of 14 ARES and seven AGS in Illinois, as well as several other national marketers focused on the commercial and industrial segment. Peoples Energy Services has customers from a wide variety of commercial and industrial segments, as well as residential customers. This minimizes the impacts of business cycle risks in any one segment. The Company continually evaluates opportunities to further diversify its customer base and product offerings.
5. OIL AND GAS PRODUCTION SEGMENT
	The Oil and Gas Production segment, through Peoples Energy Production, is active in the acquisition, development and production of oil and gas reserves in selected onshore basins in the United States through direct ownership in oil, gas and mineral leases. Peoples Energy Production also has a 30 percent equity investment in EnerVest Energy, L.P. (EnerVest). EnerVest, which develops and manages a portfolio of oil and gas producing properties, is a minor contributor to this segment. Peoples Energy Production's primary focus is on natural gas, with growth coming from low-to-moderate-risk drilling opportunities and acquisition of proved reserves with upside potential that can be realized through drilling, production enhancements and reservoir optimization programs. Certain producing properties owned by Peoples Energy Production qualified for income tax credits as defined in Section 29 of the Internal Revenue Code of 1986. These credits expired on December 31, 2002.
	Competition in acquiring oil and gas leases and producing properties in the Company's targeted onshore basins is substantial. Competitors include the major oil companies, as well as many independents, some of which have significantly greater resources. In order to grow the current asset base, replace and expand reserves, and increase operating income, the Company must select and acquire from third parties quality-producing properties and prospects for future drilling. The Company has no control over the timing of when these opportunities may become available. When available, the Company believes that it has the ability to evaluate opportunities quickly and to acquire properties without a financing contingency, which may give it a competitive advantage.
	Extensive federal, state and local laws govern oil and natural gas operations, regulate the discharge of materials into the environment or otherwise relate to the protection of the environment. Numerous governmental agencies issue rules and regulations to implement and enforce such laws that are often difficult and costly to comply with and which may carry substantial administrative, civil and even criminal penalties for failure to comply. The regulatory burden on the oil and natural gas extractive industry increases its cost of doing business and consequently affects its profitability. These laws, rules and regulations affect the Company's operations, as well as the oil and gas exploration and production industry in general. The costs of such compliance have not been material to Peoples Energy Production to date. The Company believes that it is in substantial compliance with current applicable environmental laws, rules and regulations and that continued compliance with existing requirements will not have a material adverse impact on the Oil and Gas Production segment. The Company currently has no material estimated capital expenditures for environmental control facilities.
6. OTHER SEGMENT
	Peoples District Energy is involved in district heating and cooling as a partner in Trigen-Peoples District Energy Company (Trigen-Peoples). This and certain business development activities do not fall under the above segments and are reported in the Other segment. Also included are results from Peoples NGV which has developed fueling stations for natural gas vehicles. Peoples NGV exited a partnership relating to this business in fiscal 2002, but continues to operate company-owned refueling stations. No growth from this business is anticipated.
7. CORPORATE AND ADJUSTMENTS
	Corporate activities that support the business segments, as well as consolidating adjustments, are included in Corporate and Adjustments.
ITEM 2.
ITEM 2. Properties
1. GAS DISTRIBUTION SEGMENT
	All of the principal plants and properties of Peoples Gas and North Shore Gas have been maintained in the ordinary course of business and are believed to be in satisfactory operating condition. The distribution facilities serve Chicago and other areas in northeastern Illinois. Peoples Gas owns and operates an underground gas storage reservoir and a liquefied natural gas plant at Manlove Field located in central Illinois. Peoples Gas also owns a natural gas pipeline system that connects Manlove Field and seven major interstate pipelines to and from Chicago. The underground storage reservoir also serves North Shore Gas under a contractual arrangement. General properties include a substantial investment in office and service buildings, garages, repair shops and motor vehicles, together with the equipment, tools and fixtures necessary to conduct utility business. Peoples Gas' main office facility is leased.
	Most of the principal plants and properties of Peoples Gas and North Shore Gas, other than mains, services, meters, regulators and cushion gas in underground storage, are located on property owned in fee. Substantially all gas mains are located under public streets, alleys and highways, or under property owned by others under grants of easements. Meters and house regulators in use and a portion of services are located on premises being served. Certain storage wells and other facilities of the Manlove Field storage reservoir and certain portions of the transmission system are located on land held pursuant to leases, easements or permits.
	Substantially all of the physical properties now owned or hereafter acquired by Peoples Gas or North Shore Gas are subject to (a) the first-mortgage lien of each utility's respective mortgage to U.S. Bank National Association, as Trustee, to secure each utility's respective outstanding first mortgage bonds and (b) in certain cases, other exceptions and defects that do not interfere with the use of the property.
2. POWER GENERATION SEGMENT
	The operational power plants are equity method investments and property is carried on the partnerships' books.
	Peoples Energy Resources also is involved in developing three power projects in the western United States. At this time, Peoples Energy Resources holds options to purchase land in New Mexico, Oregon and Texas where the facilities may be located.
	Peoples Energy Resources' headquarters are located in leased office space in Chicago.
3. MIDSTREAM SERVICES SEGMENT
	Peoples Gas utilizes its storage and pipeline supply assets as a natural gas hub in the Chicago area. Peoples Energy Resources owns and operates a propane-based peaking plant and approximately 44 miles of six and eight inch diameter pipeline which is used to buy and sell refinery fuel gas within the Chicago marketplace.
4. RETAIL ENERGY SERVICES SEGMENT
	The Retail Energy Services segment does not own material tangible properties. Its primary assets are the customer service contracts and accounts. Its headquarters are located in leased office space in Chicago.
5. OIL AND GAS PRODUCTION SEGMENT
	The Oil and Gas Production segment, through Peoples Energy Production, owns working interests in substantial oil and gas leasehold positions located in various areas of Texas, Louisiana, New Mexico, Arkansas, Oklahoma and North Dakota. The Company operates a number of Texas and Louisiana properties, with its principal operating areas being located in South Texas and along the Gulf Coast of Texas. As of September 30, 2003, total proved reserves were approximately 182 Bcfe, of which approximately 60 percent are operated by the Company. The Company also owns a 30 percent interest ($20.7 million) in EnerVest, which manages and develops a portfolio of oil and gas producing properties.
	In fiscal 2003, the Company acquired interests in several additional South Texas and Gulf Coast Texas fields from Prize Energy Resources, L.P., a subsidiary of Magnum Hunter Resources, Inc. (Magnum Hunter) for approximately $33 million. In addition, the Company consolidated its interests in the Corpus Christi West Field through a purchase from Royal Production Company, et al for approximately $9 million and assumed operations of this field.
	In June 2002, the Company acquired an interest and operated position in the East White Point field in San Patricio County, Texas (East White Point). The reserves acquired, 90 percent of which are natural gas, were purchased for approximately $10 million.
	In April 2001, the Company acquired interests in the Alvarado and North La Reforma fields located in South Texas. These fields consist of approximately 11,500 gross acres (8,900 net) of developed and undeveloped oil and gas leasehold and are operated by Peoples Energy Production. The acquired reserves, 91 percent of which are natural gas, were purchased for approximately $120 million. At the time of the acquisition, this transaction doubled the Company's total proved reserves and increased its net production capacity by approximately 40 percent.
	Peoples Energy Production leases office space in Houston, Texas. Total capital outlays in fiscal 2003 for drilling and exploration projects were approximately $46 million.
	The following tables summarize certain property statistics for Peoples Energy Production's holdings.
At September 30, 2003
Proved reserves (Bcfe)
Productive wells (1)
Gross oil wells
Net oil wells
Gross gas wells (2)
Net gas wells (2)
Acreage
Gross developed acres
97,461
Net developed acres
40,449
Gross undeveloped acres
11,610
Net undeveloped acres
4,290
(1)	Gross wells represents the total number of wells participated in, regardless of the Company's interest. Net wells represents the aggregation of fractional interests the Company has in gross wells.
(2)	Twenty-four gross (7.8 net) wells have multiple completions.
	As of September 30, 2003, four gross (1.6 net) wells were in progress.
6. CORPORATE AND OTHER SEGMENTS
	Trigen-Peoples owns a district heating and cooling facility near downtown Chicago. Substantially all of the real and personal property of Trigen-Peoples is subject to a security interest and mortgage granted to The Prudential Insurance Company of America (Prudential), its successors and assigns with respect to Trigen-Peoples senior term notes, which is nonrecourse debt to the Company. Prudential holds a security interest in the shares of Peoples District Energy owned by the Company in connection with the Trigen-Peoples nonrecourse financing.
	Peoples Energy does not own material tangible properties except through its subsidiaries. Its primary assets are its investment holdings in its subsidiaries. Peoples Energy leases office space in Chicago from Peoples Gas.
ITEM 3.
ITEM 3. Legal Proceedings
	The Company, Peoples Gas and North Shore Gas are involved in various other claims and legal actions arising out of the normal course of business. Management does not expect that the outcome of these other proceedings will have a material adverse effect on the Company's, Peoples Gas' and North Shore Gas' financial position or results of operations. See Notes 1K and 5 of the Notes to Consolidated Financial Statements.
ITEM 4.
ITEM 4. Submission of Matters to a Vote of Security Holders
	None.
EXECUTIVE OFFICERS OF THE COMPANY
	The following is a list of the names, ages and positions of the executive officers of the Company. Executive officers were elected to serve for a term of one year or until their successors are duly elected and qualified.
Age at
Name
11/30/2003
Position with the Company
Thomas A. Nardi
Senior Vice President and Chief Financial Officer (2001) of the Company. Mr. Nardi is also Senior Vice President, Chief Financial Officer and Director of Peoples Gas and North Shore Gas (2002). Prior to becoming Senior Vice President, Mr. Nardi was President of Peoples Energy Services (2000). Mr. Nardi has been an employee of the Company and/or its subsidiaries since 2000. Prior to working for the Company, Mr. Nardi was an officer and employee of Nicor Inc. (1981-2000) where he most recently served as Senior Vice President Business Development (1995-2000). Prior to that, he held various executive positions such as Controller, Treasurer and Vice President Rates and Gas Supply.
Steven W. Nance
President of the Oil and Gas Production segment of the Company (Peoples Energy Production Company) (2000). Prior to working for the Company, Mr. Nance was an independent consultant and investor in the oil and gas business (1999-2000). Prior to that, Mr. Nance was an employee of XPLOR Energy Inc., an independent oil and gas company where he was Chairman, President and Chief Executive Officer (1998-1999), President and Chief Executive Officer (1997-1998) and Executive Vice President and Chief Operating Officer (1997).
Kevin J. O'Connell
Vice President (Corporate Planning and Development) of the Company (2000). Prior to becoming Vice President of the Company, Mr. O'Connell was Vice President of Peoples Energy Ventures (1997). Mr. O'Connell has been an employee of the Company and/or its subsidiaries since 1997. Prior to working for the Company, Mr. O'Connell was an employee of MidCon Corporation.
Thomas M. Patrick
Chairman, President and Chief Executive Officer (2002) and Director (1998) of the Company. Mr. Patrick is also Chairman of the Board and Chief Executive Officer of Peoples Gas and North Shore Gas (2002). Prior to becoming Chairman, Mr. Patrick was President and Chief Operating Officer (1998) of the Company and its subsidiaries and Vice Chairman (2001) of both utility subsidiaries. Mr. Patrick has been an employee of the Company and/or its subsidiaries since 1976.
Desiree G. Rogers
Senior Vice President (Marketing and Communications) of the Company (2001). Ms. Rogers is also Senior Vice President of Peoples Gas and North Shore Gas (2001). Prior to becoming Senior Vice President, Ms. Rogers was Chief Marketing and Communications Officer of the Company (2000). Ms. Rogers has been an employee of the Company and/or its subsidiaries since 1997. Prior to working for the Company, Ms. Rogers was the Director of the Illinois State Lottery (1991-1997).
Age at
Name
11/30/2003
Position with the Company
Douglas M. Ruschau
Vice President (Finance) (2002) and Treasurer of the Company (2003). Mr. Ruschau is also Vice President (2002) and Treasurer (2003) of Peoples Gas and North Shore Gas. Mr. Ruschau became an employee of the Company in 2002. Prior to working for the Company, Mr. Ruschau was employed by Nicor Inc. (1980-2002) as Assistant Vice President Finance (1998) and Assistant Treasurer (1993) where his responsibilities included oversight of financing activities, cash management, pensions and investments, investor relations, investment analysis and financial forecasting.
Theodore R. Tetzlaff
General Counsel of the Company (2003). Mr. Tetzlaff is also a partner in the law firm of McGuireWoods LLP, as well as managing partner of its Chicago office and a member of its governing Board of Partners (2002). Prior to joining McGuireWoods, Mr. Tetzlaff was a partner in the Chicago law firm of Jenner & Block (1982 - 2001) and also served for a period as General Counsel of Tenneco Inc. (1992 - 1999).
PART II
ITEM 5.
ITEM 5. Market for the Company's Common Stock and Related Stockholder Matters
	The common stock of the Company is listed on the New York Stock, Chicago Stock and Pacific Exchanges (trading symbol: PGL). At November 30, 2003, there were 20,892 registered shareholders.
	The common stock price range and dividends declared per common share by quarters for fiscal 2003 and 2002 were as follows:
ITEM 6.
ITEM 6. Selected Financial Data
(1)	Includes $152.0 million of long-term debt of Peoples Gas classified as short-term debt due to bondholder tender rights.
(2)	Includes $90.0 million of long-term debt ($75.0 million for Peoples Gas and $15.0 million for North Shore Gas) retired in fiscal 2003 and $202.0 million of long-term debt of Peoples Gas classified as short-term debt due to bondholder tender rights.
(3)	Includes $100.0 million of long-term debt retired in fiscal 2002 and $202.0 million of long-term debt of Peoples Gas classified as short-term due to bondholder tender rights.
ITEM 7.
ITEM 7. Management's Discussion and Analysis of Results of Operations and Financial Condition
RESULTS OF OPERATIONS
Summary
	The Company recorded higher fiscal year 2003 results compared to the fiscal 2002 period. Key factors contributing to this improvement include strong growth in operating income from the Company's diversified energy businesses, a return to more normal weather in its Gas Distribution business, and lower interest expense. Fiscal 2003 net income was $103.9 million or $2.87 per diluted share, compared with $89.1 million or $2.51 per diluted share, in fiscal 2002.
	Fiscal 2002 net income decreased to $89.1 million or $2.51 per share, compared to $96.9 million or $2.74 per share in fiscal 2001. The decrease in fiscal year results was largely due to the negative impact of weather that was 16 percent warmer than fiscal 2001 and lower equity investment income, which together more than offset the benefits of lower operating costs in the Gas Distribution segment and lower interest expense. The Company's weather insurance policy offset approximately 25 percent of the negative impact of weather.
	A summary of variations affecting the Company's net income between periods is presented below, followed by explanations of significant differences.
	Revenues and cost of energy sold for fiscal 2003 increased as a direct result of higher commodity prices and increased volumes sold in the current fiscal year. Colder weather contributed to increased sales and related gas costs in the Gas Distribution, Retail Energy Services and Midstream Services segments. Revenues were also impacted by increased production in the Oil and Gas Production segment. Revenues and cost of energy sold for fiscal 2002 decreased due to lower gas prices and lower volumes sold primarily caused by warmer weather. Revenue comparisons were also impacted by a change in the reporting method of a Midstream Services investment.
	Operation and maintenance expense for fiscal 2003 increased primarily due to lower pension credits ($21.7 million), increased utility environmental cost ($14.7 million) and increased operation expense in the Oil and Gas Production segment ($6.6 million). Environmental costs are recovered through the utilities' rate mechanism and a like amount is included in revenues, therefore these costs did not affect operating income. Fiscal 2002 operation and maintenance decreased slightly compared to fiscal 2001. The items causing these decreases were primarily lower labor, group insurance and outside services expenses. The fiscal 2003, 2002 and 2001 pension credits totaled $1.5 million, $23.2 million and $20.1 million, respectively.
	Depreciation, depletion and amortization for fiscal 2003 and 2002 increased mainly as a result of increased production in the Oil and Gas Production segment.
	Taxes, other than income taxes for fiscal 2003 increased due to higher revenues in the Gas Distribution segment, offset by an adjustment to the municipal and state utility tax accrual. Taxes, other than income taxes for fiscal 2002 decreased due primarily to lower revenues in the Gas Distribution segment.
	Gains on property sales decreased in fiscal 2003 and 2002 as compared to the previous years. Only one property sale occurred in fiscal 2003 resulting in a gain. Fiscal 2002 results contained gains on two property sales. Prior to fiscal 2003, these amounts were reported as other income. Comparative years have been reclassified.
	Equity investment income for fiscal 2003 increased primarily from income generated from a full year of activity at SCEP and increased contributions from Elwood and EnerVest. The decrease in equity investment income for fiscal 2002 from fiscal 2001 was caused by the effect of Elwood's bond financing on partnership results. Also contributing to the decrease was the change in the reporting method of a Midstream Services investment. Finally, lower results from EnerVest in fiscal 2002 also contributed to the reduction in equity investment income from fiscal 2001.
	Other income, net of other expense for fiscal 2003 decreased mainly due to a reduction in interest income along with the effects of a prior year insurance settlement. Other income, net of other expense for fiscal 2002 was lower primarily due to a reduction in interest income, offset partially by the proceeds of a settlement of a suit brought by Peoples Gas and North Shore Gas against an insurer for the recovery of environmental costs.
	Interest expense declined in both fiscal 2003 and 2002 due to lower interest rates and reduced average borrowings outstanding.
	Income taxes for fiscal 2003 increased due primarily to higher pretax income along with the expiration on December 31, 2002, of Section 29 income tax credits related to the Oil and Gas Production segment. Income taxes for fiscal 2002 decreased due to lower pretax income.
	A summary of the Company's operating income by segment, and variations between periods, is presented below.
Gas Distribution Segment
	The Company's core business is the distribution of natural gas. Peoples Gas and North Shore Gas purchase, store, distribute, sell and transport natural gas to approximately one million customers (825,000 for Peoples Gas and 150,000 for North Shore Gas). Peoples Gas' 4,000-mile distribution system serves Chicago and North Shore Gas' 2,000 mile distribution system serves 54 communities in northeastern Illinois. The customer base includes residential, commercial and industrial retail sales and transportation accounts, and provides a broad foundation that is not concentrated with any particular group of customers. Peoples Gas also owns a storage facility in central Illinois and a pipeline system that connects the storage facility and seven major interstate pipelines to Chicago.
	Revenues of Peoples Gas and North Shore Gas are directly impacted by fluctuations in weather because both companies have a large number of heating customers. Fluctuations in weather have the potential to significantly impact year-to-year comparisons of operating income and cash flow. A common statistic used as an indicator of the affect of weather is Heating Degree Days (HDD). An HDD is a unit of measure used to represent each degree that the mean temperature for a 24-hour period is less than 65 degrees Fahrenheit.
	Revenues of Peoples Gas and North Shore Gas are also affected by changes in the unit cost of the utilities' gas purchases and do not include the cost of gas supplies for customers who purchase gas directly from producers and marketers. In a normal gas price environment, the unit cost of gas does not have a significant direct effect on operating income because the utilities' tariffs provide for dollar-for-dollar recovery of gas costs. (See Note 1K of the Notes to Consolidated Financial Statements.) However, significant changes in gas costs can materially affect the reserve for uncollectible accounts, customer demand and working capital needs. (See Note 7 of the Notes to Consolidated Financial Statements.)
	The following table summarizes revenue, deliveries and other statistics for the Gas Distribution segment.
(1) As used above, net margin is not a financial measure computed under generally accepted accounting principles (GAAP). Gross margin is the GAAP measure most closely related to net margin. Management believes net margin to be useful in understanding the Gas Distribution segment's operations because the utility subsidiaries are allowed, under their tariffs, to recover gas costs, revenue taxes and environmental costs from their customers on a dollar-for-dollar basis.
(2) Normal HDD are based on a 30-year average of monthly temperatures at Chicago's O'Hare Airport for the years 1970-1999.
	The discussion of the Gas Distribution segment variations is primarily related to Peoples Gas and North Shore Gas activity. Segment results also include the impact of the Company's weather insurance policy. This is a five-year policy scheduled to expire at the end of fiscal 2004. There are no weather insurance receivables reflected in fiscal 2003 and 2001. Fiscal 2002 revenues include $8.7 million in weather insurance income.
	The fluctuation in net margin per dekatherm delivered for fiscal 2003 versus fiscal 2002 reflects the variation in margin primarily caused by increased volumes delivered associated with colder weather. The utility's rate structure establishes a lower unit cost as volumes delivered to a customer increase. Other items affecting net margins include revenue tax accrual adjustments and a decrease in other Gas Distribution revenues primarily reflecting weather insurance accrued last year.
	Fiscal 2003 revenues for Peoples Gas increased $378.6 million over fiscal 2002 resulting primarily from higher gas prices ($235.0 million), from increased deliveries due to weather that was almost 19 percent colder ($130.0 million) and higher revenue taxes. Operating income in fiscal 2003 increased $9.2 million compared with fiscal 2002 due mainly to the effects of weather ($26.0 million) and a reduction in the municipal and state utility tax accrual ($10.0 million). The revenue tax accrual adjustment resulted primarily from the effect of higher uncollectibles on the tax liabilities, which are paid based upon cash receipts. Lower pension credits ($20.8 million) and higher nonlabor operating expense partially reduced operating income.
