Peoples Energy Reports Fiscal 2005 First Quarter Results; Results Refl

    Business Editors

    CHICAGO--(BUSINESS WIRE)--Jan. 28, 2005--Peoples Energy (NYSE:PGL) today reported fiscal 2005 first quarter net income of $22.5 million, or $0.59 per diluted share. Operating income for the quarter totaled $46.4 million. Consistent with previous estimates, first quarter results included a non-cash, pension-related charge of $11.2 million, or $0.18 per diluted share after taxes, associated with the company's recent organizational restructuring.
    First quarter ongoing net income (non-GAAP), defined as GAAP net income adjusted to exclude the effects of the restructuring-related pension charge, was $29.2 million, or $0.77 per diluted share, and ongoing operating income (non-GAAP), which also excludes the restructuring charge, was $57.6 million. Net income for the prior year first quarter was $31.4 million, or $0.85 per diluted share, and operating income was $60.2 million. Management believes that ongoing net income (non-GAAP) and ongoing operating income (non-GAAP) are useful for year over year comparisons since restructuring related charges of this magnitude are infrequent and affect the comparability of operating results. Ongoing net income and ongoing operating income are used internally to measure performance against budget and in reports for management and the board of directors.
    "The primary cause for the decline in quarterly earnings was the charge related to our recent organizational restructuring." said Thomas M. Patrick, chairman, president and CEO. "However, we are encouraged by the early results of that action, with approximately $5 million of labor-related savings generated in the first quarter. Ongoing operating income was slightly lower than a year ago. The largest factor was lower Gas Distribution deliveries, due to a combination of warmer than normal weather and lower weather normalized demand."
    The table and discussion below summarize first quarter operating results for Peoples Energy's business segments:

Three Months Ended December 31(a) ------------------------------------------ Before Restructuring- Restructuring Related As Reported (non-GAAP) Charges (GAAP) ------------- -------------- ------------- Operating Income (Loss) (millions) 2004 2003 2004 2003 2004 2003 ------ ------ ------- ------ ------ ------ Gas Distribution $47.7 $51.5 $47.7 $51.5 Oil and Gas Production 8.6 9.4 8.6 9.4 Power Generation (1.0) (1.3) (1.0) (1.3) Midstream Services 2.5 3.5 2.5 3.5 Retail Energy Services 3.3 3.1 3.3 3.1 Corporate and Other (3.5) (6.2) (11.2) (14.7) (6.2) ------ ------ ------- ------ ------ ------ Total Operating Income (Loss) $57.6 $60.2 $(11.2) - $46.4 $60.2

Net Income (Loss) (millions) $29.2 $31.4 $ (6.8) - $22.5 $31.4

Net Income (Loss) per diluted share $0.77 $0.85 $(0.18) - $0.59 $0.85

(a) Numbers may not sum due to rounding

    Gas Distribution. Operating income was $47.7 million for the first quarter, compared to $51.5 million in the year-ago period. Operating results were negatively impacted by lower deliveries, which declined 4 Bcf from a year ago. Weather was 9% or 196 degree days warmer than normal and 2% or 32 degree days warmer than the same period last year. The company accrued $1.1 million of weather insurance recoveries, which partially offset the impact of warmer than normal weather. Direct labor costs declined $2.2 million in the quarter, essentially offsetting increases in other non-labor related expenses.
    Oil and Gas Production. Operating income declined $0.8 million to $8.6 million. Higher net realized commodity prices were offset by lower than expected production due primarily to timing delays associated with the company's drilling program, well performance and curtailments. Higher operating expenses and production taxes also negatively impacted operating income compared to the prior year period. Offsetting these negatives were lower exploration expense and higher equity investment income due primarily to a gain on the sale of certain properties at its EnerVest partnership.
    The following table summarizes production and price statistics for the Oil and Gas Production segment. Current hedge positions for the company's remaining expected fiscal 2005 production are included in the attached financial pages.

