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Peoples Energy Corporation (Company) is solely a holding Company and does not engage directly in any business of its own. Income is derived principally from the Company's utility subsidiaries, The Peoples Gas Light and Coke Company (Peoples Gas) and North Shore Gas Company (North Shore Gas). The Company also derives income from its other subsidiaries, Peoples District Energy Corporation (Peoples District Energy), Peoples NGV Corp. (Peoples NGV), Peoples Energy Resources Corp. (Peoples Energy Resources), Peoples Energy Services Corporation (Peoples Energy Services), Peoples Energy Ventures, LLC (Peoples Energy Ventures) and Peoples Energy Production Company (Peoples Energy Production). Peoples Energy Production was formerly a direct subsidiary of Peoples Energy Ventures. As a result of a reorganization, Peoples Energy Production became a direct subsidiary of the Company on October 1, 2001. The Company and its subsidiaries had 2,624 employees at September 30, 2001.

The Company was incorporated in 1967 under the Illinois Business Corporation Act and has its principal executive offices at 130 East Randolph Drive, Chicago, Illinois 60601-6207 (Telephone 312-240-4000). Its business activities are segregated into six segments as described below.

The Gas Distribution segment is the Company's core business. Its two regulated utilities purchase, distribute, sell and transport natural gas to approximately one million retail customers through a 6,000-mile distribution system serving the City of Chicago and 54 communities in northeastern Illinois.

Peoples Gas, an operating public utility, is engaged primarily in the purchase, storage, distribution, sale and transportation of natural gas. It has approximately 847,000 residential, commercial and industrial retail sales and transportation customers within the City of Chicago (City). Peoples Gas also owns a storage facility in central Illinois and a pipeline, which connects the facility and six major interstate pipelines to Chicago.

North Shore Gas, an operating public utility, is engaged primarily in the purchase, storage, distribution, sale and transportation of natural gas. It has approximately 153,000 residential, commercial and industrial retail sales and transportation customers within its service area of approximately 275 square miles, located in northeastern Illinois.

The Power Generation segment is engaged in the development, construction, operation and ownership of electric generation facilities for sales to electric utilities and marketers. The Company, through Peoples Energy Resources, and Dominion Energy, Inc. (Dominion) are equal investors in Elwood Energy LLC (Elwood), which owns and operates a nominal 1,350-megawatt peaking facility near Chicago, Illinois.

The Midstream Services segment is engaged in wholesale activities that provide value to gas distribution marketers, utilities and pipelines. The Company, through Peoples Gas, operates a natural gas hub. It also owns and operates, through Peoples Energy Resources, a natural gas liquids peaking facility and is active in other asset-based wholesale activities. The Company and Enron North America Corp. (Enron) are equal partners in enovate, L.L.C. (enovate), which engages in a comprehensive wholesale business for the Chicago marketplace, including new product development, marketing and trading.

The Retail Energy Services segment markets gas and electricity and provides energy management and other services to retail customers. Peoples Energy Services and Peoples Energy Ventures subsidiaries are engaged in providing energy commodities and value added services to industrial, commercial and residential customers.

The Oil and Gas Production segment is active in the acquisition, development and production of oil and gas reserves in selected onshore basins in North America. Peoples Energy Production also has an equity investment in EnerVest Energy, L.P. (EnerVest) which acquires, develops and manages a portfolio of oil and gas producing properties. Peoples Energy Production's primary focus is on natural gas, with growth coming from low-to-moderate-risk drilling opportunities and the acquisition of proved reserves with upside potential, which can be realized through drilling, production enhancements and reservoir optimization programs. Certain producing properties owned by Peoples Energy Production qualify for income tax credits as defined in Section 29 of the Internal Revenue Code of 1986. The Section 29 income tax credits are computed based on units of production and are scheduled to expire December 31, 2002.