	Fiscal 2002 revenues for Peoples Gas decreased $661.2 million compared to fiscal 2001 due mainly to weather that was 16 percent warmer than fiscal 2001 and the lower gas costs. Operating income decreased $18.8 million as a result of lower gas delivery volumes resulting from the effect of the warmer weather and from an increase in the provision for uncollectible accounts ($2.2 million). Partially offsetting these effects was an increase in pension credits ($3.1 million).
	The fiscal 2003, 2002 and 2001 pension credits for Peoples Gas totaled $4.2 million, $25.0 million and $21.9 million, respectively.
	Peoples Gas and North Shore Gas accrue for estimated uncollectible accounts as revenues are recorded. The accrual rates are established based upon historical experience and projections of future charge-offs resulting from various factors, including the impact of natural gas prices and weather. Each quarter, Peoples Gas and North Shore Gas update the projection of future charge-offs based upon the most current information available, and adjust the reserve for uncollectible accounts, if necessary. Based on this ongoing review, Peoples Gas recorded an additional $5.0 million provision in the third quarter, increasing the reserve for uncollectible accounts to $29.2 million at September 30, 2003. During fiscal 2002, Peoples Gas recorded an additional $17.0 million charge to increase the reserve for uncollectible accounts. (See Note 7 of the Notes to Consolidated Financial Statements.)
	Fiscal 2003 revenues for North Shore Gas increased $75.3 million over fiscal 2002 resulting primarily from higher gas prices ($45.0 million) and from increased deliveries due to weather that was almost 19 percent colder ($25.0 million) and higher revenue taxes. Operating income increased $4.3 million due mainly to the effects of weather ($3.7 million), partially offset by an increase in pension expense of $0.9 million. The fiscal 2003 pension expense totaled $1.7 million.
	Fiscal 2002 revenues for North Shore Gas decreased $117.8 million compared to fiscal 2001 due primarily to weather that was 16 percent warmer and lower unit gas costs. Operating income decreased $5.6 million as a result of lower gas delivery volumes resulting from the affects of warmer weather.
	The fiscal 2003, 2002 and 2001 pension expense for North Shore Gas totaled $1.7 million, $0.8 million and $0.7 million, respectively.
Power Generation Segment
	The Power Generation segment, through Peoples Energy Resources, is engaged in the development, construction, operation and ownership of electric generation facilities for sales to electric utilities and marketers. Currently, the Company has an ownership interest in two electric generation facilities. The Company and Dominion are equal investors in Elwood, which owns and operates a 1,400-megawatt peaking facility near Chicago. Power generated by Elwood is sold through long-term contracts with Exelon, Engage and Aquila. The Company has a 27 percent interest in SCEP, a partnership with Exelon, that owns and operates a 350-megawatt facility. The Power Generation segment is also developing three additional sites to partner with or sell to investors.
	The Elwood partnership recognizes revenue consistent with the contractual requirements for generator unit availability under Elwood's power sales agreements (PSAs) with its customers. Peaker plants serve to provide power on peak days when power beyond normal base load requirements is needed, which in Chicago usually occurs during the summer. As a result, a premium is placed on power capacity availability during the summer months, and the Elwood PSAs have substantial penalties for units not being available for dispatch in these months only. The terms of the PSA are such that in economic substance Elwood's customers are purchasing the majority of the plant's power capacity during summer months, and revenue is recognized accordingly.
	The SCEP partnership's PSA does not have substantial penalties for nonperformance in the summer months. Also, unlike Elwood, which has market-based rates under FERC regulations in its PSAs, SCEP's rates are cost-based rates under FERC regulations. A significant cost for an electric generating plant is depreciation of fixed plant and equipment. Therefore, revenue recognition is based on a monthly demand payment that is earned and paid throughout the year on a straight-line basis.
	An important business purpose of this segment is to develop power generation sites. The Company has a business development staff working to find new investment opportunities either through the development of power sites or through partnering with others in the construction of power facilities. The costs of these activities are either expensed as incurred or are capitalized as specific site development assets, as appropriate. Included in deferred charges at September 30, 2003, was $7.1 million related to this activity.
	Fiscal 2003 operating income increased $1.2 million due to a full year of equity investment income generated from SCEP, which began commercial operations in July 2002, and lower operating costs ($1.2 million) associated with new investment opportunities, partially offset by last year's site-development income.
	Fiscal 2002 operating income decreased $9.9 million mainly due to the inclusion in fiscal 2002's results of interest expense associated with Elwood's bond financing. In fiscal 2001, the interim financing costs for this project were reflected as corporate interest expense. The inclusion of this cost reduced equity investment income from Elwood by $16.5 million. Fiscal 2001's results also benefited from a gain on the liquidation of financial hedges associated with Elwood's gas supply requirements ($4.0 million). Adjusting for the financing and hedge impacts, operating income increased significantly due to Elwood's first full year of operation with its expanded facilities, which became commercially operable in June 2001 ($5.9 million), and from the site-development income and start up of operations at SCEP, which began commercial operations in July 2002 ($5.6 million). These benefits were somewhat offset by higher development expenses related to the pursuit of new power projects.
	Aquila's senior unsecured debt rating was downgraded to below investment grade by Moody's Investor Service (Moody's) in September 2002 and by Standard & Poor's Ratings Services (S&P) in November 2002. The Company is closely monitoring the creditworthiness of Aquila, one of three companies contracting with Elwood for plant capacity and output. (See Note 4 of the Notes to Consolidated Financial Statements.)
Midstream Services Segment
	The Midstream Services segment is engaged in asset-based wholesale activities that provide services to marketers, utilities, pipelines and gas-fired power generation facilities in the upper Midwest. The segment's services are asset based by virtue of having the physical ability to deliver the gas. The phrase "asset based" is intended to differentiate Peoples Energy Resources' business from that of certain marketers in the wholesale natural gas business who enter into gas supply and storage contracts without any means of delivering the physical commodity, intending instead to always settle with counterparties on the delivery date through the payment of money without delivery of gas. In addition, Peoples Gas utilizes its storage and pipeline supply assets as a natural gas hub and Peoples Energy Resources owns a propane-based peaking plant and leases storage assets. Period-to-period comparisons can have large fluctuations caused by volatility in the energy markets.
	Revenues for fiscal 2003 increased $113.8 million as compared to fiscal 2002. The Company is expanding its wholesale marketing and asset management activities. Such activities are now performed in a wholly owned subsidiary and therefore revenues and expenses have increased versus fiscal 2002 when such activities were performed by enovate, an equity investment for a portion of the year. Operating income increased $0.7 million due to wholesale marketing and asset management activities ($2.9 million), partially offset by income in the prior year associated with enovate ($1.9 million).
	Revenues for fiscal 2002 increased $61.0 million over fiscal 2001. In previous periods, enovate results were reported as equity investment income. From late March 2002 and until the dissolution of enovate in September 2002, 100 percent of enovate's sales were recorded in revenues. Operating income decreased $5.2 million compared to fiscal 2001, due to a reduction in income from enovate ($8.2 million) which benefited from extraordinary market volatility in fiscal 2001 and from a decline in wholesale activities ($2.9 million). Partially offsetting these effects was an increase in operating income from hub activity ($5.3 million) which experienced a record year due primarily to strong seasonal pricing differentials.
	The following table summarizes operating statistics for the Midstream Services segment.
Retail Energy Services Segment
	Peoples Energy Services, which is the only substantial contributor to the Retail Energy Services segment, provides energy, to industrial, commercial and residential customers regionally within Illinois. Residential customer choice for Illinois became available during the period of March through May 2002, for both gas and electricity.
	During the third quarter of fiscal 2003, Peoples Energy Services entered into an agreement to become the natural gas provider for the State of Illinois. Under this agreement, Peoples Energy Services will provide nearly 3 Bcf of natural gas to the State of Illinois facilities in Chicago, representing an estimated five percent increase in total natural gas volumes for this segment.
	Revenues for fiscal 2003 increased $83.3 million primarily due to increased deliveries associated with customer growth and colder weather, and higher natural gas commodity prices. Margins in the Retail Energy Services segment are dependent on various factors such as the regulatory environment, commodity pricing and competitive factors, making gross revenue statistics a less reliable indicator of results. Gross margin increased $2.3 million. Higher gas and electric margins and customer growth positively impacted operating results.
Operating income increased $2.0 million, reflecting the benefits of the increased margins offset partially by increased operating expenses.
	Revenues for fiscal 2002 decreased $88.7 million due to declining natural gas commodity prices. Operating income increased $4.6 million resulting from higher margin ($5.1 million), partially offset by a slight increase in operating expenses. Power deliveries were slightly up due to warmer summer weather while power prices remained constant, resulting in increased margin from sales contracts that include a price-swing-risk mitigation factor. Additionally, the prior year included short-term electric margin losses from fixed price sales backed by seasonally priced supply.
	The following table summarizes operating statistics for Peoples Energy Services.
Oil and Gas Production Segment
	The Oil and Gas Production segment, through Peoples Energy Production, is active in the acquisition, development and production of oil and gas reserves in selected onshore basins in the United States through direct ownership in oil, gas and mineral leases. Peoples Energy Production's primary focus is on natural gas, with growth coming from low-to-moderate-risk drilling opportunities and acquisition of proved reserves with upside potential, which can be realized through drilling, production enhancements and reservoir optimization programs. Peoples Energy Production also has an equity investment in EnerVest ($20.7 million as of September 30, 2003), which develops and manages a portfolio of oil and gas producing properties. Results from the equity investment in EnerVest improved $2.6 million during fiscal 2003.
	Certain producing properties owned by Peoples Energy Production qualified for income tax credits as defined in Section 29 of the Internal Revenue Code of 1986. These credits expired on December 31, 2002. The amount recorded to income for the fiscal years ended September 30, 2003, 2002 and 2001 was $1.1 million, $4.5 million and $4.7 million, respectively.
	In November 2002, the Company acquired an interest in five properties in south Texas and the upper Texas gulf area from a subsidiary of Magnum Hunter. The reserves acquired, 99 percent of which are natural gas, were purchased for approximately $33 million and added approximately 11 MMcfe per day production at the time of the acquisition. In April of 2003, the Company acquired additional interest in the Corpus Christi West Field from Royal Production and several affiliated entities for approximately $9 million. This acquisition added more than 2 MMcfe per day production at the time of the acquisition.
	Fiscal 2003 revenues increased $40.6 million over fiscal 2002. Operating income in fiscal 2003 increased $15.7 million over fiscal 2002. Last year's results included the one time benefit of a settlement on hedges of $5.1 million. Excluding that impact, fiscal year results tripled due mainly to improved commodity prices and increased production. The increase in production was due to the impact of the acquired properties and the success of the Company's drilling program.
	Fiscal 2002 revenues increased $11.7 million due to the impact of new production from reserves acquired in fiscal 2001, positive results from drilling programs, the East White Point acquisition in June 2002 and the settlement of hedges associated with Enron. Higher production was partially offset by a decline in net realized natural gas prices, excluding the impact of the settlement of hedges associated with Enron. Operating income decreased $3.0 million due mainly to lower results from the EnerVest partnership ($8.6 million). Net income for
fiscal 2002 was positively impacted by the utilization of Section 29 income tax credits associated with certain producing properties ($4.5 million).
	As of September 30, 2003, the Company had hedges in place for 16.1 million MMbtus for fiscal 2004, or 60 percent of estimated fiscal 2004 production, assuming a 10 percent growth over fiscal 2003 production. Of the hedges in place, approximately 60 percent are swaps at an average price of $3.56 per MMbtu. The remainder are no cost collars with a weighted average floor price of $3.80 per MMbtu and a weighted average ceiling price of $5.82 per MMbtu. The majority of these hedges are valued against the New York Mercantile Exchange's (NYMEX) Henry Hub Natural Gas Contract. In addition, as of September 30, 2003, the Company had hedges in place for 291,000 Bbls of oil at an average price of $24.79 per Bbl. The oil hedges are valued using the average daily price for the month for the NYMEX West Texas Intermediate Cushing, Oklahoma Oil Contract.
	The following table summarizes operating statistics from the Oil and Gas Production segment.
(1) Oil production is converted to gas equivalents based on a conversion of six Mcf of gas per barrel of oil.
	The increase in the depreciation, depletion and amortization rate was caused by the inclusion of costs to develop reserves that were previously classified as proved undeveloped and the transfer of acquisition and development costs and reserves related to properties previously classified as probable, that are now classified as proved. These costs have been added to the depreciation, depletion and amortization pool.
	The increase in average production taxes is the result of increased revenues during fiscal 2003. In most states, production taxes are assessed as a percentage of revenues before the impact of hedges. Revenues, excluding hedges, for the fiscal year ended September 30, 2003, increased 136 percent compared to fiscal 2002.
Other Segment
	The Company is involved in other activities such as district heating and cooling through its Trigen-Peoples partnership and miscellaneous nonmaterial investments. These and certain business development activities do not fall under the above segments and are reported in the Other segment. The reported results also include income from the operation of fueling stations for natural gas vehicles.
	Revenues, operating expense and operating income variations for fiscal years 2003 and 2002 were insignificant as compared with the previous fiscal year periods.
Corporate and Adjustments
	The cost of Corporate activities that support the business segments, as well as consolidating adjustments, are included in Corporate and Adjustments.
	The operating loss variation in fiscal 2003 for this segment was insignificant as compared with fiscal 2002. Lower corporate costs were offset by the cost impact of a higher Peoples Energy stock price on outstanding stock appreciation rights (SAR) grants under the Company's equity compensation plans.
	Fiscal 2002 operating losses in this segment remained relatively flat as compared to fiscal 2001. The impact of a lower Peoples Energy stock price on outstanding grants under the Company's equity compensation plans ($4.6 million) was offset by higher corporate support expenses.
Other Income and Other Expense
	The following table summarizes activity included in the Company's other income and other expense categories.
	Fiscal 2003 interest income reflects a return to more normal daily cash levels. Fiscal 2002 and 2001 activity reflected additional interest income related to cash advances to Elwood Energy and a note receivable from the sale of a turbine.
	Also included in fiscal 2002 other income is a portion of the proceeds from a settlement of a suit brought by Peoples Gas and North Shore Gas against an insurer for the recovery of environmental costs which represents the amount received for the release of the insurer under certain insurance policies from pending or future claims unrelated to manufactured gas plant operations.
	Fiscal 2002 and 2001 reflect impairment losses related to items owned but never used in the Company's operations. Fiscal 2002 reflects the write-down of assets located at Peoples Gas former SNG plant, transformers purchased in connection with a power site development and an investment in a supply and transportation contract. Fiscal 2001 write-downs include a turbine held for a power site development and an investment in a partnership formed to explore the development of a pipeline.
	The following table summarizes activity included in Peoples Gas' other income and other expense categories.
	The following table summarizes activity included in North Shore Gas' other income and other expense categories.
Interest Expense
	Fiscal 2003 interest expense for the Company decreased $7.0 million from fiscal 2002 due to lower interest rates and lower average borrowing requirements. The reduction due to rates was primarily the result of lower rates on variable rate debt, the retirement or refinancing of higher cost notes and bonds, and increased use of commercial paper. Average borrowing requirements were reduced primarily due to the repayment of a $100.0 million note in fiscal 2002 and to increased issuances of common stock in fiscal 2003.
	Fiscal 2002 interest expense decreased $15.6 million from fiscal 2001 due to several factors. Interest decreased due to a reduction in corporate short-term debt mainly due to Elwood's bond financing. This impact was partially offset by the full year of interest expense in fiscal 2002 associated with the $325.0 million in corporate notes issued in January 2001 to fund the expansion of the diversified businesses. Utility short-term borrowing requirements were much lower due to the impacts of warmer weather, lower natural gas prices and improved customer collections. Additionally, the Company benefited from lower interest rates on commercial paper and Peoples Gas' variable rate bonds.
	Fiscal 2003 interest expense for Peoples Gas decreased $1.4 million from fiscal 2002 due to lower rates on variable rate debt and to the retirement or refinancing of higher cost notes and bonds. These impacts were partially offset by higher average borrowing requirements resulting from colder weather and higher natural gas prices. For fiscal 2002, interest expense for Peoples Gas decreased $13.1 million due mainly to lower average short-term borrowing requirements resulting from warmer weather, lower natural gas prices and improved customer collections. Also impacting interest expense was lower interest rates on Peoples Gas' variable rate bonds and other short-term debt.
	North Shore Gas' fiscal 2003 interest expense decreased $1.4 million from fiscal 2002 primarily due to lower interest rates. North Shore Gas' fiscal 2002 variation for interest expense was insignificant.
Fiscal 2004 Outlook
	The Company expects fiscal 2004 earnings to be in the range of $2.70 to $2.85 per share. The target range for the coming year is based on several factors including continued operating income growth from the Company's diversified energy businesses of 10 to 20 percent, ongoing cost control measures, a return to normal weather, pension expense in the range of $11 million to $13 million, a provision for bad debt expense of approximately 2.5 percent of utility revenues and a higher average number of shares outstanding resulting in $0.05 to $0.10 per share of dilution. Capital expenditures are expected to decline from about $187 million in fiscal 2003 to about $150 million in fiscal 2004, with about $80 million in the Gas Distribution segment and the balance in the diversified energy segments. (See Forward-Looking Information.)
Critical Accounting Policies
	In preparing the Company's financial statements using GAAP, management exercises judgment in the selection and application of accounting principles, including making estimates and assumptions. Management considers its critical accounting policies to be those that are important to the representation of the Company's financial condition and results of operations. They require management's most difficult and subjective or complex judgments, including those that could result in materially different amounts if the Company reported under different conditions or using different assumptions. There were no material changes in the application of each of the critical accounting policies listed below during fiscal 2003.
Regulated Operations. Due to the regulation of the Company's utility subsidiaries, certain transactions are recorded based on the accounting prescribed in Statement of Financial Accounting Standards (SFAS) No. 71, "Accounting for the Effects of Certain Types of Regulation." Under this statement certain costs or revenues are deferred on the balance sheet until recovered or refunded through rates. Accordingly, actions of the Commission could have an effect on the amount recovered from or refunded to customers. Any differences between recoverable and refundable amounts and the amounts deferred would be recorded as income or expense at the time of any Commission action. If all or a reportable portion of the utility operations becomes no longer subject to the provision of SFAS No. 71, a write-off of related regulatory assets or liabilities would be required, unless some form of transition cost recovery continued through rates established and collected for the remaining regulated operations. No such change is foreseen by management. (See Notes 1J and 1K of the Notes to Consolidated Financial Statements.)
Environmental Activities Relating to Former Manufactured Gas Operations. The Company's utility subsidiaries, their predecessors, and certain former affiliates operated facilities in the past at multiple sites for the purpose of manufacturing gas and storing manufactured gas (manufactured gas sites). The utility subsidiaries are accruing and deferring the costs they incur in connection with environmental activities at the manufactured gas sites pending recovery through rates or other entities. The amounts deferred include costs incurred but not yet recovered through rates and management's best estimates of the costs that the utilities will incur in investigating and remediating the manufactured gas sites. Management's estimates are based upon an ongoing review by management and its outside consultants of future investigative and remedial costs.
	Management considers this policy critical due to the substantial uncertainty in the estimation of future costs with respect to the amount and timing of costs, and the extent of recovery from other potentially responsible parties (PRPs). (See Notes 1L and 5A of the Notes to Consolidated Financial Statements.)
Retirement and Postretirement Benefits. The calculation of pension expense (credits) relies on actuarial assumptions including discount rate, long-term rate of return on assets and assumed future increases in compensation. These assumptions are determined annually and changes to the assumptions can have a material effect on the amounts recorded from year to year. The Company bases its discount rate assumption on yields of
high quality long-term, fixed-income bonds. A decrease in the assumed discount rate of 25 basis points would have increased fiscal 2003 pension expense by $1.6 million.
	Additionally, when an employee retires and takes his/her retirement benefit as a lump sum, a settlement amount under SFAS No. 88, "Employer's Accounting and Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits," is calculated representing the difference between the actuarial liability for this employee and the lump sum. The Company has chosen to record this difference as well as a portion of previously unrecognized gains and losses in the current period instead of amortizing the difference over the expected average service life of the remaining participants. Both methods are acceptable under GAAP. Therefore, the timing of retirements can have an effect on the amount recorded in any given year. (See Note 8 of the Notes to Consolidated Financial Statements.)
	In addition, the Company and its subsidiaries currently provide certain health care and life insurance benefits for retired employees. Substantially all employees may become eligible for such benefit coverage if they reach retirement age while working for the Company. Through the use of an independent actuary, the Company accrues the expected costs of such benefits during a portion of the employees' years of service. This accrual is based on assumptions regarding discount rates, rate of return on assets and health care cost trend rates. The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rate by one percentage point for each future year would have increased the accumulated postretirement benefit obligation at September 30, 2003 by $9.2 million and the aggregate of service and interest cost components of the net periodic postretirement benefit cost by $1.4 million annually. Decreasing the assumed health care cost trend rate by one percentage point for each future year would have decreased the accumulated postretirement benefit obligation at September 30, 2003 by $7.9 million and the aggregate of service and interest cost components of the net periodic postretirement benefit cost by $1.2 million annually. A decrease in the assumed discount rate of 25 basis points would have increased postretirement benefit cost expense by $0.2 million.
Derivative Instruments and Hedging Activities. The Company enters into financial derivative contracts to hedge price risk on natural gas purchases and sales. For each contract, management must determine whether the underlying transaction qualifies as a hedge under derivative accounting rules. If contracts do qualify as hedges, they will have a minimal effect on income until settled. Otherwise the change in the fair value of these contracts would be recorded in income monthly and result in potentially significant impacts, both positive and negative. Additionally, due to the nature of the Company's businesses, most of the Company's contracts for physical purchases and sales of gas or power meet the definition of a derivative, but are exempt from derivative accounting requirements under the normal purchase and sale exemption. Under this exemption, if the transactions are clearly intended to meet the requirements of the customers, mark-to-market accounting is not required. Management judgment is required to make this determination. (See Note 1M of the Notes to Consolidated Financial Statements.)