Three Months Ended December 31, -------------------------------- 2004 2003 % Change -------- -------- ---------- Average daily production: Gas (MMCFD) 62.5 66.2 (5.6)% Oil (MBD) 1.4 1.5 (6.7)% Gas equivalent (MMCFED) 70.7 75.1 (5.9)% Net realized price: Gas (MCF) $ 4.42 $ 4.14 6.8% Oil (BBL) $30.03 $24.93 20.5% Gas equivalent (MCFE) $ 4.49 $ 4.14 8.5% Percentage hedged Gas 96% 79% Oil 83% 65%

    Power Generation. Operating income (loss) in the first quarter was $(1.0) million, compared to $(1.3) million in the year-ago period. Most of the capacity revenues in the Power Generation segment are recognized in the June to September period, resulting in seasonal operating losses for this segment during the first two fiscal quarters.
    Midstream Services. Operating income fell to $2.5 million, a decrease of approximately $1 million from last year. The decline was driven by lower operating results from wholesale marketing due to a combination of timing of sales and unfavorable basis differentials, partially offset by improved performance from hub and NGL activity.
    Retail Energy Services. Operating income was slightly higher than the year-ago quarter. Gas and electric sales volumes increased approximately 6% and 32%, respectively, partially offset by declines in average margins.
    Corporate and Other. Absent the $11.2 million pension-related restructuring charge discussed earlier, corporate and other expenses totaled $3.5 million. Corporate and other costs in the year-ago period were $6.2 million. Results for the segment were favorably impacted by lower labor-related expenses related to last fall's restructuring.

    Financial.

    Interest expense for the quarter was up slightly compared to the year-ago period due primarily to higher interest rates, partially offset by lower average seasonal borrowing balances. Higher average shares outstanding reduced diluted earnings per share by approximately $0.02 compared to last year's first quarter. At December 31, 2004, the ratio of total debt to total debt plus equity was 55%, down from 56% a year ago and reflecting peak seasonal working capital requirements in the Gas Distribution, Midstream, and Retail Energy Services segments. All three major rating agencies recently reaffirmed their credit ratings for Peoples Energy and its utility affiliates. In addition, Moody's improved its outlook from negative to stable.
    Capital expenditures for the first quarter totaled $31 million, compared to about $70 million in last year's first quarter, which included a $35 million oil and gas acquisition. The company's capital spending plan for fiscal 2005 is unchanged at approximately $160 million, including $85 million for gas distribution and $70 million for oil and gas production.

    Outlook

    "A significant portion of our heating season remains; however natural gas prices have stayed very high and it now appears that January weather will be nearly 100 degree days warmer than normal, reducing the likelihood of making up lost ground in Gas Distribution deliveries." said Patrick. "Our Midwest-based diversified businesses are on track to meet expectations. In addition, production volumes in our Oil and Gas segment should increase steadily as our drilling program accelerates in the three remaining quarters. We are also meeting and may exceed our goals for utility and corporate cost reductions related to the organizational restructuring. Despite these positives, absent a notable turnaround in Gas Distribution deliveries, earnings for the full fiscal year will likely be at the low end of the range of $2.75 to $2.90 per share that we provided last fall."

    Earnings Conference Call

    Peoples Energy will hold a conference call to discuss financial results for the first quarter of fiscal 2005 on Friday, January 28, 2005, 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 1-800-642-1687, reference number 2990791. The telephone replay will be available approximately two hours after completion of the call through February 1, 2005. The webcast replay will be available through January 2006.

    Peoples Energy, a member of the S&P 500, is a diversified energy company comprised of five primary business segments: Gas Distribution, Oil and Gas Production, Midstream Services, Retail Energy Services, and Power Generation. The Gas Distribution business serves about 1 million retail customers in Chicago and northeastern Illinois. Visit the Peoples Energy web site 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: adverse decisions in proceedings before the Illinois Commerce Commission 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, power generation and oil and gas production segments; Aquila Inc.'s financial ability to perform under its power sales agreements with Elwood Energy LLC; drilling risks and the inherent uncertainty of oil and gas reserve estimates; weather related energy demand; the Company's ability to replace through new hires and outsourcing certain open salaried positions resulting from the voluntary severance offer made in connection with the recent management restructuring; 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 filed with the SEC under Item 1 - Business 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)

Preliminary

PEOPLES ENERGY CORPORATION FINANCIAL HIGHLIGHTS (Unaudited)

Financial Data ---------------------------------------------------------------------- (In Thousands, Except Per-Share Amounts) Three Months Ended December 31, --------------------------------- 2004 2003 ----------- -----------

Revenues $737,411 $604,884

Equity Investment Income (Loss) $888 ($245)

