PEOPLES ENERGY CORP, 10-Q, 1996-05-13

PEOPLES ENERGY CORP
10-Q, 1996-05-13
NATURAL GAS DISTRIBUTION

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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

(Mark One)

[ X ] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Quarterly Period Ended March 31, 1996

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number 1-5540

PEOPLES ENERGY CORPORATION
(Exact name of registrant as specified in its charter)

Illinois 36-2642766
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)

24th Floor, 130 East Randolph Drive, Chicago, Illinois 60601-6207
(Address of principal executive offices) (Zip Code)

(312) 240-4000
(Registrant's telephone number, including area code)

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

Indicate the number of shares outstanding of each of the issuer's
classes of common stock, as of the latest practicable date:
34,940,997 shares of Common Stock, without par value, outstanding
at April 30, 1996.

<TABLE>
PART I. FINANCIAL INFORMATION

Item 1. Financial Statements
Peoples Energy Corporation
CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)
<CAPTION>
Three Six Twelve
Months Ended Months Ended Months Ended
March 31, March 31, March 31,
------------------- ------------------ ----------------------
1996 1995 1996 1995 1996 1995
--------- --------- -------- -------- ---------- ----------
(Thousands, except per-share amounts)

<S> <C> <C> <C> <C> <C> <C>
OPERATING REVENUES:
Gas sales $452,290 $375,642 $727,463 $642,193 $ 978,307 $ 920,432
Transportation of customer-
owned gas 43,135 45,313 82,406 78,065 127,155 117,203
Other 3,131 3,431 6,293 11,250 12,592 19,487
-------- -------- -------- -------- ---------- ----------
Total Operating Revenues 498,556 424,386 816,162 731,508 1,118,054 1,057,122
-------- -------- -------- -------- ---------- ----------

OPERATING EXPENSES:
Gas costs 244,033 211,034 373,904 357,121 474,219 490,000
Operation 62,462 49,676 116,592 98,400 217,287 205,207
Maintenance 11,108 10,441 21,162 19,863 43,030 39,687
Depreciation and amortization 17,876 16,836 34,532 33,355 67,585 66,596
Taxes - Income 35,728 26,669 58,632 40,015 47,340 22,626
- State & local revenue 51,880 46,045 85,644 77,291 118,074 110,903
- Other 5,806 5,732 10,879 10,746 21,833 20,632
-------- -------- -------- -------- ---------- ----------
Total Operating Expenses 428,893 366,433 701,345 636,791 989,368 955,651
-------- -------- -------- -------- ---------- ----------

OPERATING INCOME 69,663 57,953 114,817 94,717 128,686 101,471
-------- -------- -------- -------- ---------- ----------
OTHER INCOME
AND (DEDUCTIONS):
Interest income 508 1,792 3,162 3,151 10,078 7,776
Interest on long-term debt
of subsidiaries (9,004) (11,653) (19,955) (23,204) (43,164) (46,288)
Other interest expense (1,663) (1,996) (3,662) (3,371) (7,748) (4,083)
Income taxes (4,052) (688) (1,735) (1,231) (4,336) (3,270)
Miscellaneous - net 6,563 411 5,504 884 5,823 2,347
-------- -------- -------- -------- ---------- ----------
Total Other Income
and Deductions (7,648) (12,134) (16,686) (23,771) (39,347) (43,518)
-------- -------- -------- -------- ---------- ----------
NET INCOME $ 62,015 $ 45,819 $ 98,131 $ 70,946 $ 89,339 $ 57,953
======== ======== ======== ======== ========== ==========
Average Shares of Common
Stock Outstanding 34,939 34,899 34,933 34,892 34,922 34,878

Earnings Per Share of
Common Stock $ 1.77 $ 1.31 $ 2.81 $ 2.03 $ 2.56 $ 1.66
======== ======== ======== ======== ========== ==========

Dividends Declared Per Share $ .46 $ .45 $ .91 $ .90 $ 1.81 $ 1.80
======== ======== ======== ======== ========== ==========

<FN>
The Notes to Consolidated Financial Statements are an integral part of these
statements.
</TABLE>

<TABLE>
Peoples Energy Corporation
CONSOLIDATED BALANCE SHEETS

March 31, March 31,
1996 September 30, 1995
(Unaudited) 1995 (Unaudited)
---------- ---------- ----------
(Thousands)
<S> <C> <C> <C>

PROPERTIES AND OTHER ASSETS
- ---------------------------
CAPITAL INVESTMENTS:
Property, plant and equipment,
at original cost $2,011,391 $2,088,277 $2,050,231
Less - Accumulated depreciation 644,919 715,208 699,191
---------- ---------- ----------
Net property, plant and equipment 1,366,472 1,373,069 1,351,040
Other investments 10,230 10,367 15,145
---------- ---------- ----------
TOTAL CAPITAL INVESTMENTS - NET 1,376,702 1,383,436 1,366,185
---------- ---------- ----------
CURRENT ASSETS:
Cash 6,871 3,328 42,272
Cash equivalents 73,752 172,911 174,130
Other temporary cash investments,
at cost that approximates market value 900 1,100 1,000
Trust fund - bond redemption -- 237 --
Receivables -
Customers, net of allowance for
uncollectible accounts of $23,390,
$19,013, and $20,974, respectively 190,264 56,715 144,950
Other 54,631 1,897 3,515
Accrued unbilled revenues 67,236 21,167 44,345
Materials and supplies, at average cost 16,800 16,466 26,170
Gas in storage, at last-in, first-out cost 40,064 100,547 72,540
Gas costs recoverable through rate adjustments 51,078 6,205 8,394
Prepayments 3,457 2,302 3,589
---------- ---------- ----------
TOTAL CURRENT ASSETS 505,053 382,875 520,905
---------- ---------- ----------
OTHER ASSETS:
Regulatory assets of subsidiaries 60,993 39,706 40,022
Deferred charges 14,807 16,475 17,845
---------- ---------- ----------
TOTAL OTHER ASSETS 75,800 56,181 57,867
---------- ---------- ----------
TOTAL PROPERTIES AND OTHER ASSETS $1,957,555 $1,822,492 $1,944,957
========== ========== ==========

<FN>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>

<TABLE>
Peoples Energy Corporation
CONSOLIDATED BALANCE SHEETS
<CAPTION>

March 31, March 31,
1996 September 30, 1995
(Unaudited) 1995 (Unaudited)
----------- ---------- -----------
(Thousands of Dollars)
<S> <C> <C> <C>
CAPITALIZATION AND LIABILITIES
- ------------------------------
CAPITALIZATION:

Common Stockholders' Equity:
Common stock, without par value
Authorized - 60,000,000 shares
Outstanding - 34,940,815, 34,913,426,
and 34,898,909 shares, respectively $ 277,648 $ 277,113 $ 276,771
Retained earnings 430,918 364,581 404,795
---------- ---------- ----------
Total Common Stockholders' Equity 708,566 641,694 681,566
Long-term debt of subsidiaries,
exclusive of sinking fund payments
and maturities due within one year 527,104 621,874 621,956
---------- ---------- ----------
TOTAL CAPITALIZATION 1,235,670 1,263,568 1,303,522
---------- ---------- ----------
CURRENT LIABILITIES:
Interim loans of subsidiaries 8,700 900 900
Accounts payable 197,335 102,377 104,371
Dividends payable on common stock 16,073 15,711 15,705
Customer gas service and credit deposits 19,390 40,577 29,499
Sinking fund payments and maturities,
due within one year -
Long-term debt of subsidiaries -- 4,000 4,000
Accrued taxes 95,166 28,160 72,025
Gas sales revenue refundable through
rate adjustments 22,559 79,502 73,335
Accrued interest 10,679 12,796 11,991
Temporary LIFO liquidation credit 66,704 -- 58,410
---------- ---------- ----------
TOTAL CURRENT LIABILITIES 436,606 284,023 370,236
---------- ---------- ----------
DEFERRED CREDITS AND OTHER LIABILITIES:
Deferred income taxes - primarily
accelerated depreciation 212,023 208,424 200,021
Investment tax credits being amortized
over the average lives of related property 36,249 38,132 39,003
Other 37,007 28,345 32,175
---------- ---------- ----------
TOTAL DEFERRED CREDITS AND
OTHER LIABILITIES 285,279 274,901 271,199
---------- ---------- ----------
TOTAL CAPITALIZATION AND LIABILITIES $1,957,555 $1,822,492 $1,944,957
========== ========== ==========

<FN>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>

<TABLE>
Peoples Energy Corporation
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
<CAPTION>
Six Months Ended
March 31,
-------------------
1996 1995
--------- ---------
(Thousands)
<S> <C> <C>
OPERATING ACTIVITIES:
Net Income $ 98,131 $ 70,946
Adjustments to reconcile net income to net cash:
Depreciation and amortization 34,532 33,355
Deferred income taxes and investment tax credits - net 2,167 7,456
Change in deferred credits and other liabilities 8,211 (10,123)
Change in other assets (19,618) (3,292)
Other 32 38
Change in current assets and liabilities:
Receivables - net (186,283) (72,978)
Accrued unbilled revenues (46,069) (24,423)
Materials and supplies (334) (2,315)
Gas in storage 60,483 78,465
Gas costs recoverable (44,873) 6,032
Accounts payable 94,958 (4,764)
Customer gas service and credit deposits (21,187) (15,921)
Accrued taxes 67,006 43,089
Gas sales revenue refundable (56,943) 22,392
Accrued interest (2,117) (951)
Temporary LIFO liquidation credit 66,704 58,410
Other (1,155) (1,539)
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 53,645 183,877
-------- --------

INVESTING ACTIVITIES:
Capital expenditures of subsidiaries - construction (38,312) (41,374)
Other assets 10,376 (1,089)
Other temporary cash investments 200 1,555
Other capital investments 106 (448)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (27,630) (41,356)
-------- --------
FINANCING ACTIVITIES:
Interim loans of subsidiaries - net 7,800 --
Trust fund - utility construction -- 31,493
- bond redemption 237 --
Retirement of long-term debt of subsidiaries (98,770) (4,119)
Dividends paid on common stock (31,433) (31,395)
Proceeds from issuance of common stock 535 651
-------- --------
NET CASH USED IN FINANCING ACTIVITIES (121,631) (3,370)
-------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (95,616) 139,151

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD 176,239 77,251
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 80,623 $216,402
======== ========

<FN>
The Notes to Consolidated Financial Statements are an integral part of
these statements.
</TABLE>

Peoples Energy Corporation

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

1. BASIS OF PRESENTATION

The accompanying consolidated financial statements include the
accounts of Peoples Energy Corporation (Company) and its wholly
owned subsidiaries, The Peoples Gas Light and Coke Company
(Peoples Gas), North Shore Gas Company (North Shore Gas), Peoples
District Energy Corporation (Peoples District Energy), Peoples
Energy Services Corporation, and Peoples NGV Corp., and comprise
the assets, liabilities, revenues, expenses, and underlying common
stockholders' equity of these companies. Income is principally
derived from the Company's utility subsidiaries, Peoples Gas and
North Shore Gas. The statements have been prepared by the Company
in conformity with the rules and regulations of the Securities and
Exchange Commission (SEC) and reflect all adjustments that are, in
the opinion of management, necessary to present fairly the results
for the interim periods herein and to prevent the information from
being misleading. Certain items previously reported for the prior
periods have been reclassified to conform with the presentation in
the current periods.