Provision for Uncollectible Accounts. The Company's subsidiaries accrue for estimated uncollectible accounts as revenues are recorded. The accrual rates are established based upon historical experience and projections of future charge-offs resulting from various factors, including the impacts of natural gas prices and weather. Each quarter, the Company's subsidiaries update the projection of future charge-offs based upon the most current information available, and adjust the reserve for uncollectible accounts, if necessary. (See Note 7 of the Notes to Consolidated Financial Statements.)
Other Matters
Accounting Standards. In January 2003, the FASB issued Financial Interpretation No. (FIN) 46, "Consolidation of Variable Interest Entities - An Interpretation of ARB No. 51." Under FIN 46, if a business enterprise has a controlling financial interest in a variable interest entity, the assets, liabilities and results of the activities of the variable interest entity should be included in consolidated financial statements with those of the business enterprise. The Company's only off-balance sheet financing is through its equity method investments, none of which qualify as a Variable Interest Entity. This implementation date has been deferred to fiscal 2004. The Company does not expect FIN 46 to significantly affect the Company's financial condition or results of operations.
	The Company adopted SFAS No. 141, "Business Combinations," and SFAS No. 142, "Goodwill and Other Intangible Assets," as of October 1, 2001. These statements, in part, clarify that more assets should be distinguished and classified between tangible and intangible. The Company did not change or reclassify contractual mineral rights included in oil and gas properties on the balance sheet upon adoption of SFAS No. 142. The Company believes the treatment of such mineral rights as tangible assets under the successful efforts method of accounting for crude oil and natural gas properties is appropriate. However, the accounting profession and others are engaged in industry-wide deliberations regarding whether SFAS Nos. 141 and 142 require contractual mineral rights to be classified as intangible assets rather than tangible assets.
Competition and Deregulation. Since May 2002, all retail gas customers, including residential customers, in northern Illinois have had the opportunity to select an alternative supplier other than the local utility (an alternative gas supplier). Outside of the service territories of Peoples Gas, North Shore Gas and Nicor Gas, only large-volume customers have had the ability to choose an alternative gas supplier. Because the Gas Distribution utilities do not make any profit on the commodity cost of gas and because transportation charges are basically the same for customers using an alternative gas supplier and for sales customers, the operating income of the Gas Distribution utilities is generally not affected by whether a customer is a transportation customer or a sales customer.
	With respect to retail electric competition, the phase-in of open access set forth in the December 16, 1997, electric restructuring law is now complete. Since May 1, 2002, all retail electric customers, including residential customers, have had the ability to select an alternative retail electric supplier, which is a nonutility supplier or an electric utility other than the customer's local electric utility. However, as of October 31, 2003, no company has requested the required authorization from the Commission to provide electricity service to residential customers. Customers who buy their electricity from an alternative retail electric supplier are required to pay transition charges to the utility through the year 2006. Management believes that the restructuring of the electric market in Illinois under this legislation will not have a material adverse effect on the competitive position of the Company's subsidiaries.
LIQUIDITY AND CAPITAL RESOURCES
	The following is a summary of cash flows for the Company:
	Cash provided by operating activities decreased in fiscal 2003 compared to fiscal 2002 primarily due to working capital needs related to higher gas prices and increased storage. Peoples Gas' inventory gas increased by $46.6 million and Midstream Services' inventory increased by $19.4 million. The increase in net cash used in investing activities in fiscal 2003 compared to 2002 was primarily due to the collection of previously advanced cash to Elwood in fiscal 2002 as a result of project financing of that facility. The net cash used in financing
activities decreased in fiscal 2003 compared to 2002 primarily due to the retirement in fiscal 2002 of $300.3 million of debt and to increased proceeds of $42.5 million from the issuance of common stock in fiscal 2003.
	See the Consolidated Statements of Cash Flows and the discussion of major balance sheet variations for more detail.
Balance Sheet Variations
	The Company's total assets at September 30, 2003 increased $204.9 million compared to September 30, 2002, primarily caused by:
increased gas in storage of $76.0 million as a result of an increase in physical inventory at Gas Distribution, Midstream Services and Retail Energy Services segments' storage;
increased utility and oil and gas property net of depreciation of $62.8 million related to utility construction and oil and gas acquisitions and drilling;
increased intangible pension asset of $30.5 million related to an additional minimum liability recorded ;
increased receivables from customers of $31.1 million caused by higher gas costs;
increased gas cost recoverable of $12.4 million; and
decreased other receivables of $32.7 million related to reduced receivables from hedging activities.
	The Company's total liabilities at September 30, 2003 increased $163.2 million compared to September 30, 2002, primarily caused by:
increased long-term debt of $190.3 million related to replacing current bond maturities and terming up of commercial paper and adjustable rate debt;
decreased commercial paper of $29.9 million;
decreased other short-term debt and current portion of long-term debt of $140.0 million;
decreased regulatory liabilities of $30.0 million related to the utilities' price protection program;
increased accounts payable of $43.0 million related to higher priced gas purchases;
increased pension and postretirement benefit liabilities of $85.7 million caused by lower discount and interest rate assumptions; and
increased deferred income taxes of $29.6 million.
	The Company's total equity at September 30, 2003 increased by $41.7 million compared to September 30, 2002, primarily caused by:
increased common stock of $44.8 million related primarily to the continuous equity program and Direct Purchase and Investment Plan;
increased retained earnings of $27.6 million; and
decreased accumulated other comprehensive income (AOCI) of $30.8 million related to pension liabilities and hedging activity.
Changes in Debt Securities
	During fiscal 2003, the Company took advantage of the low interest rate environment to refinance existing debt with lower interest rate debt and to term-up adjustable rate debt. In general, debt classified as short-term due to the technical tender provisions was replaced by long-term debt. (See Note 11 of the Notes to Consolidated Financial Statements.)
Financial Sources
	The Company and its two regulated utilities have access to outside capital markets, commercial paper markets and internal sources of funds that together provide sufficient resources to meet their working capital and long-term capital requirements. The Company does not anticipate any changes that would materially alter its current liquidity position.
	Due to the seasonal nature of gas usage, a major portion of the utilities' cash collections occurs between January and June. Because of timing differences in the receipt and disbursement of cash and the level of construction requirements, the utility subsidiaries borrow from time to time on a short-term basis. Short-term borrowings are repaid with cash from operations, other short-term borrowings or refinanced on a permanent basis with debt or equity, depending on market conditions and capital structure considerations.
	In addition to cash generated internally by operations, as of September 30, 2003, the Company has credit facilities of $317.5 million (Peoples Energy, $150.0 million; Peoples Gas, $167.5 million, of which $37.0 million may be utilized by North Shore Gas). Peoples Gas also has a seasonal supplemental line of $40.0 million for the winter months. These various facilities primarily support the Company's ability to borrow using commercial paper. As of September 30, 2003, Peoples Energy's entire line was available and $111.6 million of the $167.5 million Peoples Gas and North Shore Gas facilities were available. The Company's credit facilities generally contain debt triggers that permit the lenders to terminate the credit commitments to the borrowing company and declare any outstanding amounts due and payable if the borrowing company's debt-to-total capital ratio exceeds 65 percent. The credit facilities are expected to be renewed when they expire, although the exact amount of the renewals will be evaluated at that time and may change from the current levels. As of September 30, 2003, Peoples Gas had $24.4 million of loans from Peoples Energy. North Shore Gas had no such loans outstanding at September 30, 2003.
	The current credit ratings for the Company, Peoples Gas and North Shore Gas are summarized on the table below.
Corporate
Credit Rating
Senior
Unsecured Debt
Utility Senior
Secured Debt
Corporate
Commercial Paper
Utility
Commercial Paper
Moody's
A3
A3
Aa3
P-2
P-1
Standard and Poor's
A-
BBB+
A-
A-2
A-2
Fitch Ratings
A
A
AA-
	On July 29, 2003, Fitch Ratings (Fitch) lowered the Company's senior unsecured rating from A+ to A. For both Peoples Gas and North Shore Gas, the senior secured rating was lowered from AA to AA- and the commercial paper rating was lowered from+ to. The Company's commercial paper rating was affirmed and the ratings outlook for all three companies was raised from Negative to Stable. Fitch noted that the Company's consolidated business risk profile resulting from its diversification strategy has resulted in leverage and credit protection measures that are more consistent with the revised rating.
	Moody's describes double-A rated debt (Aa1, Aa2 and Aa3) as high-grade and single-A rated debt (A1, A2 and A3) as upper-medium grade. S&P describes A-rated debt (A+, A and A-) as strong and triple-B rated debt (BBB+, BBB and BBB-) as adequate. Fitch describes double-A rated debt (AA+, AA and AA-) as having a very high credit quality and single-A rated debt (A+, A and A-) as having high credit quality. The lowest investment grade credit ratings for Moody's is Baa3, for S&P is BBB- and for Fitch is BBB-. Thus, all three credit rating agencies give the Company, Peoples Gas and North Shore Gas investment grade ratings.
	Regarding short-term ratings applicable to commercial paper, Moody's describes the P-1 rating as indicating a superior repayment ability and P-2 as indicating a strong repayment ability. S&P describes an A-2 rating as satisfactory. Fitch describes the ratings (F1+ and) as indicating the highest credit quality.
Changes in Equity Securities
	The Company has filed a universal shelf registration statement on Form S-3 for the issuance from time to time of up to 1.5 million shares of common stock pursuant to a continuous equity offering in one or more negotiated transactions or "at-the-market" offerings. As of September 30, 2003, 858,300 shares of common stock have been issued through the continuous equity offering. Proceeds, net of issuance costs, totaled $32.4 million. Subsequent to September 30, 2003, and through December 11, 2003, the Company has not issued any additional shares under this registration statement. In addition, the Company issues common stock through various plans
such as its Direct Purchase and Investment Plan and its Employee Stock Purchase Plan. (See Note 14 of the Notes to Consolidated Financial Statements.)
Financial Uses
Capital Spending. In fiscal 2003, the Company spent $187.2 million on capital projects and investments in equity investees. The Gas Distribution segment spent $82.0 million on property, plant and equipment of which $73.0 million was spent by Peoples Gas and $9.0 million was spent by North Shore Gas. The remaining $105.2 million was spent by the diversified business segments. The majority of this capital was in the Oil and Gas Production segment, which spent $98.2 million on the acquisition of producing properties, drilling projects and the exploitation of the acquired and existing assets. Total forecasted capital spending for fiscal 2004 is estimated to be $150 million.
Working Capital Credit Facility. Elwood, the Company and Dominion have entered into a revolving working capital credit facility under which the Company and Dominion will fund Elwood's working capital requirements up to a maximum aggregate amount of $10.0 million. The facility is dated June 28, 2002, and commenced July 1, 2002. The outstanding loans would earn interest at the A-2/P-2 commercial paper rate plus 50 basis points. At September 30, 2003, the entire amount was available.
Dividends. On February 5, 2003, the Directors of the Company voted to increase the regular quarterly dividend on the Company's common stock from 52 cents per share to 53 cents per share.
Commitments and Contingencies
	The Company has certain contractual obligations directly related to the Company's operations and unconsolidated equity investees. The majority of these are long-term debt related with other substantial commitments for gas supply, transportation and storage contracts. (See Note 6 of the Notes to Consolidated Financial Statements.)
Contractual Obligations. The following table summarizes the Company's long-term minimum contractual obligations.
(1)	Includes adjustable rate bonds classified as short-term debt. (See Note 11 of the Notes to Consolidated Financial Statements.)
(2)	Includes gas purchases, storage, transportation, computer related and miscellaneous long-term and short-term capital purchase commitments.
Off-Balance Sheet Financing. Off-balance sheet debt at September 30, 2003 and 2002, consists of the Company's pro rata share of nonrecourse debt of various equity investments, including Trigen-Peoples ($15.4 million and $15.7 million), EnerVest ($2.7 million and $5.7 million) and Elwood ($190.0 million and $196.9 million). The Company believes this off-balance sheet financing will not have a material effect on the Company's future financial condition. The Company also has commercial obligations in the form of guarantees and letters of credit in support of its unconsolidated equity investments' operations. (See Note 6 of the Notes to Consolidated Financial Statements.)
Environmental Matters. The Company's Gas Distribution utility subsidiaries are conducting environmental investigations and remedial work at certain sites that were the locations of former manufactured gas operations. (See Note 5A of the Notes to Consolidated Financial Statements.)
	In 1994, North Shore Gas received a demand from a responsible party under the Comprehensive Environmental Response, Compensation and Liability Act of 1980, as amended (CERCLA), for environmental costs associated with a former mineral processing site in Denver, Colorado. The demand alleged that North Shore Gas is a successor to the liability of a former entity that allegedly disposed of mineral processing wastes there between 1934 and 1941. (See Note 5B of the Notes to Consolidated Financial Statements.)
Gas Charge Reconciliation Proceedings. The Commission is conducting a proceeding regarding the fiscal 2001 reconciliation of Peoples Gas' and North Shore Gas' revenues from the Gas Charge and related costs. On August 7, 2003, three intervenors (Citizens Utility Board (CUB), Illinois Attorney General (AG) and Chicago) filed testimony in Peoples Gas' proceeding and one intervenor (CUB) filed testimony in North Shore Gas' proceeding. Each of the intervenors requested disallowances, which vary in amount depending upon the issues raised and the assumptions and methodologies used to measure the impact of the issues. In the Peoples Gas proceeding, the AG and CUB have requested disallowances, which range from $8 million to $56 million, covering a variety of alleged issues other than financial hedging. CUB has requested an additional disallowance of $53 million and Chicago has requested a disallowance of $230 million based on the financial hedging issue. In the North Shore Gas proceeding, CUB raised only the hedging issue and recommended a disallowance of $10 million. The Commission's Staff (the Staff) filed its testimony in these proceedings on August 15, 2003. The Staff requested a disallowance of $31 million in the Peoples Gas proceeding and $1.4 million in the North Shore Gas proceeding covering a variety of alleged issues, none of which related to hedging. Peoples Gas and North Shore Gas submitted rebuttal testimony in response to the Staff and the intervenors on November 13, 2003. In that testimony, Peoples Gas stated that it would not oppose two disallowances proposed by the Staff, totaling approximately $5.2 million. One of these proposed disallowances, totaling $4.7 million, results in a change in the treatment for accounting and rate making purposes of gas used to support operational capabilities of Peoples Gas' underground storage. This change has no immediate effect on net income because amounts previously recovered through the Gas Charge will be capitalized as property, plant and equipment and depreciated over the asset's useful life. An offsetting liability for this amount, which is expected to be refunded to customers, will be recorded. Peoples Gas will also record property, plant and equipment and liabilities totaling $5.9 million for similar amounts recovered through the Gas Charge in fiscal 2003 and fiscal 2002. These transactions will be recorded in the first quarter of fiscal 2004. Peoples Gas opposed all other proposed disallowances and North Shore Gas opposed all disallowances in its case. The remaining procedural schedule provides for the Staff and intervenors to file rebuttal testimony, Peoples Gas and North Shore Gas to file surrebuttal testimony and evidentiary hearings to be held. An order from the Commission is not expected before the fourth quarter of fiscal 2004. Peoples Gas and North Shore Gas each believes that it conducted business prudently and in the best interest of customers within established standards but cannot predict the outcome of these proceedings.
	The Company believes that its fiscal 2001 purchasing practices were consistent with the standards applied by the Commission in its past Orders and upheld by the Illinois courts. Although the Company cannot predict the outcome of these proceedings, the Company believes that it conducted business prudently and in the best interest of customers within these established standards.
	Fiscal year 2002 Gas Charge reconciliation cases were initiated on November 7, 2002. Peoples Gas and North Shore Gas each filed direct testimony on August 1, 2003. A status hearing is scheduled for February 10, 2004. Fiscal year 2003 Gas Charge reconciliation cases were initiated on November 12, 2003. Peoples Gas' and North Shore Gas' direct testimony is due on April 1, 2004. A status hearing is scheduled for May 12, 2004.
Indenture Restrictions
	North Shore Gas' indenture relating to its first mortgage bonds contains provisions and covenants restricting the payment of cash dividends and the purchase or redemption of capital stock. At September 30, 2003, such restrictions amounted to $6.9 million of North Shore Gas' total retained earnings of $80.9 million.
	Peoples District Energy owns a 50 percent equity interest in Trigen-Peoples. The Construction and Term Loan Agreement between Trigen-Peoples and Prudential related to Trigen-Peoples' project financing prohibits any distribution that would result in the partners' total capital account in Trigen-Peoples being less than $7.0 million. At September 30, 2003, the partners' capital account was $7.7 million. The Construction and Term Loan Agreement also prohibits any distribution unless the partnership's debt service coverage ratio for the four fiscal quarters prior to the distribution was at least 1.25 to 1.0. Trigen-Peoples' debt service coverage ratios for the last four fiscal quarters were 1.98 to 1.0, 1.85 to 1.0, 2.28 to 1.0, and 2.07 to 1.0.
	Peoples Energy Resources owns a 50 percent equity interest in Elwood. Elwood's trust indenture and other agreements related to its project financing prohibit Elwood from making distributions, unless Elwood has maintained certain minimum historic and projected debt service coverage ratios. At July 7, 2003, the most recent semi-annual distribution date, a minimum debt service coverage ratio of 1.2 to 1.0 was required and Elwood's actual debt service coverage ratio was approximately 1.5 to 1.0.
Risk Management Activities
Market Risk. The Company's earnings may vary due to changes in commodity prices (market risk) through its subsidiaries' operations and investments. To manage this market risk, the Company uses forward contracts and financial instruments, including commodity futures contracts, swaps, no-cost collars and options contracts.
	It is the policy of the Company to use these instruments solely for the purpose of managing risk and not for any speculative purpose. All market risk is identified and reduced to levels less than the maximum earnings-at-risk limit approved by the Board of Directors. All hedging is conducted on registered exchanges or with counterparties that meet stringent credit requirements. Formal risk management policies and procedures are in place for all subsidiaries. Most of these instruments qualify for hedge accounting. Therefore, gains and losses from these instruments will be recorded in the income statement in the same month that the underlying hedged activity is recorded. Any hedge ineffectiveness is booked monthly to the income statement. (See Note 1M of the Notes to Consolidated Financial Statements.)
	The Company monitors and controls its derivative and physical positions using analytical techniques including measuring future obligations to changes in market price (mark-to-market), sensitivity analysis and value at risk. This process provides information on credit exposure as well as the current value of the portfolio. All NYMEX valuations are based on well publicized market prices rather than model valuation projections. Monthly projections of basis valuation are based on deal quotes and adjusted for seasonality based on historical trends.
	Starting in the second quarter of fiscal 2002, the Company's utilities began to use financial derivative instruments to lock in the purchase price for a portion of its future natural gas purchases. The strategy is intended to minimize fluctuations in gas costs charged to the utility gas sales customers. Since these derivative instruments are not designated as hedges and are employed to support gas costs charged to utility gas sales customers, the accounting for these derivative instruments is subject to SFAS No. 71. Therefore, changes in the market value of these derivatives are recorded as a regulatory asset or regulatory liability on the balance sheet. Gains or losses on the settlement of these contracts are included as an adjustment to gas purchases in the determination of the monthly Gas Charge passed through to customers.
	The Company has positions in natural gas transportation and inventory as part of its Midstream Services operations. The Company uses derivative financial instruments to protect against loss of value in its capacity caused by changes in the market place. Most of these are considered cash flow hedges of future transactions. A small portion are used to protect the value of inventory and are accounted for as fair value hedges. Gains and losses from these instruments will be recorded in the income statement in the same month the underlying hedged activity is recorded. Although most of the physical contracts managed by the Midstream Services segment are accounted for on an accrual basis, certain contracts may be accounted for on a mark-to-market basis. As of September 30, 2003, there was no material mark-to-market effect for physical contracts.
	The Company sells fixed price and variable priced products as part of its Retail Energy Services business. Price risk is managed through the use of supplier contracts, storage and financial transactions. As of September 30, 2003, the exposure from open positions was immaterial.
	The Power Generation segment has entered into power sales contracts that effectively eliminate fuel price risk.
	The following table summarizes the valuation of outstanding financial contracts for fiscal 2003 and 2002.
	The maturity of the fair value hedges and the mark-to-market contracts fall within the next 12 months of the balance sheet date. Included in the value of mark-to-market contracts are amounts relating to the utility subsidiaries' gas price protection program ($13.7 million). All gains or losses from these contracts will be included in the Gas Charge to customers. The maturities of the cash flow hedges are summarized in the table below. All valuations are based on NYMEX closing prices at September 30, 2003.
Weather Risk. The Company's earnings vary due to the warmth or severity of the weather. The Company manages this risk through the purchase of weather insurance and the use of block rates in utility rate design. Block rates help mitigate the effect of warm weather by allowing greater cost recovery on the first volumes through the meter and less on the last volumes. The insurance currently in place protects the Company on the portion of lost revenue incurred when weather is seven percent to 13 percent warmer than normal. The insurance accrual is recorded using the prescribed intrinsic method of accounting and settles annually based on the Company's fiscal year.
Interest Rate Risk. The Company periodically utilizes derivative instruments to reduce interest rate risk associated with the issuance of debt. During fiscal 2003, the Company entered into treasury lock agreements totaling $115.0 million that hedged the 10-year treasury component of a portion of the total anticipated fiscal 2003 debt financings. On April 24, 2003, in connection with the issuance of the utility subsidiaries' new debt, the
Company unwound all of its treasury lock positions resulting in a $0.7 million loss charged by Peoples Gas and a $0.4 million loss charged by North Shore Gas to other comprehensive income. These amounts will be amortized over the 10-year term of the new debt.
