PGL Peoples Energy Corp

Strong performance from diversified businesses not enough to overcome weaker utility earnings Peoples Energy (NYSE:PGL) today reported preliminary net income for its second quarter ended March 31, 2006, of $33.2 million, or $0.86 per diluted share compared to $51.2 million, or $1.34 per diluted share for the same period in 2005. Fiscal year-to-date preliminary net income was $13.7 million, or $0.36 per diluted share compared to $73.6 million, or $1.94 per diluted share a year-ago. "Aside from the impacts of the settlement, gas distribution operating results continue to be hampered by warm weather, customer conservation, and higher bad debt expense," said Thomas M. Patrick, Chairman, President, and CEO of Peoples Energy. "However, operating income from our diversified businesses continues to be strong. From a longer-term perspective, we made significant progress during the quarter on our strategic initiatives by completing a major oil and gas acquisition, moving to divest our remaining power generation assets, and preparing for near-term utility rate case filings. In addition, the final settlement of our long-standing gas charge proceedings removes a major uncertainty that has been facing the company." Second quarter and fiscal year-to-date results were negatively impacted by charges of $15.7 million pre-tax ($0.25 per share after tax) and $107.3 million pre-tax ($1.68 per share after tax), respectively, from the previously announced settlement of utility gas charge proceedings for fiscal years 2000 through 2004. Last year's second quarter and year-to-date periods included pre-tax charges of $2.0 million and $13.2 million, respectively, related to the Company's 2004 organizational restructuring. Fiscal 2006 second quarter and year-to-date gas distribution results were also negatively impacted by lower deliveries and a change in the regulatory treatment of Hub revenue. Diversified results improved significantly from the year-ago periods. Financial results for the second quarter and year-to-date periods are summarized in Table I in accordance with generally accepted accounting principles (GAAP) and on an ongoing from continuing operations (non-GAAP) basis before the impact of the fiscal 2006 settlement charge and last year's restructuring charge. Management believes that ongoing results are useful for year over year comparisons since changes of the magnitude associated with the settlement and the organizational restructuring are infrequent and affect the comparability of operating results. Ongoing results are used internally to measure performance and in reports for management and the Company's Board of Directors. -0- *T Table I - Fiscal Second Quarter and Year-To-Date Results ---------------------------------------------------------------------- Three Months Ended March 31, ($ millions, except per share amounts) -------------------------------------------------- Restructuring Ongoing and Settlement As Reported (non-GAAP) Charges (GAAP) ---------------- ---------------- ---------------- 2006 2005 2006 2005 2006 2005 ---------------- ---------------- ---------------- Operating Income (Loss): Gas Distribution $58.6 $77.2 ($15.7) $42.9 $77.2 Oil and Gas Production 8.8 5.2 8.8 5.2 Energy Marketing 10.3 9.9 10.3 9.9 Energy Assets 1.4 0.6 1.4 0.6 Corporate and Other (4.0) (2.4) ($2.0) (4.0) (4.4) ---------------- ---------------- ---------------- Total Operating Income (Loss) $75.1 $90.5 ($15.7) ($2.0) $59.4 $88.5 Income (Loss) from Continuing Operations $43.0 $51.1 ($9.4) ($1.2) $33.6 $49.9 Income (Loss) from Discontinued Operations (0.4) 1.3 ---------------- Net Income $33.2 $51.2 ================ Per Diluted Share: Income (Loss) from Continuing Operations $1.12 $1.34 ($0.25) ($0.03) $0.87 $1.31 Income (Loss) from Discontinued Operations (0.01) 0.03 ---------------- Net Income $0.86 $1.34 ================ Six Months Ended March 31, ($ millions, except per share amounts) -------------------------------------------------- Restructuring Ongoing and Settlement As Reported (non-GAAP) Charges (GAAP) ---------------- ---------------- ---------------- 2006 2005 2006 2005 2006 2005 ---------------- ---------------- ---------------- Operating Income (Loss): Gas Distribution $109.3 $126.9 ($107.3) $2.0 $126.9 Oil and Gas Production 20.2 13.8 20.2 13.8 Energy Marketing 20.1 12.2 20.1 12.2 Energy Assets 3.1 1.5 3.1 1.5 Corporate and Other (8.5) (5.3) ($13.2) (8.5) (18.5) ---------------- ---------------- ---------------- Total Operating Income (Loss) $144.2 $149.1 ($107.3) ($13.2) $36.9 $135.9 Income (Loss) from Continuing Operations $79.9 $80.8 ($64.6) ($7.9) $15.3 $72.9 Income (Loss) from Discontinued Operations (1.6) 0.7 ---------------- Net Income $13.7 $73.6 ================ Per Diluted Share: Income (Loss) from Continuing Operations $2.08 $2.13 ($1.68) ($0.21) $0.40 $1.92 Income (Loss) from Discontinued Operations (0.04) 0.02 ---------------- Net Income $0.36 $1.94 ================ Note: Numbers may not sum due to rounding *T Notable items for the second quarter include the following: -- As previously announced, the Illinois Commerce Commission (ICC) approved an amended settlement agreement related to the utilities' gas charges for fiscal years 2000 through 2004. As a result of the amended settlement, the Company recorded a $15.7 million pre-tax charge in the second quarter. This is in addition to the $91.7 million pre-tax charge recorded in the first quarter and $13.3 million recognized in prior fiscal years. -- Pursuant to the amended settlement agreement, Hub revenues are treated as a reduction of gas costs recoverable from customers. The impact of this change related to pre-fiscal 2006 Hub revenue is included in the settlement charge. Beginning in the second quarter, fiscal 2006 Hub revenues are recorded as a credit to customers' gas charges, including $2.8 million previously reported as revenue in the fiscal 2006 first quarter. -- In connection with the Company's previously announced plans to exit the power generation business, financial results for power generation are now being reported as discontinued operations. -- Gas distribution deliveries for the quarter were negatively impacted by 15% warmer than normal weather. In addition, utility deliveries continue to be negatively impacted by customer conservation. -- Oil and gas production volumes for the quarter increased 7% from a year ago. The higher production levels reflect strong performance on both existing and new wells and the impact of the Company's second quarter acquisition of certain oil and gas properties in East Texas, North Louisiana, and Mississippi. -- Energy Marketing operating income increased substantially from the year-ago periods, driven by higher wholesale margins. Gas Distribution. Ongoing (non-GAAP) operating income for the second quarter was $58.6 million, compared to $77.2 million last year. The decrease reflected lower deliveries ($14.3 million) and a change in treatment of Hub revenue ($6.4 million), as noted earlier. Weather was 15% or 484 degree days warmer than normal and 11% or 339 degree days warmer than last year. Deliveries declined 12 Bcf to 87 Bcf. Operating expenses were down slightly from a year ago. On a fiscal year-to-date basis, ongoing (non-GAAP) operating income was $109.3 million compared to $126.9 million last year. The decrease is due primarily to the impact of lower gas deliveries ($9.3 million), including an estimated 4% decline in weather normalized demand due to the impact of customer conservation, the change in treatment of Hub revenue ($5.9 million) noted above, and slightly higher operating expenses. Year-to-date weather was 472 degree days or 9% warmer than normal, and 120 degree days or 2% warmer than last year. Operating expenses increased $2.9 million, as an increase in bad debt expense ($6.6 million) due to record high natural gas prices and their corresponding impact on revenues and higher pension expense ($4.5 million) were nearly offset by reductions in depreciation expense ($3.6 million) and various other operating costs. The $107.3 million in settlement charges recorded in fiscal 2006 and the $13.3 million liability recognized in prior periods reflect the following settlement amounts: -- $100 million in refunds to customers, -- $5.0 million related to the first year funding of conservation program costs, -- $10.7 million to reflect a change in regulatory treatment for fiscal 2005 hub revenues, -- $5.0 million net increase to the bad debt reserve primarily related to the termination of collection activities on approximately $207 million of bad debt written off during fiscal years 2000-2005. The utilities are now expected to file for rate relief with the Illinois Commerce Commission in early summer. The timing has been delayed somewhat due to conclusion of the gas charge