The Company is involved in other activities such as district heating and cooling and the development of fueling stations for natural gas vehicles. The Company has invested in Enertech Capital Partners II, L.P., (Enertech) a venture capital fund specializing in energy-related and telecommunication entities. These and other activities do not fall under the above segments and are reported in the Other segment.

Peoples Gas and North Shore Gas are authorized, by statute and/or certificates of public convenience and necessity to conduct operations in the territories they serve. In addition, these subsidiaries operate under franchises and license agreements granted them by the communities they serve. Peoples Gas holds a perpetual, nonexclusive franchise from the City. North Shore Gas' franchises with communities within its service territory are of various terms and expiration dates.

Absent extraordinary circumstances, potential competitors are barred from constructing competing gas distribution systems in the utility subsidiaries' service territories by a judicial doctrine known as the "first in the field" doctrine. In addition, the high cost of installing duplicate distribution facilities would render the construction of a competing system impractical.

Competition in varying degrees exists between natural gas and other fuels or forms of energy available to consumers in the Midwest and the utilities' respective service territories.

On December 16, 1997, the State of Illinois enacted legislation to restructure the electric market in Illinois. Under the legislation, approximately one-third of nonresidential electric customers, including customers with very large loads, were able to purchase electric power from the supplier of their choice beginning on October 1, 1999. All nonresidential customers received this choice by December 31, 2000. All residential customers will be given this choice by May 1, 2002. Customers who buy their electricity from a supplier other than the local electric utility will be required to pay transition charges to the utility through the year 2006. These charges are intended to compensate the electric utilities for revenues lost because of customers buying electricity from other suppliers. The legislation also allows an electric utility to issue bonds, in aggregate amounts up to 50 percent of its Illinois jurisdictional capitalization, to be financed by a specific charge to its customers. An electric utili ty also may transfer up to 15 percent of its assets to an affiliated or unaffiliated entity without approval from the Illinois Commerce Commission (Commission). In return for these and other benefits, electric utilities are required to reduce their rates to residential customers. The state's largest electric utility, the utility that serves northeastern Illinois, reduced its residential rates by 15 percent on August 1, 1998, and by another five percent on October 1, 2001. The legislation does not require electric utilities to divest their power generation assets. However, subject to certain capacity restrictions, electric utilities can divest assets without Commission approval. Management believes that the restructuring of the electric marketing in Illinois under this legislation will not have a material adverse effect on the competitive position of the Company's subsidiaries.

In addition to restructuring the electric market, the legislation provides for additional funding for assistance to low-income energy users, including customers of the Company's utility subsidiaries. The legislation creates a fund, financed by charges to electric and gas customers of public utilities and participating municipal utilities and electric co-ops, which supplements currently available federal energy assistance.

A substantial portion of the gas that Peoples Gas and North Shore Gas deliver to their customers consists of gas that the subsidiaries' customers purchase directly from producers and marketers rather than from the subsidiaries. These direct customer purchases have little effect on net income because the utilities provide transportation service for such gas volumes and recover margins similar to those applicable to conventional gas sales.

A pipeline may seek to provide transportation service directly to end-users. Such direct service by a pipeline to an end-user would bypass the local distributor's service and reduce the distributor's earnings. However, none of the subsidiaries' pipeline suppliers has undertaken any service bypassing the subsidiaries. Both utility subsidiaries have a bypass rate approved by the Commission, which allows the utilities to renegotiate rates with customers that are potential bypass candidates.

Through its Retail Energy Services segment, the Company is involved in the marketing of gas and electricity to retail customers. Competition in this arena is intense and comes from utility affiliates, purchases by some larger marketers, and a number of smaller marketers as the market continues to expand. Through its positive name recognition, acquisition of customer contracts and strategic marketing efforts, the Company aims to capture major regional market share of this business. The business climate is volatile with many companies entering and exiting the business.