Operating Income $46,413 $60,152

Net Income $22,476 $31,351

Earnings Per Share - Basic $0.59 $0.85

Earnings Per Share - Diluted $0.59 $0.85

Average Shares Outstanding - Basic 37,816 36,814

Average Shares Outstanding - Diluted 37,993 36,976

Reconciliation of 2004 GAAP and Non-GAAP Earnings ---------------------------------------------------------------------- (In Thousands, Except Per-Share Amounts) --------------------------------- Three Months Ended December 31, --------------------------------- Ongoing (Non- Restructuring GAAP) Charge GAAP --------------------------------- Operating Income (Loss) $57,620 ($11,207) $46,413 Net Income (Loss) $29,229 ($6,753) $22,476 Earnings (Loss) Per Share - Diluted $0.77 ($0.18) $0.59

Common Stock Data ---------------------------------------------------------------------- December 31, --------------------------------- 2004 2003 ----------- ----------- Annualized dividend rate $2.16 $2.12 Dividend yield 4.9% 5.0% Book value per share $23.34 $23.32 Market price $43.95 $42.04 Market price as a percent of book value 188% 180% ----------------------------------------------------------------------

Peoples Energy Corporation Preliminary

Summary of Selected Operating Data (Unaudited) ----------------------------------------------------------------------

Three Months Ended December 31, ----------------------- 2004 2003 ----------------------------------------------------------------------

Gas Distribution Margin (in thousands) Total Gas Distribution revenues $517,780 $438,411 Less: Gas costs 329,604 254,987 ----------- ----------- Gross margin (1) 188,176 183,424 Less: Revenue taxes 45,964 41,335 Environmental costs recovered 8,982 4,788 ----------- ----------- Net margin (1) $133,230 $137,301

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Gas Distribution Deliveries (MDth) Gas sales - Residential 35,037 37,215 - Commercial 5,793 6,313 - Industrial 1,146 1,055 Transportation 24,868 26,308 ----------- ----------- Total Gas Distribution Deliveries 66,844 70,891

----------------------------------------------------------------------

Weather Heating degree days - actual 2,083 2,115 Heating degree days - percent colder (warmer) than normal -8.6% -7.2%

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Number of Gas Distribution Customers (average) Gas sales - Residential 877,841 881,533 - Commercial 45,282 44,009 - Industrial 2,834 2,846 Transportation 24,074 24,424 ----------- ----------- Total Gas Distribution Customers 950,031 952,812

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Retail Energy Gas and Electric Customers (at December 31) 26,617 26,122

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Employees (at December 31) Gas Distribution 1,693 1,847 Diversified Businesses 129 124 Corporate Support 318 401 Total Employees 2,140 2,372

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Megawatt Capacity (at December 31) 805 805

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(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 December 31, -------------------- 2004 2003 ----------------------------------------------------------------------

Oil and Gas Production Average daily production: Gas (MMCFD) 62.5 66.2 Oil (MBD) 1.4 1.5 Gas equivalent (MMCFED) 70.7 75.1

Average index price: Gas ($/MMBTU) - Henry Hub $ 7.07 $ 4.58 Oil ($/BBL) $ 48.28 $ 31.18

Average hedge price: Gas ($/MMBTU) $ 4.84 $ 3.98 Oil ($/BBL) $ 25.95 $ 24.99

Percentage hedged: Gas 96% 79% Oil 83% 65%

Net realized price: Gas ($/MCF) $ 4.42 $ 4.14 Oil ($/BBL) $ 30.03 $ 24.93 Gas Equivalent (MCFE) $ 4.49 $ 4.14

Oil & Gas Production Remaining FY 2005 Hedge Position (January - September)

Volume Hedged Wtd. Avg. Prices (MMBTU)/(MBO) ($MMBTU)/($BBL) -------------- ----------------- Gas (1) ------- Swaps (40%) 6,893,750 $4.36 Collars (60%) 10,169,250 $4.51 - $5.45 -------------- 17,063,000 (2) $4.45 - $5.01 Oil (1) ------- Swaps 338 (3) $28.26

(1) As of January 26, 2005. (2) Approximately 75-80% based on estimated 2005 production. (3) Approximately 80-85% based on estimated 2005 production.