Certain footnote disclosures and other information, normally
included in financial statements prepared in accordance with
generally accepted accounting principles, have been condensed or
omitted from these interim financial statements, pursuant to SEC
rules and regulations. Therefore, the statements should be read
in conjunction with the consolidated financial statements and
related notes contained in the Company's Annual Report on Form
10-K for the fiscal year ended September 30, 1995.

The business of the Company's utility subsidiaries is
influenced by seasonal weather conditions because a large element
of the utilities' customer load consists of gas used for space
heating. Weather-related deliveries can, therefore, have a
significant positive or negative impact on net income.
Accordingly, the results of operations for the interim periods
presented are not indicative of the results to be expected for all
or any part of the balance of the current fiscal year.

2. SIGNIFICANT ACCOUNTING POLICIES

2A Revenue Recognition

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

2B Regulated Operations

Peoples Gas' and North Shore Gas' utility operations are
subject to regulation by the Illinois Commerce Commission
(Commission). Regulated operations are accounted for in
accordance with Statement of Financial Accounting Standards
(SFAS) No. 71, "Accounting for the Effects of Certain Types of
Regulation." This standard controls the application of
generally accepted accounting principles for companies whose
rates are determined by an independent regulator such as the
Commission. Regulatory assets represent certain costs that are
expected to be recovered from customers through the ratemaking
process. When incurred, such costs are deferred as assets in
the balance sheet and subsequently recorded as expenses when
those same amounts are reflected in rates.

2C Statement of Cash Flows

For purposes of the balance sheet and the statement of cash
flows, the Company considers all short-term liquid investments
with maturities of three months or less to be cash equivalents.

<TABLE>
Income taxes and interest paid (excluding capitalized
interest) were as follows:

<CAPTION>
For the six months
ended March 31,
1996 1995
-------------------------------------------------
(Thousands)
<S> <C> <C>

Income taxes paid $26,749 $12,478
Interest paid 23,218 24,351

</TABLE>

2D Income Taxes

The Company follows the liability method of accounting for
deferred income taxes. Under the liability 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 or credited to regulatory assets or liabilities.

2E Recovery of Gas Costs, Including Charges for Transition Costs

Pursuant to Federal Energy Regulatory Commission (FERC)
Order 636 and successor orders, pipelines are allowed to
recover from their customers so-called transition costs. These
costs arise from the restructuring of pipeline service
obligations required by the 636 Orders. The utilities are
currently recovering pipeline charges for transition costs
through the Gas Charge. (See Notes 4A and 4B.)

Under the tariffs of Peoples Gas and North Shore Gas, the
difference for any fiscal year between costs recoverable
through the Gas Charge and revenues billed to customers under
the Gas Charge is refunded or recovered over a 12-month billing
cycle beginning the following January 1. Consistent with these
tariff provisions, such difference for any month is recorded
either as a current liability or as a current asset (with a
contra entry to Gas Costs), and the fiscal year-end balance is
amortized over the 12-month period beginning the following
January 1.

The Commission conducts annual proceedings regarding, for
each gas utility, the reconciliation of revenues from the Gas
Charge and related costs incurred for gas. In such
proceedings, costs recovered by a utility through the Gas
Charge are subject to challenge. Such proceedings regarding
Peoples Gas for fiscal years 1992 through 1996 and North Shore
Gas for fiscal years 1991 through 1996 are currently pending
before the Commission.

3. COVENANTS REGARDING RETAINED EARNINGS

North Shore Gas' indenture relating to its first mortgage bonds
contains provisions and covenants restricting the payment of cash
dividends and the purchase or redemption of capital stock. At
March 31, 1996, such restrictions amounted to $11.6 million out of
North Shore Gas' total retained earnings of $71.2 million.

4. RATES AND REGULATION

4A Utility Rate Proceedings

Peoples Gas' Rate Order. On November 8, 1995, the Commission
issued an order approving changes in rates of Peoples Gas that are
designed to increase annual revenues by approximately $30.8
million, exclusive of additional charges for revenue taxes.
Peoples Gas was allowed a rate of return on original-cost rate base
of 9.19 per cent, which reflects an 11.10 per cent cost of common
equity. The new rates were implemented on November 14, 1995. A
group of industrial transportation customers has appealed the
Commission's order to the Illinois Appellate Court. Any change
made by the Appellate Court would have a prospective effect only.

North Shore Gas' Rate Order. On November 8, 1995, the Commission
issued an order approving changes in rates of North Shore Gas that
are designed to increase annual revenues by approximately $5.6
million, exclusive of additional charges for revenue taxes. North
Shore Gas was allowed a rate of return on original-cost rate base
of 9.75 per cent, which reflects an 11.30 per cent cost of common
equity. The new rates were implemented on November 14, 1995. A
group of industrial transportation customers has appealed the
Commission's order to the Illinois Appellate Court. Any change
made by the Appellate Court would have a prospective effect only.

FERC Order 636 Cost Recovery. On September 15, 1993, the
Commission entered an order initiating an investigation into the
appropriate means of recovery by Illinois gas utilities of pipeline
charges for FERC Order 636 transition costs. The Commission issued
a final order in this proceeding on March 9, 1994. The order
provides for the full recovery of transition costs from Peoples
Gas' and North Shore Gas' gas service customers and transportation
customers to the extent they contract for firm standby service.
The Citizens Utility Board and State's Attorney of Cook County
filed an application for rehearing of the March 9 order with the
Commission. In its orders on rehearing, the Commission continued
to provide for full recovery of transition costs, but directed
that, effective November 1, 1994, gas supply realignment (GSR)
costs (one of the four categories of transition costs) be recovered
on a uniform volumetric basis from all transportation and sales
customers. In December 1994, a group of industrial transportation
customers of Illinois utilities appealed the Commission's orders on
rehearing to the Illinois Appellate Court. The Illinois Appellate
Court, on September 21, 1995, affirmed the Commission's order. A
group of industrial transportation customers of Illinois utilities
filed a petition for leave to appeal the Appellate Court's order to
the Illinois Supreme Court. If the Illinois Supreme Court accepts
the appeal, any change made by it to the Commission's order would
have a prospective effect only. (See Notes 2E and 4B.)

4B FERC Orders 636, 636-A, and 636-B

FERC Order 636 and successor orders require pipelines to make
separate rate filings to recover transition costs. There are four
categories of such costs, the largest of which for Peoples Gas and
North Shore Gas is GSR costs. The utilities are subject to charges
for transition cost recovery by Natural Gas Pipeline Company of
America (Natural). Charges by Natural for transition costs
commenced on January 1, 1994. On September 29, 1994, the FERC
approved a Stipulation and Agreement (Agreement) filed by Natural.
The Agreement places a cap on the amount of GSR costs recoverable
by Natural from Peoples Gas and North Shore Gas. For Peoples Gas,
that cap is approximately $103 million and for North Shore Gas,
that cap is approximately $25 million. However, subject to these
caps, the level of costs that Peoples Gas and North Shore Gas will
incur is dependent primarily upon the future market price of
natural gas and pipeline negotiations with producers. Peoples Gas
and North Shore Gas are currently recovering
transition costs through the Gas Charge. At March 31, 1996,
Peoples Gas and North Shore Gas have made payments of $57.4 million
and $14.1 million, and have accrued an additional $6.1 million and
$1.5 million, respectively, toward the caps.

The 636 Orders are not expected to have a material adverse
effect on financial position or results of operations of the
Company or its subsidiaries. (See Notes 2E and 4A.)

5. ENVIRONMENTAL MATTERS

5A Former Manufactured Gas Plant Operations

The Company's utility subsidiaries, their predecessors, and
certain former affiliates operated facilities in the past at sites
for the purpose of manufacturing gas and storing manufactured gas
(Manufactured Gas Sites). 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. At this
time, except for the Waukegan Site and the 110th Street Station
Site (discussed below), it is not known what, if any, remedial
action will be necessary at the Manufactured Gas Sites or, if
necessary, what the cost of any such action would be.

Peoples Gas and North Shore Gas, in cooperation with the
Illinois Environmental Protection Agency (IEPA), are conducting
investigations of over 30 Manufactured Gas Sites to determine
whether remedial action might be necessary. The investigations
were initiated pursuant to a request by the IEPA. To the best of
the Company's knowledge, similar requests have been made by the
IEPA to other major Illinois gas and electric utilities.

In 1990, North Shore Gas entered into an Administrative Order on
Consent (AOC) with the United States Environmental Protection
Agency (EPA) and the IEPA to implement and conduct a remedial
investigation/feasibility study (RI/FS) of a Manufactured Gas Site
located in Waukegan, Illinois, where manufactured gas and coking
operations were formerly conducted (Waukegan Site). The RI/FS is
comprised of an investigation to determine the nature and extent of
contamination at the Waukegan Site and a feasibility study to
develop and evaluate possible remedial actions. North Shore Gas
entered into the AOC after being notified by the EPA that North
Shore Gas, General Motors Corporation (GMC) and Outboard Marine
Corporation were each a potentially responsible party (PRP) under
the Comprehensive Environmental Response, Compensation and
Liability Act of 1980, as amended (CERCLA) with respect to the
Waukegan Site. A PRP is potentially liable for the cost of any
investigative and/or remedial work that the EPA determines is
necessary. Other parties identified as PRPs did not enter into the
AOC. Under the terms of the AOC, North Shore Gas is responsible
for the cost of the RI/FS. North Shore Gas believes, however, that
it will recover a significant portion of the costs of the RI/FS
from other entities. GMC has agreed to share equally with North
Shore Gas in funding of the RI/FS cost, without prejudice to GMC's
or North Shore Gas' right to seek a lesser cost responsibility at a
later date.

Peoples Gas has observed what appear to be gas purification
wastes on a Manufactured Gas Site in Chicago, formerly called the
110th Street Station, and property contiguous thereto (110th Street
Station Site). Peoples Gas has fenced the 110th Street Station
Site and is conducting a study under the supervision of the IEPA to
determine the feasibility of a limited removal action.