Credit Risk. The Company has established a credit policy to mitigate the effect of nonperformance on wholesale transactions. Pursuant to this policy, a credit limit is established for all counterparties based on a review of their financial condition. This policy does not cover Retail Energy Services or Gas Distribution customers, which are covered under other retail credit procedures. The Company reviews, and changes when necessary, its credit underwriting and monitoring procedures. For example, the Company has taken action this year to reduce exposure to counterparties with low credit ratings by lowering credit limits and reducing or terminating future business. In addition, the Company has adequate financial assurance provisions in many of its commercial agreements that permit the Company to call for additional credit support (e.g., letters of credit, cash deposits or payment in advance).
	Aquila's senior unsecured debt rating was downgraded to below investment grade by Moody's in September 2002 and by S&P in November 2002. The Company is closely monitoring the creditworthiness of Aquila, one of three companies contracting with Elwood for plant capacity and output. (See Note 4 of the Notes to Consolidated Financial Statements.)
Interest Coverage
	The fixed charges coverage ratios for the Company, Peoples Gas and North Shore Gas are as follows:
	The increase in the ratio for the Company in fiscal 2003 reflects higher pretax income and lower interest expense due to lower interest rates and lower average borrowing requirements. The increase in the ratio for the Company in fiscal 2002 reflects lower interest expense due to lower short-term debt resulting from Elwood's bond financing, a decrease in the utility short-term borrowing requirements and lower interest rates.
	The slight increase in the ratio for Peoples Gas in fiscal 2003 reflects higher pretax income and slightly lower interest expense due to lower interest rates on variable rate debt and to the retirement or refinancing of higher cost rates and bonds. The increase in the ratio for Peoples Gas in fiscal 2002 reflects lower short-term borrowing requirements and lower interest rates.
	The increase in the ratio for North Shore Gas in fiscal 2003 reflects higher pretax income and lower interest expense due to lower interest rates. The slight decrease in the ratio for North Shore Gas in fiscal 2002 reflects lower pretax income offset by slightly lower interest expense.
FORWARD-LOOKING INFORMATION
	This MD&A contains statements that may be considered forward-looking, such as: management's expectations, the statements of the Company's business and financial goals regarding its business segments, the effect of weather on net income, cash position, source of funds, financing activities, market risk, the insignificant effect on income arising from changes in revenue from customers' gas purchases from entities other than the Gas Distribution subsidiaries, the adequacy of the Gas Distribution segment's reserves for uncollectible accounts, capital expenditures of the Company's subsidiaries and environmental matters. These statements speak of the Company's plans, goals, beliefs, or expectations, refer to estimates or use similar terms. Generally, the words
"may," "could," "project," "believe," "anticipate," "estimate," "plan," "forecast," "will be" and similar words identify forward-looking statements. Actual results could differ materially, because the realization of those results is subject to many uncertainties including:
adverse decisions in proceedings before the Commission concerning the prudence review of the utility subsidiaries' gas purchases;
the future health of the United States and Illinois economies;
the timing and extent of changes in interest rates and energy commodity prices, including but not limited to the effect of unusually high gas prices on cost of gas supplies, accounts receivable and the provision for uncollectible accounts and interest expense;
adverse resolution of material litigation;
effectiveness of the Company's risk management policies and the creditworthiness of customers and counterparties;
regulatory developments in the United States, Illinois and other states where the Company does business;
changes in the nature of the Company's competition resulting from industry consolidation, legislative change, regulatory change and other factors, as well as action taken by particular competitors;
the Company's success in identifying diversified business segment projects on financially acceptable terms and generating earnings from projects in a reasonable time;
operational factors affecting the Company's Gas Distribution, Power Generation and Oil and Gas Production segments;
Aquila's financial ability to perform under its power sales agreements with Elwood;
drilling risks and the inherent uncertainty of oil and gas reserve estimates;
weather related energy demand; and
terrorist activities.
	Some of these uncertainties that may affect future results are discussed in more detail in Item 1 - Business. All forward-looking statements included in this MD&A are based upon information presently available, and the Company assumes no obligation to update any forward-looking statements.
ITEM 7A.
ITEM 7A. Quantitative and Qualitative Disclosures about Market Risk
	Quantitative and qualitative disclosures about market risk are reported under MD&A - Risk Management Activities.
ITEM 8.
ITEM 8. Financial Statements and Supplementary Data
Page
Statement of Management's Responsibility
Independent Auditors' Report
Peoples Energy
Peoples Gas
North Shore Gas
Consolidated Statements of Income for Fiscal Years Ended
September 30, 2003, 2002 and 2001
Peoples Energy
Peoples Gas
North Shore Gas
Consolidated Balance Sheets at September 30, 2003 and 2002
Peoples Energy
Peoples Gas
North Shore Gas
Consolidated Capitalization Statements at September 30, 2003 and 2002
Peoples Energy
Peoples Gas
North Shore Gas
Consolidated Statements of Stockholders' Equity for Fiscal
Years Ended September 30, 2003, 2002 and 2001
Peoples Energy
Peoples Gas
North Shore Gas
Consolidated Statements of Cash Flows for Fiscal Years Ended
September 30, 2003, 2002 and 2001
Peoples Energy
Peoples Gas
North Shore Gas
Notes to Consolidated Financial Statements
STATEMENT OF MANAGEMENT'S RESPONSIBILITY
	The financial statements and other financial information included in this report were prepared by management, which is responsible for the integrity and objectivity of presented data. The consolidated financial statements of the Company and its subsidiaries were prepared in conformity with generally accepted accounting principles of the United States and necessarily include some amounts that are based on the best estimates and judgments of management.
	The Company maintains internal accounting systems and related administrative controls, along with internal audit programs, that are designed to provide reasonable assurance that the accounting records are accurate and assets are safeguarded from loss or unauthorized use. Consequently, management believes that the accounting records and controls are adequate to produce reliable financial statements.
	Deloitte & Touche LLP, the Company's independent public accountants retained by the Audit Committee of the Board of Directors, as a part of its audit of the financial statements, selectively reviews and tests certain aspects of internal accounting controls solely to determine the nature, timing and extent of its audit tests. Management has made available to Deloitte & Touche LLP all of the Company's financial records and related data and believes that all representations made to the independent public accountants during its audit were valid and appropriate.
	The Audit Committee of the Board of Directors, comprised of six nonmanagement directors, meets regularly with management, the internal auditors, and Deloitte & Touche LLP, jointly and separately, to ensure that appropriate responsibilities are discharged. These meetings include review with and retention of all outside auditors, approval of any non-audit services by independent auditors, discussion and review of quarterly and annual earnings results and SEC filings, accounting principles and practices, internal accounting controls, audit results and the presentation of financial information in the annual report.
THOMAS M. PATRICK
Chairman, President and Chief Executive Officer
THOMAS A. NARDI
Senior Vice President and Chief Financial Officer
INDEPENDENT AUDITORS' REPORT
To Shareholders of Peoples Energy Corporation:
	We have audited the accompanying consolidated balance sheets and consolidated capitalization statements of Peoples Energy Corporation and subsidiary companies (the Company) at September 30, 2003 and 2002, and the related consolidated statements of income, stockholders' equity, and cash flows for each of the three years in the period ended September 30, 2003. Our audits also included the financial statement schedules listed in the Index at Item 15(a)2. These consolidated financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
	We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
	In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Peoples Energy Corporation and subsidiary companies at September 30, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended September 30, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
	As explained in Note 1 to the financial statements, effective October 1, 2000, the Company changed its method of accounting for derivative instruments to adopt Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities," as amended.
DELOITTE & TOUCHE LLP
Chicago, Illinois
December 10, 2003
INDEPENDENT AUDITORS' REPORT
To The Peoples Gas Light and Coke Company:
	We have audited the accompanying consolidated balance sheets and consolidated capitalization statements of The Peoples Gas Light and Coke Company and subsidiary companies (hereinafter referred to as Peoples Gas, a wholly owned subsidiary of Peoples Energy Corporation) at September 30, 2003 and 2002, and the related consolidated statements of income, stockholder's equity, and cash flows for each of the three years in the period ended September 30, 2003. Our audits also included the financial statement schedules listed in the Index at Item 15(a)2. These consolidated financial statements and financial statement schedules are the responsibility of the management of Peoples Gas. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
	We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
	In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Peoples Gas at September 30, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Chicago, Illinois
December 10, 2003
INDEPENDENT AUDITORS' REPORT
To North Shore Gas Company:
	We have audited the accompanying consolidated balance sheets and consolidated capitalization statements of North Shore Gas Company and subsidiary companies (hereinafter referred to as North Shore Gas, a wholly owned subsidiary of Peoples Energy Corporation) at September 30, 2003 and 2002, and the related consolidated statements of income, stockholder's equity, and cash flows for each of the three years in the period ended September 30, 2003. Our audits also included the financial statement schedules listed in the Index at Item 15(a)2. These consolidated financial statements and financial statement schedules are the responsibility of the management of North Shore Gas. Our responsibility is to express an opinion on these consolidated financial statements and financial statement schedules based on our audits.
	We conducted our audits in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
	In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of North Shore Gas at September 30, 2003 and 2002, and the results of its operations and its cash flows for each of the three years in the period ended September 30, 2003, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein.
DELOITTE & TOUCHE LLP
Chicago, Illinois
December 10, 2003
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A. General
	Peoples Energy Corporation (the Company or Peoples Energy) is solely a holding company whose income is derived principally from its regulated utility subsidiaries, The Peoples Gas Light and Coke Company (Peoples Gas) and North Shore Gas Company (North Shore Gas). The utilities are primarily engaged in the sale and transportation of natural gas to residential, commercial and industrial customers in Chicago and the northeast section of Illinois. Other businesses of the Company include Power Generation, Midstream Services, Retail Energy Services and Oil and Gas Production.
	The Company makes certain estimates and assumptions in preparing its consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (GAAP). These estimates and assumptions affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses for the periods presented. Actual results may differ from those estimates.
	All subsidiaries are included in the consolidated financial statements. All significant intercompany transactions have been eliminated in consolidation. Investments for which the Company's subsidiaries have at least a 20 percent interest, but less than a majority ownership, and partnerships in which the Company has less than a majority interest are accounted for under the equity method. Certain items previously reported for years prior to fiscal 2003 have been reclassified to conform to the current-year presentation. A significant income statement reclassification resulted in reporting gains on property sales in operating income which in prior years were reported in other income.
	The Company was a 50 percent partner with Enron Midwest in enovate until March 29, 2002, when Enron's interest in the partnership was purchased by the Company. From late March and until its dissolution in September 2002, enovate was reported as a wholly owned subsidiary instead of an investment accounted for under the equity method.
B. Use of Fair Value Measurements
	The Company reports certain contracts and instruments at fair value in accordance with GAAP. Fair value is based on actively quoted market prices, if available. In the absence of actively quoted market prices, the Company seeks indicative price information from external sources, including broker quotes and industry publications. If pricing information from external sources is not available, the Company must estimate prices based on available historical and near-term future price information and certain statistical methods, including regression analysis.
	For options and contracts with option-like characteristics where pricing information is not available from external sources, the Company uses a modified Black-Scholes model and considers time value, the volatility of the underlying commodities and other relevant assumptions when estimating fair value. For contracts with unique characteristics, the Company estimates fair value using a discounted cash flow approach deemed appropriate in the circumstances and applied consistently from period to period. If pricing information is not available from external sources, judgment is required to develop the estimates of fair value. For individual contracts, the use of different assumptions could have a material effect on the contract's estimated fair value.
	The following table summarizes the carrying amounts and fair values of financial instruments included in the Consolidated Balance Sheets of the Company, Peoples Gas and North Shore Gas.
	The estimated fair values are determined based on the long-term debt interest rates that are currently available for issuance of debt with similar terms and remaining maturities. The carrying amount of all other financial instruments approximates fair value.
	Considerable judgment is required to develop the fair value estimates; therefore, the values are not necessarily indicative of the amounts that could be realized in a current market exchange. The fair value estimates are based on information available to management as of September 30, 2003. Management is not aware of any subsequent factors that would affect significantly the estimated fair value amounts.
C. Revenue Recognition
	Gas and electricity sales and transportation revenues are recorded on the accrual basis for all gas and electricity delivered during the month, including an estimate for gas and electricity delivered but unbilled at the end of each month. The amount of accrued unbilled revenue at September 30, 2003 and 2002, for the Company was $40.8 million and $32.1 million, respectively. The amount of accrued unbilled revenue at September 30, 2003 and 2002, for Peoples Gas was $24.5 million and $21.0 million, respectively. The amount of accrued unbilled revenue at September 30, 2003 and 2002, for North Shore Gas was $5.2 million and $3.4 million, respectively. The amount of accrued unbilled revenue at September 30, 2003 and 2002, for Peoples Energy Services was $11.1 million and $7.6 million, respectively.
	In Illinois, delivering, supplying, furnishing or selling gas for use or consumption and not for resale is subject to state and, in some cases, municipal taxes (revenue taxes). The Illinois Public Utility Act provides that the tax may be recovered from utility customers by adding an additional charge to customers' bills. These taxes are due only to the extent they are collected as cash receipts as opposed to amounts billed. As a result, revenue taxes are reported on a gross basis. The billed amounts for the recovery of these taxes are included in revenues and an offsetting expense amount representing the expected cash payment of the taxes is included in taxes, other than income taxes on the income statement. Revenue tax amounts included in revenues are as follows:
D. Weather Insurance
	The Company is partially protected from the impact of unusually mild weather by a five-year weather insurance policy that expires at the end of fiscal 2004. The weather insurance program protects earnings when weather falls below 6,000 HDD per fiscal year or about seven percent warmer than normal with payments limited to a maximum of $12.0 million per year and $36.0 million over the life of the policy. Since the inception of the policy, and through September 30, 2003, the Company has recorded $17.1 million in weather insurance revenue. The Company retains all upside revenue potential when weather is colder than normal. The contract settles annually at the fiscal year-end. The insurance proceeds are reported as revenue and the premium is charged to operating expense based on the guidance of EITF 99-02.
E. Comprehensive Income
	Comprehensive income is the total of net income and all other nonowner changes in equity. Comprehensive income includes net income plus the effect of additional pension liability not yet recognized as net periodic pension cost and the unrealized hedge gain or loss on derivative instruments. The Company has reported AOCI in its Consolidated Statements of Stockholders' Equity.
F. Income Taxes
	The Company follows the asset and liability method of accounting for deferred income taxes. Under this method, deferred income taxes have been recorded using currently enacted tax rates for the differences between the tax basis of assets and liabilities and the basis reported in the financial statements. Due to the effects of regulation on Peoples Gas and North Shore Gas, certain adjustments made to deferred income taxes are, in turn, debited (credited) to regulatory assets (liabilities). (See Note 9C.)
	Income taxes allocated to Peoples Gas and North Shore Gas are included in the consolidated tax return of Peoples Energy. The separate return method has not been used, but the principles of that method are generally followed. Deferred taxes exist at Peoples Gas and North Shore Gas only if the temporary differences that generate those deferred taxes are derived from assets and liabilities of Peoples Gas and North Shore Gas. Additionally, the taxable income of Peoples Gas and North Shore Gas is the basis for recording current income tax expense and cash payments by each company. Finally, tax benefits of loss companies, or tax credits such as Section 29 credits from nonutility subsidiaries of Peoples Energy, are not allocated to Peoples Gas and North Shore Gas.
	There are specific deviations from the separate return method. North Shore Gas could sometimes be an alternate minimum tax (AMT) taxpayer if it were a stand-alone company but only records a deferred tax asset and pays amounts to Peoples Energy if the entire group is an AMT. North Shore Gas uses the federal income tax marginal rate of 35 percent, but on a stand-alone basis, it would use a marginal rate between 34 and 35 percent. Finally, if Peoples Gas or North Shore Gas were to have a capital loss, and another member of the group had capital gains to offset that loss, no deferred tax asset or increase to income tax expense would result.
	Each utility subsidiary within the consolidated group nets its income tax-related regulatory assets and liabilities. At September 30, 2003 and 2002, net regulatory income tax assets for the Company and Peoples Gas amounted to $21.8 million and $18.7 million, respectively, while net regulatory income tax liabilities for the Company and North Shore Gas recorded in other liabilities equaled $1.5 million and $3.4 million, respectively.
	Investment tax credits have been deferred and are being amortized to income over the remaining book lives of related property.
	As a result of qualified production from oil and gas reserves that were acquired in December 1999, the Company recognized $1.1 million, $4.5 million and $4.7 million of Section 29 tax credits in fiscal 2003, 2002 and 2001, respectively. Section 29 tax credits expired on December 31, 2002.
G. Stock Compensation Plans
	SFAS No. 123, "Accounting for Stock-Based Compensation," was amended by SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure, an amendment of FASB Statement No. 123," (SFAS No. 148) to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation. In addition, the disclosure requirements of SFAS No. 148 require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results.
	Had compensation cost for stock options (under both Long-Term Incentive Compensation Plan (LTIC) and Directors Stock and Option Plan (DSOP)) and shares issued under the Employee Stock Purchase Plan (ESPP) been determined consistent with SFAS Nos. 123 as amended, the Company's net income and earnings per share would have been reduced to the following pro forma amounts:
	The fair value of each option grant used to determine pro forma net income is estimated as of the date of grant using a variation of the Black-Scholes option-pricing model with the following weighted average assumptions used for grants in the fiscal years ended September 30, 2003, 2002 and 2001, respectively. The pro forma expense is recognized over the vesting period of the options, the longest of which is 12 months.
H. Property, Plant and Equipment
	Property, plant and equipment is stated at original cost and includes appropriate amounts of capitalized labor costs, payroll taxes, employee benefit costs, administrative costs and an allowance for funds used during construction or capitalized interest as appropriate.
	The Company's utility subsidiaries charge the cost of maintenance and repairs of property and minor renewals and improvements of property to maintenance expense. When depreciable property is retired, its original cost is charged to the accumulated provision for depreciation. The provision for depreciation substantially reflects the systematic amortization of the original cost of depreciable property, net of the accumulated reserve for depreciation, over the estimated composite remaining useful lives on the straight-line method. Additionally, actual dismantling cost, net of salvage, is recorded as depreciation expense in the month incurred.
	Diversified businesses' depreciable property, other than oil and gas producing properties, is amortized over its estimated useful lives. Gains and losses are recognized at the time of asset sale or disposition.
	The consolidated provision for depreciation and amortization for the Company, expressed as an annual percentage of the original cost of depreciable property, was 3.0 percent, 3.1 percent and 3.2 percent for fiscal years 2003, 2002 and 2001, respectively. For Peoples Gas the annual percentage was 3.0 percent, 3.2 percent and
3.3 percent for fiscal years 2003, 2002 and 2001, respectively. For North Shore Gas the annual percentage was 2.3 percent, 2.2 percent and 2.2 percent for fiscal years 2003, 2002 and 2001, respectively.
	In the case of oil and gas producing properties, the Company is amortizing the capitalized costs by utilizing the successful efforts method of accounting on an overall units-of-production method based on total estimated proved oil and gas reserves. The fiscal 2003, 2002 and 2001 average rate of depletion was $1.62, $1.40 and $1.39 per Mcf equivalent unit of production, respectively.
	The Company performs an evaluation for impairment whenever events or changes in circumstances indicate that the carrying amount of long-lived assets or intangible assets with finite lives may not be recoverable. These assets are written down to fair value if the sum of the expected future undiscounted cash flows is less than the carrying amounts.
I. Gas in Storage
	The Company's utility subsidiaries price storage injections at the fiscal-year average of the costs of natural gas supply purchased. Withdrawals from storage for the utilities are priced on the last-in, first-out (LIFO) cost method. The estimated replacement cost of gas in inventory at September 30, 2003 and 2002, exceeded the LIFO cost by approximately $174.8 million and $131.2 million, respectively.
	The estimated replacement cost of gas in inventory for Peoples Gas at September 30, 2003 and 2002 exceeded the LIFO cost by approximately $146.5 million and $109.3 million, respectively. The estimated replacement cost of gas in inventory for North Shore Gas at September 30, 2003 and 2002 exceeded the LIFO cost by approximately $28.3 million and $21.9 million, respectively. Both Peoples Gas' and North Shore Gas' calculation used a year-end Chicago city-gate gas price of $4.89 for fiscal year 2003 and $4.04 for fiscal year 2002.
	The Retail Energy Services and Midstream Services segments account for gas in inventory using the average cost method.
J. Regulated Operations
	Peoples Gas' and North Shore Gas' utility operations are subject to regulation by the Commission. Regulated operations are accounted for in accordance with SFAS No. 71. This standard controls the application of GAAP for companies whose rates are determined by an independent regulator such as the Commission. Under this standard, certain costs or revenues are deferred on the balance sheet until recovered or refunded through rates.
	Below is a summary of regulatory assets and liabilities of Peoples Gas and North Shore Gas that were reflected on the Consolidated Balance Sheets.
	The only regulatory asset that earns a return is the deferred environmental costs associated with former manufactured gas plant operations, which are allowed to be recovered by the utilities from customers on a dollar-for-dollar basis (see Note 1L). This return is based on cash expenditures only. No other regulatory asset earns a return.
K. Recovery of Gas Costs
	Under the tariffs of Peoples Gas and North Shore Gas, all prudently incurred gas costs are recoverable from customers. The difference for any month between costs recoverable through the Gas Charge and the actual amount billed to customers under the Gas Charge is recovered from or refunded to customers through future adjustments to the Gas Charge. Such difference for any month is recorded either as a current asset or as a current liability (with a contra entry to gas costs). Gas costs consist of two types - Commodity and Non-Commodity costs. The two types are tracked independently and may cause both an accounts receivable from and an accounts payable to customers.