settlement case. The companies are currently in the process of updating the filings to reflect more current forecasts of ongoing future revenues and costs for delivery service. The normal rate case process at the Commission usually requires about eleven months, so any rate increase granted would not become effective until late spring of 2007. Oil and Gas Production. Operating income totaled $8.8 million for the quarter, compared to $5.2 million in the year ago period. Results for the quarter benefited from a 7% increase in production and higher net realized prices, partially offset by higher operating costs, mainly depletion expenses and a downward adjustment of $2.0 million to the gain on the sale of EnerVest properties recorded in the first quarter of 2006. The February 2006 acquisition added 4.5 MMcfed to quarterly production. During the second quarter, the Company drilled 15 wells, of which 14 were successful. Year-to-date operating income totaled $20.2 million, compared to $13.8 million a year ago. Year-to date results benefited from higher net realized prices and a $7.6 million gain associated with the first quarter sale of assets at the Company's EnerVest partnership, offset by higher operating expenses and slightly lower production. The decline in production from a year ago reflects the normal decline of existing production, partially offset by the Company's 2006 drilling program and the impact of the recent acquisition. Production for the full year is expected to increase slightly from the prior year. On a year-to-date basis, the Company drilled 27 wells with a success rate of 96%. Approximately 64% of the Company's gas production was hedged for the quarter compared to 95% for the second quarter of 2005. As of April 20, 2006, approximately 65-70% of estimated remaining fiscal 2006 natural gas production was hedged. Table II summarizes second quarter and year-to-date operating statistics for the Oil and Gas Production segment: -0- *T Table II - Oil and Gas Operating Results Three Months Ended Six Months Ended March 31, March 31, ------------------------ ------------------------- % % 2006 2005 Change 2006 2005 Change -------- ------- ------- -------- ------- -------- Average daily production: Gas (MMCFD) 64.9 59.1 9.8% 61.4 60.8 1.0% Oil (MBD) 1.1 1.3 (15.4%) 1.1 1.3 (15.4%) Gas equivalent (MMCFED) 71.6 66.7 7.3% 67.8 68.7 (1.3%) Net realized price: Gas ($/MCF) $5.94 $4.62 28.6% $5.28 $4.52 16.8% Oil ($/BBL) $25.64 $26.94 (4.8%) $27.63 $28.56 (3.3%) Gas equivalent ($/MMCFE) $5.78 $4.60 25.7% $5.22 $4.55 14.7% Percentage hedged: Gas 64% 95% (32.6%) 74% 95% (22.1%) Oil 74% 96% (22.9%) 77% 89% (13.5%) *T Energy Marketing. Operating income totaled $10.3 million for the quarter and $20.1 million year-to-date, up $0.5 million and $7.9 million from the year ago periods, respectively. Wholesale marketing results were up sharply in both periods, reflecting additional capacity and the positive impact of price volatility and spreads on storage and transportation optimization strategies. Second quarter and year-to-date results for retail marketing activities declined from a year ago due primarily to mark-to-market accounting and the impact of warmer than normal weather on gas margins. Results for the segment include an unrealized loss of $13.8 million and $16.0 million related to lower-of-cost-or-market inventory adjustments and mark-to-market accounting for the quarter and year-to-date periods, respectively. Much of this is timing and is expected to reverse over the course of this and next fiscal years as the underlying transactions are settled. The earnings variability resulting from accounting timing can be significant from period to period, even when the underlying economic position is unchanged. Quarterly comparisons can also vary due to the seasonal nature of retail gas marketing and the opportunistic nature of wholesale capacity optimization activity. As a result, operating results for the remainder of the fiscal year are expected to break even, as the reversal of temporary accounting adjustments is offset by fixed capacity and other operating costs. Energy Assets. Operating income totaled $1.4 million for the quarter and $3.1 million year-to-date, up slightly from the year-ago periods. On March 31, the Company agreed to sell its interest in the Southeast Chicago Energy Project (SCEP) for approximately $50 million subject to closing adjustments. Closing