The utility subsidiaries are accruing and deferring the costs
they incur in connection with all of the Manufactured Gas Sites,
including related legal expenses, pending recovery through rates or
from insurance carriers or other entities. At March 31, 1996, the
total of the costs deferred by the subsidiaries, net of recoveries
and amounts billed to other entities, was $17.2 million. This
amount includes an estimate of the costs of completing the studies
required by the EPA at the Waukegan Site and the investigations
initiated at the request of the IEPA at the other sites referred
to above. The amount also includes an estimate of the costs of
remediation at the Waukegan Site and at the 110th Street Station
Site in Chicago, at the minimum amount of the current estimated
range of such costs. The costs of remediation at the other sites
cannot be determined until more is known about the nature and
extent of contamination and the remedial action, if any, to be
required by the EPA or the IEPA. 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 have filed suit against a number
of insurance carriers for the recovery of environmental costs
relating to the utilities' former manufactured gas operations. The
suit asks the court to declare that the insurers are liable under
policies in effect between 1938 and 1985 for costs incurred or to
be incurred by the utilities in connection with five Manufactured
Gas Sites in Chicago and Waukegan. The utilities are also asking
the court to award damages stemming from the insurers' breach of
their contractual obligation to defend and indemnify the utilities
against these costs. At this time, management cannot determine the
timing and extent of the subsidiaries' recovery of costs from their
insurance carriers. Accordingly, the costs deferred at March 31,
1996 have not been reduced to reflect recoveries from insurance
carriers.

Costs incurred by Peoples Gas or North Shore Gas for
environmental activities relating to former manufactured gas
operations will be recovered from insurance carriers or 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 subsidiaries. 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. At March 31, 1996, the subsidiaries
had recovered $6.6 million of such costs through rates.

5B Former Mineral Processing Site in Denver, Colorado

In February 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. Shattuck is a wholly owned
subsidiary of Salomon, Inc. (Salomon). The demand alleges that
North Shore Gas is a successor-in-interest to certain companies
that were allegedly responsible during the period 1934-1941 for the
disposal of mineral processing wastes containing radium and other
hazardous substances at the site. 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 at 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.

In November 1994, North Shore Gas filed a declaratory judgment
action against Salomon in the District Court for the Northern
District of Illinois. The suit asks the court to declare that
North Shore Gas is not liable for response costs incurred or to be
incurred at the Denver site. Salomon has filed a counterclaim for
costs incurred and to be incurred by Salomon and Shattuck with
respect to the site.

5C Gasoline Release in Wheeling, Illinois

In June 1995, North Shore Gas received a letter from the IEPA
informing North Shore Gas that it was not in compliance with
certain provisions of the Illinois Environmental Protection Act
which prohibit water pollution within the State of Illinois. On
November 14, 1995, the Illinois Attorney General filed a complaint
in the Circuit Court of Cook County naming North Shore Gas and four
other parties as defendants. The complaint alleges that the
violations are the result of a gasoline release that occurred in
Wheeling, Illinois in June 1992 when a contractor who was
installing a pipeline for North Shore Gas accidentally struck a
gasoline pipeline owned by West Shore Pipeline Company.

North Shore Gas is currently evaluating this matter.

6. GAS OVER-PRESSURE CONDITION

On January 17, 1992, an over-pressure condition occurred in the
gas mains of Peoples Gas serving an approximately one-square-mile
area of the Near Northwest Side of the City of Chicago. The
over-pressure condition caused a major explosion and numerous
fires.

A number of lawsuits, some of which included wrongful-death
claims, were filed against the Company and Peoples Gas as a result
of the over-pressure condition. All of the lawsuits alleging
wrongful-death claims have been settled. While property damage
cases are still pending, management believes that any liability
that may arise from such cases will not have a material adverse
effect on financial position or results of operation of the Company
or Peoples Gas.

7. DISTRICT ENERGY

Peoples District Energy is a 50 per cent participant in a
partnership, Trigen-Peoples District Energy Company, that provides
heating and cooling services to the McCormick Place exposition and
convention center in Chicago, Illinois. The partnership also
intends to offer district energy services to other large buildings
in Chicago. The services will ultimately be supplied from one or
more central plants, a concept known as district energy. The other
partner, Trigen-Chicago Energy Corporation (Trigen-Chicago), is a
subsidiary of Trigen Energy Corporation (Trigen). Neither the
partnership nor its partners are regulated as a public utility.

In December 1992, the partnership entered into a 28-year
contract with the Metropolitan Pier and Exposition Authority (MPEA)
to construct and operate a plant that will provide steam and
chilled water to McCormick Place for heating and cooling purposes
(MPEA Agreement). In November 1993, the partnership assumed
operation of the current space-conditioning system and began
providing service to the two existing halls. The partnership also
will provide heating and cooling to a planned exhibition hall that
is scheduled to be in operation early in 1997. The partnership is
obligated to provide services to McCormick Place for the term of
the MPEA Agreement at or below the cost (as determined by a
contractual formula) that the MPEA would incur to produce heating
and cooling for itself. The MPEA Agreement also obligates the
partnership to complete and pay for construction of the plant by
certain dates specified in the contract. To secure its obligations
during the service period under the MPEA Agreement, the partnership
is obligated to provide, maintain, and reinstate a letter of credit
upon which the MPEA can draw to pay its costs, expenses, and
damages, up to $4 million per incident, principally in the event of
the partnership's failure to cure timely an interruption of
service.

The Company and Trigen have provided two joint and several
guarantees to the MPEA of the partnership's performance of its
obligations under the MPEA Agreement. One of the guarantees covers
all obligations of the partnership relating to construction of the
project (Construction Obligations), and is limited in the aggregate
to $15 million, except for the guarantors' funding obligations
described above and costs to the extent incurred by the MPEA in
connection with enforcement of obligations of the partnership or
the guarantors. The second guarantee covers all obligations of the
partnership other than the Construction Obligations, including
liabilities arising from an interruption of service to McCormick
Place, insolvency of the partnership, or other partnership default.
This second guarantee is limited in the aggregate to $11 million,
except for an additional $4 million to $8 million in the event of
insolvency of the partnership or the installation (pursuant to
enforcement of lender or MPEA remedies) of any other operator of
the district energy plant in lieu of the partnership, and except
for the partnership's obligations relating to the letter of credit
in favor of the MPEA described above and costs to the extent
incurred by the MPEA in connection with the enforcement of
obligations of the partnership or the guarantors.

The district energy plant is estimated to cost approximately
$41.5 million. The MPEA has effectively funded $8 million of the
construction costs, and the partnership will fund the balance. In
August 1995, the partnership obtained a $28 million construction
and term loan to finance construction of a major portion of the
project. Upon completion of construction of the project, the
construction loans will be converted to a term loan with a 20-year
maturity. In connection with the financing, the Company pledged
its shares of common stock of Peoples District Energy to the lender
as security for the loan obligations. Additionally, the Company,
Peoples District Energy, Trigen, Trigen-Chicago and the partnership
executed a Sponsors Support and Equity Contribution Agreement
(Sponsors Support Agreement).

Under the Sponsors Support Agreement, the Company and Trigen
have certain contractual obligations to the lender that could
require payment by each of the Company and Trigen of 50 per cent of
the outstanding loan obligations upon the occurrence of certain
events relating to material destruction of the project,
condemnation of the project, purchase of the project by the MPEA
pursuant to provisions of the MPEA Agreement and default by the
partnership, the Company or Trigen of certain of its obligations to
the MPEA.

8. TAX MATTERS

On September 30, 1993, the Company received notification from
the Internal Revenue Service (IRS) that settlement of past income
tax returns had been reached for fiscal years 1978 through 1990.
The IRS settlement resulted in payments of principal and interest
to the Company in 1994 in total amount of approximately $28
million, or $21.6 million after income taxes. Both Peoples Gas and
North Shore Gas received regulatory authorization to defer the
recognition of the settlement amount in income for fiscal year
1993, and to recognize its portion of the settlement amount in
income for fiscal years 1994 and 1995. Each utility represented to
the Commission that, having received this accounting authorization,
it would not file a request for an increase in base rates before
December 1994. The regulatory treatment of the IRS settlement
having been resolved in November 1993, Peoples Gas and North Shore
Gas together included $14 million, or $10.8 million after income
taxes, in income in 1994. The amount after income taxes was
included in Other Income _ Miscellaneous. At September 30, 1994,
approximately $14 million was included in Deferred Credits and
Other Liabilities _ Other.

As a result of the Commission's accounting authorization, the
fiscal year 1995 portion of the settlement amount for Peoples Gas
and North Shore Gas was amortized (credited) to operation expense.
The effect was to offset increases in costs that the utilities
would incur during the year. In fiscal 1995, the utilities
together amortized approximately $14 million, or $10.8 million
after income taxes.

9. BONDS REDEEMED

On November 14, 1995, Peoples Gas notified the trustee of the
City of Joliet 1984 Gas Supply Revenue Refunding Bonds, Series A
and B, which were secured by Peoples Gas' Series U and V First
Mortgage Bonds, of its intention to redeem approximately $87
million aggregate principal amount of the bonds. The redemption,
from general corporate funds, was completed on December 29, 1995.

On December 18, 1995, North Shore Gas notified the trustee of
its intention to redeem $8 million aggregate principal amount of
Series I First Mortgage Bonds. The redemption, using the proceeds
of an interim short-term bank loan as well as other monies of North
Shore Gas, was completed on February 1, 1996.

10. SNG PLANT CLOSING

Peoples Gas has closed its synthetic gas-making plant located
near Joliet, Illinois. The decision was effected after a
cost-benefit analysis was performed, which showed that, as of
December 1, 1995, it would not be cost-effective to use the plant
as a source of gas, given new, more economical supply arrangements
to become effective on that date. Those supply arrangements were
the result of initiatives undertaken by the utilities to
restructure their gas supply portfolios in response to FERC Order
636. The rates approved by the Commission in Peoples Gas' most
recent rate case reflect the annual effect of a five-year
amortization of the undepreciated investment in the plant and
decommissioning expenses. The plant closing did not have a
material effect on financial position or results of operations of
the Company or Peoples Gas.

11. EXPIRATION OF STORAGE CONTRACTS

Peoples Gas and North Shore Gas had certain natural gas storage
contracts with Natural that expired on or before December 1, 1995.
Associated with the expiration of the contracts, the utilities
realized a gain, after taxes, of $3.8 million in the second quarter
of fiscal 1996.

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

RESULTS OF OPERATIONS

Net Income

Net income increased $16.2 million, to $62 million, for the
three months ended March 31, 1996, from the results of last year's
like quarter, due mainly to increased gas deliveries largely
resulting from weather that was 12 per cent colder than last year's
period. In addition, net income benefited from rate increases that
went into effect for Peoples Gas and North Shore Gas on November
14, 1995. (See Note 4A of the Notes to Consolidated Financial
Statements.) Also, the current quarter was aided by gains
associated with the expiration of certain natural gas storage
contracts. (See Note 11 of the Notes to Consolidated Financial
Statements.) These increases were partly offset by higher
operating expenses and the effect of last year's federal income tax
settlement (see Note 8 of the Notes to Consolidated Financial
Statements).

Net income increased $27.2 million, to $98.1 million, and $31.4
million, to $89.3 million, for the current six- and 12-month
periods, from the results of the similar prior periods, due
principally to higher gas deliveries, mostly the result of weather
that was 20 per cent and 19 per cent colder than the previous
respective periods. Both current periods also benefited from the
aforementioned rate increases and the gains associated with the
expiration of certain natural gas storage contracts. These
increases were offset, in part, by higher operating expenses plus
the prior periods' recognition of the federal income tax settlement
and gains from the sale of certain oil and gas rights.