	For each utility subsidiary, the Commission conducts annual proceedings regarding the reconciliation of revenues from the Gas Charge and related gas costs. In these proceedings, the accuracy of the reconciliation of revenues and costs is reviewed and the prudence of gas costs recovered through the Gas Charge is examined by interested parties. If the Commission were to find that the reconciliation was inaccurate or any gas costs were imprudently incurred, the Commission would order the utility to refund the affected amount to customers through subsequent Gas Charge filings. The proceedings are typically initiated shortly after the close of the fiscal year and take at least a year to 18 months to complete. Proceedings regarding Peoples Gas and North Shore Gas for the fiscal year 2001 costs are currently pending before the Commission. On August 7, 2003, three intervenors (CUB, the AG and Chicago) filed testimony in Peoples Gas' proceeding and one intervenor (CUB) filed testimony in North Shore Gas' proceeding. Issues raised by the intervenors in the Peoples Gas proceeding related primarily to not having financially hedged gas costs during the winter of 2000-2001 and the use of its Manlove storage field to support transactions with third parties ("hub" transactions). Each of the intervenors requested disallowances, which vary in amount depending upon the issues raised and the assumptions and methodologies used to measure the impact of the issues. In the Peoples Gas proceeding, the AG and CUB have requested disallowances, which range from $8 million to $56 million, covering a variety of alleged issues other than financial hedging. CUB has requested an additional disallowance of $53 million and Chicago has requested a disallowance of $230 million based on the financial hedging issue. In the North Shore Gas proceeding, CUB raised only the hedging issue and recommended a disallowance of $10 million.
	The Staff filed its testimony in these proceedings on August 15, 2003. The Staff requested a disallowance of $31 million in the Peoples Gas proceeding and $1.4 million in the North Shore Gas proceeding covering a variety of alleged issues, none of which related to hedging.
	Peoples Gas and North Shore Gas submitted rebuttal testimony in response to the Staff and the intervenors on November 13, 2003. In that testimony, Peoples Gas stated that it would not oppose two disallowances proposed by the Staff, totaling approximately $5.2 million. One of these proposed disallowances, totaling $4.7 million, results in a change in the treatment for accounting and rate making purposes of gas used to support operational capabilities of Peoples Gas' underground storage. This change has no immediate effect on net income because amounts previously recovered through the Gas Charge will be capitalized as property, plant and equipment and depreciated over the asset's useful life. An offsetting liability for this amount, which is expected to be refunded to customers, will be recorded. Peoples Gas will also record property, plant and equipment and liabilities totaling $5.9 million for similar amounts recovered through the Gas Charge in fiscal 2003 and fiscal 2002. These transactions will be recorded in the first quarter of fiscal 2004. Peoples Gas opposed all other proposed disallowances and North Shore Gas opposed all disallowances in its case. The remaining procedural schedule provides for the Staff and intervenors to file rebuttal testimony, Peoples Gas and North Shore Gas to file surrebuttal testimony and evidentiary hearings to be held. An order from the Commission is not expected before the fourth quarter of fiscal 2004.
	The Company believes that its fiscal 2001 purchasing practices were consistent with the standards applied by the Commission in its past Orders and upheld by the Illinois courts. Although the Company cannot predict the outcome of these proceedings, the Company believes that it conducted business prudently and in the best interest of customers within these established standards.
	Fiscal year 2002 Gas Charge reconciliation cases were initiated on November 7, 2002. Peoples Gas and North Shore Gas each filed direct testimony on August 1, 2003. A status hearing is scheduled for February 10, 2004. Fiscal year 2003 Gas Charge reconciliation cases were initiated on November 12, 2003. Peoples Gas' and North Shore Gas' direct testimony is due on April 1, 2004. A status hearing is scheduled for May 12, 2004.
L. Recovery of Costs of Environmental Activities Relating to Former Manufactured Gas Operations
	For each utility subsidiary, the Commission conducts annual proceedings regarding the reconciliation of revenues from the operation of a rate mechanism approved by the Commission and known as "Rider 11 - Adjustment for Incremental Costs of Environmental Activities" and related environmental costs. In these proceedings, the accuracy of the reconciliation of revenues and costs is reviewed and the prudence of environmental costs recovered through Rider 11 is examined by interested parties. If the Commission were to find that the reconciliation was inaccurate or any environmental costs were imprudently incurred, the Commission would order the utility to refund the affected amount to customers through subsequent Rider 11 filings. The proceedings are typically initiated after the close of the fiscal year and take at least a year to 18 months to complete. Proceedings regarding Peoples Gas and North Shore Gas for the fiscal year 2001 costs are final and the Commission has accepted the fiscal year 2001 costs as reported. Proceedings regarding Peoples Gas and North Shore Gas for the fiscal year 2002 costs are ongoing. The fiscal year 2002 Rider 11 reconciliation case for each utility subsidiary was initiated March 12, 2003. On May 12, 2003, each utility filed its direct testimony and exhibits. The administrative law judge has granted three motions by the Staff to extend the time for it to file its direct testimony, which is now due on January 22, 2004. The utilities' rebuttal testimony is due on February 12, 2004. The evidentiary hearing is scheduled for March 4, 2004. (See Note 5A.)
M. Derivative Instruments and Hedging Activities
	The Company has hedged various anticipated cash flow transactions through December 2006. The majority of these hedges are related to the Company's forecasted sales of oil and gas produced by its Oil and Gas Production subsidiary. During the 12 months ended September 30, 2003, the Company recorded a $25.5 million loss ($16.4 million, net of tax) related to oil and gas hedge activity. The majority of this activity was recorded in AOCI as of September 30, 2003, with the exception of gains and losses attributable to hedges entered into and settled during the 12 months of fiscal 2003, which accounted for $4.4 million. The Company anticipates reclassifying, in the next 12 months as the underlying hedged physical transactions are recorded in earnings, $13.4 million of deferred losses from AOCI into earnings, as calculated using commodity prices at September 30, 2003. As of September 30, 2003, the Company has $34.7 million of derivative liabilities, $8.4 million of derivative assets, and cumulative deferred losses in AOCI of $15.6 million, net of taxes, related to oil and gas cash flow hedges.
	The Company's Midstream Services segment also uses derivative instruments to hedge its storage and transportation assets. As of September 30, 2003, the recorded loss in AOCI related to cash flow hedge activity is $1.5 million, net of taxes. The Company anticipates reclassifying all of this activity into earnings over the next 12 months as the underlying hedged physical transactions are recorded in earnings. As of September 30, 2003, the Company has $0.1 million of derivative liabilities, $2.6 million of derivative assets and cumulative deferred losses in AOCI of $1.5 million, net of taxes, related to the Midstream Services segment's cash flow hedges.
	The Company also records adjustments to AOCI to reflect its share of AOCI amounts recorded by partnerships related to their hedging activity. The Company records an offsetting amount to its investment in the partnership. As of September 30, 2003, the recorded loss in AOCI related to these investments was $3.9 million, net of taxes.
	Peoples Gas and North Shore Gas, as part of the gas price protection program, use derivative transactions to mitigate volatility in their respective Gas Charges. Since these derivative instruments are not designated as hedges and are employed to support gas costs charged to regulated gas customers, the accounting for these derivative instruments is subject to SFAS No. 71. As of September 30, 2003, Peoples Gas and North Shore Gas have net regulatory assets related to these transactions of $10.8 million and $2.9 million, respectively. Any realized gains or losses associated with this activity will be included in gas costs passed through to utility customers.
	The Company periodically utilizes derivative instruments to reduce interest rate risk associated with the issuance of debt. During fiscal 2003, the Company entered into treasury lock agreements totaling $115.0 million that hedged the 10-year treasury component of a portion of the total anticipated fiscal 2003 debt financings. On April 24, 2003, in connection with the issuance of the utility subsidiaries' new debt, the Company unwound all of its treasury lock positions resulting in a $0.7 million loss recorded by Peoples Gas and a $0.4 million loss recorded by North Shore Gas to other comprehensive income. This amount will be amortized over the 10-year term of the debt.
	The Company periodically makes deposits with brokers in order to satisfy margin requirements. As of September 30, 2003 and 2002, the total balance of these deposits was $19.4 million and $28.6 million, respectively.
	The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," amended by SFAS No. 137 and SFAS No. 138 (collectively "SFAS No. 133") on October 1, 2000. As a result of adopting the standard, the Company recorded a "Cumulative Effect of Accounting Change" transitional adjustment. The transitional impact on the financial statements of adopting SFAS No. 133 as of October 1, 2000, was to reduce earnings by $34,000, net of tax; reduce AOCI by $23.6 million, net of tax; record a liability of $40.0 million; record an increase in investment in equity investees of $0.9 million; and record deferred taxes of $15.5 million.
N. Statement of Cash Flows
	For purposes of reporting cash flows, the Company considers all highly liquid financial instruments with an original maturity of three months or less to be cash equivalents.
	Under the Company's cash management practices, checks issued pending clearance that result in overdraft balances for accounting purposes are included in the accounts payable balance and total $5.7 million and $17.1 million as of September 30, 2003 and 2002, respectively.
	The return of capital investments in fiscal 2002 related to advances to the Elwood partnership and project financing. Although most of the returns reported in the Statement of Cash Flows are related to Elwood, some returns of capital relate to the liquidation of a part of the Oil and Gas Production equity investment in EnerVest.
O. Recent Accounting Pronouncements Adopted within the Current Fiscal Year
In May 2003, the FASB issued SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity." It provides guidance on how an entity classifies and measures certain financial instruments with characteristics of both liabilities and equity. This statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise was generally effective for the fourth quarter ended September 30, 2003. The Company was not affected by this standard.
	In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on Derivative Instruments and Hedging Activities." This statement amends and clarifies the accounting and reporting for derivative instruments, including embedded derivatives, and for hedging activities under SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." It amends SFAS No. 133 to reflect the decisions made as part of the Derivatives Implementation Group and in other FASB projects or deliberations. SFAS No. 149 is effective for contracts entered into or modified after June 30, 2003, and for hedging relationships designated after June 30, 2003. As of September 30, 2003, there have been no significant impacts on the Company from adopting SFAS No. 149. However, management expects that more transactions in the Midstream Services segment will be subject to mark-to-market accounting in fiscal 2004.
	In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure." It is an amendment of SFAS No. 123 to provide alternative methods of transition for a voluntary change to the fair value based method of accounting for stock-based employee compensation and Accounting Principles Board (APB) No. 28, Interim Financial Reporting. In addition, this statement allows companies to continue to report using the intrinsic method. It amends the disclosure requirements of SFAS No. 123 for reporting under the intrinsic method to require prominent disclosures in both annual and interim financial statements about the pro forma stock option expense. The Company has continued to report based on the intrinsic method and has more prominently disclosed pro forma stock option expense. (See Note 1G.)
	In November 2002, the FASB issued FIN 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others - an interpretation of SFAS No. 5, 57 and 107 and rescission of FIN 34." FIN 45 elaborates on the disclosures to be made by a guarantor in its interim and annual financial statements about its obligations under certain guarantees and in certain circumstances requires recognition of a liability for the fair value of the obligation undertaken in issuing the guarantee. The Company adopted the disclosure requirements of FIN 45 in the first quarter of fiscal 2003 (see Note 6). The recognition and measurement provisions of FIN 45 were effective for guarantees issued or modified after December 31, 2002, however, there was no impact on the Company.
	On October 25, 2002, the FASB through EITF Issue 02-03, "Issues Involved in Accounting for Contracts under EITF 98-10," rescinded EITF 98-10, "Accounting for Contracts Involved in Energy Trading and Risk Management Activities." The rescission did not have an effect on the Company.
	In July 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 requires an entity to record a liability and corresponding asset representing the present value of legal obligations associated with the retirement of tangible, long-lived assets. SFAS No. 143 is effective for fiscal years beginning after June 2002. The Company, Peoples Gas and North Shore Gas adopted the standard on October 1, 2002 and did not record any significant adjustments.
2: BUSINESS SEGMENTS
	The Company has six business segments: Gas Distribution, Power Generation, Midstream Services, Retail Energy Services, Oil and Gas Production and Other. Operating income also includes the effect of corporate activities and consolidating adjustments.
	The Company has determined its business segments based on regulation and on type of products or services and activity related to those products or services, such as production versus marketing of natural gas. These segments are consistent with how the Company's senior management develops overall strategy for the Company. The financial performance of each segment is evaluated based on its operating income. The accounting policies of the six segments are the same as those described in Note 1A. No single customer represents more than 10 percent of consolidated revenues. All of the segments' reportable revenues are derived from sources within the United States and all segments' reportable long-lived assets are located in the United States.
	The Gas Distribution segment is the Company's core business. Its two regulated utilities purchase, store, distribute, sell and transport natural gas to approximately one million retail customers through a 6,000-mile distribution system serving Chicago and 54 communities in northeastern Illinois. The Company also owns a storage facility in central Illinois and a pipeline system that connects the facility and seven major interstate pipelines to Chicago.
	The Power Generation segment is engaged in the development, construction, operation and ownership of electric generation facilities for sales to electric utilities and marketers. The segment is a 50 percent investor in Elwood and a 27 percent investor in SCEP.
	The Midstream Services segment performs wholesale activities that provide value to utilities, marketers and pipelines. The Company, through Peoples Gas, utilizes its storage and pipeline supply assets as a natural gas hub. It also owns and operates a propane-based peaking plant and is active in other asset-based wholesale activities.
	The Retail Energy Services segment provides gas, electricity and energy management services to industrial, commercial and residential customers regionally within Illinois.
	The Oil and Gas Production segment is active in the acquisition, development and production of oil and gas reserves in selected onshore basins in the United States. The Company also has an equity investment in EnerVest, which develops and manages a portfolio of oil and gas producing properties.
	The Company is involved in other activities such as district heating and cooling. The business development activities do not fall under the above segments and are reported in the Other segment.
	The activities of Peoples Gas and North Shore Gas are mainly within the Gas Distribution segment with only immaterial amounts of activity in other segments. Total segment capital assets include net property, plant and equipment and certain intangible assets classified in other investments.
	Financial data by business segment is summarized below.
	The table below summarizes the Company's net capital investments.
3: EQUITY INVESTMENTS
	The Company has several investments that are accounted for as unconsolidated equity method investments. During the second quarter of fiscal 2002, the Company acquired Enron Midwest's 50 percent interest in enovate, its partnership with Enron. Results from this business were recorded in the Midstream Services segment as a consolidated subsidiary from March 2002 until enovate was liquidated in September 2002. Individually, the Company's equity investments do not meet the requirements for financial disclosure. However, in aggregate these investments were material. The Company records its share of income gains and losses based on financial information it receives from the partnerships. The Company is not a managing partner in any of these investments.
	The following table summarizes the aggregate financial results and financial position of the Company's unconsolidated equity method investments.
	The following table summarizes the Company's equity method investment ownership percentage and related equity investment income (loss).
(1)	The Company's investment interest in SCEP began in the fourth quarter of fiscal 2002. The Company liquidated its investments in enovate and Peoples NGV in the second quarter of fiscal 2002 and the first quarter of fiscal 2003, respectively.
4: CONCENTRATION OF CREDIT RISK
	Peoples Gas provides natural gas service to approximately 825,000 customers within Chicago. North Shore Gas provides natural gas service to about 150,000 customers within approximately 275 square miles in northeastern Illinois. Credit risk for the utility companies is spread over a diversified base of residential, commercial and industrial customers.
	Peoples Gas and North Shore Gas encourage customers to participate in their long-standing budget payment programs, which allow the cost of higher gas consumption levels associated with the heating season to be spread over a 12-month billing cycle. Customers' payment records are continually monitored and credit deposits are required, when appropriate.
	Peoples Energy Resources, the Company's Midstream Services and Power Generation subsidiary, buys and sells natural gas through a variety of counterparties. In addition, the Company has ownership interests in two natural gas fired power plants: Elwood (50 percent) and SCEP (27 percent). Elwood's plant capacity and output has been sold on a long-term basis to three counterparties: Aquila, Engage and Exelon. SCEP's plant capacity and output has been sold on a long-term basis to Exelon.
	Moody's and S&P's Ratings Services rate Aquila's senior unsecured debt as below investment grade. As a result of Aquila's credit ratings, Aquila has provided Elwood with security in the form of letters of credit and a cash escrow equal to one year of capacity payments of approximately $37.3 million. In the event Aquila does not fulfill its payment obligations or terminates its power sales agreements and Elwood cannot make adequate alternate arrangements, Elwood could suffer a revenue shortfall or an increase in its costs that could adversely affect the ability of Elwood to fully perform its obligations under the indenture related to its outstanding bonds. If Elwood is adversely affected by the failure of Aquila to make payments under its power sales agreements, the Company may receive substantially reduced or no investment income from Elwood. At this time, the Company cannot determine whether or to what extent Aquila's failure to pay Elwood would result in a material adverse effect on the Company.
	Peoples Energy Services, the Company's Retail Energy Services subsidiary, sells natural gas and electricity to approximately 18,500 commercial and industrial customers in northern Illinois.
	As of September 30, 2003, Peoples Energy Production, the Company's Oil and Gas Production subsidiary, operated 126 wells with approximately 90 percent of the production from these wells being sold to a single marketer, Cima Energy LLC. In addition, the Company owns nonoperated interests in 332 wells, which are managed by 53 operators.
5: ENVIRONMENTAL MATTERS
A. Former Manufactured Gas Plant Operations
	The Company's utility subsidiaries, their predecessors and certain former affiliates operated facilities in the past at multiple sites for the purpose of manufacturing gas and storing manufactured gas. In connection with manufacturing and storing gas, various by-products and waste materials were produced, some of which might have been disposed of rather than sold. Under certain laws and regulations relating to the protection of the environment, the subsidiaries might be required to undertake remedial action with respect to some of these materials. Two of the manufactured gas sites are discussed in more detail below. The subsidiaries are addressing an additional 32 manufactured gas sites under a program supervised by the IEPA. Investigations have been completed at all or portions of 27 sites. Remediations have been completed at all or portions of four sites.
	The EPA has identified North Shore Gas as a PRP under CERCLA at the Waukegan Coke Plant Site located in Waukegan, Illinois (Waukegan Site). The Waukegan Site is part of the Outboard Marine Corporation (OMC) Superfund Site. The EPA also has identified General Motors Corporation, OMC, Elgin Joliet and Eastern Railway Company, Larsen Marine Service and the City of Waukegan as PRPs at the Waukegan Site. OMC has filed for bankruptcy.
	In September 1999, the EPA issued the Record of Decision (ROD) selecting the remedial action for the Waukegan Site. The selected remedy is based upon commercial/industrial land use and consists of on-site treatment of groundwater and off-site disposal of soil containing polynuclear aromatic hydrocarbons and arsenic. The EPA has estimated the present worth of the remedy to be $26.5 million (representing the present worth of estimated capital costs and of estimated operation and maintenance costs). North Shore Gas and the other PRPs (except for the City of Waukegan) are conducting the remedial design for the Waukegan Site pursuant to an administrative order on consent.
	North Shore Gas and the other parties notified by the EPA have been discussing implementation of the remedy and the allocation of costs associated with the investigation and remediation of the Waukegan Site. North Shore Gas has entered into a settlement with one of the PRPs and is continuing discussions with the remaining parties.
	In June 2002, the City of Waukegan purchased the Waukegan Site from the OMC bankruptcy trustee. In October 2002, the City of Waukegan rezoned the property from industrial to residential. The City of Waukegan also enacted an ordinance that purports to require the remediation of soil, at sites within a defined geographic area that includes the Waukegan Site, to levels more stringent than those set forth in the ROD.
	In May 2003, the EPA began negotiations with North Shore Gas and the other PRPs regarding a consent decree for the performance of the remedial action selected in the ROD. In August 2003, the City of Waukegan petitioned the EPA to amend the ROD so as to make the remedy and clean up standard consistent with various proposed future uses of the Waukegan Site, including urban residential development. The EPA has extended the moratorium on enforcement action in order to give the City of Waukegan and the other parties the opportunity to reach agreement on future land use issues. The EPA has informed the parties that it will conclude negotiations for a consent decree, make a determination on the City of Waukegan's application to amend the ROD, and use its statutory authority to pursue cleanup if the PRPs do not reach an agreement. The parties are continuing discussions among themselves and with the EPA regarding these matters.
	At this time, management is unable to determine whether, or to what extent, the change in ownership, change in zoning, enactment of the ordinance or request to amend the ROD will affect remedial costs at the Waukegan Site.
	The current owner of a site in Chicago, formerly called Pitney Court Station, filed suit against Peoples Gas in federal district court under CERCLA. The suit seeks recovery of the past and future costs of investigating and remediating the site. Peoples Gas is contesting this suit. The current owner of a portion of another site in Chicago, formerly called the 22nd Street Station, has notified Peoples Gas that it intends to file suit under the Resource Conservation and Recovery Act seeking an order directing Peoples Gas to remediate the site.
	The utility subsidiaries are accruing and deferring liabilities incurred in connection with all of the manufactured gas sites, including related legal expenses, pending recovery through rates or from other entities. At September 30, 2003, the total of the costs deferred (stated in current year dollars) for Peoples Gas was $125.5 million; for North Shore Gas the total was $38.0 million; and for the Company on a consolidated basis the total deferred was $163.5 million. Each of these amounts includes management's best estimates of the costs the utilities will spend in investigating and remediating the manufactured gas sites. Management estimates that additional costs in the following amounts are reasonably possible: for Peoples Gas, $64.6 million; for North Shore Gas, $26.8 million; and for the Company on a consolidated basis, $91.4 million. Management's estimates are based upon an ongoing review by management and its outside consultants of potential costs associated with conducting investigative and remedial actions at the manufactured gas sites, including updated estimates based
on completed investigations or specific remedial plans. While each subsidiary intends to seek contribution from other entities for the costs incurred at the sites, the full extent of such contributions cannot be determined at this time.