is expected to occur in the fiscal third quarter and result in a modest gain. The Company expects to sell its remaining power generation assets, a 50% interest in Elwood Energy and a development site in Oregon, by fiscal year-end at a sizable gain. All financial results relating to power generation formerly included in this business segment are now reported as discontinued operations, including prior year results. Corporate and Other. Absent the $2.0 million and $13.2 million restructuring charges recognized in the year-ago quarter and fiscal year-to-date periods, respectively, ongoing Corporate and Other expenses increased $1.6 million for the quarter and $3.2 million year-to-date compared to last year. The increases were primarily labor-related. Financial. Year to-date interest expense increased $3.1 million compared to a year ago due primarily to higher interest rates The effective tax rate on ongoing income was about 33%, down from 35% last year. At March 31, 2006, total debt was 56% of total debt plus equity, up from 51% a year ago due primarily to the settlement charge and the February oil and gas acquisition which is being temporarily financed with commercial paper borrowing. Capital expenditures are projected to approximate $330 million, including $105 million in gas distribution and the remainder primarily in oil and gas production. Earnings Outlook. "We are lowering our ongoing (non-GAAP) fiscal 2006 earnings from continuing operations estimate to $1.40 to $1.65 per share (($0.05) to $0.20 per share on a GAAP basis)", said Patrick. "This outlook excludes approximately $0.23 per share of annual income from our power segment which is now classified as discontinued operations. The downward revision reflects two major factors -- the adverse impact on utility deliveries from warm weather and customer conservation (including April weather that was almost 30% warmer than normal) and the change in the regulatory treatment of Hub revenue. Our ongoing (non-GAAP) outlook also excludes the impacts of the settlement and expected sizable gain from the sale of our power assets." The outlook does not reflect the potential variability in earnings due to fair value accounting adjustments, which could be material but are not estimable. Table III reconciles the current earnings outlook for fiscal 2006 to the Company's original estimate. "On a longer-term basis, fiscal 2007 earnings will continue to be under pressure as a result of continued cost increases in our gas distribution business and only a partial year of rate relief. However, assuming reasonable rate relief for our utilities and continued solid performance by our diversified businesses, we anticipate sharp improvement in fiscal 2008 earnings." -0- *T Table III - Earnings Outlook EPS Impact ---------------------------- Original FY 2006 earnings outlook $2.25 - $2.45 Reclassification of power generation to discontinued operations (0.23) - (0.23) ---------------------------- Adjusted original FY 2006 outlook $2.00 $2.20 Warmer than normal weather/conservation (0.30) - (0.35) Change in treatment of Hub revenue (0.14) - (0.14) Higher interest expense (0.03) - (0.05) Other, net (0.04) - (0.06) ------------- ------------- FY 2006 outlook from continuing operations $1.40 - $1.65 Income from discontinued operations(a) 0.23 - 0.23 ---------------------------- Net Income - (non-GAAP) $1.65 - $1.90 Settlement charge (1.68) - (1.68) ------------- ------------- Net Income - (GAAP) ($0.05) - $0.20 ============= ============= (a) Includes operating results of assets held for sale. Excludes expected net gain from sales. *T Earnings Conference Call. Peoples Energy will hold a conference call to discuss financial results for the second quarter of fiscal 2006 on Wednesday, May 3, 2006, at 9:00 a.m. Central (10:00 a.m. Eastern). To listen to the webcast live or in replay visit the "Investors" section of the Peoples Energy website at www.PeoplesEnergy.com and select the Live Webcast icon on the Corporate Overview page. A replay of the call can also be accessed by dialing 1-888-203-1112, reference number 2106040. The telephone replay will be available approximately two hours after completion of the call through May 10, 2006. The webcast replay will be available through May 2007. Peoples Energy, a member of the S&P 500, is a diversified energy company consisting of five primary business segments: Gas Distribution, Oil