<TABLE>
A summary of variations affecting income between periods is
presented below, with explanations of significant differences
following:

Three Months Ended Six Months Ended 12 Months Ended
March 31, 1996 March 31, 1996 March 31, 1996
Increase/(Decrease) Increase/(Decrease) Increase/(Decrease)
from Prior Period from Prior Period from Prior Period
------------------ ------------------ ------------------
(Thousands of dollars) Amount % Amount % Amount %
- ---------------------------------------------------------------------------------------------

Net operating revenues (a) $35,336 21.1 $59,518 20.0 $69,542 15.2
Operation and
maintenance expenses 13,453 22.4 19,491 16.5 15,423 6.3
Depreciation and
amortization expense 1,040 6.2 1,177 3.5 989 1.5
Income taxes 9,059 34.0 18,617 46.5 24,714 109.2
Other income and deductions (4,486) (37.0) (7,085) (29.8) (4,171) (9.6)
Net Income 16,196 35.3 27,185 38.3 31,386 54.2
- ---------------------------------------------------------------------------------------------

<FN>
(a) Operating revenues, net of gas costs and revenue taxes.

</TABLE>

Net Operating Revenues

Gross revenues of Peoples Gas and North Shore Gas are affected
by changes in the unit cost of the subsidiaries' gas purchases and
do not include the cost of gas supplies for customers who purchase
gas directly from producers and marketers rather than from the
subsidiaries. The direct customer purchases have no 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. Changes in the unit cost of gas do not
significantly affect net income because the utilities' tariffs
provide for dollar-for-dollar recovery of gas costs. (See Note 2E
of the Notes to Consolidated Financial Statements.) The utilities'
tariffs also provide for dollar-for-dollar recovery of the cost of
revenue taxes imposed by the state and various municipalities.

Since income is not significantly affected by changes in revenue
from customers' gas purchases from producers or marketers rather
than from the subsidiaries, changes in gas costs, or changes in
revenue taxes, the discussion below pertains to "net operating
revenues" (operating revenues, net of gas costs and revenue taxes).
The Company considers net operating revenues to be a more pertinent
measure of operating results than gross revenues.

Net operating revenues increased $35.3 million, to $202.6
million, $59.5 million, to $356.6 million, and $69.5 million, to
$525.8 million, for the current three-, six-, and 12-month
periods, respectively, reflecting increased gas deliveries, mainly
caused by colder weather in each of the more recent periods. The
aforementioned rate increases for the Company's utility
subsidiaries improved net operating revenues in the current
three-month period by about $12.7 million, or $7.7 million after
income taxes. Rate increases benefited net operating revenues in
both the current six- and 12-month periods by about $18.8 million,
and net income by $11.4 million.

See Other Matters - Operating Statistics for details of selected
financial and operating information by gas service classification.

Operation and Maintenance Expenses

Operation and maintenance expenses increased $13.5 million, to
$73.6 million and $19.5 million, to $137.8 million, for the current
three- and six-month periods, due mainly to the recognition of an
IRS settlement of $6.2 million and $10.6 million in the respective
prior periods. (See Note 8 of the Notes to Consolidated Financial
Statements.) Also the prior six-month period included $3.7 million
from the sale of certain oil and gas rights. In addition, both
current periods were affected by increases in the provision for
uncollectible accounts, due primarily to increased revenues, the
amortization of environmental costs, reengineering expenses, and
labor charges. These increases were partially offset by decreased
pension and group insurance expenses.

Operation and maintenance expenses increased $15.4 million, to
$260.3 million, in the current 12-month period, due principally to
a decreased credit of $7 million between periods for the timing
difference in recognizing an IRS settlement and the recognition in
the prior 12-month period of $3.7 million from the sale of certain
oil and gas rights. In addition, the current period was impacted
by increases in reengineering costs, the amortization of
environmental costs, and labor charges. These increases were
offset, in part, by decreases in the provision for uncollectible
accounts and pension and group insurance expenses.

Depreciation and Amortization Expense

Depreciation and amortization expense increased $1 million, to
$17.9 million, $1.2 million, to $34.5 million, and $989,000, to
$67.6 million, for the current three-, six-, and 12-month periods,
due primarily to depreciable property additions and the
amortization of costs associated with the closing of Peoples Gas'
SNG Plant (see Note 10 of the Notes to Consolidated Financial
Statements).

Income Taxes

Income taxes, exclusive of income taxes included in other income
and deductions, increased $9.1 million, to $35.7 million, $18.6
million, to $58.6 million, and $24.7 million, to $47.3 million, in
the current three-, six-, and 12-month periods, due principally to
higher pre-tax income.

Other Income and Deductions

Other income and deductions decreased $4.5 million, $7.1
million, and $4.2 million, for the current three-, six-, and
12-month periods, respectively, due primarily to the gain of $3.8
million, after income taxes, associated with the expiration of
certain natural gas storage contracts. (See Note 11 of the Notes
to Consolidated Financial Statements.) In addition, all three
periods benefited from decreased interest on long-term debt
reflecting less debt outstanding. The current 12-month period also
includes increased other interest expense on amounts refundable to
customers partially offset by increased interest income.

Other Matters

Effect of Weather. Weather variations affect the volumes of gas
delivered for heating purposes and, therefore, can have a
significant positive or negative impact on net income and coverage
ratios.

FERC Order 636 Costs. In 1992, the FERC issued Order 636 and
successor orders that required substantial restructuring of the
service obligations of interstate pipelines. (See Notes 2E, 4A,
and 4B of the Notes to Consolidated Financial Statements.)

On September 15, 1993, the Commission entered an order
initiating an investigation into the appropriate means of recovery
by Illinois gas utilities of pipeline charges for FERC Order 636
transition costs. The Illinois Appellate Court affirmed the
Commission's order on rehearing on September 21, 1995. (See Notes
2E, 4A, and 4B of the Notes to Consolidated Financial Statements.)

Reengineering Study. Peoples Gas and North Shore Gas have
undertaken a major project to reengineer their business processes
with the goal of increasing efficiency, responsiveness to customer
needs, and cost effectiveness.

Large Volume Gas Service Agreements. Peoples Gas has entered into
gas service contracts with three large volume customers under a
specific rate schedule approved by the Commission. These contracts
were negotiated to overcome the potential threat of bypassing the
utility's distribution system. The impact on the net income of
Peoples Gas as a result of these contracts is not material.

<TABLE>

Operating Statistics. The following table represents gas
distribution margin components:

<CAPTION>
Three Months Ended Six Months Ended Twelve Months Ended
March 31, March 31, March 31,
------------------- ------------------ -----------------------
1996 1995 1996 1995 1996 1995
-------- -------- ------- ------- -------- --------

Operating Revenues (thousands):
Gas sales
Residential $ 370,911 $ 311,337 $ 604,687 $ 537,845 $ 819,639 $ 773,209
Commercial 66,121 52,863 100,102 86,331 129,884 121,015
Industrial 15,258 11,442 22,674 18,017 28,784 26,208
-------- ------- -------- -------- ------- -------
452,290 375,642 727,463 642,193 978,307 920,432

Transportation
Residential 12,387 14,624 24,732 25,060 37,521 36,777
Commercial 18,901 19,639 35,577 33,272 52,623 48,676
Industrial 11,847 11,050 22,097 19,733 37,011 31,750
------ ------ ------ ------ ------- -------
43,135 45,313 82,406 78,065 127,155 117,203
------ ------ ------ ------ ------- -------
Other 3,131 3,431 6,293 11,250 12,592 19,487
------- ------- ------- ------- --------- ---------
Total Operating Revenues 498,556 424,386 816,162 731,508 1,118,054 1,057,122
Less - Gas Costs 244,033 211,034 373,904 357,121 474,219 490,000
- Revenues Taxes 51,880 46,045 85,644 77,291 118,074 110,903
------- ------- ------- ------- --------- ---------
Net Operating Revenues $ 202,643 $ 167,307 $ 356,614 $ 297,096 $ 525,761 $ 456,219
======= ======= ======= ======= ========= =========

Deliveries (MDth):
Gas Sales
Residential 71,389 60,505 119,182 97,323 152,430 126,472
Commercial 13,649 10,563 21,066 16,351 26,794 21,611
Industrial 3,288 2,454 5,113 3,659 6,512 5,176
------ ------ ------- ------- -------- ---------
88,326 73,522 145,361 117,333 185,736 153,259
------ ------ ------- ------- -------- ---------

Transportation
Residential 9,952 10,754 18,814 17,850 25,775 24,074
Commercial 16,685 17,470 30,457 28,681 43,425 40,719
Industrial 13,769 12,270 25,913 22,287 43,518 36,914
------ ------ ------- ------- -------- ---------
40,406 40,494 75,184 68,818 112,718 101,707
------ ------ ------ ------ -------- ---------

Total Gas Sales
and Transportation 128,732 114,016 220,545 186,151 298,454 254,966
======= ======= ======= ======= ======== =========

Margin per Dth
delivered $1.57 $1.47 $1.62 $1.60 $1.76 $1.79

</TABLE>

LIQUIDITY AND CAPITAL RESOURCES

Indenture Restrictions. North Shore Gas' indenture relating to its
first mortgage bonds contains provisions and covenants restricting
the payment of cash dividends and the purchase or redemption of
capital stock. At March 31, 1996, such restrictions amounted to
$11.6 million out of North Shore Gas' total retained earnings of
$71.2 million. (See Note 3 of the Notes to Consolidated Financial
Statements.)

Regulatory Actions. On November 8, 1995, the Commission issued
orders approving changes in rates of Peoples Gas and North Shore
Gas. (See Note 4A of the Notes to Consolidated Financial
Statements.)

On September 29, 1995, Peoples Gas and North Shore Gas filed
petitions with the Commission for approval of performance-based
rate programs (PBR Programs) for gas costs. The objectives of the
PBR Programs are to provide incentives to minimize gas supply and
capacity costs in a changing market and to pursue innovative gas
supply-related opportunities. Under specified conditions and up to
certain limits, Peoples Gas and North Shore Gas would share equally
with gas sales customers the savings or costs from these programs.
The PBR Programs would be for a pilot period covering April 1, 1996
through fiscal year 1998 and were filed pursuant to a new provision
of the Illinois Public Utilities Act which allows experiments in
performance-based rates. The Commission has commenced hearings on
the PBR Program proposals, and an order is expected during the
third quarter of fiscal 1996.

Environmental Matters. The Company's utility subsidiaries are
conducting environmental investigations and work at certain sites
that were the location of former manufactured gas operations. (See
Note 5A of the Notes to Consolidated Financial Statements.)

In February 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
reimbursement, indemnification and contribution for response costs
incurred at a former mineral processing site in Denver, Colorado.
In November 1994, North Shore Gas filed a declaratory judgment
action asking the court to declare that North Shore Gas is not
liable for response costs relating to the site. (See Note 5B of
the Notes to Consolidated Financial Statements.)

