Fitch Ratings affirms Peoples Energy & subsidiaries’ ratings

CHICAGO, Ill., July 5, 2002 — Fitch Ratings has affirmed the credit ratings of Peoples Energy Corp. (PEC) and its subsidiaries, Peoples Gas Light and Coke Co. (PGLC) and North Shore Gas Co. (North Shore).

The Rating Outlook for all three companies is Stable. The ratings affirmations were based on a recent review of PEC’s operating results and updated business plans.

The ratings of PEC, PGLC and North Shore are as follows:
–Senior unsecured debt ‘A+’;
–Commercial paper ‘F1’.

–Senior secured debt ‘AA’;
–Commercial paper ‘F1+’.

North Shore
–Senior secured debt ‘AA’;
–Commercial paper ‘F1+’.

PEC’s credit profile continues to be supported by the solid financial positions and low business risks of its regulated gas distribution utility subsidiaries, PGLC and North Shore. The natural gas segment accounted for approximately 87% of fiscal 2001 consolidated EBIT and 92% of consolidated funds from operations.

PGLC and North Shore operate in mature and stable markets with a constructive regulatory environment that allows for a purchased gas adjustment clause. The utility subsidiaries benefit from solid credit fundamentals, modest business and financial risks and positive operating characteristics, including diverse sources of gas supply and access to significant storage capability.

PEC’s ratings also take into consideration the company’s four diversified business segments – oil and gas production, natural gas midstream services, power generation and retail energy marketing. PEC has taken a relatively conservative approach to its expansion into the diversified arena.

Oil and gas operations focus on acquiring and developing on-shore, low-risk natural gas reserves. Hedging practices minimize commodity price volatility. Investments in power generation have been and are expected to involve experienced partners and cash flow will be supported through contractual arrangements with creditworthy counterparties.

Any material deviation away from this strategy or a decline in the operating or financial performance of the diversified businesses could pressurize PEC’s credit quality. Earlier this year, PEC indicated that a lack of suitable and attractively priced oil and gas production properties has slowed the company’s growth plans, causing PEC to lower its earnings outlook for fiscal 2002.

Fitch will continue to monitor developments in PEC’s financial condition and business position.
PEC has improved its debt and coverage ratios through debt reduction and related interest expense savings due to the October 2001 non-recourse project financing of the Elwood generating facilities.

The proceeds from the project financing were used to reduce debt at the PEC parent level, resulting in PEC’s consolidated debt to total capitalization ratio decreasing from a high of 61.1% at fiscal year-end 2001 to 53.1% in the second quarter of fiscal 2002. PEC’s consolidated debt ratio is projected to remain around 53-54% level over the next two years.

A continued conservative financing strategy is expected at PEC, including pursuing non-recourse debt where warranted, particularly in power generation segment, and the use of tax-advantaged debt at the utilities, where approximately 78% of debt is tax exempt.

PEC’s core operations are its two natural gas utility subsidiaries, PGLC and North Shore Gas, that together serve nearly 1 million customers in Chicago and northeastern Illinois. PEC’s diversified energy businesses focus on oil and gas production, midstream services, power generation and retail energy services.

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