Peoples Gas and North Shore Gas sell natural gas having an average heating value of approximately 1,000 British thermal units (Btus) per cubic foot.* Sales are made and service rendered by Peoples Gas and North Shore Gas pursuant to rate schedules on file with the Commission containing various service classifications largely reflecting customers' different uses and levels of consumption. The Gas Charge is determined in accordance with the provisions in Rider 2, Gas Charge, to recover the costs incurred by Peoples Gas and North Shore Gas to purchase, transport, manufacture and store gas supplies. The level of the Gas Charge under both subsidiaries' rate schedules is adjusted monthly to reflect increases or decreases in natural gas supplier charges, purchased storage service costs, transportation charges and liquefied petroleum gas costs. In addition, under the tariffs of Peoples Gas and North Shore Gas, the difference for any month between costs recoverable through the Gas Charge and revenues b illed to customers under the Gas Charge is refunded to or recovered from customers. Consistent with these tariff provisions, such difference for any month is recorded either as a current liability or a current asset (with a contra entry to Gas Costs). (See Note 1N of the Notes to Consolidated Financial Statements.)

The business of the Company's utility subsidiaries is influenced by seasonal weather conditions because a large element of the subsidiaries' customer load consists of space heating. Therefore, weather-related deliveries can have a significant positive or negative impact on net income. (For discussion of the effect of the seasonal nature of gas revenues on cash flow, see Liquidity and Capital Resources in Item 7.)

* All volumes of natural gas set forth in this report relating to the Company's gas distribution segment are stated on a 1,000 Btu (per cubic foot) billing basis.
(100 cubic feet = 1 therm; 10 therms = 1 Dekatherm - Dth; 1,000 Dekatherms = 1 MDth)

The basic marketing plans of Peoples Gas and North Shore Gas are to maintain their existing shares in all market segments and develop opportunities emerging from changes in the utility environment and technological equipment advances for new, expanded or current natural gas applications, including cogeneration, prime movers, microturbines, natural gas-fueled vehicles and natural gas air-conditioning.

Peoples Gas and North Shore Gas are subject to the jurisdiction of and regulation by the Commission, which has general supervisory and regulatory powers over practically all phases of the public utility business in Illinois. These include rates and charges, issuance of securities, services and facilities, systems of accounts, investments, safety standards, transactions with affiliated interests, as defined in the Illinois Public Utilities Act, and other matters.

The Company is a holding company as defined in the Public Utility Holding Company Act of 1935 (1935 Act). By Order entered on December 6, 1968 (Holding Company Act Release No. 16233), the Securities and Exchange Commission (SEC), pursuant to Section 3(a)(1) of the 1935 Act, exempted the Company and its subsidiary companies as such from the provisions of the 1935 Act, other than Section 9(a)(2) thereof.

Most of the gas distributed by Peoples Gas and North Shore Gas is transported to the utilities' distribution systems by interstate pipelines. In their provision of gas sales services (gathering, transportation and storage services, and gas supply), pipelines are regulated by the Federal Energy Regulatory Commission (FERC) under the Natural Gas Act and the Natural Gas Policy Act of 1978. (See "Sales and Rates" and "Current Gas Supply".)

Peoples Gas' operation of its natural gas hub is subject to the jurisdiction of and regulation by the FERC, which has authority over the rates, terms and conditions of the hub services.

The Power Generation segment is involved in the generation of electric power for sale to electric utilities and marketers. Under the 1935 Act, an exempt wholesale generator (EWG) is exempt from being deemed a public utility for purposes of the 1935 Act and no company will become a holding company under the 1935 Act as a result of owning an interest in an EWG. To qualify as an EWG, an entity must be engaged exclusively in the business of owning or operating an eligible facility and selling electricity at wholesale. An eligible facility is a generating facility used solely to produce electricity exclusively for sale at wholesale. Elwood was first certified as an EWG by FERC in 1999. Elwood is a public utility under the Federal Power Act and subject to the jurisdiction of FERC with respect to wholesale electric rates and other matters. Elwood has received authority from FERC to make wholesale sales of electricity at market-based rates. The FERC's order, as is customary with market-based rate schedules, r eserves the right to revoke Elwood's market-based rate authority if it is subsequently determined that Elwood or its affiliates possess excessive market power.