On November 14, 1995, the Illinois Attorney General filed a
complaint in the Circuit Court of Cook County naming North Shore
Gas and four other parties as defendants. The complaint alleges
violations arising out of a gasoline release that occurred in
Wheeling, Illinois in June 1992 when a contractor who was
installing a pipeline for North Shore Gas accidentally struck a
gasoline pipeline owned by West Shore Pipeline Company. North
Shore Gas is currently evaluating this matter. (See Note 5C of the
Notes to Consolidated Financial Statements.)

District Energy. Peoples District Energy is a 50 per cent
participant in a partnership, Trigen-Peoples District Energy
Company, that provides district energy services to the McCormick
Place exposition and convention center in Chicago, Illinois. The
partnership also intends to offer district energy services to other
large buildings in Chicago. The other partner is a subsidiary of
Trigen Energy Corporation (Trigen), a company whose primary
business is constructing and operating district energy facilities.
Neither the partnership nor its partners are regulated as a public
utility. The Company and Trigen have each provided two joint and
several limited guarantees to the owner and operator of McCormick
Place and also have certain limited obligations to the
partnership's lender under a Sponsors Support and Equity
Contribution Agreement. (See Note 7 of the Notes to Consolidated
Financial Statements.)

Bonds Redeemed. On November 14, 1995, Peoples Gas notified the
trustee of the City of Joliet 1984 Gas Supply Revenue Refunding
Bonds, Series A and B, which were secured by Peoples Gas' Series U
and V First Mortgage Bonds, of its intention to redeem
approximately $87 million aggregate principal amount of the bonds.
The redemption, from general corporate funds, was completed on
December 29, 1995. (See Note 9 of the Notes to Consolidated
Financial Statements.)

Credit Lines. The utility subsidiaries have lines of credit of
$131.1 million. Agreements covering $93.7 million of the total
will expire on June 26, 1996. The agreement covering the remaining
$37.4 million will expire on January 31, 1998. Such lines of
credit cover projected short-term credit needs of the subsidiaries
and support the long-term debt treatment of Peoples Gas'
adjustable-rate mortgage bonds.

Interest Coverage. The fixed charges coverage ratios for Peoples
Gas for the 12-months ended March 31, 1996, and fiscal 1995 and
1994 were 3.76, 2.76, and 3.28, respectively.

The corresponding coverage ratios for North Shore Gas for the
same periods were 4.18, 2.93, and 3.33, respectively.

Dividends. On February 7, 1996, the Directors of the Company voted
to increase the regular quarterly dividend on the Company's common
stock to 46 cents per share from 45 cents per share previously in
effect. The current annualized dividend rate amounts to $1.84 per
share.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

See Note 5 of the Notes to Consolidated Financial Statements
for a discussion pertaining to environmental matters.

See Note 6 of the Notes to Consolidated Financial Statements
for a discussion of an over-pressure condition that occurred on
January 17, 1992, in Peoples Gas' gas mains on the Near Northwest
Side of the City of Chicago.

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

a. The Company held its Annual Meeting of Shareholders on
February 23, 1996.

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

1. The election of nominees for directors who will
serve for a one-year term or until their respective
successors shall be duly elected. The nominees, all of
whom were elected, were as follows: Pastora San Juan
Cafferty, Franklin A. Cole, J. Bruce Hasch, Frederick C.
Langenberg, Homer J. Livingston, Jr., William G. Mitchell,
Earl L. Neal, Michael S. Reeves, Richard E. Terry, Richard
P. Toft, and Arthur R. Velasquez. The Inspectors of
Election certified the following vote tabulations:

BROKER
FOR WITHHELD NON-VOTES
---------- ---------- ----------

Pastora San Juan Cafferty 28,929,136 465,227 0
Franklin A. Cole 28,961,243 465,227 0
J. Bruce Hasch 29,049,452 465,227 0
Frederick C. Langenberg 28,999,104 465,227 0
Homer J. Livingston, Jr 29,066,779 465,227 0
William G. Mitchell 29,074,052 465,227 0
Earl L. Neal 28,994,520 465,227 0
Michael S. Reeves 29,014,017 465,227 0
Richard E. Terry 29,035,614 465,227 0
Richard P. Toft 29,052,297 465,227 0
Arthur R. Velasquez 29,030,927 465,227 0

</TABLE>

2. A proposal to ratify the recommendation of the
Audit Committee and the appointment by the Board of
Directors of Arthur Andersen LLP as the independent public
accountants for the Company and its subsidiaries for the
fiscal year ending September 30, 1996. The Inspectors of
Election certified the following vote tabulations:

BROKER
FOR AGAINST ABSTAIN NON-VOTES
---------- ---------- --------- ---------

28,938,962 355,527 189,720 0

</TABLE>

Item 6. Exhibits and Reports on Form 8-K

a. Exhibits

Exhibit
Number Description of
Document

3 (i) Amendments to the By-Laws of the Registrant
dated, May 1, 1996

3 (ii) By-Laws of the Registrant, as amended on May 1, 1996

27 Financial Data Schedule

b. Reports on Form 8-K filed during the quarter ended
March 31, 1996

None.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of

1934, as amended, the registrant has duly caused this report to be

signed on its behalf by the undersigned thereunto duly authorized.

Peoples Energy Corporation
--------------------------
(Registrant)

May 13, 1996 By: /s/ K. S. BALASKOVITS
- ------------ ------------------------------
(Date) K. S. Balaskovits
Vice President and Controller

(Same as above)
------------------------------
Principal Accounting Officer

CERTIFIED COPY OF RESOLUTIONS

I, E. P. CASSIDY, Secretary of PEOPLES ENERGY

CORPORATION (herein called the "Company"), DO HEREBY CERTIFY that

the following is a true and correct copy of certain resolutions

unanimously adopted by the Board of Directors of said Company on

May 1, 1996, and that said resolutions have not been amended,

rescinded or revoked and the same remain in full force and

effect:

WHEREAS, the Board of Directors of
the Company deems it desirable and in the best
interests of the Company and its shareholders
that the Company adopt a shareholder rights
plan to ensure that all shareholders receive
fair and equal treatment in the event of a
proposed takeover; and

WHEREAS, the Board of Directors
believes that a dividend to holders of the
Company's common stock, without par value (the
"Common Stock"), of rights ("Rights") to
purchase one-half of one share of Common
Stock, on the terms and subject to the
conditions hereinafter provided will
contribute to the preservation of the
Company's long-term value for its
shareholders; and

WHEREAS, Goldman, Sachs & Co.,
financial advisors to the Company, on the
basis of their review of, among other things,
the provisions of the form of Rights Agreement
with Harris Trust and Savings Bank (the
"Rights Agreement"), historical financial
information and financial forecasts relating
to the business, earnings, cash flow, assets
and prospects of the Company, and the
historical market prices and trading activity
for the Common Stock, has advised the Board of
Directors with respect to an appropriate
exercise price for each Right.

[Declaration of Rights Dividend]

NOW, THEREFORE, BE IT RESOLVED, That
a dividend of one right (a "Right") per share
of Common Stock be paid on May 15, 1996 to
shareholders of record of the Common Stock
issued and outstanding at the close of
business on May 15, 1996, each Right
representing the right to purchase one-half of
one Share of Common Stock upon the terms and
subject to the conditions set forth in the
form of the Rights Agreement presented to this
meeting, which agreement is hereby approved in
all respects; and

RESOLVED FURTHER, That the exercise
price of the Rights shall be $37.50 per Right
and that the redemption price therefor shall
be $.01 per Right; and

RESOLVED FURTHER, That the proper
officers of the Company be, and each hereby
is, authorized in the name and on behalf of
the Company to execute the Rights Agreement
substantially in the form submitted to this
meeting, with such modifications as the
officer or officers executing the same shall
(as conclusively evidenced by his execution
thereof) approve and to deliver the same to
the Rights Agent thereunder, such execution
and delivery conclusively to evidence the due
authorization and approval thereof by the
Company; and

[Right Certificates]

RESOLVED FURTHER, That certificates
evidencing the Rights (the "Right
Certificates") shall be issued and delivered
as provided in the Rights Agreement and shall
be substantially in the form set forth
therein; and

RESOLVED FURTHER, That the Right
Certificates shall be signed by (i) the
Chairman of the Board, the President, the
Executive Vice President or any Vice President
and the Secretary or any Assistant Secretary
or the Treasurer or any Assistant Treasurer or
(ii) any two officers of the Company so
authorized to sign by a resolution of the
Board of Directors and under its corporate
seal (which may be in the form of a facsimile
of the seal of the Company); provided,
however, that the signature of said officers
of the Company may, but need not, be a
facsimile signature imprinted or otherwise
reproduced on the Right Certificates, if such
Right Certificates are signed by the Rights
Agent. The Company adopts for such purposes
the facsimile signature of the present or any
future Chairman of the Board, President,
Executive Vice President, Vice President,
Secretary and Assistant Secretary, Treasurer
and Assistant Treasurer and any authorized
officers of the Company, notwithstanding the
fact that at the time the Right Certificates
shall be authenticated and delivered or
disposed of he or she shall have ceased to be
such officer; and

RESOLVED FURTHER, That the proper
officers be, and each of them hereby is,
authorized to execute on behalf of the Company
and under its corporate seal (which may be in
the form of a facsimile of the seal of the
Company) Right Certificates issued to replace
lost, stolen, mutilated or destroyed Right
Certificates, and such Right Certificates as
may be required for exchange, substitution or
transfer as provided in the Rights Agreement
in the manner and form to be required in, or
contemplated by, the Rights Agreement; and

RESOLVED FURTHER, That the Right
Certificates shall be countersigned by the
Rights Agent either manually or by facsimile
signature and books for the registration and
transfer of the Right Certificates shall be
maintained by the Rights Agent at its
principal offices; and

[Appointment of Rights Agent]

RESOLVED FURTHER, That Harris Trust
and Savings Bank is hereby appointed Rights
Agent under the Rights Agreement, and that
upon presentation to it of Right Certificates
for exercise in accordance with the Right
Agreement, Harris Trust and Savings Bank is
authorized, as Transfer Agent and Registrar
for the Common Stock, to issue, originally
countersign, register and deliver the shares
of Common Stock issuable upon such exercise;
and

[Registration and Listing]

RESOLVED FURTHER, That the proper
officers of the Company be, and each of them
hereby is, authorized, for and on behalf of
the Company, to execute personally or by
attorney-in-fact and to cause to be filed with
the Securities and Exchange Commission a
registration statement under the Securities
Act of 1933, as amended (the "Securities
Act"), for the registration of the shares of
Common Stock issuable upon exercise of the
Rights, and thereafter to execute and cause to
be filed any amended registration statement or
registration statements and amended prospectus
or prospectuses, or amendments or supplements
to any of the foregoing, and to cause such
registration statement and any amendments
thereto to become effective in accordance with
the Securities Act and the General Rules and
Regulations of the Securities and Exchange
Commission thereunder; and