	Peoples Gas and North Shore Gas filed suit against a number of insurance carriers for the recovery of environmental costs relating to the utilities' former manufactured gas operations. The suit asked the court to declare, among other things, that the insurers are liable under policies in effect between 1937 and 1986 for costs incurred or to be incurred by the utilities in connection with five of their manufactured gas sites in Chicago and Waukegan. The utilities also asked the court to award damages stemming from the insurers' breach of their contractual obligation to defend and indemnify the utilities against these costs. As of September 30, 2003, the utilities have reached settlement agreements with all of the insurance carriers, except for one that is in liquidation. On October 29, 2003, pursuant to the agreement of the parties, the court dismissed the suit against the remaining defendant insurers without prejudice to the utilities' right to pursue claims at a later point in time against the non-settling insurer. The court's order terminates the litigation. The utilities are applying portions of the proceeds from these settlements to pay costs otherwise recoverable through rates. The costs deferred at September 30, 2003 have been reduced by the portions of the settlement proceeds that have been received prior to September 30, 2003, and that have yet to be applied to pay such costs.
	Management believes that the liabilities incurred by Peoples Gas and by North Shore Gas for environmental activities relating to former manufactured gas operations are recoverable from insurance carriers, other entities or through rates for utility service. Accordingly, management believes that the costs incurred by the subsidiaries in connection with former manufactured gas operations will not have a material adverse effect on the financial position or results of operations of the utilities. Peoples Gas and North Shore Gas are recovering the costs of environmental activities relating to the utilities' former manufactured gas operations, including carrying charges on the unrecovered balances, under rate mechanisms approved by the Commission.
B. Former Mineral Processing Site in Denver, Colorado
	In 1994, North Shore Gas received a demand from the S.W. Shattuck Chemical Company, Inc. (Shattuck), a responsible party under CERCLA, for reimbursement, indemnification and contribution for response costs incurred at a former mineral processing site in Denver, Colorado (Denver site). Shattuck is a wholly owned subsidiary of Salomon, Inc. (Salomon). The demand alleges that North Shore Gas is a successor to the liability of a former entity that was allegedly responsible during the period 1934-1941 for the disposal of mineral processing wastes containing radium and other hazardous substances at the site. In 1992, the EPA issued the ROD for the Denver site. The remedy selected in the ROD consisted of the on-site stabilization, solidification and capping of soils containing radioactive wastes. In 1997, the remedial action was completed. The cost of the remedy at the site has been estimated by Shattuck to be approximately $31 million. Salomon has provided financial assurance for the performance of the remediation of the site.
	North Shore Gas filed a declaratory judgment action against Salomon in the District Court for the Northern District of Illinois. The suit asked the court to declare that North Shore Gas is not liable for response costs at the Denver site. Salomon filed a counterclaim for costs incurred by Salomon and Shattuck with respect to the site. In 1997, the District Court granted North Shore Gas' motion for summary judgment, declaring that North Shore Gas is not liable for any response costs in connection with the Denver site.
	In 1998, the United States Court of Appeals, Seventh Circuit, reversed the District Court's decision and remanded the case for determination of what liability, if any, the former entity has, and therefore North Shore Gas has, for activities at the site.
	In 1999, the EPA announced that it was reopening the ROD for the Denver site. The EPA's announcement followed a six-month scientific/technical review by the agency of the remedy's effectiveness. In 2000, the EPA amended the ROD to require removal of the radioactive wastes from the site to a licensed off-site disposal facility. The EPA estimates that this action will cost an additional $21.5 million (representing the present worth of estimated capital costs and estimated operation and maintenance costs).
	In December 2001, Shattuck entered into a proposed settlement agreement with the United States and the State of Colorado regarding past and future response costs at the site. In August 2002, the agreement was approved by the District Court for the District of Colorado. Under the terms of the agreement, Shattuck will pay, in addition to amounts already paid for response costs at the site, approximately $7.2 million in exchange for a release from further obligations at the site. The release will not apply in the event that new information shows that the remedy selected in the amended ROD is not protective of human health or the environment or if it becomes necessary to remediate contaminated groundwater beneath or emanating from the site.
	North Shore Gas does not believe that it has liability for the response costs, but cannot determine the matter with certainty. At this time, North Shore Gas cannot reasonably estimate what range of loss, if any, may occur. In the event that North Shore Gas incurred liability, it would pursue reimbursement from insurance carriers, other responsible parties, if any, and through its rates for utility service.
6: COMMITMENTS AND CONTINGENCIES
A. Contractual Cash Obligations
	Total commitments at September 30, 2003 were $1,163.9 million. Other long-term obligations include gas purchases, storage, transportation, computer related and miscellaneous long-term commitments and short-term capital purchase commitments. The following table summarizes the Company's long-term minimum contractual obligations.
(1)	Includes $152.0 million of adjustable rate bonds classified as short-term debt due to bondholder tender rights. (See Note 11.)
(2) 	Includes gas purchases, storage, transportation, computer related and miscellaneous long-term and short-term capital purchase commitments.
	The following table summarizes Peoples Gas' long-term minimum contractual obligations.
(1)	Includes $152.0 million of adjustable rate bonds classified as short-term debt due to bondholder tender rights. (See Note 11.)
(2)	Includes gas purchases, storage, transportation, computer related and miscellaneous long-term and short-term capital purchase commitments.
	The following table summarizes North Shore Gas' long-term minimum contractual obligations.
(1)	Includes gas purchases, storage, transportation, computer related and miscellaneous long-term and short-term capital purchase commitments.
B. Other Commercial Commitments
	As of September 30, 2003, there were $55.3 million of guarantees for debt service and operational guarantees of the Company's unconsolidated equity investments compared to $55.4 million at September 30, 2002. Standby letters of credit were $6.5 million compared to $4.7 million at September 30, 2002. The following table summarizes other commercial commitments.
	The following table summarizes guarantees of unconsolidated equity investees.
	The Company and Dominion have each guaranteed 50 percent of the amount required to be maintained by Elwood in a debt service reserve account related to the facility's financing. The amount of the Company's guarantee varies over the life of the loan but will not exceed $16.5 million. The Company has the right to terminate the guarantee upon Elwood's depositing sufficient cash in the debt service reserve account. Until such time, the guarantee continues until bonds are redeemed in full, which is expected to occur July 5, 2026.
	The Company has guaranteed 50 percent of Elwood's operational obligations to Aquila in connection with the Aquila power sales agreements. The Company's aggregate liability under the guarantees is limited to $10.0 million. The guarantees terminate August 31, 2016 and August 31, 2017. The Company has also guaranteed 50 percent of Elwood's operational obligations to Engage in connection with the Engage power sales agreement. The Company's aggregate liability under this guarantee is limited to $12.5 million. The guarantee terminates December 31, 2004.
	The Company and Trigen Energy Corporation (Trigen) are equal partners in Trigen-Peoples, which provides heating and cooling services to the Metropolitan Pier and Exposition Authority (MPEA) at the McCormick Place Exposition Center in Chicago pursuant to a Development and Energy Services Agreement (MPEA Agreement). Under the MPEA Agreement, Trigen-Peoples must deliver to MPEA and maintain a standby letter of credit to secure Trigen-Peoples' obligations. In addition, the Company and Trigen have provided MPEA with a joint and several guarantee of Trigen-Peoples' obligations under the MPEA Agreement. The guarantee is limited to $11.0 million, plus providing from $4.0 million to $8.0 million in replacement letters of credit, of which the Company would be entitled to collect half of such amounts from Trigen. The guarantee continues for the term of the MPEA Agreement, which ends January 1, 2022.
	The Company and Trigen are also party to a Sponsor Support and Equity Contribution Agreement (Sponsor Agreement) with Trigen-Peoples' lender, Prudential. Under the Sponsor Agreement, the Company and Trigen each agree to pay Prudential 50 percent of Trigen-Peoples' outstanding loan obligations only upon the occurrence of certain events relating to material destruction of the plant, taking of the plant by eminent domain, purchase of the plant by MPEA or default by Trigen-Peoples, the Company or Trigen of certain obligations under the MPEA Agreement and only to the extent that proceeds received by Trigen-Peoples as a result of any such events, plus other cash of Trigen-Peoples, are not sufficient to pay the Prudential loan obligations. None of such events is currently expected to occur. Trigen-Peoples' outstanding loan from Prudential was $30.1 million at September 30, 2003. The guarantee continues until payment of the Prudential loan in full, expected to occur December 31, 2017. The Company is not able to estimate the maximum potential amount of future payments under the Sponsor Agreement, if any, because it cannot ascertain the amount of eminent domain proceeds that would be available to the partnership in the unlikely event of a government taking of the plant, nor can it estimate the amount of yield maintenance premium payable with respect to the partnership's loan obligations as such amount is a function of the outstanding loan balance and interest rates at the time the event occurs.
	Peoples Gas has five standby letters of credit totaling $4.4 million as of September 30, 2003. North Shore Gas has none. Neither Peoples Gas nor North Shore Gas had any guarantees of unconsolidated equity investments.
C. Operating Leases
	The Company and subsidiaries lease office space under agreements that expire in various years through 2014. During fiscal 2003, the Company extended the lease for its headquarters for an additional five years to August 31, 2014. The rental obligations consist of a base rent plus operating expenses and taxes. Rental expenses for the Company under operating leases were $9.7 million, $9.2 million and $8.7 million for September 30, 2003, 2002 and 2001, respectively. Rental expenses for Peoples Gas under operating leases were $5.2 million, $7.9 million and $7.4 million for September 30, 2003, 2002 and 2001, respectively. Rental expenses for North Shore Gas under operating leases were insignificant. The minimum rental commitments payable in future years under all noncancelable leases for the Company and Peoples Gas are summarized on the table in section A of this note.
7: RESERVE FOR UNCOLLECTIBLE ACCOUNTS
	The Company's subsidiaries accrue for estimated uncollectible accounts as revenues are recorded. The accrual rates are established based upon historical experience and projections of future charge-offs resulting from various factors, including the impacts of natural gas prices and weather. Each quarter, the Company's subsidiaries update the projection of future charge-offs based upon the most current information available, and adjust the reserve for uncollectible accounts, if necessary.
	The following table summarizes accounts receivable and reserve for uncollectible accounts balances of the Company's utility subsidiaries.
	The utilities have implemented more aggressive policies in an attempt to improve the collection of accounts receivable, such as: requiring deposits from customers identified as high risk for payment problems; prioritizing and expediting disconnection of service to delinquent accounts; utilizing letter writing campaigns and outbound calling to medium- and low-risk customers with delinquent accounts; faster reporting of delinquent accounts to credit reporting agencies and using secondary collection agents when primary collection agents are not successful. Peoples Gas and North Shore Gas believe that their reserves are adequate given what is known at this time. However, the reserve for uncollectible accounts remains an estimate and could require further adjustments if circumstances change.
	The following table summarizes Peoples Gas' aging of accounts receivable balances.
8: RETIREMENT AND POSTRETIREMENT BENEFITS
	The Company and its subsidiaries participate in two defined benefit pension plans, the Retirement Plan and the Service Annuity System, covering substantially all employees. These plans provide pension benefits that generally are based on an employee's length of service, compensation during the five years preceding retirement and social security benefits. Employees who began participation in the nonunion pension plan July 1, 2001, and thereafter will have their benefits determined based on their compensation during the five years preceding termination of employment and an age-based percentage credited to them for each year of their participation. The Company and its subsidiaries make contributions to the plans based upon actuarial determinations and in consideration of tax regulations and funding requirements under federal law. The Company also has a nonqualified pension plan that provides certain employees with pension benefits in excess of qualified plan limits imposed by federal tax law. Retiring employees have the option of receiving retirement benefits in the form of annuities or a lump sum payment.
	In addition, the Company and its subsidiaries currently provide certain health care and life insurance benefits for retired employees. Substantially all employees may become eligible for such benefit coverage if they reach retirement age while working for the Company. The plans are funded based upon actuarial determinations and in consideration of tax regulations as well as the Company's funding policy. The Company accrues the expected costs of such benefits over the average remaining service lives of all employees.
	Reconciliations of the beginning and ending balances of the projected pension benefit obligation and the accumulated postretirement benefit obligation, reconciliations of the beginning and ending balances of the plan assets, and the funded status of these plans, based on a July 1 to June 30 measurement year, are as follows:
	The market-related value of assets was set equal to the fair value of assets on October 1, 1994. In each subsequent year, the market-related value of assets is calculated based on five-year smoothing of asset gains and losses. Gains and losses relative to the expected fair value of assets (based on the expected return on assets assumption) are recognized cumulatively in the following manner: 20 percent in the first year, 40 percent in the second year, 60 percent in the third year, 80 percent in the fourth year, and completely recognized in the fifth year.
	SFAS No. 87 "Employers' Accounting for Pensions" requires recognition of an additional liability when accrued pension cost on the balance sheet as of the measurement date is less than the plan's unfunded accumulated benefit obligation. As of June 30, 2003, the Retirement Plan had an unfunded accumulated benefit obligation of $27.2 million (accumulated benefit obligation of $221.2 million compared to plan assets of $194.0 million). The Company has a prepaid pension cost on the balance sheet of $43.0 million for the Retirement Plan. Accordingly, the Company recognized an additional minimum liability related to the Retirement Plan of
$70.2 million which was offset by an intangible asset of $30.5 million and a charge to accumulated other comprehensive income of $39.7 million ($23.9 million, after tax). The Company's nonqualified pension plan also has an accumulated benefit obligation in excess of plan assets. The accumulated benefit obligation for the nonqualified plan was $4.9 million at June 30, 2003, and $7.4 million at June 30, 2002. There are no plan assets in the nonqualified plan due to the nature of the plan.
	Net pension benefit cost and net postretirement benefit cost for all plans for the Company included the following components:
	The Company follows the procedures specified in SFAS No. 88 to account for unrecognized gains and losses related to the settlement of its pension plans' Projected Benefit Obligations (PBO). During fiscal 2003, as in past fiscal years, a portion of each plan's PBO was settled by the payment of lump sum benefits, resulting in a settlement cost (credit) under SFAS No. 88 for the Service Annuity System, Retirement Plan and Supplemental Plan.
	In fiscal 2003, the Company recognized costs of $6.5 million from the settlement of portions of projected pension benefit obligations. The fiscal 2003 settlement cost includes a charge of $4.7 million related to benefits paid out under the Supplemental Plan caused by the retirement of an executive officer of the Company. In fiscal 2002 and 2001, the Company recognized credits of $13.2 million and $23.2 million, respectively, from the settlement of portions of projected pension benefit obligations.
	In fiscal 2001, the Company offered a voluntary retirement program. As a result of this program, a special benefit cost of $26.2 million ($24.9 million for pension benefit cost and $1.3 million for postretirement benefit cost) was recognized in fiscal 2001.
	In the calculation of the pension benefit cost and the other postretirement benefit cost under the plans, the following actuarial assumptions were used for measurements as of June 30 and benefit costs (credits) for fiscal years beginning October 1:
Pension benefits
Discount rate
6.00%
7.50%
8.00%
Long-term rate of return on assets
8.75%
9.00%
9.00%
Assumed future compensation increases
3.75%
4.00%
4.50%
Other postretirement benefits
Discount rate
6.00%
7.50%
8.00%
Long-term rate of return on assets
8.75%
9.00%
9.00%
Health care cost trend rate
8.00%
5.50%
5.25%
	Fiscal 2003 health care cost trend rate reflects the first year of a routine four year rate phase-in process used to project health care costs based on the external trends and the Company's experience. The health care trend rate of 8.00 percent was assumed for fiscal 2004, and will decline gradually to 5.00 percent by fiscal 2007.
	The Company bases its discount rate assumption on yields of high quality long-term, fixed-income bonds. The average yield on the Moody's Aa-Rated Long-Term Corporate Bond Index (Index) on or around the measurement date of June 30 is used for guidance. This Index is comprised of bonds issued from both industrial and utility sectors and is the arithmetic average of the average yield for both sectors. The Company considers the dispersion of yields around the Index along with the durations of the Index and pension liability in establishing its discount rate assumption.
	A decrease in the assumed discount rate of 25 basis points would have increased 2003 pension expense by $1.6 million and increased 2003 postretirement benefit expense by $0.2 million.
	The health care cost trend rate assumption has a significant effect on the amounts reported. Increasing the assumed health care cost trend rate by one percentage point for each future year would have increased the accumulated postretirement benefit obligation at September 30, 2003, by $9.2 million and the aggregate of service and interest cost components of the net periodic postretirement benefit cost by $1.4 million annually. Decreasing the assumed health care cost trend rate by one percentage point for each future year would have decreased the accumulated postretirement benefit obligation at September 30, 2003, by $7.9 million and the aggregate of service and interest cost components of the net periodic postretirement benefit cost by $1.2 million annually.
	In addition to the defined benefit pension plans, the Company sponsors 401(k) savings plans for the majority of its employees. The plans allow employees to contribute a portion of their income in accordance with specified guidelines. The Company matches a percentage of the employee contribution up to certain limits. The cost of the Company's matching contribution to the savings plans totaled $3.9 million, $3.7 million and $3.6 million in fiscal 2003, 2002 and 2001, respectively.
9: TAX MATTERS
A. Income Tax Expense
	Total income tax expense as shown for the Company on the Consolidated Statements of Income is composed of the following:
	Total income tax expense as shown for Peoples Gas on the Consolidated Statements of Income is composed of the following:
	Total income tax expense as shown for North Shore Gas on the Consolidated Statements of Income is composed of the following:
B. Tax Rate Reconciliation
	The following is a reconciliation for the Company between the computed income tax expense (tax rate of 35 percent times book income before income tax) and the total provision for income tax expense.
	The following is a reconciliation for Peoples Gas between the computed income tax expense (tax rate of 35 percent times book income before income tax) and the total provision for income tax expense.
	The following is a reconciliation for North Shore Gas between the computed income tax expense (tax rate of 35 percent times book income before income tax) and the total provision for income tax expense.
C. Deferred Income Taxes
	Summarized in the table below for the Company are the temporary differences which gave rise to the net deferred income tax liabilities (see Note 1F).
(1)	Major items included in Other are regulatory assets, hedging activity, group insurance and provision for uncollectible accounts.
(2)	Includes $4.5 million of net current deferred taxes that is classified in other current assets and accounts payable on the balance sheet.
(3)	Includes $2.1 million of net current deferred taxes that is classified in other current assets and accounts payable on the balance sheet.
	Summarized in the table below for Peoples Gas are the temporary differences which gave rise to the net deferred income tax liabilities (see Note 1F).
	Summarized in the table below for North Shore Gas are the temporary differences which gave rise to the net deferred income tax liabilities (see Note 1F).
10: DEBT COVENANTS
	North Shore Gas' indenture relating to its first mortgage bonds contains provisions and covenants restricting the payment of cash dividends and the purchase or redemption of capital stock. At September 30, 2003, such restrictions amounted to $6.9 million out of North Shore Gas' total retained earnings of $80.9 million.
	The Company has revolving credit facilities, which primarily support its commercial paper borrowing. The Peoples Energy credit facilities, and most of the Peoples Gas and North Shore Gas credit facilities, provide that the lenders under such facilities may terminate the credit commitments to the borrowing company and declare any outstanding amounts due and payable if the borrowing company's debt-to-total capital ratio exceeds 65 percent. At September 30, 2003, this ratio, as defined in the credit facilities, was 53 percent for Peoples Energy, 48 percent for Peoples Gas and 40 percent for North Shore Gas.
	The Company's indenture relating to its $325.0 million notes due January 15, 2011 has a cross-default provision relating to any other indebtedness greater than $15.0 million. The Company's one- and three-year revolving credit facilities have a cross-default provision relating to any other indebtedness greater than $15.0 million. Peoples Gas' and North Shore Gas' one-year revolving credit facilities have a cross-default provision relating to any other indebtedness greater than $15.0 million for Peoples Gas and $5.0 million for North Shore Gas.
	The Indenture of Mortgage, dated January 2, 1926, as supplemented, securing the First and Refunding Mortgage Bonds issued by Peoples Gas, constitutes a direct, first-mortgage lien on substantially all property owned by Peoples Gas. The Indenture, dated April 1, 1955, as supplemented, securing the first mortgage bonds issued by North Shore Gas, constitutes a direct, first-mortgage lien on substantially all property owned by North Shore Gas.
11: LONG-TERM DEBT AND SHORT-TERM DEBT
A. Changes in Debt Securities
	During fiscal year 2003, the Company took advantage of the low interest rate environment to refinance existing debt with lower interest rate debt and to term-up commercial paper and adjustable rate debt. The following table summarizes the changes that have occurred in the composition of the Company's debt. In general, debt classified as short-term due to the technical tender provisions was replaced by long-term debt.
	Peoples Gas and North Shore Gas utilize mortgage bonds to secure tax exempt interest rates. The Illinois Development Finance Authority has issued tax exempt bonds for the benefit of Peoples Gas and North Shore Gas and Chicago has issued tax exempt bonds for the benefit of Peoples Gas. Each issuance is secured by an equal principal amount of Peoples Gas' or North Shore Gas' first mortgage bonds.