The Company and its subsidiaries are subject to federal and state environmental laws. Peoples Gas and North Shore Gas are conducting environmental investigations and work at certain sites that were the location of former manufactured gas plant operations. (See Note 5A of the Notes to Consolidated Financial Statements.) North Shore Gas has received a demand for payment of environmental response costs at a former mineral processing site in Denver, Colorado. (See Note 5B of the Notes to Consolidated Financial Statements.) Also, Peoples Gas and North Shore Gas conducted a mercury inspection and remediation program. (See Note 5C of the Notes to Consolidated Financial Statements.)

Peoples Gas and North Shore Gas have each entered into various long-term and short-term firm gas supply contracts. When used in conjunction with contract peaking and contract storage, Peoples Gas' company-owned storage, and the peak-shaving facilities of the utilities, such supply is deemed sufficient to meet current and foreseeable peak and annual market requirements.

Although the Company believes North American supply to be sufficient to meet U.S. market demands for the foreseeable future, it is unable to quantify or otherwise make specific representations regarding national supply availability and the cost of that supply.

The following tabulation shows the expected design peak-day availability of gas in thousands of dekatherms (MDth) during the 2001-2002 heating season for Peoples Gas and North Shore Gas:

The sources of gas supply (including gas transported for customers) in MDth for Peoples Gas and North Shore Gas for the three years ended September 30, 2001, 2000 and 1999 were as follows:

Peoples Gas and North Shore Gas have entered into gas supply agreements with Enron for a substantial amount of the utilities' respective purchases. Subsequent to Enron's bankruptcy, Enron has failed to fully perform under these supply agreements. Peoples Gas and North Shore Gas have replaced Enron's delivery shortfalls that are needed for customer requirements through the use of storage and purchases from other suppliers. On December 10, 2001, Peoples Gas and North Shore Gas filed a motion in Enron's bankruptcy case to, among other things, terminate these supply agreements. (See Note 1P and Note 19 of the Notes to Consolidated Financial Statements.)

Peoples Energy Services purchases the majority of the natural gas required to serve its needs from multiple wholesale suppliers. All gas is delivered to Peoples Energy Services at the Chicago city gates for those local distribution companies. Peoples Energy Services does not contract for interstate pipeline capacity in connection with purchases from the various suppliers.

All of the principal plants and properties of Peoples Gas and North Shore Gas have been maintained in the ordinary course of business and are believed to be in satisfactory operating condition. The distribution facilities serve the City and other areas in northeastern Illinois. Peoples Gas owns and operates an underground gas storage reservoir and an LNG plant at Manlove Field located near Champaign, Illinois. Peoples Gas also owns a transmission system that transports gas from Manlove Field to Chicago. The underground storage reservoir and LNG plant also serve North Shore Gas. General properties include a substantial investment in office and service buildings, garages, repair shops and motor vehicles, together with the equipment, tools and fixtures necessary to conduct utility business.

Most of the principal plants and properties of Peoples Gas and North Shore Gas, other than mains, services, meters, regulators and cushion gas in underground storage, are located on property owned in fee. Substantially all gas mains are located under public streets, alleys and highways, or under property owned by others under grants of easements. Meters and house regulators in use and a portion of services are located on premises being served. Certain storage wells and other facilities of the Manlove Field storage reservoir and certain portions of the transmission system are located on land held pursuant to leases, easements or permits.

Substantially all of the physical properties now owned or hereafter acquired by Peoples Gas and North Shore Gas are subject to (a) the first-mortgage lien of each utility's mortgage to U.S. Bank Trust National Association, as Trustee, to secure the principal amount of each utility's outstanding first mortgage bonds and (b) in certain cases, other exceptions and defects that do not interfere with the use of the property.