RESOLVED FURTHER, That the Secretary
of the Company is hereby appointed as agent
for service of the Company with respect to
such registration statement, with all the
powers and functions specified in the General
Rules and Regulations of the Securities and
Exchange Commission under the Securities Act;
and

RESOLVED FURTHER, That the proper
officers of the Company be, and each of them
hereby is, authorized, in the name and on
behalf of the Company, to take all such
actions and to execute all such documents as
they may deem necessary or appropriate in
connection with the issuance of the Rights in
order to comply with the Securities Act and
the Exchange Act, as amended, including,
without limitation, amending to the extent
appropriate existing registration statements
of the Company; and

RESOLVED FURTHER, That the proper
officers of the Company be, and each of them
hereby is, authorized jointly and severally,
in the name and on behalf of the Company, to
execute and file such application or
applications and amendments and supplements
thereto, and take such other action as may be
necessary to list the Rights on the New York
Stock Exchange, the Chicago Stock Exchange,
the Pacific Stock Exchange and on any other
stock exchanges deemed appropriate by such
officers of the Company; and that the proper
officers of the Company be, and each of them
hereby is, authorized to appear before the
Securities and Exchange Commission and any
such stock exchanges, and to execute such
papers and agreements as may be necessary to
conform with the requirements of the
Securities and Exchange Commission and any
such stock exchanges and to effectuate such
listing and registration; and

[Subsequent Issuance of Rights]

RESOLVED FURTHER, That as long as
the Rights are attached to the shares of
Common Stock as provided in the Rights
Agreement, one additional Right shall be
delivered with each Common Share issued after
May 15, 1996, including but not limited to
shares of Common Stock issued upon conversion
of any convertible securities of the Company
and exercise of any options to purchase shares
of Common Stock granted by the Company; and

["Blue Sky" Qualification]

RESOLVED FURTHER, That the Board of
Directors deems it desirable and in the best
interests of the Company that its securities
be qualified or registered for sale in various
jurisdictions; that the Chairman, the
President, any Executive Vice President,
Senior Vice President or Vice President and
the Secretary or an Assistant Secretary be,
and each of them hereby is, authorized to
determine the jurisdictions in which
appropriate action shall be taken to qualify
or register for sale all or such part of the
securities of the Company as said officers may
deem advisable; that said officers are hereby
authorized to perform on behalf of the Company
any and all such acts as they, or any of them,
may deem necessary or advisable in order to
comply with the applicable laws of any such
jurisdictions, and in connection therewith to
execute and file all requisite papers and
documents, including, but not limited to,
applications, reports, surety bonds,
irrevocable consents and appointments of
attorneys for service of process; and the
execution by such officers of any such papers
or documents or the doing by them of any act
in connection with foregoing matters shall
conclusively establish their authority
therefor and the approval and ratification by
the Company of the papers and documents so
executed and the action so taken; and

[General Resolutions]

RESOLVED FURTHER, That the Board of
Directors hereby adopts, as if expressly set
forth herein, the form of any resolution
required by any authority to be filed in
connection with any applications, consents to
service or other documents if (i) in the
opinion of the officer or officers of the
Company executing the same, the adoption of
such resolutions is necessary or desirable and
(ii) the Secretary or an Assistant Secretary
of the Company evidences such adoption by
inserting in the minutes of this meeting
copies of such resolutions, which will
thereupon be deemed to be adopted by the Board
of Directors with the same force and effect as
if presented at this meeting; and

RESOLVED FURTHER, That any of the
officers of the Company be, and each of them
hereby is, authorized and directed, for and on
behalf of the Company, to execute and deliver
any and all agreements, certificates and other
documents, take any and all steps and do any
and all things which they may deem necessary
or appropriate in order to effectuate the
purposes of each and all of the foregoing
resolutions; and

RESOLVED FURTHER, That any actions
taken by such officers prior to the date of
this meeting that are within the authority
conferred hereby are hereby ratified,
confirmed and approved in all respects as to
the act and deed of the Company.

IN WITNESS WHEREOF, I have hereunto set my hand and

affixed the seal of the Company this 2nd day of May, 1996.

/s/ E. P. CASSIDY
-------------------------
E. P. Cassidy
Secretary

BY-LAWS

PEOPLES ENERGY CORPORATION

AMENDED MAY 1, 1996

PEOPLES ENERGY CORPORATION

BY-LAWS

ARTICLE I - OFFICES

ARTICLE II - MEETINGS OF SHAREHOLDERS

ARTICLE III - DIRECTORS AND COMMITTEES

ARTICLE IV - OFFICERS

ARTICLE V - INDEMNIFICATION OF DIRECTORS,
OFFICERS, EMPLOYEES AND AGENTS

ARTICLE VI - CERTIFICATES OF STOCK AND THEIR
TRANSFER

ARTICLE VII - MISCELLANEOUS (CONTRACTS)

ARTICLE VIII - AMENDMENT OR REPEAL OF BY-LAWS

PEOPLES ENERGY CORPORATION

INDEX
PAGE

Amendment of By-Laws . . . . . . . . . . . . . . . . . . 18
Appointment of Officers . . . . . . . . . . . . . . . . 10
Assistant Controller, Duties of . . . . . . . . . . . . 13
Assistant General Counsel, Duties of . . . . . . . . . . 13
Assistant Secretary, Duties of . . . . . . . . . . . . . 13
Assistant Treasurer, Duties of . . . . . . . . . . . . . 13
Assistant Vice President, Duties of . . . . . . . . . . 12

Board of Directors . . . . . . . . . . . . . . . . . . . 5

Certificates of Stock and Their Transfer . . . . . . . . 15
Chairman of the Board, Duties of . . . . . . . . . . . . 11
Chairman of the Executive Committee . . . . . . . . . . 8
Committees
Executive . . . . . . . . . . . . . . . . . . . . . . 8
Other . . . . . . . . . . . . . . . . . . . . . . . . 9
Controller, Duties of . . . . . . . . . . . . . . . . . 13
Contracts, Execution of . . . . . . . . . . . . . . . . 17

Directors and Committees . . . . . . . . . . . . . . . . 5

Election of Directors . . . . . . . . . . . . . . . . . 5
Election of Officers . . . . . . . . . . . . . . . . . . 10
Executive Committee . . . . . . . . . . . . . . . . . . 8

Fees and Compensation . . . . . . . . . . . . . . . . . 9

PEOPLES ENERGY CORPORATION

PAGE

General Counsel, Duties of . . . . . . . . . . . . . . . 13

Indemnification of Directors, Officers, Employees
and Agents . . . . . . . . . . . . . . . . . . . . . . 14

Meetings
Directors . . . . . . . . . . . . . . . . . . . . . . 7
Action Without Meeting . . . . . . . . . . . . . . . 9
Shareholders . . . . . . . . . . . . . . . . . . . . . 1

Notice of Meetings
Directors . . . . . . . . . . . . . . . . . . . . . . 7
Shareholders . . . . . . . . . . . . . . . . . . . . . 2

Officers
Appointed . . . . . . . . . . . . . . . . . . . . . . 10
Elected . . . . . . . . . . . . . . . . . . . . . . . 10
Offices, Two or More Held By One Person . . . . . . . . 10

President, Duties of . . . . . . . . . . . . . . . . . . 11
Presiding Officer
Board Meetings . . . . . . . . . . . . . . . . . . . . 8
Shareholders Meetings . . . . . . . . . . . . . . . . 5
Proxies . . . . . . . . . . . . . . . . . . . . . . . . 4

Quorum
Board . . . . . . . . . . . . . . . . . . . . . . . . 7
Shareholders . . . . . . . . . . . . . . . . . . . . . 4

PEOPLES ENERGY CORPORATION

PAGE

Secretary, Duties of . . . . . . . . . . . . . . . . . . 12
Signatures to Checks, Drafts, etc. . . . . . . . . . . . 17
Stock, Certificates of and their Transfer . . . . . . . 15

Treasurer, Duties . . . . . . . . . . . . . . . . . . . 12

Vice President, Duties of . . . . . . . . . . . . . . . 12
Voting
Shareholders . . . . . . . . . . . . . . . . . . . . . 4
Stock Owned by Company . . . . . . . . . . . . . . . . 18

BY-LAWS

PEOPLES ENERGY CORPORATION

ARTICLE I

Offices

SECTION 1.1. Principal Office. The principal office of the
Company shall be in the City of Chicago, County of Cook and State of
Illinois.

SECTION 1.2. Other Offices. The Company may also have
offices at such other places both within and without the State of
Illinois as the Board of Directors may from time to time determine
or the business of the Company may require.

ARTICLE II

Meetings of Shareholders

SECTION 2.1. Annual Meeting. The annual meeting of the
shareholders shall be held on the fourth Friday of the month of
February in each year, if not a legal holiday, or, if a legal
holiday, then on the next succeeding business day, for the purpose
of electing directors and for the transaction of such other
business as may come before the meeting. If the election of
directors shall not be held on the day herein designated for the
annual meeting, or at any adjournment thereof, the Board of
Directors shall cause such election to be held at a special
meeting of the shareholders as soon thereafter as convenient.

SECTION 2.2. Special Meetings. Except as otherwise
prescribed by statute, special meetings of the shareholders for
any purpose or purposes, may be called by the Chairman of the
Board, the Vice Chairman of the Executive Committee, the
Executive Committee or the President. Such request shall state
the purpose or purposes of the proposed meeting.

SECTION 2.3. Place of Meetings. Each meeting of the
shareholders for the election of the directors shall be held at
the principal office of the Company in the City of Chicago,
Illinois, unless the Board of Directors shall by resolution
designate another place as the place of such meeting. Meetings
of shareholders for any other purpose may be held at such place,
and at such time as shall be determined by the Chairman of the
Board, or the President, or in their absence, by the Secretary,
and stated in the notice of the meeting or in a duly executed
waiver of notice thereof.

