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Peoples Adds 59 Bcfe of Proved Reserves, Plans Sale of Power Generation Business

Peoples Energy's oil and gas production subsidiary, Peoples Energy Production, added about 59 Bcfe of proved gas reserves in the heart of the Cotton Valley/Travis Peak (Hosston) gas trend in East Texas, North Louisiana and Mississippi for $139 million. The company also announced that it has received proposals and is in negotiations to sell its power generation assets (800 MW) and exit that business.

"The acquisition of oil and gas properties announced today is consistent with our strategy of acquiring proven reserves with upside potential," said CEO Thomas M. Patrick. "While adding to our existing production base, it will also provide an extensive inventory of low risk drilling opportunities for years to come.

"Meanwhile, the anticipated sale of our power assets now positions Peoples Energy to focus on three primary lines of business -- gas distribution, oil and gas production, and energy marketing -- while helping to fund growth initiatives in these businesses and maintain a strong balance sheet."

Peoples said the oil and gas assets, nearly all of which will be operated by the company, consist of 60,000 gross acres in 33 fields and will initially add 7.5 MMcfe/d of production. About 47% of the proven reserves are developed. Peoples' first quarter fiscal 2006 production averaged 64 MMcfe/d and its fiscal year-end 2005 proven reserves totaled 181.6 Bcfe. The company said the purchased reserves will have a longer production life and the company's overall reserves-to-production ratio is projected to increase from 7.4 years to nine years.

"This acquisition continues to build on our successful entree into the Cotton Valley trend, a prolific producing province of longer life, low risk reserves, which was initiated in fiscal 2004," said Steven W. Nance, president of Peoples Energy Production. "These assets are very similar in nature to our assets in East Texas where we have had extremely good success over the past two years and as such, the properties will be easily integrated into our existing operations.

"In addition, the multi-year drilling inventory provided by these assets will allow us to secure the rig commitments we need to fully develop the properties," he said.

The company has identified 190 proven and probable drilling locations and estimates that an additional 50 Bcfe of identified low-risk, upside reserve potential exists within the acquired acreage. In addition, another 100 to 200 potential locations have been identified that are associated with 40-acre infill drilling that should add additional reserve and production upside. Initial development of the acquired reserves, 95% of which are natural gas, will begin in the fourth quarter of fiscal 2006.

Concurrent with the transaction, the company plans to hedge 50% of anticipated fiscal 2007 production and 100% of fiscal 2008 and 2009 production from existing wells associated with the acquired assets. Overall, the company will have hedges in place for 65% of its expected remaining fiscal 2006 production as well as 50% and 20% of fiscal 2007 and 2008 anticipated production, respectively.

Peoples said the transaction will be financed on a short-term basis with commercial paper borrowing until receipt of the proceeds from the power asset sales.

Peoples said it is actively engaged in exclusive discussions regarding the sale of its partnership interests in the Southeast Chicago (SCEP) and Elwood power generation facilities, as well as its 100% interest in a fully-permitted power development site in Oregon. Peoples owns 800 net MW of power generation assets, with a book value at Dec. 31, 2005 of $123 million. Pending final due diligence and regulatory approvals by the Federal Energy Regulatory Commission and Federal Trade Commission, the company expects to close on the sales and to record a significant gain during fiscal 2006.

"While our power investments have provided solid earnings and cash flow, the power market has changed dramatically over the past several years since we became involved in power generation," said Patrick. "The future industry fundamentals for electric generation in the U.S. are very uncertain, and as we have previously indicated, we had no plans to make further investments in that sector. As a result, we have made a decision to exit the business and to re-deploy the capital to our remaining segments. It is gratifying that we expect to do so with a good return on our original investment."

Peoples said beginning with second quarter results, earnings from the power assets and any gains recorded on the sale will be shown as discontinued operations. Full year ongoing operating income from this business is $15 million, or $0.23 per share after-tax, nearly all of which is recorded in the last two fiscal quarters.

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