The Company owns and operates, as part of its Midstream Services segment, a plant in Will County, Illinois that gasifies natural gas liquids to support the sale of winter peaking services to area natural gas utilities and marketers. The current seasonal capacity of the plant is approximately 800,000 MMbtu. The plant is fully paid for and no liens exist on the property.

The Company owns working interests in various oil and gas reserves, as part of its Oil and Gas Production segment. Currently, these interests are located in New Mexico, Texas, Louisiana, North Dakota, Oklahoma and Arkansas. The total investment in these properties is approximately $211.0 million. As of September 30, 2001, total proved oil and gas reserves owned by Peoples Energy Production were approximately 129.0 Bcf equivalent. Reserve information on these properties was provided by the following engineering firms: Miller & Lents, LTD - International Oil & Gas Consultants; Netherland, Swell and Associates, Inc.; and Prator Bett, LLC - Petroleum Engineers.

As part of its Power Generation segment, the Company is an investor with Dominion in the Elwood facility, a nominal 1,350-megawatt peaking facility near Chicago, Illinois. Phase II of this facility, a 750-megawatt expansion, was completed in early July 2001. The Elwood facility is subject to a security interest granted to Bank One Trust Company National Association, as Trustee in connection with a project-based financing of the facility. (See Note 18 of the Notes to Consolidated Financial Statements.)

As part of the Other segment, the Company and Trigen Energy Corporation are equal investors in a district energy facility located in Chicago, Illinois. The facility is subject to a security interest granted to The Prudential Insurance Company of America in connection with a project-based financing of the facility.

See Note 5 of the Notes to Consolidated Financial Statements.

None.

The following is a list of the names, ages and positions of the executive officers of the Company. Executive officers were elected to serve for a term of one year or until their successors are duly elected and qualified.

The common stock of the Company is listed on the New York Stock, Chicago Stock, and Pacific Exchanges (trading symbol: PGL). At November 30, 2001, there were 22,342 registered shareholders.

The common stock price range and dividends declared per common share by quarters for fiscal 2001 and 2000 were as follows:

ITEM 6. Selected Financial Data

Fiscal 2001 net income for the Company increased to $97.0 million, or $2.74 per share, compared to $86.4 million, or $2.44 per share, in the year-ago period. Operating income from the Company's diversified businesses more than doubled from the previous year. The Company's core utility businesses remained strong resulting in an increase in operating income of $22.2 million, excluding the impacts of three special items described below.

In the fourth quarter of 2001 and 2000, the Company recorded special items. The after-tax impacts of these items in 2001 reduced earnings by $14.7 million, or $.42 per share. The after-tax impact of a fiscal 2000 fourth quarter mercury adjustment reduced earnings by $9.7 million, or $.27 per share. The special items are as follows:

On August 2, the Company announced a special retirement program, which was offered to nonunion employees. Of the 170 employees eligible to retire, 131 employees, or 77 percent, accepted the offer. As a result, the Company recorded a one-time charge of $26.2 million, or $.45 per share, to reflect the additional pension expense impact of these early retirements. This amount will be paid from the pension trust fund and therefore will have no impact on operating cash flow. The Company expects fiscal 2002 labor savings to be about $7 million. (See Note 9 of the Notes to Consolidated Financial Statements.)

During the fourth quarter of fiscal 2000, the Company recorded $16.1 million in total anticipated costs for the Company's utilities' mercury inspection and remediation program. At this time, the Company does not expect any further costs associated with that program and has therefore reversed the remaining reserve of $10.3 million, or $.18 per share. (See Note 5C of the Notes to Consolidated Financial Statements.)

The Company adjusted its reserve for uncollectible accounts by recording an additional provision of $8.5 million, or $.15 per share, to reflect current collection experience related to last winter's extremely high gas costs. (See Note 7 of the Notes to Consolidated Financial Statements.)

In fiscal 2001, all three of these adjustments affected the gas distribution segment ($23.4 million). Additionally, approximately $1.0 million of the pension costs were booked to corporate and adjustments. In fiscal 2000, the mercury accrual affected only the gas distribution segment ($16.1 million).