and Gas Production, Energy Assets, Energy Marketing and Corporate and Other. The Gas Distribution business serves about 1 million utility customers in Chicago and northeastern Illinois. Visit the Peoples Energy website at PeoplesEnergy.com. Forward-Looking Information. This press release contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Generally, the words "may", "could", "project", "believe", "anticipate", "estimate", "plan", "forecast", "will be", and similar words identify forward-looking statements. Actual results could differ materially from such expectations because of many uncertainties, including, but not limited to: the outcome of rate increase proceedings to be filed with the Illinois Commerce Commission (ICC) by the utility subsidiaries; adverse decisions in proceedings before the ICC concerning the prudence review of the utility subsidiaries' gas purchases; the future health of the United States and Illinois economies; the timing and extent of changes in interest rates and energy commodity prices, including but not limited to the effect of gas prices on cost of gas supplies, accounts receivable and the provision for uncollectible accounts, interest expense and earnings from the oil and gas production segment; adverse resolution of material litigation; effectiveness of the Company's risk management policies and the creditworthiness of customers and counterparties; regulatory developments in the United States, Illinois and other states where the Company does business; changes in the nature of the Company's competition resulting from industry consolidation, legislative change, regulatory change and other factors, as well as action taken by particular competitors; operational factors affecting the Company's gas distribution, energy assets and oil and gas production segments; Aquila Inc.'s financial ability to perform under its power sales agreements with Elwood Energy LLC; the Company's ability to complete its divestment of its power generation assets during the fiscal year on advantageous terms; drilling and production risks and the inherent uncertainty of oil and gas reserve estimates; weather related energy demand; the application of, or changes in, accounting rules or interpretations, including, but not limited to, the impact of mark-to-market accounting treatment for some of the Company's derivative contracts used by the Company to manage commodity price, basis and other risks; and terrorist activities. Also, projections to future periods of the effectiveness of internal control over financial reporting are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Some of the uncertainties that may affect future results are discussed in more detail in Peoples Energy's most recent Form 10-K/A filed with the SEC under Item 1 - Business, Item 1A - Risk Factors and Item 7 - Management's Discussion and Analysis, as such information may be updated by subsequent filings under the Securities Exchange Act of 1934. All forward-looking statements included in this press release are based upon information presently available, and Peoples Energy assumes no obligation to update any forward-looking statements. (Financial Tables Follow) -0- *T Preliminary PEOPLES ENERGY CORPORATION FINANCIAL HIGHLIGHTS (Unaudited) Financial Data ---------------------------------------------------------------------- Three Months Ended March 31, ------------------------------- (In Thousands, Except Per-Share Amounts) 2006 2005 --------------- --------------- Revenues $1,180,028 $1,026,906 Equity Investment Income (Loss) ($1,975) $397 Operating Income $59,432 $88,520 Net Income $33,170 $51,172 Earnings Per Share - Basic $0.87 $1.35 Earnings Per Share - Diluted $0.86 $1.34 Average Shares Outstanding - Basic 38,338 37,928 Average Shares Outstanding - Diluted 38,467 38,093 ------------------------------- Six Months Ended March 31, ------------------------------- (In Thousands, Except Per-Share Amounts) 2006 2005 --------------- --------------- Revenues $2,232,414 $1,764,317 Equity Investment Income $7,677 $1,744 Operating Income $36,917 $135,906 Net Income $13,689 $73,648 Earnings Per Share - Basic $0.36 $1.94 Earnings Per Share - Diluted $0.36 $1.94 Average Shares Outstanding - Basic 38,291 37,873 Average Shares Outstanding - Diluted 38,423 38,042 Common Stock Data ---------------------------------------------------------------------- March 31, ------------------------------- 