	In March 2003, Peoples Gas issued $50.0 million of 4.00% Series MM-1 bonds, due March 1, 2010 in a private placement with registration rights. On October 15, 2003, Peoples Gas completed a registered exchange offer of $50.0 million principal amount of 4.00% Series MM-2 bonds due March 1, 2010 for all of the outstanding Series MM-1 bonds.
	In May 2003, Peoples Gas issued $75.0 million of 4.625% Series NN-1 bonds, due May 1, 2013 in a private placement with registration rights. On October 15, 2003, Peoples Gas completed a registered exchange offer of $75.0 million principal amount of 4.625% Series NN-2 bonds due May 1, 2013 for all of the outstanding Series NN-1 bonds.
	In May 2003, North Shore Gas issued $40.0 million of 4.625% Series N-1 bonds, due May 1, 2013 in a private placement with registration rights. On October 15, 2003, North Shore Gas completed a registered exchange offer of $40.0 million principal amount of 4.625% Series N-2 bonds due May 1, 2013 for all of the outstanding Series N-1 bonds.
B. Short-Term Debt
The following table presents a detail of short-term debt by type.
	Short-term cash needs of Peoples Energy are met through bank loans or the issuance of short-term debt. The outstanding total amount of commercial paper and bank loans under the revolving credit facilities cannot at any time exceed total bank lines of credit then in effect. At September 30, 2003 and 2002, Peoples Energy had lines of credit totaling $150.0 million and $257.7 million, respectively, of which available credit was $150.0 million and $254.5 million, respectively. Agreements covering $75.0 million of these lines will expire in March 2004 and $75.0 million of these lines will expire in March 2006. Such lines of credit cover the projected short-term credit needs of the Company. Payment for the lines of credit is by fee. In addition, at September 30, 2003 and 2002, the Company had approximately $6.5 million and $4.7 million, respectively, of letters of credit outstanding for financial and performance guarantees.
	Short-term cash needs of Peoples Gas and North Shore Gas are met through intercompany loans from the Company, bank loans or the issuance of short-term debt. The outstanding total amount of commercial paper and bank loans under the revolving credit facilities cannot at any time exceed total bank lines of credit then in effect. At September 30, 2003 and 2002, Peoples Gas and North Shore Gas had aggregate available lines of credit totaling $167.5 million and $117.3 million, respectively, of which available credit was $111.6 million and $34.6 million. Agreements covering these lines expire in July and August 2004. In addition, Peoples Gas has arranged for an additional seasonal credit facility of $40.0 million for the period of December 15, 2003 to April 15, 2004. Such lines of credit are believed to be adequate to support projected short-term credit needs of the utility subsidiaries. The credit facilities of the Company and its two utilities are expected to be renewed when they expire, although the exact amount of the renewals will be evaluated at that time and may change from the current levels.
12: EARNINGS PER SHARE
	The following table summarizes average and diluted shares for computing the Company's per-share amounts. The dilution is attributable to stock options outstanding under the Company's LTIC and DSOP. The diluted shares for the Company are as follows:
	For the fiscal years ended September 30, 2003, 2002 and 2001, options to purchase 526,600, 609,400 and 21,000 shares of common stock, respectively, were excluded from the computation of diluted earnings per share because the option exercise prices were greater than the average market price of the common shares, and therefore were antidilutive.
13: PREFERRED STOCK
	The Company has five million shares of Preferred Stock, no par value, authorized for issuance, of which none were issued and outstanding at September 30, 2003.
	Peoples Gas has 430,000 shares of Preferred Stock, $100 par value, authorized for issuance, of which none were issued and outstanding at September 30, 2003. North Shore Gas has 160,000 shares of Preferred Stock, $100 par value, authorized for issuance, of which none were issued and outstanding at September 30, 2003.
14: COMMON STOCK
	The Company has filed a universal shelf registration statement on Form S-3 for the issuance from time to time of up to 1.5 million shares of common stock pursuant to a continuous equity offering in one or more negotiated transactions or "at-the-market" offerings. Through September 30, 2003, 858,300 shares of common stock have been issued through the continuous equity offering. Proceeds, net of issuance costs, totaled $32.4 million. Subsequent to September 30, 2003, and through December 11, 2003, the Company has not issued any additional shares through the program.
	In addition, the Company issues common stock through other plans such as Direct Purchase and Investment plan and ESPP. In early fiscal 2003, the Company began issuing new shares from open market transactions to satisfy the requirements of these plans. Stock activity is summarized below.
	The grant of a restricted stock award (RSA) entitles the recipient to vote the shares of Company common stock covered by such award and to receive dividends thereon. The recipient may not transfer or otherwise dispose of such shares until the restrictions thereon lapse. RSAs granted to date vest in equal annual increments over a five-year period from the date of grant. The Compensation Committee of the Company's Board of Directors (or with respect to the Chief Executive Officer, subject to the approval of the nonemployee directors) may, in its sole discretion, accelerate the vesting of any RSAs granted under the LTIC. If a recipient's employment with the Company terminates, other than by reason of death, disability, or retirement after attaining age 65, the recipient forfeits all rights to the unvested portion of the RSA, unless the Compensation Committee (with respect to the Chief Executive Officer, subject to the approval of the nonemployee directors) determines otherwise.
	The grant of an option enables the recipient to purchase Company common stock at a purchase price equal to the fair market value of the shares on the date the option was granted. The grant of an SAR enables the recipient to receive, for each SAR granted, cash in an amount equal to the excess of the fair market value of one share of Company common stock on the date the SAR is exercised over the fair market value of one share on the date the SAR was granted. Before an option or SAR may be exercised, the recipient must generally complete 12 months of continuous employment subsequent to the grant of the option or SAR. Options and SARs may be exercised within 10 years from the date of grant, subject to earlier termination in case of death, retirement or termination of employment for other reasons.
	In December 2002, the Board of Directors, upon the recommendation of the Compensation Committee, amended the DSOP. Under the DSOP, each nonemployee director of the Company will receive, as part of his or her annual retainer beginning in May 2003, an annual award of 1,000 deferred shares of common stock of the Company, which will replace the annual grant of 300 shares and 3,000 options previously provided for by the plan. Deferred shares are automatically deferred until the earliest of (i) the director's retirement from the Company's Board of Directors following attaining the age of 70, (ii) one year after the director ceases to be a director of the Company for any other reason, and (iii) a change of control of the Company and are not delivered by the Company until such date. Directors may elect to defer receipt of common stock in whole, or in part, for a period of time after the date on which distribution would otherwise occur by making an election to receive shares of common stock in installments no later than the calendar year prior to the year in which the distribution would otherwise occur. The director is entitled to receive amounts representing dividends from such deferred shares equal to dividends paid with respect to a like number of shares of common stock of the Company. Each
director can make an election from time to time as to whether to receive dividends in the form of cash payments or in the form of additional deferred shares. A bookkeeping account is maintained for each nonemployee director. Each grant of deferred shares is automatically deferred and credited to the account of the director. The account of a director who elects to receive dividends in the form of additional deferred shares is credited with a number of deferred shares determined by dividing the amount of the dividend by the mean price of a share of Company common stock on the New York Stock Exchange on the dividend payment date. Deferred shares do not entitle a director to vote on any matter to be considered by the Company's shareholders prior to the date of distribution of common stock and are generally not transferable other than upon a director's death.
	The Company also offers employees periodic opportunities to purchase shares of its common stock at a discount from the then current market price under its ESPP. As of September 30, 2003, the Company may sell up to 899,401 shares of common stock to its employees under the ESPP. Under the terms of this plan, all employees are eligible to purchase shares at 90 percent of the stock's market price at the date of purchase. The Company sold 12,926 shares, 12,921 shares and 10,373 shares to employees in fiscal 2003, 2002 and 2001, respectively.
	The following table summarizes the stock-based employee compensation cost included in reported net income.
	The following table presents the weighted average option and SARs price and the nonqualified stock options, SARs and RSA activity related to the Company's LTIC and DSOP plans. The options and SARs had a weighted average remaining life of eight years and six years, respectively. For options outstanding, prices ranged from $31.34 to $41.16. At September 30, 2003, there were 2,406,175 SARs available for future grants. Under options and RSA programs, a total of 1,218,580 shares were available for future grants.
Weighted
Weighted
Average
Non-Qualified
Average
Option Price
Stock Options
SAR Price
SARs
RSA
Outstanding at September 30, 2000
$ 35.38
486,625
$ 35.64
458,425
62,560
Granted
33.16
285,900
32.62
264,900
50,900
Exercised
35.19
(312,475)
35.24
(312,275)
(20,955)
Forfeited
34.54
(1,500)
34.54
(1,500)
-
Outstanding at September 30, 2001
34.13
458,550
33.99
409,550
92,505
Granted
40.90
550,500
41.16
27,900
50,300
Exercised
33.47
(42,900)
33.15
(52,200)
(63,595)
Forfeited
41.16
(7,600)
-
-
-
Outstanding at September 30, 2002
37.99
958,550
34.63
385,250
79,210
Granted
34.06
426,900
34.03
25,000
46,800
Exercised
33.67
(238,950)
33.09
(210,750)
(30,235)
Forfeited
38.48
(29,500)
-
-
(1,300)
Outstanding at September 30, 2003
37.40
1,117,000
36.17
199,500
94,475
15: QUARTERLY FINANCIAL DATA (UNAUDITED)
	Quarterly financial data does not always reveal the trend of the Company's business operations due to nonrecurring items and seasonal weather patterns which affect earnings, and related components of net revenues and operating income. Quarterly financial data for the Company was as follows:
	Quarterly earnings-per-share amounts are based on the weighted average common shares outstanding for each quarter and, therefore, the sum of each quarter may not equal the amount computed for the total year.
	Quarterly financial data for Peoples Gas was as follows:
	Quarterly financial data for North Shore Gas was as follows:
Net Income
Operating
Operating
Applicable to
Fiscal Quarters
Revenues
Income
Common Stock
(In Thousands)
Fourth
$ 23,478
$ (100)
$ (314)
Third
40,313
2,589
Second
102,745
15,539
9,241
First
65,468
8,883
4,760
Fourth
$ 18,324
$ (2,494)
$ (645)
Third
34,742
4,853
2,335
Second
61,740
13,044
7,218
First
41,927
7,813
4,012
16: SUPPLEMENTAL OIL AND GAS DISCLOSURES (Unaudited)
A. Results of Operations for Exploration and Production Activities
	The following table summarizes revenue and direct cost information relating to the Company's oil and gas exploration and production activities. The Company has no long-term agreements to purchase oil or gas production from foreign governments or authorities.
(1)	Includes hedge losses of $25.2 million, hedge gains of $9.9 million and hedge losses of $18.7 million for fiscal years 2003, 2002 and 2001, respectively.
(2)	Amortization rate per Mcfe reflects only depreciation, depletion and amortization of capitalized costs of proved oil and gas properties.
B. Costs Incurred in Oil and Gas Property Acquisition, Exploration and Development Activities
	The following table summarizes capitalized costs incurred in oil and gas producing activities.
C. Capitalized Costs Relating to Oil and Gas Producing Activities
	The following table summarizes capitalized costs and associated accumulated depreciation, depletion and amortization, including impairments, relating to the Company's oil and gas production, exploration and development activities.
D. Costs Not Being Amortized
	Following is a summary of costs excluded from the depletion base at September 30, 2003 by year incurred. Other than as noted below, the Company is unable to predict either the timing of the inclusion of these costs and the related natural gas and oil reserves in its depletion computation or their potential future impact on depletion rates.
	The Company will include $8.4 million of these costs in its fiscal 2004 depletion rate computation.
E. Reserve Quantity Information
	The Company's proved oil and gas reserve quantities are based on estimates prepared by third-party independent engineering consulting firms in conjunction with the Company's engineers, geologists and geophysicists in accordance with guidelines established by the SEC. The Company's estimates of proved reserve quantities of its properties are prepared by Netherland, Sewell & Associates, Inc., Miller and Lents, Ltd. and Prator Bett, L.L.C. Each year, Peoples Energy Production files estimates of oil and gas reserves with the U.S. Department of Energy on Form EIA-23. These estimates are consistent with the reserve data reported in this Note 16, with the exception that Form EIA-23 includes only gross reserves from properties operated by the Company.
	Estimated quantities of proved oil and natural gas reserves and changes in net quantities of proved developed and undeveloped oil and natural gas reserves were as follows:
Gas
Gas
Oil
Equivalent
MMcf
MBbls
MMcfe (1)
(In Thousands)
Ending Reserves - September 30, 2001
116,210
2,052
128,523
Extensions, discoveries and other additions
13,276
15,017
Production
(16,842)
(417)
(19,343)
Purchases of reserves in place
12,629
13,804
Revisions of previous estimates
(3,404)
(20)
(3,524)
Sales of reserves on place
-
-
-
Ending Reserves - September 30, 2002
121,869
2,101
134,477
Extensions, discoveries and other additions
29,412
32,984
Production
(22,878)
(487)
(25,798)
Purchases of reserves in place
38,644
40,102
Revisions of previous estimates
(59)
(308)
Sales of reserves on place
-
-
-
Ending Reserves - September 30, 2003
167,101
2,393
181,457
Proved Developed Reserves
End of year - September 30, 2001
95,729
1,452
104,441
End of year - September 30, 2002
90,548
1,412
99,020
End of year - September 30, 2003
127,476
1,800
138,276
(1)	Oil reserves and production are converted to gas equivalents based on a conversion of six Mcf of gas per barrel of oil.
	Oil and natural gas reserves cannot be measured exactly. Estimates of oil and natural gas reserves require extensive judgments of geologic and reservoir engineering data and are generally less precise than other estimates made in connection with financial disclosures.
	Proved reserves are those quantities which, upon analysis of geological and engineering data, appear with reasonable certainty to be recoverable in the future from known oil and natural gas reservoirs under existing economic and operating conditions. Proved developed reserves are those reserves which can be expected to be recovered through existing wells with existing equipment and operating methods. Proved undeveloped reserves are those reserves which are expected to be recovered from new wells on undrilled acreage or from existing wells where a relatively major expenditure is required.
	Assigning monetary values to such estimates, which require extensive judgment, does not reduce the subjectivity and changing nature of such reserve estimates. The uncertainties inherent in the disclosure of oil and gas reserves are compounded by applying additional estimates of the rates and timing of production and the costs that will be incurred in developing and producing the reserves. The information set forth herein is therefore subjective and, since judgments are involved, may not be comparable to estimates submitted by other oil and natural gas producers. In addition, since prices and costs do not remain static and no price or cost escalations or de-escalations have been considered, the results are not necessarily indicative of the estimated fair market value of estimated proved reserves nor of estimated future cash flows.
F. Standardized Measure of Discounted Future Net Cash Flows and Changes Therein Relating to Proved Oil and Gas Reserves
	Future cash inflows are based on year-end cash prices for oil and gas and do not include the effects of hedges. Operating costs, production and ad valorem taxes and future development costs are based on current costs with no escalation.
	The following table summarizes unaudited information concerning future net cash flows for oil and gas reserves, net of income tax expense. Income tax expense has been computed using expected future tax rates and giving effects to tax deductions and credits available, under current laws, and which relate to oil and gas producing activities. This information does not purport to present the fair market value of the Company's oil and gas assets, but does present a standardized measure of value disclosure concerning possible future net cash flows that would result under the assumptions used.
	The future net cash flows before income taxes for fiscal 2003, 2002 and 2001 are $586.7 million, $357.2 million and $150.8 million, respectively, and after discounting at 10 percent are $369.2 million, $227.9 million and $101.3 million, respectively.
	In the foregoing determination of future cash inflows, sales revenues for gas and oil were based on cash prices at year end. Future costs of developing and producing the proved gas and oil reserves reported at the end of each year shown were based on costs determined at each such year end, assuming the continuation of existing economic conditions. Future income taxes were computed by applying the appropriate year-end or future statutory tax rate to future pretax net cash flows, less the tax basis of the properties involved, and giving effect to tax deductions and permanent differences. Estimates of future liabilities and receivables applicable to oil and gas commodity hedges are not reflected in future cash flows from proved reserves as of the date of the reserve report.
	A summary of the changes in the standardized measure of discounted future net cash flows applicable to proved oil, natural gas liquids and gas reserves follows:
ITEM 9.
ITEM 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
	None.
ITEM 9A.
ITEM 9A. Controls and Procedures
	The Company, Peoples Gas and North Shore Gas maintain disclosure controls and procedures (as defined in Rule 13a-15e of the Securities Exchange Act of 1934, as amended) which are designed to ensure that information required to be disclosed by the Company, Peoples Gas and North Shore Gas in the reports that are submitted or filed with the Commission is recorded, processed, summarized and reported within the time periods specified in the Commission's rules and forms. Thomas M. Patrick, principal executive officer and Thomas A. Nardi, principal financial officer of the Company, Peoples Gas and North Shore Gas, have evaluated the disclosure controls and procedures, within 90 days of the filing of this report. Based upon that evaluation, Messrs. Patrick and Nardi have concluded that the disclosure controls and procedures are effective.
	There have been no significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of Messrs. Patrick's and Nardi's most recent evaluation.
PART III
ITEM 10.
ITEM 10. Directors and Executive Officers of the Company
	Information relating to the directors of the Company is set forth under the caption "Information Concerning Nominees for Election as Directors" of the Company's proxy statement, to be filed with the SEC on or about January 6, 2004, and to be distributed in connection with the Company's annual meeting of shareholders to be held on February 27, 2004. Such information is incorporated herein by reference.
	Information relating to the Board of Directors determinations concerning whether a member of Audit Committee of the Board is a "financial expert" as that term is defined under Item 401(h) of Regulation S-K is set forth under the caption "Committees of the Board of Directors" of the Company's above-mentioned proxy statement to be filed with the SEC on or about January 6, 2004, and is incorporated herein by reference.
	Information relating to the executive officers of the Company is set forth in Part I of this report under the caption "Executive Officers of the Company."
	The Company has disclosed its code of ethics on its website at www.PeoplesEnergy.com.
ITEM 11.
ITEM 11. Executive Compensation
	Information relating to executive compensation for the Company is set forth under the captions "Executive Compensation" and "Report on Executive Compensation" of the Company's proxy statement to be filed with the SEC on or about January 6, 2004 in connection with the Company's annual meeting of shareholders to be held on February 27, 2004. Such information is incorporated herein by reference.
ITEM 12.
ITEM 12. Security Ownership of Certain Beneficial Owners and Management
	Information for the Company relating to this item is set forth under the caption "Share Ownership of Director Nominees, and Executive Officers" of the Company's proxy statement, to be filed with the SEC on or about January 6, 2004, and to be distributed in connection with the Company's annual meeting of shareholders to be held on February 27, 2004. Such information is incorporated herein by reference.
EQUITY COMPENSATION PLAN INFORMATION
Plan Category
(A)
Number of Securities to be Issued Upon Exercise of Outstanding Options, Warrants and Rights
(B)
Weighted-Average Exercise Price of Outstanding Options, Warrants and Rights
(C)
Number of Securities Remaining Available for Future Issuance under Equity Compensation Plans (Excluding Securities Reflected in Column A)
Equity compensation plans approved by security holders
1,111,308 (1) (2)
$37.45
1,218,580 (3) (4)
Equity compensation plans not approved by security holders (5)
78,113 (6)
$36.65
114,987
Total
1,189,421
-----
1,333,567
Excludes 199,500 SARs outstanding and exercisable under the Company's LTIC Plan. The grant of an SAR enables the recipient to receive, for each SAR granted, cash in an amount equal to the excess of the fair market value of one share of Company common stock on the date the SAR is exercised over the fair market value of one share on the date the SAR was granted. No security is issued upon the exercise of a SAR.
Includes 63,308 shares equivalent held for the account of participants in the Company's Directors Deferred Compensation Plan.
Excludes 2,406,175 SARs remaining available for issuance under the Company's LTIC Plan.
Includes 352,000 RSAs remaining available for issuance under the Company's LTIC Plan.
Securities under the Company's DSOP. Under the DSOP, on May 1 of each year, through 2002, each nonemployee director of the Company received, as part of his or her annual retainer, a stock payment of 300 shares of common stock and options to purchase 3,000 shares of common stock. The exercise price for each option equals one hundred percent (100 percent) of the mean between the highest and lowest quoted selling price for the Company's common stock in the New York Stock Exchange Composite Transactions on the last day in April for which the New York Stock Exchange was open for trading in the year of the grant. Options granted under the plan have a 10-year term. (See Note 14 for amendments to the plan that were effective beginning in May 2003.)
Includes 9,113 deferred shares held for the account of participants in the Company's DSOP.
ITEM 13.
ITEM 13. Certain Relationships and Related Transactions
	Information relating to certain relationships and related transactions with certain officers of the Company is set forth under the caption "Certain Relationships and Related Transactions" of the Company's proxy statement, to be filed with the SEC on or about January 6, 2004, and to be distributed in connection with the Company's annual meeting of shareholders to be held on February 27, 2004. Such information is incorporated herein by reference.
ITEM 14.
ITEM 14. Principal Accountant Fees and Services
	The information required by this item is included under the caption "Independent Public Accountants" of the Company's proxy statement to be filed with the SEC on or about January 6, 2004, and to be distributed in connection with the Company's annual meeting of shareholders to be held on February 27, 2004. Such information is incorporated herein by reference.
PART IV
ITEM 15.
ITEM 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K
Schedule II
Schedule II
Schedule II
SIGNATURES
	Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
PEOPLES ENERGY CORPORATION
Date: December 11, 2003
By: /s/ THOMAS M. PATRICK
Thomas M. Patrick
Chairman of the Board, President and
Chief Executive Officer
	Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December 11, 2003.