Net income for the Company, excluding these special items in both years, increased to $111.7 million, or $3.16 per share, compared to $96.1 million, or $2.71 per share, in the year-ago period. The $15.6 million increase ($26.9 million before taxes) was mainly a result of increased earnings from the gas distribution segment ($22.2 million). The gas distribution segment benefited from reduced depreciation expense ($16.4 million) and from the positive effects of pension benefit accounting ($7.1 million). Partially offsetting these effects was an increase in the utilities' provision for uncollectible accounts ($12.7 million), excluding the fourth quarter adjustment, due to unseasonably cold weather and higher natural gas prices. Margin increased $3.6 million and was positively affected by an increase in gas delivery volumes due to weather that was 19 percent colder than the previous year, partially offset by customer conservation resulting from higher natural gas costs. Margin also includes the fiscal 200 0 benefit of the Company's weather insurance policy. Also having a positive effect on fiscal 2001 earnings was continued growth from the diversified energy businesses, primarily oil and gas production ($10.2 million), power generation ($8.5 million) and midstream services ($7.6 million). Negatively impacting net income was an increase in long-term ($12.6 million) and short-term ($4.8 million) interest expense offset by an increase in miscellaneous interest income ($8.2 million).

In fiscal 2000, net income for the Company, excluding the nonrecurring mercury charge, increased to $96.1 million, or $2.71 per share, compared to $92.6 million, or $2.61 per share, in fiscal 1999. Net income for fiscal 2000 and fiscal 1999 was negatively impacted by 14 percent warmer-than-normal weather ($27.9 million and $28.3 million, respectively), however, these effects were partially mitigated in 2000 by the net benefits from the Company's weather insurance policy ($8.9 million). Increases in interest expense ($13.4 million) and depreciation expense ($17.4 million) had a negative impact on fiscal 2000 results. Positive impacts in fiscal 2000 resulted from growth in diversified segment earnings ($11.9 million) and the positive effects of pension benefit accounting ($16.1 million). Also affecting the year-to-year comparison were the elimination of the decommissioning liability associated with Peoples Gas' 1995 retirement of its synthetic natural gas (SNG) plant ($13.0 million) and a state income t ax refund ($3.3 million).

In fiscal 2001, net income for Peoples Gas increased to $75.3 million, compared to $73.6 million in the year-ago period. Peoples Gas was affected by the three special items described previously as follows: A one-time charge of $23.3 million related to the special retirement program; a reversal of the $5.3 million remaining reserve related to the mercury investigation and remediation program which had an initial reserve of $8.0 million recorded in the fourth quarter of 2000; and an $8.5 million adjustment to its reserve for uncollectible accounts. The after-tax impact of the portion of the three special items that related to Peoples Gas for fiscal 2001 reduced earnings by $16.0 million. The after-tax impact of the fiscal 2000 mercury adjustment reduced earnings by $4.8 million.

In fiscal 2001, net income for Peoples Gas, excluding these special items in both years, increased to $91.2 million, compared to $78.4 million in the year-ago period. The $12.8 million increase ($25.9 million before taxes) was mainly a result of increased margin ($13.5 million). Margin was positively affected by an increase in gas delivery volumes due to weather that was 19 percent colder than the previous year, partially offset by customer conservation resulting from higher natural gas costs. Also positively benefiting Peoples Gas' net income was decreased depreciation expense ($14.1 million), the positive effects of pension benefit accounting ($6.0 million) and reduced outside services expenses ($5.4 million). Offsetting these effects, in part, was an increase in the provision for uncollectible accounts ($11.4 million) due to unseasonably cold weather and higher natural gas prices.

