Fitch Affirms Peoples Energy Corp. & Subsidiaries; Outlook Stable.

CHICAGO -- Fitch has affirmed the ratings of Peoples Energy Corp. (PGL) as follows:

-- Senior unsecured debt at 'A';

-- Short-term debt at 'F1'.

The ratings of PGL's regulated gas subsidiaries Peoples Gas Light and Coke (PGLC) and North Shore Gas Co. (North Shore) have also been affirmed by Fitch as follows:

-- Senior secured debt at 'AA-';

-- Short-term debt at 'F1'.

The Rating Outlook for all entities is Stable.

The ratings affirmation follows a routine credit review of PGL's operating performance, business strategy, and current financial projections. PGL's credit quality is primarily derived from the solid financial positions and low business risks of its regulated gas distribution utility subsidiaries, PGLC, and North Shore. PGL primarily relies on the receipt of cash distributions from its regulated subsidiaries to service parent company debt and pay common dividends. The utilities benefit from stable cash flows, solid credit metrics, and favorable operating characteristics.

PGL's current ratings also take into consideration the company's higher consolidated business risk as a result of its diversification strategy. PGL's nonregulated business segments include oil and gas production, power generation, natural gas midstream services, and retail energy marketing. In fiscal 2004, PGL derived approximately 34% of its operating income from its nonregulated operations, the largest portion from the oil and gas production segment. The company has announced it is in the process of exiting the power-generation business, and as such, oil and gas production will continue to constitute the majority of non-utility investments over the next several years.

Fitch notes that PGL has taken a relatively conservative approach to managing its nonregulated businesses, such as the use of hedging in its oil and gas portfolio, a trend that is expected to continue. Despite this, PGL faces some uncertainty in cash flows, as evidenced by the company's counterparty exposure to Aquila Inc. (senior unsecured rated 'B-', Rating Outlook Negative) at PGL's Elwood facility through a long-term contract that expires in 2017. Aquila has announced it is seeking to restructure the Elwood contract and continues to be current on its monthly payments to Elwood. Fitch will continue to monitor the situation.

PGL's current and anticipated credit projection measures are generally commensurate with its current ratings and business risk profile. Funds from operations to interest coverage and EBITDA-to-interest are both projected by Fitch to improve to more than 6 times (x) through 2006. Consolidated leverage, as measured by debt to EBITDA, is forecasted by Fitch to continue to be at or below 3.0x. Credit measures at PGLC and North Shore are slightly weaker on a projected basis than historical levels, as a result of higher operating costs, but remain strong for the 'AA-' rating category.

PGL is a diversified energy company, whose core operations are two natural gas utilities, PGLC and North Shore Gas, serving approximately one million customers in Chicago and northeastern Illinois. PGL's diversified energy businesses focus on oil and gas production, power generation, midstream services, and retail energy services.