2006 2005 --------------- --------------- Annualized dividend rate $2.18 $2.18 Dividend yield 6.1% 5.2% Book value per share $22.00 $23.12 Market price $35.64 $41.92 Market price as a percent of book value 162% 181% ---------------------------------------------------------------------- Peoples Energy Corporation Preliminary Summary of Selected Operating Data (Unaudited) ---------------------------------------------------------------------- Three Months Ended Six Months Ended March 31, March 31, ----------------------- ----------------------- 2006 2005 2006 2005 ---------------------------------------------------------------------- Gas Distribution Margin (in thousands) Total Gas Distribution revenues $821,357 $742,442 $1,550,346 $1,262,500 Less: Gas costs 583,495 488,176 1,100,646 817,780 ----------- ----------- ----------- ----------- Gross margin (1) 237,862 254,266 449,700 444,720 Less: Revenue taxes and surcharges 69,136 65,706 129,133 111,670 Environmental costs recovered 14,033 14,145 25,329 23,128 ----------- ----------- ----------- ----------- Net margin (1) $154,693 $174,415 $295,238 $309,922 ---------------------------------------------------------------------- Gas Distribution Deliveries (MDth) Gas sales - Residential 46,052 53,764 83,234 88,801 - Commercial 7,903 9,131 14,165 14,924 - Industrial 1,480 1,759 2,715 2,905 Transportation 31,347 34,627 57,440 59,495 ----------- ----------- ----------- ----------- Total Distribution Deliveries 86,782 99,281 157,554 166,125 ---------------------------------------------------------------------- Weather Heating degree days - actual 2,741 3,080 5,043 5,163 Heating degree days - percent colder (warmer) than normal (15.0%) (5.3%) (8.6%) (6.7%) ---------------------------------------------------------------------- Number of Gas Distribution Customers (average) Gas sales - Residential 899,967 904,105 888,946 891,475 - Commercial 46,496 47,150 46,157 46,262 - Industrial 2,878 2,919 2,857 2,880 Transportation 32,779 25,080 31,152 24,505 ----------- ----------- ----------- ----------- Total Gas Distribution Customers 982,120 979,254 969,112 965,122 ---------------------------------------------------------------------- Energy Marketing Wholesale gas volumes sold (MDth) 14,015 14,895 23,923 25,802 Retail gas volumes sold (MDth) 17,939 20,654 33,025 35,442 Number of retail gas customers (at March 31) 23,884 24,473 23,884 24,473 Retail electric volumes sold (Mwh) 417 331 817 664 Number of retail electric customers (at March 31) 2,657 2,003 2,657 2,003 Total retail customers (at March 31) 26,541 26,476 26,541 26,476 ---------------------------------------------------------------------- Employees (at March 31) Gas Distribution 1,707 1,680 1,707 1,680 Diversified Businesses 135 130 135 130 Corporate Support 349 328 349 328 ----------- ----------- ----------- ----------- Total Employees 2,191 2,138 2,191 2,138 ---------------------------------------------------------------------- Megawatt Capacity (at March 31) 800 800 800 800 ---------------------------------------------------------------------- (1) As used above, net margin is not a financial measure computed under GAAP. Gross margin is the GAAP measure most closely related to net margin. Management believes net margin to be useful in understanding the Gas Distribution segment's operations because the utility subsidiaries are allowed, under their tariffs, to recover gas costs, revenue taxes and environmental costs from their customers on a dollar-for-dollar basis. Peoples Energy Corporation Preliminary Summary of Selected Operating Data (Unaudited) (continued) ---------------------------------------------------------------------- Three Months Ended Six Months Ended March 31, March 31, ----------------------- ----------------------- 2006 2005 2006 2005 ---------------------------------------------------------------------- Oil and Gas Production Average daily production: Gas (MMCFD) 64.9 59.1 61.4 60.8 Oil (MBD) 1.1 1.3 1.1 1.3 Gas equivalent (MMCFED) 71.6 66.7 67.8 68.7 Average index price: Gas ($/MMBTU) - Henry Hub $8.98 $6.27 $10.99 $6.67 Oil ($/BBL) $65.54 $46.85 $61.75 $49.06 Average hedge price: Gas ($/MMBTU) $5.27 $4.96 $5.17 $4.90 Oil ($/BBL) $27.65 $28.28 $27.65 $27.14 Percentage hedged: Gas 64% 95% 74% 95% Oil 74% 96% 77% 89% Net realized price:(1) Gas ($/MCF) $5.94 $4.62 $5.28 $4.52 Oil ($/BBL) $25.64 $26.94 $27.63 $28.56 Gas Equivalent ($/MCFE) $5.78 $4.60 $5.22 $4.55 Oil & Gas Production Hedge Position (2) Volume Hedged Wtd. Avg. Prices (MMBTU)/(MBO) ($MMBTU)/($BBL) ----------------------- ----------------------- Remaining FY 2006 Hedge Position (April - September) ------------------- Gas --- Swaps (61%) 4,954,500 $5.09 Collars (39%) 3,202,500 $4.54 - $5.56 ----------------------- ----------------------- 8,157,000 (3) $4.87 - $5.27 Oil --- Swaps 150 (4) $27.65 (1) Reflects the impact of all hedges, including mark-to-market derivatives as well as basis differentials, transportation, gathering and mmbtu/mcf conversion and are not NYMEX-equivalent prices. (2) As of April 20, 2006. (3) Approximately 65-70% based on projected 2006 production. (4) Approximately 75-80% based on projected 2006 production. Peoples Energy Corporation Preliminary Consolidated Statements of Operations (Unaudited) ---------------------------------------------------------------------- Three Months Ended Six Months Ended March 31, March 31, ----------------------- ----------------------- (In Thousands, Except Per-Share Amounts) 2006 2005 2006 2005 ---------------------------------------------------------------------- Revenues $1,180,028 $1,026,906 $2,232,414 $1,764,317 Operating Expenses: Cost of energy sold 886,640 727,715 1,683,067 1,236,607 Gas charge settlement 15,662 - 107,330 - Operation and maintenance, excluding restructuring and environmental costs 93,447 90,204 180,811 169,032 Restructuring costs - 1,956 - 13,163 Environmental costs 14,033 14,145 25,329 23,128 Depreciation, depletion and amortization 29,531 28,957 58,516 59,293 Taxes, other than income taxes 79,470 75,806 148,190 128,860 Losses (gains) on property sales (162) - (69) 72 ----------- ----------- ----------- ----------- Total Operating Expenses 1,118,621 938,783 2,203,174 1,630,155 Equity investment income (loss) (1,975) 397 7,677 1,744 ---------------------------------------------------------------------- Operating Income 59,432 88,520 36,917 135,906 Other income and expense - net 1,367 965 2,680 1,878 Interest expense 15,182 12,844 28,405 25,354 ---------------------------------------------------------------------- Income Before Income Taxes 45,617 76,641 11,192 112,430 Income tax expense (benefit) 12,026 26,810 (4,073) 39,536 ---------------------------------------------------------------------- Income from Continuing Operations $33,591 $49,831 $15,265 $72,894 Income (Loss) from Discontinued Operations, net of taxes (421) 1,341 (1,576) 754 Net Income $33,170 $51,172 $13,689 $73,648 ====================================================================== Average Shares of Common Stock Outstanding Basic 38,338 37,928 38,291 37,873 Diluted 38,467 38,093 38,423 38,042 ---------------------------------------------------------------------- Earnings (Loss) Per Share of Common Stock Basic, continuing operations 0.88 $1.31 $0.40 $1.92 Basic, discontinued operations (0.01) 0.04 (0.04) 0.02 ----------- ----------- ----------- ----------- Total - basic earnings per share $0.87 $1.35 $0.36 $1.94 ====================================================================== Diluted, continuing operations $0.87 $1.31 $0.40 $1.92 Diluted, discontinued operations (0.01) 0.03 (0.04) 0.02 ----------- ----------- ----------- ----------- Total - diluted earnings per share $0.86 $1.34 $0.36 $1.94 ====================================================================== Peoples Energy Corporation Preliminary Consolidated Balance Sheets (Unaudited) ---------------------------------------------------------------------- (In Thousands) At March 31, 2006 2005 ---------------------------------------------------------------------- Assets Capital Investments: Property, plant and equipment $3,430,223 $3,182,295 Less - Accumulated depreciation, depletion and amortization 1,315,470 1,274,022 --------------- --------------- Net property, plant and equipment 2,114,753 1,908,273 Investments in equity investees - 13,652 Other investments 13,215 13,076 --------------- --------------- Total Capital Investments - Net 2,127,968 1,935,001 Customer Accounts Receivable - net of reserves 644,410 515,540 Other Current Assets 489,213 418,344 --------------- --------------- Total Current Assets 1,133,623 933,884 Other Assets 521,178 453,275 --------------- --------------- Total Assets $3,782,769 $3,322,160 ====================================================================== Capitalization and Liabilities