In fiscal 2000, net income for Peoples Gas increased $177,000 to $78.4 million, excluding the nonrecurring mercury charge, mainly due to the positive effects of pension benefit accounting ($15.4 million) and a decrease in the provision for uncollectible accounts ($2.1 million), partially offset by a $6.4 million increase in depreciation expense. Both periods were affected by 14 percent warmer-than-normal weather ($23.9 million and $24.5 million, respectively). Also affecting the variation between the two periods were the elimination of the decommissioning liability associated with the 1995 retirement of its SNG plant ($13.0 million) and a state income tax refund ($3.0 million) both recorded in 1999.

In fiscal 2001, net income for North Shore Gas increased to $14.6 million, compared to $6.2 million in the previous period. North Shore Gas was affected by two of the previously described special items as follows: A reversal of the $5.1 million remaining reserve related to the mercury investigation and remediation program which recorded an $8.1 million reserve in the fourth quarter of fiscal 2000; and a charge of $1.9 million related to the special retirement program. The after-tax impact of the portion of these items that relate to North Shore Gas increased earnings by $1.9 million. The after-tax impact on the fiscal 2000 fourth quarter mercury adjustment reduced earnings by $4.9 million.

In fiscal 2001, net income for North Shore Gas, excluding the special items in both years, increased to $12.7 million, compared to $11.1 million in the previous period. The $1.6 million increase ($2.5 million before taxes) was primarily a result of increased margin ($2.7 million). Margin was positively affected by an increase in gas delivery volumes due to weather that was 19 percent colder than the prior period, partially offset by customer conservation resulting from higher natural gas costs. Also positively affecting results was a decrease in depreciation expense ($2.3 million). Offsetting these effects was a $582,000 increase in the provision for uncollectible accounts.

In 2000, net income for North Shore Gas decreased $1.4 million to $11.1 million, exclusive of the nonrecurring mercury charge. Both periods were also affected by warmer-than-normal weather ($4.0 million and 3.6 million, respectively). Positively impacting results was the positive effects of pension benefit accounting ($699,000).

A summary for the Company of variations affecting income between years is presented below, with explanations of significant differences following:

The Company's core business is the distribution of natural gas. Its two regulated utilities purchase, distribute, sell and transport natural gas to approximately one million retail customers through a 6,000-mile distribution system serving the City of Chicago and 54 communities in northeastern Illinois. The Company also owns a storage facility in central Illinois and a pipeline, which connects the facility and six major interstate pipelines to Chicago.

Gross revenues of Peoples Gas and North Shore Gas are affected by changes in the unit cost of the utilities' gas purchases and do not include the cost of gas supplies for customers who purchase gas directly from producers and marketers rather than from the utilities. In general, the unit cost of gas does not have a significant direct effect on gross margin because of the utilities' tariffs that provide for dollar-for-dollar recovery of gas costs. (See Note 1N of the Notes to Consolidated Financial Statements.) However, changes in gas costs can affect the provision for uncollectible accounts and working capital requirements.

The comparison below excludes the impact from the special retirement program and adjustments for mercury and uncollectible accounts.

In 2001, operating revenues for the Company increased $719.3 million compared to 2000 due mainly to the higher unit cost of gas ($617.4 million) and weather that was four percent colder than normal and 19 percent colder than the prior period. Operating income, excluding the previously described special items, increased $22.2 million to $201.7 million, due mainly to reductions in depreciation expense ($16.4 million) and outside services costs ($4.9 million), as well as from the positive effects of pension benefit accounting ($7.1 million). Negatively impacting operating income was an increase in the provision for uncollectible accounts ($12.7 million), excluding the fourth quarter adjustment. Margin increased $3.6 million and was positively affected by an increase in gas delivery volumes due to weather that was 19 percent colder than the prior period, partially offset by customer conservation resulting from higher gas costs. Margin also includes the benefit of the Company's weather insurance policy rec orded in fiscal 2000.

In August 2000, Peoples Gas and North Shore Gas filed petitions with the Commission requesting approval of revised depreciation rates based on an average service life study. In November 2000, the Commission issued orders approving Peoples Gas and North Shore Gas filed rates, which reduced depreciation expense, starting in fiscal year 2001. (See Note 1H of the Notes to Consolidated Financial Statements.)