SECTION 2.4. Notice of Meetings. Written or printed
notice stating the place, date and hour of each annual or
special meeting of the shareholders, and, in the case of a
special meeting, the purpose or purposes for which the meeting
is called, shall be given not less than 10 nor more than 60
days before the date of the meeting, except as otherwise
provided in this section or by statute. Notice of any meeting
of the shareholders may be waived by any shareholder. At any
meeting of the shareholders of the Company, only such business
shall be conducted as shall have been brought before the
meeting (1) by or at the direction of the Board of Directors
or (2) by any shareholder of the Company who is a holder of
record at the time of giving the notice provided for in this
section, who shall be entitled to vote at the meeting, and who
complies with the notice procedures set forth in this section.
For business to be properly brought before a shareholders'
meeting by a shareholder, timely written notice shall be made
to the Secretary of the Company. The shareholder's notice
shall be delivered to, or mailed and received at, the
principal office of the Company not less than 35 days nor more
than 50 days prior to the meeting; provided, however, in the
event that less than 45 days notice or prior public disclosure of
the date of the meeting is given or made to shareholders, notice
by the shareholder to be timely must be received not later than
the close of business on the tenth day following the day on which
the notice of the date of the meeting was mailed or the public
disclosure was made; provided further however, notice by the
shareholder to be timely must be received in any event not later
than the close of business on the seventh day preceding the day
on which the meeting is to be held. The shareholder's notice
shall set forth (1) a brief description of the business desired
to be brought before the meeting and the reasons for considering
the business, and (2) (a) the name and address, as they appear on
the Company's books, of the shareholder, (b) the class and number
of shares of capital stock of the Company owned by the
shareholder, and (c) any material interest of the shareholder in
the proposed business. The shareholder shall also comply with
all applicable requirements of the Securities Exchange Act of
1934 (the "1934 Act") and the rules and regulations thereunder
with respect to the matters set forth in this section. If the
chairman of the meeting shall determine and declare at the
meeting that the proposed business was not brought before the
meeting in accordance with the procedures prescribed by this
section, the business shall not be considered. The notice
procedures set forth in this section 2.4 do not change or limit
any procedures the Company may require in accordance with
applicable law with respect to the inclusion of matters in the
Company's proxy statement.

SECTION 2.5. Quorum. The holders of a majority of the
shares issued and outstanding and entitled to vote thereat,
present in person or represented by proxy, shall be requisite
for, and shall constitute, a quorum at all meetings of the
shareholders of the Company for the transaction of business,
except as otherwise provided by statute or these by-laws. If a
quorum shall not be present or represented at any meeting of
the shareholders, the shareholders entitled to vote thereat,
present in person or represented by proxy, shall have power to
adjourn the meeting from time to time, without notice other
than announcement at the meeting if the adjournment is for
thirty days or less or unless after that adjournment a new
record date is fixed, until a quorum shall be present or
represented. At such adjourned meeting at which a quorum
shall be present or represented, any business may be
transacted which might have been transacted at the meeting as
originally noticed.

SECTION 2.6. Proxies. At every meeting of the
shareholders, each shareholder having the right to vote
thereat shall be entitled to vote in person or by proxy.
Such proxy shall be appointed by an instrument in writing
subscribed by such shareholder and bearing a date not more
than eleven months prior to such meeting, unless such proxy
provides for a longer period, and shall be filed with the
Secretary of the Company before, or at the time of, the meeting.

SECTION 2.7. Voting. At each meeting of the
shareholders, each shareholder shall be entitled to one vote
for each share of stock entitled to vote thereat which is
registered in the name of such shareholder on the books of the
Company. At all elections of directors of the Company, the
holders of shares of stock of the Company shall be entitled to
cumulative voting. When a quorum is present at any meeting of
the shareholders, the vote of the holders of a majority of the
shares present in person or represented by proxy and entitled
to vote at the meeting shall be sufficient for the transaction
of any business, unless otherwise provided by statute, the
Articles of Incorporation or these by-laws.

SECTION 2.8. Presiding Officer. The presiding officer
of any meeting of the shareholders shall be the Chairman of the
Board or, in the case of the absence of the Chairman of the
Board, the President.

ARTICLE III

Directors and Committees

SECTION 3.1. Number and Election. The business and
affairs of the Company shall be managed and controlled by a
Board of Directors, eleven (11) in number, none of whom need to
be a shareholder, which number may be altered from time to time
by amendment of these by-laws, but shall never be less than three
(3). Except as provided in the Articles of Incorporation, the
directors shall be elected by the shareholders entitled to vote
at the annual meeting of such shareholders and each director
shall be elected to serve for a term of one (1) year and
thereafter until a successor shall be elected and shall qualify.
Only persons who are nominated in accordance with the procedures
set forth in this section shall be eligible to be nominated as
directors at any meeting of the shareholders of the Company. At
any meeting of the shareholders of the Company, nominations of
persons for election to the Board of Directors may be made (1)
by or at the direction of the Board of Directors or (2) by any
shareholder of the Company who is a holder of record at the time
of giving the notice provided for in this section, who shall be
entitled to vote at the meeting, and who complies with the notice
procedures set forth in this section. For a nomination to be
properly brought before a shareholders' meeting by a shareholder,
timely written notice shall be made to the Secretary of the
Company. The shareholder's notice shall be delivered to, or
mailed and received at, the principal office of the Company no
less than 35 days nor more than 50 days prior to the meeting;
provided, however, in the event that less than 45 days notice or
prior public disclosure of the date of the meeting is given or
made to shareholders, notice by the shareholder to be timely must
be received not later than the close of business on the tenth day
following the day on which the notice of the date of the meeting
was mailed or the public disclosure was made; provided further,
however, notice by the shareholder to be timely must be received
in any event not later than the close of business on the seventh
day preceding the day on which the meeting is to be held. The
shareholder's notice shall set forth (1) as to each person whom
the shareholder proposes to nominate for election or reelection
as a director, all information relating to such person that is
required to be disclosed in solicitations of proxies for election
of directors, or is otherwise required by applicable law
(including the person's written consent to being named as a
nominee and to serving as a director if elected), and (2) (a) the
name and address, as they appear on the Company's books, of the
shareholder, (b) the class and number of shares of capital stock
of the Company owned by the shareholder, and (c) a description of
all arrangements or understandings between the shareholder and
each nominee and any other person or persons (naming such person
or persons) pursuant to which the nomination or nominations are
to be made by the shareholder. The shareholder shall also comply
with all applicable requirements of the 1934 Act and the rules
and regulations thereunder with respect to the matters set forth
in this section. If the chairman of the meeting shall determine
and declare at the meeting that a nomination was not made in
accordance with the procedures prescribed by this section, the
nomination shall not be accepted.

SECTION 3.2. Regular Meetings. A regular meeting of the
Board of Directors shall be held immediately, or as soon as
practicable, after the annual meeting of the shareholders in each
year for the purpose of electing officers and for the transaction
of such other business as may be deemed necessary, and regular
meetings of the Board shall be held at such date and time and at
such place as the Board of Directors may from time to time
determine. Not less than two days' notice of all regular meetings
of the Board, except the meeting to be held after the annual
meeting of shareholders which shall be held without other notice
than this by-law, shall be given to each director personally or by
mail or telegram.

SECTION 3.3. Special Meetings. Special meetings of the
Board may be called at any time by the Chairman of the Board, the
President, or by any two directors, by causing the Secretary to
mail to each director, not less than three days before the time of
such meeting, a written notice stating the time and place of such
meeting. Notice of any meeting of the Board may be waived by any
director.

SECTION 3.4. Quorum. At each meeting of the Board of
Directors, the presence of not less than a majority of the total
number of directors specified in Section 3.l hereof shall be
necessary and sufficient to constitute a quorum for the
transaction of business, and the act of a majority of the
directors present at any meeting at which there is a quorum shall
be the act of the Board of Directors, except as may be otherwise
specifically provided by statute. If a quorum shall not be
present at any meeting of directors, the directors present
thereat may adjourn the meeting from time to time, without notice
other than announcement at the meeting, until a quorum shall be
present. In determining the presence of a quorum at a meeting of
the directors or a committee thereof for the purpose of
authorizing a contract or transaction between the Company and one
or more of its directors, or between the Company and any other
corporation, partnership, association, or other organization in
which one or more of the directors of this Company are directors
or officers, or have a financial interest in such other
organization, such interested director or directors may be
counted in determining a quorum.

SECTION 3.5. Presiding Officer. The presiding officer
of any meeting of the Board of Directors shall be the Chairman of
the Board. In the case of the absence of the Chairman of the
Board, for reasons other than provided in Section 4.3, the
President shall act in his place and stead. In the case of the
temporary absence of both the Chairman of the Board and the
President, the Vice Chairman of the Executive Committee or, in
his absence, any other director elected by vote of a majority of
the directors present at the meeting, shall act as chairman of
the meeting.

SECTION 3.6. Executive Committee. The Executive
Committee of the Board of Directors shall consist of the Chairman
of the Board who shall be the Chairman of the Executive Committee,
and each of the nonmanagement directors. The Chairman of the
Board shall select a Vice Chairman of the Executive Committee
subject to the approval of the Board of Directors of the Company.
The Executive Committee shall, in the recess of the Board, have
all the powers of the Board except those powers which, under the
law of the State of Illinois, may not be exercised by such
Committee and shall keep a record of its proceedings and report
the same to the Board. The Executive Committee may meet at any
place whenever required by a member of the Committee and may act
by the consent of a majority of its members, although not
formally convened.

SECTION 3.7. Other Committees. The Board may appoint
other committees, standing or special, from time to time from
among its own members or otherwise, and may confer such powers
on such committees as the Board may determine and may revoke
such powers and terminate the existence of such committees at
its pleasure.

SECTION 3.8. Action Without Meeting. Any action
required or permitted to be taken at any meeting of the Board
of Directors, or any committee thereof, may be taken without a
meeting if all members of the Board or of such committee, as
the case may be, consent thereto in writing and such writing
or writings are filed with the minutes of the proceedings of
the Board or such committee.

SECTION 3.9. Fees and Compensation of Directors.
Directors shall not receive any stated salary for their
services as such; but, by resolution of the Board of
Directors, reasonable fees, with or without expenses of
attendance, may be allowed. Members of the Board shall be
allowed their reasonable traveling expenses when actually
engaged in the business of the Company, to be audited and
allowed as in other cases of demands against the Company.
Members of standing or special committees may be allowed fees
and expenses for attending committee meetings. Nothing herein
contained shall be construed to preclude any director from
serving the Company in any other capacity and receiving
compensation therefor.

ARTICLE IV

Officers

SECTION 4.1. Election of Officers. There shall be
elected by the Board of Directors in each year the following
officers: a Chairman of the Board; a President; such number of
Senior Vice Presidents, such number of Executive Vice Presidents,
such number of Vice Presidents and such number of Assistant Vice
Presidents as the Board at the time may decide upon; a Secretary;
such number of Assistant Secretaries as the Board at the time may
decide upon; a Treasurer; such number of Assistant Treasurers as
the Board at the time may decide upon; a Controller; and such
number of Assistant Controllers as the Board at the time may
decide upon; a General Counsel; and such number of Assistant
General Counsel as the Board at the time may decide upon. Any
two or more offices may be held by one person, except that the
offices of President and Secretary may not be held by the same
person. All officers shall hold their respective offices during
the pleasure of the Board.

SECTION 4.2. Appointment of Officers. The Board of
Directors, the Executive Committee, the Chairman of the Board,
or the President may from time to time appoint such other
officers as may be deemed necessary, including one or more Vice
Presidents, one or more Assistant Vice Presidents, one or more
Assistant Secretaries, one or more Assistant Treasurers, one or
more Assistant Controllers and one or more Assistant General
Counsel, and such other agents and employees of the Company as
may be deemed proper. Such officers, agents and employees shall
have such authority, perform such duties and receive such
compensation as the Board of Directors, the Executive Committee
or, in the case of appointments made by the Chairman of the Board
or the President, as the Chairman of the Board or the President,
may from time to time prescribe and determine. The Board of
Directors or the Executive Committee may from time to time
authorize any officer to appoint and remove agents and employees,
to prescribe their powers and duties and to fix their
compensation therefor.