Common Stockholders' Equity: Common stock $415,570 $400,407 Treasury stock (6,677) (6,677) Retained earnings 518,025 583,435 Accumulated other comprehensive loss (82,947) (99,363) --------------- --------------- Total Common Stockholders' Equity 843,971 877,802 Long-Term Debt 894,261 895,647 --------------- --------------- Total Capitalization 1,738,232 1,773,449 Current Liabilities Commercial paper 166,190 - Accounts Payable 237,912 220,807 Other Current Liabilities 715,999 513,098 --------------- --------------- Total Current Liabilities 1,120,101 733,905 Deferred Credits and Other Liabilities 924,436 814,806 --------------- --------------- Total Capitalization and Liabilities $3,782,769 $3,322,160 ====================================================================== Preliminary Peoples Energy Corporation Business Segments (Unaudited) ---------------------------------------------------------------------- Gas Oil and Gas Energy (In Thousands) Distribution Production Marketing ---------------------------------------------------------------------- Three Months Ended March 31, 2006 Revenues $821,357 $37,281 $317,353 Depreciation, depletion and amortization 15,343 13,363 440 Equity investment income (loss) - (1,975) - Operating income (loss) (1) 42,921 8,801 10,324 ---------------------------------------------------------------------- Three Months Ended March 31, 2005 Revenues $742,442 $27,631 $254,600 Depreciation, depletion and amortization 17,117 11,040 433 Equity investment income - 130 - Operating income (loss) (2) 77,187 5,177 9,857 ---------------------------------------------------------------------- Six Months Ended March 31, 2006 Revenues $1,550,346 $64,339 $612,223 Depreciation, depletion and amortization 30,468 26,416 882 Equity investment income - 7,610 - Operating income (loss) (1) 1,967 20,195 20,089 ---------------------------------------------------------------------- Six Months Ended March 31, 2005 Revenues $1,262,500 $56,831 $442,147 Depreciation, depletion and amortization 34,109 23,626 864 Equity investment income (loss) - 1,215 - Operating income (loss) (2) 126,862 13,769 12,220 ---------------------------------------------------------------------- Energy Corporate (In Thousands) Assets and Other Adjustments Total ---------------------------------------------------------------------- Three Months Ended March 31, 2006 Revenues $7,791 $- $(3,754) $1,180,028 Depreciation, depletion and amortization 88 297 - 29,531 Equity investment income (loss) - - - (1,975) Operating income (loss) (1) 1,450 (4,064) - 59,432 ---------------------------------------------------------------------- Three Months Ended March 31, 2005 Revenues $5,209 $- $(2,976) $1,026,906 Depreciation, depletion and amortization 122 245 - 28,957 Equity investment income - 267 - 397 Operating income (loss) (2) 566 (4,267) - 88,520 ---------------------------------------------------------------------- Six Months Ended March 31, 2006 Revenues $10,398 $- $(4,892) $2,232,414 Depreciation, depletion and amortization 177 573 - 58,516 Equity investment income - 67 - 7,677 Operating income (loss) (1) 3,140 (8,474) - 36,917 ---------------------------------------------------------------------- Six Months Ended March 31, 2005 Revenues $7,726 $- $(4,887) $1,764,317 Depreciation, depletion and amortization 243 451 - 59,293 Equity investment income (loss) - 529 - 1,744 Operating income (loss) (2) 1,537 (18,482) - 135,906 ---------------------------------------------------------------------- (1) Gas Distribution results for the three and six month periods ended March 31, 2006 include the impacts of $15.7 million and $107.3 million, respectively, related to the amended gas charge settlement agreement. (2) Corporate and Other results for the three and six month periods ended March 31, 2006 include the impacts of $2.0 million and $13.2 million, respectively, related to the company's 2004 organizational restructuring. Effective in fiscal 2006, the Company's primary business segments were reorganized and reported as follows: Gas Distribution (including Peoples Gas hub operations, formerly included as part of Midstream Services), Oil and Gas Production, Energy Assets, and Energy Marketing (both retail and wholesale activity, formerly included as Retail Energy Services and part of Midstream Services, respectively). All periods have been reclassified to conform with the current presentation. *T