/s/ THOMAS M. PATRICK
Chairman of the Board, President and Chief Executive
Thomas M. Patrick
Officer and Director (Principal Executive Officer)
/s/ THOMAS A. NARDI
Senior Vice President and Chief Financial Officer
Thomas A. Nardi
(Principal Financial Officer)
/s/ LINDA M. KALLAS
Assistant Vice President and Controller
Linda M. Kallas
(Principal Accounting Officer)
/s/ JAMES R. BORIS
Director
James R. Boris
/s/ WILLIAM J. BRODSKY
Director
William J. Brodsky
/s/ PASTORA SAN JUAN CAFFERTY
Director
Pastora San Juan Cafferty
/s/ JOHN W. HIGGINS
Director
John W. Higgins
/s/ DIPAK C. JAIN
Director
Dipak C. Jain
/s/ MICHAEL E. LAVIN
Director
Michael E. Lavin
/s/ HOMER J. LIVINGSTON, JR.
Director
Homer J. Livingston, Jr.
/s/ LESTER H. MCKEEVER
Director
Lester H. McKeever
/s/ RICHARD P. TOFT
Director
Richard P. Toft
/s/ ARTHUR R. VELASQUEZ
Director
Arthur R. Velasquez
SIGNATURES
	Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
THE PEOPLES GAS LIGHT AND COKE COMPANY
Date: December 11, 2003
By: /s/ THOMAS M. PATRICK
Thomas M. Patrick
Chairman of the Board
and Chief Executive Officer
	Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December 11, 2003.
/s/ THOMAS M. PATRICK
Chairman of the Board and Chief Executive
Thomas M. Patrick
Officer and Director (Principal Executive Officer)
/s/ THOMAS A. NARDI
Senior Vice President, Chief Financial Officer and Director
Thomas A. Nardi
(Principal Financial Officer)
/s/ LINDA M. KALLAS
Assistant Vice President and Controller
Linda M. Kallas
(Principal Accounting Officer)
/s/ DONALD M. FIELD
Director
Donald M. Field
/s/ WILLIAM E. MORROW
Director
William E. Morrow
SIGNATURES
	Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
NORTH SHORE GAS COMPANY
Date: December 11, 2003
By: /s/ THOMAS M. PATRICK
Thomas M. Patrick
Chairman of the Board
and Chief Executive Officer
	Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed below by the following persons on behalf of the registrant and in the capacities indicated on December 11, 2003.
/s/ THOMAS M. PATRICK
Chairman of the Board and Chief Executive
Thomas M. Patrick
Officer and Director (Principal Executive Officer)
/s/ THOMAS A. NARDI
Senior Vice President, Chief Financial Officer and Director
Thomas A. Nardi
(Principal Financial Officer)
/s/ LINDA M. KALLAS
Assistant Vice President and Controller
Linda M. Kallas
(Principal Accounting Officer)
/s/ DONALD M. FIELD
Director
Donald M. Field
/s/ WILLIAM E. MORROW
Director
William E. Morrow
Peoples Energy Corporation and Subsidiary Companies
EXHIBIT INDEX
(a)
The exhibits listed below are filed herewith and made a part hereof:
Peoples Energy Corporation and Subsidiary Companies
EXHIBIT INDEX (Continued)
23(c)
Consent of Miller and Lents, Ltd. to incorporate by reference in Registration Statement File Nos. 2-82760, 33-6369, 333-17701, 333-84594, 333-70702, and 333-62070.
23(d)
Prator Bett, L.L.C. consent to incorporate by reference in Registration Statement File Nos. 2-82760, 33-6369, 333-17701, 333-84594, 333-70702, and 333-62070
31(a)
Certification of Thomas M. Patrick on behalf of the Company, Peoples Gas and North Shore Gas pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31(b)
Certification of Thomas A. Nardi on behalf of the Company, Peoples Gas and North Shore Gas pursuant to 17 CFR 240.13a-14(a) or 17 CFR 240.15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32(a)
Certification of Thomas M. Patrick on behalf of the Company, Peoples Gas and North Shore Gas pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32(b)
Certification of Thomas A. Nardi on behalf of the Company, Peoples Gas and North Shore Gas pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
Form 11-K for the Employee Stock Purchase Plan of the Company for the fiscal year ended September 30, 2003.
Peoples Energy Corporation and Subsidiary Companies
EXHIBIT INDEX (Continued)
3(h)
By-Laws of the Company dated February 22, 2001 (The Company - Form 10-Q for the quarter ended March 31, 2001, Exhibit 3(b); By-Laws of Peoples Gas dated April 15, 1999 (Peoples Gas - Form 10-Q for the quarter ended June 30, 1999, Exhibit 3(b)); By-Laws of North Shore Gas dated August 31, 1997 (North Shore Gas - Form 10-K for the fiscal year ended September 30, 1997, Exhibit 3(b)).
4(a)
Indenture dated as of January 18, 2001 from the Company to Bank One Trust Company National Association (The Company - Form 10-Q for the quarter ended March 31, 2001, Exhibit 4(a)).
4(b)
The Peoples Gas Light and Coke Company First and Refunding Mortgage, dated January 2, 1926, from Chicago By-Product Coke Company to Illinois Merchants Trust Company, Trustee, assumed by The Peoples Gas Light and Coke Company (Peoples) by Indenture dated March 1, 1928 (Peoples - May 17, 1935, Exhibit B-6a, Exhibit B-6b A-2 File No. 2-2151, 1936); Supplemental Indenture dated as of May 20, 1936, (Peoples - Form 8-K for the year 1936, Exhibit B-6f); Supplemental Indenture dated as of March 10, 1950 (Peoples - Form 8-K for the month of March 1950, Exhibit B-6i); Supplemental Indenture dated as of June 1, 1951 (Peoples - File No. 2-8989, Post-Effective, Exhibit 7-4(b)); Supplemental Indenture dated as of August 15, 1967 (Peoples - File No. 2-26983, Post-Effective, Exhibit 2-4); Supplemental Indenture dated as of September 15, 1970 (Peoples - File No. 2-38168, Post-Effective Exhibit 2-2); Supplemental Indenture dated as of October 1, 1984 (Peoples - Form 10-K for fiscal year ended September 30, 1984, Exhibit 4-3); Supplemental Indentures dated March 1, 1985, (Peoples - Form 10-K for fiscal year ended September 30, 1985, Exhibits 4-1, 4-2, and 4-3, respectively); Supplemental Indenture dated May 1, 1990 (Peoples - Form 10-K for the fiscal year ended September 30, 1990, Exhibit 4); Supplemental Indenture dated as of April 1, 1993 (Peoples - Form 8 dated as of May 5, 1993, Exhibit 1); Supplemental Indentures dated as of December 1, 1993 (Peoples - Form 10-Q for the quarterly period ended December 31, 1993, Exhibits 4(a) and 4(b)); Supplemental Indenture dated June 1, 1995. (Peoples - Form 10-K for fiscal year ended September 30, 1995.) Supplemental Indenture dated as of June 1, 1995 (Peoples - Form 10-K for the fiscal year ended September 30, 1995.) Supplemental Indenture, First and Refunding Mortgage Multi-Modal Bonds, Series GG of Peoples Gas, effective March 1, 2000 (Peoples Energy - Form 10-K for fiscal year ended September 30, 2000, Exhibit 4(a), Supplemental Indenture, First and Refunding Mortgage Multi-Modal Bonds, Series HH of Peoples Gas, effective March 1, 2000 (Peoples Energy - Form 10-K for fiscal year ended September 30, 2000, Exhibit 4(b), Supplemental Indenture, First and Refunding Mortgage Multi-Modal Bonds, Series II of Peoples Gas, effective March 1, 2000 (Peoples Energy - Form 10-K for fiscal year ended September 30, 2000, Exhibit 4(c), Supplemental Indenture, First and Refunding Mortgage Multi-Modal Bonds, Series JJ of Peoples Gas, effective March 1, 2000 (Peoples Energy - Form 10-K for fiscal year
Peoples Energy Corporation and Subsidiary Companies
EXHIBIT INDEX (Continued)
10(i)
ETS Service Agreement between Peoples Gas and ANR Pipeline Company, dated September 21, 1994. (The Company and Peoples Gas - Form 10-K for fiscal year ended September 30, 1995, Exhibit 10); FSS Service Agreement between Peoples Gas and ANR Pipeline Company, dated September 21, 1994. (The Company and Peoples Gas - Form 10-K for fiscal year ended September 30, 1995, Exhibit 10); Quick Notice Transportation Service Agreement Under Rate Schedule QNT between Peoples Gas and Trunkline Gas Company, dated as of December 1, 1995. (The Company and Peoples Gas - Form 10-K for fiscal year ended September 30, 1995, Exhibit 10); Quick Notice Transportation Service Agreement Under Rate Schedule QNT between Peoples Gas and Trunkline Gas Company, dated as of December 1, 1995. (The Company and Peoples Gas - Form 10-K for fiscal year ended September 30, 1995, Exhibit 10); ETS Service Agreement between North Shore Gas and ANR Pipeline Company, dated September 21, 1994. (The Company and North Shore Gas - Form 10-K for fiscal year ended September 30, 1995, Exhibit 10); FSS Service Agreement between North Shore Gas and ANR Pipeline Company, dated September 21, 1994. (The Company and North Shore Gas - Form 10-K for fiscal year ended September 30, 1995, Exhibit 10); Guaranty by Peoples Energy Corporation to Northern Border Pipeline Company, dated July 25, 1997. (The Company - Form 10-K for fiscal year ended September 30, 1997, Exhibit 10); Guaranty by Peoples Energy Corporation to Northern Border Pipeline Company, dated August 1, 1997. (The Company - Form 10-K for fiscal year ended September 30, 1997, Exhibit 10); U.S. Shippers Service Agreement between Peoples Gas and Northern Border Pipeline Company, dated August 14, 1997. (The Company and Peoples Gas - Form 10-K for fiscal year ended September 30, 1998, Exhibit 10); U.S. Shippers Service Agreement between Peoples Gas and Northern Border Pipeline Company, dated October 27, 1997. (The Company and Peoples Gas - Form 10-K for fiscal year ended September 30, 1998, Exhibit 10); Storage Rate Schedule DSS Agreement between Peoples Gas and Natural Gas Pipeline Company of America, dated January 15, 1998. (The Company and Peoples Gas - Form 10-K for fiscal year ended September 30, 1998, Exhibit 10); Storage Rate Schedule NSS Agreement between Peoples Gas and Natural Gas Pipeline Company of America, dated January 15, 1998. (The Company and Peoples Gas - Form 10-K for fiscal year ended September 30, 1998, Exhibit 10); Transportation Rate Schedule FTS Agreement between Peoples Gas and Natural Gas Pipeline Company of America, dated January 15, 1998. (The Company and Peoples Gas - Form 10-K for
Peoples Energy Corporation and Subsidiary Companies
EXHIBIT INDEX (Continued)
Exhibit
Number
Description of Document
fiscal year ended September 30, 1998, Exhibit 10); Transportation Rate Schedule FTS LN/NB Agreement between Peoples Gas and Natural Gas Pipeline Company of America, dated January 15, 1998. (The Company and Peoples Gas - Form 10-K for fiscal year ended September 30, 1998, Exhibit 10); U.S. Shippers Service Agreement between North Shore Gas and Northern Border Pipeline Company, dated August 14, 1997. (The Company and North Shore Gas - Form 10-K for fiscal year ended September 30, 1998, Exhibit 10); Transportation Rate Schedule FTS Agreement between North Shore Gas and Natural Gas Pipeline Company of America, dated January 15, 1998. (The Company and North Shore Gas - Form 10-K for fiscal year ended September 30, 1998, Exhibit 10); FTS-1 Service Agreement between North Shore Gas and ANR Pipeline Company, dated May 28, 1998. (The Company and North Shore Gas - Form 10-K for fiscal year ended September 30, 1998, Exhibit 10). NNS Service Agreement between North Shore Gas and ANR Pipeline Company, dated July 16, 1999. (The Company - Form 10-K for fiscal year ended September 30, 1999, Exhibit 10); ETS Service Agreement between North Shore Gas and ANR Pipeline Company, dated July 16, 1999. (The Company - Form 10-K for fiscal year ended September 30, 1999, Exhibit 10); FTS-1 Service Agreement between North Shore Gas and ANR Pipeline Company, dated July 16, 1999. (The Company - Form 10-K for fiscal year ended September 30, 1999, Exhibit 10); Gas Purchase and Agency Agreement By and Between Peoples Gas and Enron North America Corp., dated September 16, 1999. (The Company and Peoples Gas - Form 10-Q for the quarterly period ended December 31, 1999, Exhibit 10); Transportation Rate Schedule FTS Agreement between Natural Gas Pipeline Company of America and Peoples Gas Amendment No. 2 dated September 9, 1999. (The Company and Peoples Gas - Form 10-Q for the quarterly period ended December 31, 1999, Exhibit 10); Gas Purchase and Agency Agreement By and Between North Shore Gas and Enron North America Corp., dated September 16, 1999. (The Company and North Shore Gas - Form 10-Q for the quarterly period ended December 31, 1999, Exhibit 10); Transportation Rate Schedule FTS Agreement between Natural Gas Pipeline Company of America and North Shore Gas Amendment No. 2 dated September 9, 1999. (The Company and North Shore Gas - Form 10-Q for the quarterly period ended December 31, 1999, Exhibit 10); Amendment to Transportation Agreement between Trunkline Gas Company and Peoples Gas dated March 31, 2000. (The Company and Peoples Gas - Form 10-Q for the quarterly period ended March 31, 2000, Exhibit 10); Rate Schedule FS Flexible Storage Service Agreement By and Between Panhandle Eastern Pipe Line Company and Peoples Gas dated April 1, 2000. (The Company and Peoples Gas - Form 10-Q for the quarterly period ended March 31, 2000, Exhibit 10); Transportation Rate Schedule EFT Agreement By and Between Panhandle Eastern Pipe Line Company and Peoples Gas, dated April 1, 2000. (The Company and Peoples Gas - Form 10-Q for the quarterly period ended March 31, 2000, (Exhibit 10); Transportation Rate Schedule EFT Agreement By and Between Panhandle Eastern Pipe Line Company and Peoples Gas dated April 1, 2000. (The Company and Peoples Gas - Form 10-Q for the quarterly period ended March 31, 2000, (Exhibit 10); Transportation Rate Schedule FTS Agreement By and Between Natural Gas Pipeline Company of America and Peoples Gas, dated February 25, 2000. (The Company and Peoples Gas - Form 10-Q for the quarterly period ended June 30, 2000, (Exhibit 10); Storage Rate Schedule NSS Agreement By and Between Natural Gas Pipeline Company of America and Peoples Gas, dated March 7, 2000. (The Company and Peoples Gas - Form 10-Q for the quarterly period ended June 30, 2000, (Exhibit 10); Transportation Rate Schedule FTS Agreement By and Between Natural Gas Pipeline Company of America and Peoples Gas, dated March 16, 2000. (The Company and Peoples
Peoples Energy Corporation and Subsidiary Companies
EXHIBIT INDEX (Continued)
Exhibit
Number
Description of Document
Gas - Form 10-Q for the quarterly period ended June 30, 2000, (Exhibit 10); Amendment to Transportation Rate Schedule FTS Agreement By and Between Natural Gas Pipeline Company of America and Peoples Gas, dated April 28, 2000. (The Company and Peoples Gas - Form 10-Q for the quarterly period ended June 30, 2000, (Exhibit 10); Amendment to Transportation Rate Schedule FTS Agreement By and Between Natural Gas Pipeline Company of America and Peoples Gas, dated May 4, 2000. (The Company and Peoples Gas - Form 10-Q for the quarterly period ended June 30, 2000, (Exhibit 10); Amendment to Transportation Rate Schedule FTS Agreement By and Between Natural Gas Pipeline Company of America and Peoples Gas, dated May 4, 2000. (The Company and Peoples Gas - Form 10-Q for the quarterly period ended June 30, 2000, (Exhibit 10); Transportation Rate Schedule FTS Agreement By and Between Natural Gas Pipeline Company of America and North Shore Gas, dated February 25, 2000. (The Company and North Shore Gas - Form 10-Q for the quarterly period ended June 30, 2000, Exhibit 10); Transportation Rate Schedule FTS Agreement By and Between Natural Gas Pipeline Company of America and North Shore Gas, dated February 25, 2000. (The Company and North Shore Gas - Form 10-Q for the quarterly period ended June 30, 2000, Exhibit 10); Storage Rate Schedule DSS Agreement By and Between Natural Gas Pipeline Company of America and North Shore Gas, dated March 9, 2000. (The Company and North Shore Gas - Form 10-Q for the quarterly period ended June 30, 2000, Exhibit 10); Transportation Rate Schedule FTS Agreement By and Between Natural Gas Pipeline Company of America and North Shore Gas, dated March 16, 2000. (The Company and North Shore Gas - Form 10-Q for the quarterly period ended June 30, 2000, Exhibit 10); Amendment to Transportation Rate Schedule FTS Agreement by and Between Natural Gas Pipeline Company of America and North Shore Gas, dated May 1, 2000. (The Company and North Shore Gas - Form 10-Q for the quarterly period ended June 30, 2000, Exhibit 10), Amendment to QNT Agreement between Peoples Gas and Trunkline Gas Company, dated April 1, 2000, (The Company and Peoples Gas - Form 10-K for fiscal year ended September 30, 2000, Exhibit 10),.Amendment to ETS Agreement between Peoples Gas and ANR Pipeline Company, dated March 9, 2000, (The Company and Peoples Gas - Form 10-K for fiscal year ended September 30, 2000, Exhibit 10), Amendment to FSS Agreement between Peoples Gas and ANR Pipeline Company, dated March 9, 2000, (The Company and Peoples Gas - Form 10-K for fiscal year ended September 30, 2000, Exhibit 10), NNS Service Agreement between Peoples Gas and ANR Pipeline Company, dated March 9, 2000, (The Company and Peoples Gas - Form 10-K for fiscal year ended September 30, 2000, Exhibit 10), FTS-1 Service Agreement between Peoples Gas and ANR Pipeline Company, dated March 9, 2000, (The Company and Peoples Gas - Form 10-K for fiscal year ended September 30, 2000, Exhibit 10), Credit Agreement between Peoples Gas and ABN Amro Bank N.V., dated September 29, 2000, (The Company and Peoples Gas - Form 10-K for fiscal year ended September 30, 2000, Exhibit 10), Amendment to ETS Agreement between North Shore Gas and ANR Pipeline Company, dated March 9, 2000, (The Company and North Shore Gas- Form 10-K for fiscal year ended September 30, 2000, Exhibit 10), Amendment to FSS Agreement between North Shore Gas and ANR Pipeline Company, dated March 9, 2000 (The Company and North Shore Gas - Form 10-K for fiscal year ended September 30, 2000, Exhibit 10), Amendment to FTS-1 Agreement between North Shore Gas and ANR Pipeline Company, dated March 9, 2000, (The Company and North Shore Gas - Form 10-K for fiscal year ended September 30, 2000, Exhibit 10), Amendment to ETS Agreement between North Shore Gas and ANR Pipeline Company, dated March 9, 2000 (The Company and North Shore Gas - Form 10-K for fiscal year
Peoples Energy Corporation and Subsidiary Companies
EXHIBIT INDEX (Continued)
10(j)
Lease dated October 20, 1993, between Prudential Plaza Associates, as Landlord, and Peoples Gas, as Tenant (Peoples Gas - Form 10-Q for the quarterly period ended December 31, 1993, Exhibit 10).
10(k)
Service Guaranty Agreement dated December 16, 1992, by the Company and Trigen Energy Corporation (The Company - Form 10-Q for the quarterly period ended December 31, 1993, Exhibit 10).
10(l)
Short-Term Incentive Compensation Plan of the Company, as amended on December 7, 1994 (Company - Form 10-K for the fiscal year ended September 30, 1994, Exhibit 10); Executive Deferred Compensation Plan of the Company, effective October 1, 1994 (Company - Form 10-K for the fiscal year ended September 30, 1994, Exhibit 10); Trust Under Executive Deferred Compensation Plan and Supplemental Retirement Benefit Plan, Part A and Part B, of the Company, effective September 25, 1995. (The Company - Form 10-K for fiscal year ended September 30, 1995, Exhibit 10); Long-Term Incentive Compensation Plan, dated February 25, 2000 (The Company - Form 10-Q for the quarterly period ended March 31, 2000, Exhibit 10); Directors Stock and Option Plan effective December 1, 1999, (The Company - Form 10-K for fiscal year ended September 30, 2000, Exhibit 10); Long-Term Incentive Plan for Diversified Business Units, amended as of December 4, 2002 (The Company - Form 10-Q for the quarterly period ended December 31, 2002, Exhibit 10(e); Severance Agreement between the Company and Donald M. Field (The Company - Form 10-Q for the quarterly period ended December 31, 1998, Exhibit 10(e)); Severance Agreement between the Company and Thomas A. Nardi(The Company - Form 10-K for fiscal year ended September 30, 2002, Exhibit 10(d)).
10(m)
Credit Agreement between the Company and ABN Amro Bank N.V., dated March 10, 2000 (The Company - Form 10-Q for the quarter ended December 31, 2001, Exhibit 10); Credit Agreement between the Company and ABN Amro Bank N.V. dated March 10, 2000 (The Company - Form 10-Q for the quarter ended December 31, 2000, Exhibit 10).
10(n)
Directors Deferred Compensation Plan, as amended, dated December 1, 1999 (The Company - Form 10-K for fiscal year ended September 30, 2001, Exhibit 10).
21(a)
Subsidiaries of the Company (The Company - Form 10-K for the fiscal year ended September 30, 2001, Exhibit 21).