SECTION 4.3. Duties of Chairman of the Board. The
Chairman of the Board shall be the chief executive officer of the
Company and shall have control and direction of the management
and affairs of the Company and may execute all contracts, deeds,
assignments, certificates, bonds or other obligations for and on
behalf of the Company, and sign certificates of stock and records of
certificates required by law to be signed by the Chairman of the
Board. When present, the Chairman of the Board shall preside at
all meetings of the Board and of the shareholders. In the
absence of the Chairman of the Board, due to his permanent
disability, death, resignation or removal from office, the Vice
Chairman of the Executive Committee shall promptly convene the
Executive Committee to select a nominee for that office and
submit said nominee's name to the Board of Directors for their
consideration.

SECTION 4.4. Duties of President. Subject to the Control
and direction of the Chairman of the Board, and to the control of
the Board, the President shall have general management of all the
business of the Company, and he shall have such other powers and
perform such other duties as may be prescribed for him by the
Board or be delegated to him by the Chairman of the Board. He
shall possess the same power as the Chairman of the Board to sign
all certificates, contracts and other instruments of the Company.
In case of the absence or disability of the President, or in case
of his death, resignation or removal from office, the powers and
duties of the President shall devolve upon the Chairman of the
Board during absence or disability, or until the vacancy in the
office of President shall be filled.

SECTION 4.5. Duties of Vice President. Each of the
Senior Vice Presidents, Executive Vice Presidents, Vice
Presidents and Assistant Vice Presidents shall have such powers
and duties as may be prescribed for him by the Board, or be
delegated to him by the Chairman of the Board or by the President.
Each of such officers shall possess the same power as the
President to sign all certificates, contracts and other
instruments of the Company.

SECTION 4.6. Duties of Secretary. The Secretary shall
have the custody and care of the corporate seal, records and
minute books of the Company. He shall attend the meetings of the
Board, of the Executive Committee, and of the shareholders, and
duly record and keep the minutes of the proceedings, and file and
take charge of all papers and documents belonging to the general
files of the Company, and shall have such other powers and duties
as are commonly incident to the office of Secretary or as may be
prescribed for him by the Board, or be delegated to him by the
Chairman of the Board or by the President.

SECTION 4.7. Duties of Treasurer. The Treasurer shall
have charge of, and be responsible for, the collection, receipt,
custody and disbursement of the funds of the Company, and shall
deposit its funds in the name of the Company in such banks, trust
companies or safety deposit vaults as the Board may direct. He
shall have the custody of the stock record books and such other
books and papers as in the practical business operations of the
Company shall naturally belong in the office or custody of the
Treasurer, or as shall be placed in his custody by the Board, the
Chairman of the Board, the President, or any Vice President, and
shall have such other powers and duties as are commonly incident
to the office of Treasurer, or as may be prescribed for him by the
Board, or be delegated to him by the Chairman of the Board or by
the President.

SECTION 4.8. Duties of Controller. The Controller shall
have control over all accounting records pertaining to moneys,
properties, materials and supplies of the Company. He shall have
Charge of the bookkeeping and accounting records and functions,
the related accounting information systems and reports and
executive supervision of the system of internal accounting
controls, and such other powers and duties as are commonly
incident to the office of Controller or as may be prescribed by
the Board, or be delegated to him by the Chairman of the Board or
by the President.

SECTION 4.9. Duties of General Counsel. The General
Counsel shall have full responsibility for all legal advice,
counsel and services for the Company and its subsidiaries
including employment and retaining of attorneys and law firms as
shall in his discretion be necessary or desirable and shall have
such other powers and shall perform such other duties as from
time to time may be assigned to him by the Board, the Chairman of
the Board or the President.

SECTION 4.10. Duties of Assistant Secretary, Assistant
Treasurer, Assistant Controller and Assistant General Counsel.
The Assistant Secretary, Assistant Treasurer, Assistant Controller
and Assistant General Counsel shall assist the Secretary, Treasurer,
Controller, and General Counsel, respectively, in the performance
of the duties assigned to each and shall for such purpose have the
same powers as his principal. He shall also have such other powers
and duties as may be prescribed for him by the Board, or be
delegated to him by the Chairman of the Board or by the President.

ARTICLE V

Indemnification of Directors, Officers, Employees and Agents

SECTION 5.1. Indemnification of Directors, Officers and
Employees. The Company shall indemnify, to the fullest extent
permitted under the laws of the State of Illinois and any other
applicable laws, as they now exist or as they may be amended in
the future, any person who was or is a party, or is threatened to
be made a party, to any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative or
investigative (including, without limitation, an action by or in
the right of the Company), by reason of the fact that he or she
is or was a director, officer or employee of the Company, or is
or was serving at the request of the Company as a director,
officer, employee or agent of another corporation, partnership,
joint venture, trust, employee benefit plan or other enterprise
against expenses (including attorneys' fees), judgments, fines
and amounts paid in settlement actually and reasonably incurred
by such person in connection with such action, suit or
proceeding.

SECTION 5.2. Advancement of Expenses to Directors,
Officers and Employees. Expenses incurred by such a director,
officer or employee in defending a civil or criminal action, suit
or proceeding shall be paid by the Company in advance of the
final disposition of such action, suit or proceeding to the
fullest extent permitted under the laws of the State of Illinois
and any other applicable laws, as they now exist or as they may
be amended in the future.

SECTION 5.3. Indemnification and Advancement of
Expenses to Agents. The board of directors may, by resolution,
extend the provisions of this Article V regarding indemnification
and the advancement of expenses to any person who was or is a
party or is threatened to be made a party to any threatened,
pending or completed action, suit or proceeding by reason of the
fact he or she is or was an agent of the Company or is or was
serving at the request of the Company as a director, officer,
employee or agent of another corporation, partnership, joint
venture, trust, employee benefit plan or other enterprise.

SECTION 5.4. Rights Not Exclusive. The rights provided
by or granted under this Article V are not exclusive of any other
rights to which those seeking indemnification or advancement of
expenses may be entitled.

SECTION 5.5. Continuing Rights. The indemnification
and advancement of expenses provided by or granted under this
Article V shall continue as to a person who has ceased to be a
director, officer, employee or agent and shall inure to the
benefit of the heirs, executors and administrators of that
person.

ARTICLE VI

Certificates of Stock and Their Transfer

SECTION 6.1. Certificates of Stock. The certificates of
stock of the Company shall be in such form as may be determined by
the Board of Directors, shall be numbered and shall be entered in
the books of the Company as they are issued. They shall exhibit
the holder's name and number of shares and shall be signed by the
Chairman of the Board, the President or a Vice President and also
by the Treasurer or an Assistant Treasurer or the Secretary or
an Assistant Secretary and shall bear the corporate seal or a
facsimile thereof. If a certificate is countersigned by a
transfer agent or registrar, other than the Company itself or
its employee, any other signature or countersignature on the
certificate may be facsimiles. In case any officer of the
Company, or any officer or employee of the transfer agent or
registrar, who has signed or whose facsimile signature has been
placed upon such certificate ceases to be an officer of the
Company, or an officer or employee of the transfer agent or
registrar, before such certificate is issued, said certificate
may be issued with the same effect as if the officer of the
Company, or the officer or employee of the transfer agent or
registrar, had not ceased to be such at the date of issue.

SECTION 6.2. Transfer of Stock. Upon surrender to the
Company of a certificate for shares duly endorsed or accompanied
by proper evidence of succession, assignment or authority to
transfer, and upon payment of applicable taxes with respect to
such transfer, it shall be the duty of the Company, subject to
such rules and regulations as the Board of Directors may from
time to time deem advisable concerning the transfer and
registration of certificates for shares of stock of the Company,
to issue a new certificate to the person entitled thereto, cancel
the old certificate and record the transaction upon its books.

SECTION 6.3. Shareholders of Record. The Company shall
be entitled to treat the holder of record of any share or shares
of stock as the holder in fact thereof and, accordingly, shall not
be bound to recognize any equitable or other claim to or interest
in such share or shares on the part or any other person, whether
or not it shall have express or other notice thereof, except as
otherwise provided by statute.

SECTION 6.4. Lost, Destroyed or Stolen Certificates. The
Board of Directors, in individual cases or by general resolution,
may direct a new certificate or certificates to be issued by the
Company as a replacement for a certificate or certificates for a
like number of shares alleged to have been lost, destroyed or
stolen, upon the making of an affidavit of that fact by the person
claiming the certificate or certificates of stock to be lost,
destroyed or stolen. When authorizing such issue of a new
certificate or certificates, the Board of Directors may, in its
discretion and as a condition precedent to the issuance thereof,
require the owner of such lost, destroyed or stolen certificate or
certificates, or his legal representative, to give the Company a
bond in such form and amount as it may direct as indemnity
against any claim that may be made against the Company with
respect to the certificate or certificates alleged to have been
lost, destroyed or stolen.

ARTICLE VII

Miscellaneous

SECTION 7.1. Contracts and Other Instruments. All
contracts or obligations of the Company shall be in writing and
shall be signed either by the Chairman of the Board, the
President, or any Vice President and, unless the Board shall
otherwise determine and direct, the seal of the Company shall be
attached thereto, duly attested by the Secretary or an Assistant
Secretary, except contracts entered into in the ordinary course of
business where the amount involved is less than One Hundred
Thousand Dollars ($100,000), and except contracts for the
employment of servants or agents, which contracts so excepted may
be entered into by the Chairman of the Board, the President, any
Vice President, or by such officers or agents as the Chairman of
the Board or the President may designate and authorize. Unless
the Board shall otherwise determine and direct, all checks or
drafts and all promissory notes shall be signed by two officers
of the Company. When prescribed by the Board, bonds, promissory
notes, and other obligations of the Company may bear the
facsimile signature of the officer who is authorized to sign such
instruments and, likewise, may bear the facsimile signature of
the Secretary or an Assistant Secretary.

SECTION 7.2. Voting Stock Owned by Company. Any or all
shares owned by the Company in any other corporation, and any or
all voting trust certificates owned by the Company calling for or
representing shares of stock of any other corporation, may be
voted by the Chairman of the Board, the President, any Vice
President, the Secretary or the Treasurer, either in person or by
written proxy given to any person in the name of the Company at
any meeting of the shareholders of such corporation, or at any
meeting of voting trust certificate holders, upon any question
that may be presented at any such meeting. Any such officer, or
anyone so representing him by written proxy, may on behalf of the
Company waive any notice of any such meeting required by any
statute or by-law and consent to the holding of such meeting
without notice.

ARTICLE VIII

Amendment or Repeal of By-Laws

These by-laws may be added to, amended or repealed at
any regular or special meeting of the Board by a vote of a
majority of the membership of the Board.

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