Peoples Energy Corporation Preliminary

Consolidated Statements of Income (Unaudited) ----------------------------------------------------------------------

Three Months Ended December 31, ------------------------ (In Thousands, Except Per-Share Amounts) 2004 2003 ----------------------------------------------------------------------

Revenues $737,411 $604,884

Operating Expenses: Cost of energy sold 508,892 380,560 Operation and maintenance, excluding restructuring charge 88,325 87,310 Restructuring charge 11,207 - Depreciation, depletion and amortization 30,344 28,921 Taxes, other than income taxes 53,046 47,696 Losses on property sales 72 - ----------- ----------- Total Operating Expenses 691,886 544,487

Equity investment income (loss) 888 (245) ----------------------------------------------------------------------

Operating Income 46,413 60,152

Other income and expense - net 913 605

Interest expense 12,510 12,281 ----------------------------------------------------------------------

Income Before Income Taxes 34,816 48,476

Income tax expense 12,340 17,125 ----------------------------------------------------------------------

Net Income $ 22,476 $ 31,351 ======================================================================

Average Shares of Common Stock Outstanding Basic 37,816 36,814 Diluted 37,993 36,976 ---------------------------------------------------------------------- Earnings Per Share of Common Stock Basic $ 0.59 $ 0.85 Diluted $ 0.59 $ 0.85 ----------------------------------------------------------------------

Peoples Energy Corporation Preliminary

Consolidated Balance Sheets (Unaudited) ----------------------------------------------------------------------

December 31, December 31, (In Thousands) 2004 2003 ----------------------------------------------------------------------

Assets Capital Investments: Property, plant and equipment $3,150,362 $3,036,996 Less - Accumulated depreciation, depletion and amortization 1,247,190 1,148,780 ------------ ------------ Net property, plant and equipment 1,903,172 1,888,216 Investments in equity investees 124,633 132,005 Other investments 24,288 21,843 ------------ ------------

Total Capital Investments - Net 2,052,093 2,042,064

Customer Accounts Receivable - net of reserves 480,371 403,377 Other Current Assets 320,174 298,720 Other Assets 467,654 440,568 ------------ ------------

Total Assets $3,320,292 $3,184,729 ======================================================================

Capitalization and Liabilities Common Stockholders' Equity: Common stock $ 392,911 $ 357,626 Treasury stock (6,677) (6,760) Retained earnings 556,456 561,806 Accumulated other comprehensive income (loss) (58,897) (50,088) ------------ ------------

Total Common Stockholders' Equity 883,793 862,584 Long-Term Debt 897,207 846,330 ------------ ------------

Total Capitalization 1,781,000 1,708,914

Current Liabilities Commercial paper 172,049 192,921 Short-term debt - 50,000 Other 543,381 501,414 ------------ ------------ Total Current Liabilities 715,430 744,335

Deferred Credits and Other Liabilities 823,862 731,480 ------------ ------------

Total Capitalization and Liabilities $3,320,292 $3,184,729 ======================================================================

Peoples Energy Corporation Preliminary

Business Segments (Unaudited) ---------------------------------------------------------------------- Oil and Gas Gas Power Midstream (In Thousands) Distribution Production Generation Services ---------------------------------------------------------------------- Three Months Ended December 31, 2004 Revenues $517,780 $ 29,200 $ - $108,682 Depreciation, depletion and amortization 16,992 12,586 - 112 Equity investment income (loss) - 1,086 (460) - Operating income (loss) 47,739 8,591 (965) 2,469 ---------------------------------------------------------------------- Three Months Ended December 31, 2003 Revenues $438,411 $ 28,621 $ - $ 65,201 Depreciation, depletion and amortization 16,508 11,734 31 111 Equity investment income (loss) - 23 (214) - Operating income (loss) 51,538 9,415 (1,290) 3,544 ----------------------------------------------------------------------

Preliminary Peoples Energy Corporation

Business Segments (Unaudited) (continued) ---------------------------------------------------------------------- Retail Corporate Energy and (In Thousands) Services Other Adjustments Total ---------------------------------------------------------------------- Three Months Ended December 31, 2004 Revenues $112,967 $ - $(31,218) $737,411 Depreciation, depletion and amortization 405 35 214 30,344 Equity investment income (loss) - 262 - 888 Operating income (loss) 3,263 (213) (14,471) 46,413 ---------------------------------------------------------------------- Three Months Ended December 31, 2003 Revenues $ 83,126 $ 81 $(10,556) $604,884 Depreciation, depletion and amortization 430 4 103 28,921 Equity investment income (loss) - (54) - (245) Operating income (loss) 3,149 (219) (5,985) 60,152 ----------------------------------------------------------------------

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CONTACT: Peoples Energy Elizabeth Castro (Media), 312-240-4567 or Jim Chiti (Investor Relations), 312-240-4730

KEYWORD: ILLINOIS INDUSTRY KEYWORD: OIL/GAS ENERGY UTILITIES EARNINGS CONFERENCE CALLS SOURCE: Peoples Energy

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