Weather for fiscal years 2000 and 1999 was warmer than normal in both periods by 14 percent, but the negative impact in 2000 was reduced substantially due to the Company's weather insurance policy. The five-year weather insurance policy protects earnings when weather falls below 6,000-degree days. In fiscal 2000, the weather insurance benefit, net of the premium, amounted to $8.9 million. The Company will continue to retain all upside revenue potential when weather is colder than normal.

In 2000, operating revenues for the Company increased compared to 1999 due primarily to the higher unit cost of gas ($130.0 million) and the benefits associated with the weather insurance policy ($10.5 million). These effects were offset, in part, by a decline of $3.6 million in gas deliveries. Operating income, exclusive of the previously described special item related to the Company's mercury investigation and remediation program, increased $24.7 million to $179.5 million. This increase was primarily the result of pension benefit accounting ($16.1 million) and the net benefits associated with the weather insurance policy ($8.9 million). Partially offsetting these positive effects was an increase of $6.8 million in depreciation expense.

In 2001, operating revenues for Peoples Gas increased $614.8 million compared to fiscal 2000 due mainly to the higher unit cost of gas ($516.0 million) and weather that was four percent colder than normal and 19 percent colder than the prior period. Operating income, excluding the previously described special items, increased $30.8 million to $178.7 million, due primarily to an increase in margin ($13.5 million) and reductions in depreciation expense ($14.1 million). The increase in margin was due to higher gas delivery volumes resulting from weather that was 19 percent colder than the previous period offset, in part, by customer conservation resulting from higher gas costs. Also having a positive impact on operating income were lower outside services expense ($5.4 million) as well as the positive effects of pension benefit accounting ($6.0 million). Partially offsetting these positive results was an increase in the provision for uncollectible accounts ($11.4 million).

In 2000, operating income for Peoples Gas increased $17.5 million to $147.9 million, excluding the previously mentioned special items, due principally to positive effects of pension benefit accounting ($15.4 million) and the decrease in the provision for uncollectible accounts ($2.1 million). These positive impacts were offset, in part, by a $6.4 million increase in depreciation expense.

In 2001, operating revenues for North Shore Gas increased $117.1 million compared to 2000 due mainly to the higher unit cost of gas ($101.4 million) and weather that was four percent colder than normal and 19 percent colder than the prior period. Operating income, excluding the previously described special items, increased $4.0 million to $26.7 million due mainly to an increase in margin ($2.7 million). The increase in margin was primarily a result of higher gas delivery volumes due to weather that was 19 percent colder than the prior year, partially offset by customer conservation resulting from higher gas costs. Also affecting operating income was a reduction in depreciation expense ($2.3 million), partially offset by a decrease in the provision for uncollectible accounts ($582,000).

In 2000, operating income for North Shore Gas decreased $1.7 million to $22.7 million, excluding the previously mentioned special items, due primarily to both periods being affected by weather that was warmer than normal. Partially offsetting this impact was the positive effects of pension benefit accounting ($700,000).

The Company's objectives for the Gas Distribution segment center on continuous improvement, technological advancements, safety and customer service. Assuming normal weather and lower gas costs, operating income for this segment for fiscal 2002 is expected to decrease slightly from fiscal 2001 operating income (excluding the effect of the special items discussed above) as a result of lower pension credits, partially offset by the labor savings associated with the aforementioned special retirement program and lower uncollectible expense. Significantly warmer than normal weather would further decrease operating income.

Operating Statistics The following table represents gross margin components and delivery statistics for the Company:

(a)    Volumes associated with contract pooling service are included in the respective customer classes.

Operating Statistics The following table represents gross margin components and delivery statistics for Peoples Gas:

(a)    Volumes associated with contract pooling service are included in the respective customer classes.

Operating Statistics The following table represents gross margin components and delivery statistics for North Shore Gas: