SEVERANCE AGREEMENT
                                     BETWEEN
                           PEOPLES ENERGY CORPORATION
                                       AND
                                THOMAS M. PATRICK
                 CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE OFFICER
 
            THIS AGREEMENT, effective as of June 2, 2004, by and between Peoples
Energy Corporation, an Illinois corporation and Thomas M. Patrick, Chairman,
President and Chief Executive Officer (the "Executive").
 
                                   WITNESSETH
 
            WHEREAS, the Executive is a valuable employee of the Company and an
integral part of the management of the Company; and
 
            WHEREAS, PEC wishes to encourage the Executive to continue his
career and services with the Company for the period during and after an actual
or threatened Change in Control; and
 
            WHEREAS, the Board of Directors of PEC previously determined that it
would be in the best interests of the Company and its shareholders to assure
continuity in the management of the Company's administration and operations in
the event of a change in control by entering into a severance agreement with the
Executive; and
 
            WHEREAS, PEC and the Executive entered into a severance agreement
effective as of August 1, 2002 (the "Prior Agreement"); and
 
            WHEREAS, the Board of Directors of PEC at its meeting on June 2,
2004 determined that it would be in the best interest of the Company and its
shareholders to terminate the Prior Agreement and enter into a new severance
agreement with the executive to reflect, among other things, the adoption of the
2004 Incentive Compensation Plan.
 
            NOW THEREFORE, in consideration of the termination of the Prior
Agreement and other good and valuable consideration, it is hereby agreed by and
between the parties hereto as follows:
 
            1. Definitions.
 
            "AAA" shall have the meaning set forth in paragraph 5 of this
Agreement.
 
            "Affiliate" shall mean the subsidiaries of PEC and other entities
controlled by such subsidiaries.
 
                                     - 1 -
<PAGE>
 
            "Agreement" shall mean this Severance Agreement.
 
            "Benefit Service" shall mean the Benefit Service as defined in the
PEC Retirement Plan.
 
            "Board" shall mean the Board of Directors of PEC.
 
            "Cause" shall mean the Executive's fraud or dishonesty which has
resulted in or is likely to result in material economic damage to the Company as
determined in good faith by a vote of at least two-thirds of the non-employee
directors of PEC at a meeting of the Board at which the Executive is provided an
opportunity to be heard.
 
            "Change in Control" shall mean:
 
            (i) the acquisition by any Person or Persons acting in concert, of
beneficial ownership (as defined in Rule 13d-3 under the Exchange Act), directly
or indirectly, of twenty percent (20%) or more of the outstanding stock of PEC
(calculated as provided in paragraph (d) of Rule 13d-3 under the Exchange Act in
the case of rights to acquire stock); or
 
            (ii) (A) the consummation of any consolidation or merger of PEC,
other than a consolidation or merger of PEC in which holders of its stock
immediately prior to the consolidation or merger hold proportionately at least
fifty-five percent (55%) of the outstanding common stock of the continuing or
surviving corporation, or (B) any sale, lease, exchange or other transfer (in
one transaction or a series of related transactions) of all or substantially all
the assets of PEC ("Transfer Transaction"), except where (1) PEC owns all of the
outstanding stock of the transferee entity or (2) the holders of PEC's common
stock immediately prior to the Transfer Transaction own proportionately at least
fifty-five percent (55%) of the outstanding stock of the transferee entity,
immediately after the Transfer Transaction, or (C) any consolidation or merger
of PEC where, after the consolidation or merger, one Person owns one hundred
percent (100%) of the shares of stock of PEC (except where the holders of the
PEC's common stock immediately prior to such merger or consolidation own
proportionately at least fifty-five percent (55%) of the outstanding stock of
such Person immediately after such consolidation or merger); or
 
            (iii) a change in the members of the PEC Board of Directors within a
twenty-four (24) month period such that the individuals who are members of the
PEC Board of Directors at the beginning of such twenty-four (24) month period
cease to comprise two-thirds (2/3) of the members, unless the election or
nomination for election by PEC's shareholders of each new director was approved
by the vote of at least two-thirds of the directors then still in office who
were in office at the beginning of the twenty-four (24) month period.
 
            "Code" shall mean the United States Internal Revenue Code of 1986,
as amended, or any successor thereto.
 
            "Company" shall mean PEC and include any Affiliate and successor or
successors to PEC.
 
                                     - 2 -
<PAGE>
 
            "Compensation" shall mean the sum of (i) the Executive's annual rate
of salary on the last day the Executive was an employee of the Company,
including any elective contributions made by the Company on behalf of the
Executive that are not includable in the gross income of the Executive under
Section 125 or 402(e)(3) of the Code or any successor provision thereto, and
including any amount of salary that has been deferred by the Executive, (ii) an
award equal to the average of the amounts awarded to the Executive under the PEC
STIC or Short-Term Plan during the three years preceding termination of
employment, and (iii) the economic equivalent value of any awards received by
Executive under the Long-Term Plan in the calendar year preceding termination of
employment (as determined in good faith by the Compensation Committee).
 
            "Compensation Committee" shall mean the Compensation Committee of
the PEC Board of Directors.
 
            "Constructive Discharge" shall mean a good faith determination by
the Executive that there has been any (i) material change by the Company of the
Executive's functions, duties or responsibilities which change would cause the
Executive's position with the Company to become of less dignity, responsibility,
importance, prestige or scope, including, without limitation, the assignment to
the Executive of duties and responsibilities inconsistent with his position,
(ii) assignment or reassignment by the Company of the Executive, without the
Executive's consent, to another place of employment more than fifty (50) miles
from the Executive's current place of employment, (iii) liquidation,
dissolution, consolidation or merger of PEC, or transfer of all or substantially
all of its assets, other than a transaction or series of transactions in which
the resulting or surviving transferee entity has, in the aggregate, a net worth
at least equal to that of PEC immediately before such transaction and such
resulting or surviving transferee entity expressly assumes this Agreement and
all obligations and undertakings hereunder, or (iv) reduction, which is more
than de minimis, in the Executive's total compensation (Compensation,
perquisites and benefits). It is understood and agreed by all parties hereto
that a reduction in (a) the amount the Executive receives under the Short-Term
Plan, (b) the awards received by the Executive under the Long-Term Plan, or (c)
the perquisites or benefits of the Executive shall not be deemed a reduction if
such amount received under the Short-Term Plan, awards received under the
Long-Term Plan, or such perquisites or benefits are with respect to the
Short-Term Plan, Long-Term Plan and perquisites greater than that received by
any Company officer of lesser rank and with respect to benefits, no less than
that received by any Company officer of lesser rank. An event shall not be
considered Constructive Discharge unless the Executive provides written notice
to PEC specifying the event relied upon for Constructive Discharge within six
months after the occurrence of such event. Within thirty days of receiving such
written notice from the Executive, the Company may cure or cause to be cured the
event upon which the Executive claims a Constructive Discharge and no
Constructive Discharge shall have been considered to have occurred with respect
to such event. PEC and the Executive, upon mutual written agreement, may waive
any of the foregoing provisions which would otherwise constitute a Constructive
Discharge.
 
                                     - 3 -
<PAGE>
 
            "Coverage Period" shall mean the period commencing with the month in
which termination of employment as described in paragraph 3.a. of this Agreement
shall have occurred, and ending thirty-six (36) months thereafter.
 
            "Effective Date" shall mean June 2, 2004.
 
            "Exchange Act" shall mean the Securities Exchange Act of 1934, as
amended.
 
            "Long-Term Plan" shall mean the Long-Term Incentive Compensation
Plan, a sub-plan of the 2004 Incentive Compensation Plan or any successor
long-term incentive plan.
 
            "PEC" shall mean Peoples Energy Corporation, an Illinois
corporation.
 
            "PEC LTIC" shall mean the Peoples Energy Corporation Long Term
Incentive Compensation Plan originally adopted on February 22, 1990 as in effect
prior to February 27, 2004, the effective date of the 2004 Plan.
 
            "PEC Retirement Plan" shall mean the Peoples Energy Corporation
Retirement Plan as in effect on the Effective Date, as amended from time to time
or any successor plan.
 
            "PEC SRB" shall mean the Peoples Energy Corporation Supplemental
Retirement Benefit Plan, as in effect on the Effective Date, as amended from
time to time or any successor plan.
 
            ""PEC STIC" shall mean the Peoples Energy Corporation Short Term
Incentive Compensation Plan originally adopted on October 1, 1992 as in effect
prior to February 27, 2004, the effective date of the 2004 Plan.
 
            "Person" shall have the meaning given in Section 3(a)(9) of the
Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof,
including a "group" as defined in Section 13(d) except that such term shall not
include: (i) the Company or any of its subsidiaries; (ii) a trustee or other
fiduciary holding securities under an employee benefit plan of the Company or
any of its Affiliates; (iii) an underwriter temporarily holding securities
pursuant to an offering of such securities; or (iv) a corporation owned,
directly or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of stock of the Company.
 
            "Present Value Amount" shall mean the amount calculated by the
Compensation Committee as of the date of the termination of the Executive's
employment as described in paragraph 3.a., using as a mortality basis the
mortality basis used by the PEC Retirement Plan for determining benefits, or if
such mortality basis is not available, a mortality basis determined by the PEC
Retirement Plan's consulting actuaries, and using as a discount rate, the
discount rate utilized under the PEC Retirement Plan for determining lump sum
benefits assuming the Executive's last day of employment is the date of the
Executive's termination of employment as described in paragraph 3.a.
 
                                     - 4 -
<PAGE>
 
            "Rule of Eighty-Five" shall mean the Rule of Eighty-Five as defined
under the PEC Retirement Plan.
 
            "Short-Term Plan" shall mean the Short-Term Incentive Compensation
Plan, a sub-plan of the 2004 Incentive Compensation Plan or any successor
short-term incentive plan.
 
            "Term" shall mean the term of this Agreement as set forth in
paragraph 2.
 
            "2004 Plan" shall mean the 2004 Incentive Compensation Plan,
effective February 27, 2004, as amended from time to time or any successor plan.
 
            2. Term.
 
            This Agreement shall be effective as of the Effective Date and shall
continue thereafter until the later of: (i) thirty-six (36) full calendar months
following the date on which occurs any of the events described as constituting a
Change in Control in subparagraphs (i) or (iii) of the definition of Change in
Control in paragraph 1; or (ii) twenty-four (24) full calendar months following
the date of consummation of a transaction described as constituting a Change of
Control in subparagraph (ii) of the definition of Change in Control in paragraph
1.
 
            3. Severance Benefit.
 
            a. If, during the period commencing on the date of a Change in
Control and ending on the last day of the Term, the Executive's employment
hereunder is terminated by the Company for any reason, other than Cause, death,
or disability, or is terminated by the Executive in the event of a Constructive
Discharge, then, within five (5) business days after such termination, PEC shall
pay to the Executive (or, if the Executive has died before receiving all
payments to which he has become entitled hereunder, to the beneficiary or estate
of the Executive as described in paragraph 13) the sum: of (i) accrued but
unpaid salary and accrued but unused paid time off for nonunion employees under
the Paid Time Off Bank, as in effect on the Effective Date, as amended from time
to time or any successor plan, and (ii) severance pay in a lump sum cash amount
equal to three (3) years of the Executive's Compensation. The Executive (or, if
the Executive has died before receiving all payments to which he becomes
entitled hereunder, the beneficiary or the estate of the Executive as described
in paragraph 13) will be paid in cash within ten (10) business days after
termination as described in this paragraph 3.a., the Present Value Amount of the
vested benefits accrued by the Executive under the PEC SRB on the date of
termination of employment as described in this paragraph 3.a., determined as if
the Executive had received credit for an additional three (3) years of Benefit
Service. For purposes of determining the Executive's accrued benefits under the
preceding sentence, such benefits shall be determined as full benefits, without
actuarial reduction, as if the Executive qualified for the Rule of Eighty-Five
under the PEC Retirement Plan and PEC SRB (regardless of whether the Executive
so qualifies). Any payment of the Executive's vested accrued benefit under the
PEC SRB pursuant to this paragraph 3.a. shall be in lieu of any payment under
the PEC SRB itself and once paid pursuant to this Agreement, the Executive shall
have no further claim to payment under the PEC SRB. In the event of a change in
control as defined under the PEC
 
                                     - 5 -
<PAGE>
 
LTIC, all non-vested restricted stock awarded to the Executive under the PEC
LTIC shall be vested and owned by the Executive in accordance with the
provisions of the PEC LTIC. In the event of a change in control, as defined in
the 2004 Plan, any award under the Long-Term Plan and any Award Opportunity
under the Short-Term Plan shall be distributed or paid in accordance with the
respective provisions of such plans. The Executive's termination of employment
with the Company to become an employee of a corporation which directly or
indirectly owns one hundred percent (100%) of or which is owned one hundred
percent (100%) by the Company shall not be considered a termination of
employment for purposes of this Agreement, provided that such termination and
subsequent employment is not a Constructive Discharge. The subsequent
termination of the Executive's employment from such corporation, without
employment at a company that is wholly-owned by such corporation, shall be
considered a termination of employment for purposes of this Agreement.
 
            b. During the Coverage Period the Executive shall be entitled to all
benefits under the Company's welfare benefit plans (within the meaning of
Section 3(1) of the Employee Retirement Income Security Act of 1974, as
amended), as if the Executive were still employed during such period, at the
same level of benefits and at the same dollar cost to the Executive as is
available to all of the Company's executives generally and if and to the extent
that equivalent benefits shall not be payable or provided under any such plans,
the Company shall pay or provide equivalent benefits on an individual basis;
provided, however, that PEC's obligations under this paragraph 3.b. shall cease
upon the date following the termination of the Executive's employment as
described in paragraph 3.a. that the Executive is eligible to receive benefits
under welfare benefit plans (within the meaning of Section 3(1) of the Employee
Retirement Income Security Act of 1974, as amended) provided by an employer of
the Executive other than the Company.
 
            c. (i) If Independent Tax Counsel shall determine that the aggregate
payments made to the Executive pursuant to this Agreement and any other payments
to the Executive from the Company which constitute "parachute payments" as
defined in Section 280G of the Code (or any successor provision thereto)
("Parachute Payments") would be subject to the excise tax imposed by Section
4999 of the Code (the "Excise Tax"), then the Executive shall be entitled to
receive an additional payment (a "Gross-Up Payment") in an amount calculated at
the highest marginal tax rate applicable to the Executive for the tax year in
which such payments were paid to the Executive (determined by Independent Tax
Counsel) such that after payment by the Executive of all federal, state and
other taxes (including any Excise Tax) imposed upon the Gross-Up Payment and any
interest or penalties imposed with respect to such taxes, the Executive retains
from the Gross-Up Payment an amount equal to the Excise Tax imposed upon the
payments. For purposes of this paragraph 3.c., "Independent Tax Counsel" shall
mean a lawyer, a certified public accountant with a nationally recognized
accounting firm, or a compensation consultant with a nationally recognized
actuarial and benefits consulting firm, with expertise in the area of executive
compensation tax law, who shall be selected by the Executive and shall be
reasonably acceptable to PEC, and whose fees and disbursements shall be paid by
PEC.
 
               (ii) If Independent Tax Counsel shall determine that no Excise
Tax is payable by the Executive, it shall furnish the Executive with a written
opinion that the Executive
 
                                     - 6 -
<PAGE>
 
has substantial authority not to report any Excise Tax on the Executive's
Federal income tax return. If the Executive is subsequently required to make a
payment of any Excise Tax, then the Independent Tax Counsel shall determine, in
the same manner as a Gross-Up Payment, an additional amount payable to or for
the benefit of the Executive (the "Gross-Up Underpayment"), which Gross-Up
Underpayment shall be promptly paid by PEC to or for the benefit of the
Executive. The fees and disbursements of the Independent Tax Counsel shall be
paid by PEC.
 
               (iii) The Executive shall notify PEC in writing within 15 days of
any claim by the Internal Revenue Service that, if successful, would require the
payment by PEC of a Gross-Up Payment. If PEC notifies the Executive in writing
that it desires to contest such claim and that it will bear the costs and
provide the indemnification as required by this subparagraph (iii) of paragraph
3.c., the Executive shall:
 
                  (A) give the Company any information reasonably requested by
the Company relating to such claim,
 
                  (B) take such action in connection with contesting such claim
as the Company shall reasonably request in writing from time to time, including,
without limitation, accepting legal representation with respect to such claim by
an attorney selected by the Company,
 
                  (C) cooperate with the Company in good faith in order to
effectively contest such claim, and
 
                  (D) permit the Company to participate in any proceedings
relating to such claim; provided, however, that the Company shall bear and pay
directly all costs and expenses (including additional interest and penalties)
incurred in connection with such contest and shall indemnify and hold the
Executive harmless, on an after-tax basis calculated at the highest marginal tax
rate applicable to the Executive, for any Excise Tax or federal and state income
tax or other taxes, including interest and penalties with respect thereto,
imposed as a result of such representation and payment of costs and expenses.
The Company shall control all proceedings taken in connection with such contest.
If an advance to the Executive by the Company would not be prohibited by law,
the Company may direct the Executive to pay such claim and sue for a refund, in
which case the Company shall advance the amount of such payment to the
Executive, on an interest-free basis and shall indemnify and hold the Executive
harmless, on an after-tax basis calculated at the highest marginal tax rate
applicable to the Executive, from any Excise Tax or federal and state income tax
or other taxes, including interest or penalties with respect thereto, imposed
with respect to such advance or with respect to any imputed income with respect
to such advance.
 
               (iv) If, after the receipt by the Executive of an amount advanced
by PEC pursuant to subparagraph (iii) of paragraph 3.c., the Executive becomes
entitled to receive any refund with respect to such claim, the Executive shall
within 10 days pay to the Company the amount of such refund (together with any
interest paid or credited thereon after taxes applicable thereto).
 
                                     - 7 -
<PAGE>
 
            d. In the event of any termination of the Executive's employment as
described in paragraph 3.a., the Executive shall be under no obligation to seek
other employment, and there shall be no offset against amounts due the Executive
under this Agreement on account of any remuneration attributable to any
subsequent employment.
 
            4. Source of Payments.
 
               All payments provided for in paragraph 3 shall be paid in cash
from the general funds of PEC; provided, however, that such payments shall be
reduced by the amount of any payments made to the Executive or his dependents,
beneficiaries or estate from any trust or special or separate fund established
or utilized by PEC to assure such payments. The Company shall not be required to
establish a special or separate fund or other segregation of assets to assure
such payments, and, if the Company shall make any investments to aid it in
meeting its obligations hereunder, the Executive shall have no right, title or
interest whatever in or to any such investments except as may otherwise be
expressly provided in a separate written instrument relating to such
investments. Nothing contained in this Agreement, and no action taken pursuant
to its provisions, shall create or be construed to create a trust of any kind,
or a fiduciary relationship between the Company and the Executive or any other
person. To the extent that any person acquires a right to receive payments from
the Company such right shall be no greater than the right of an unsecured
creditor of the Company.
 
            5. Litigation Expenses; Arbitration.
 
               a. PEC's obligation to make the payments provided for in this
Agreement and otherwise to perform its obligations hereunder shall not be
affected by any set-off, counterclaim, recoupment, defense or other claim, right
or action which the Company may have against the Executive or others, except as
set forth in paragraph 7. In no event shall the Executive be obligated to seek
other employment or take any other action by way of mitigation of the amounts
payable to the Executive under any of the provisions of this Agreement. PEC
agrees to pay, upon written demand therefor by the Executive, all legal fees and
expenses which the Executive may reasonably incur as a result of any dispute or
contest (regardless of the outcome thereof) by or with the Company or others
regarding the validity or enforceability of, or liability under, any provision
of this Agreement, plus in each case interest at the Federal long-term rate in
effect under Section 1274(d) of the Code, compounded monthly. In any such action
brought by the Executive for damages or to enforce any provisions of this
Agreement, the Executive shall be entitled to seek both legal and equitable
relief and remedies, including, without limitation, specific performance of the
Company's obligations hereunder, in his sole discretion. The obligation of the
Company under this paragraph 5 shall survive the termination for any reason of
this Agreement (whether such termination is by the Company, by the Executive,
upon the expiration of this Agreement or otherwise).
 
               b. In the event of any dispute or difference between the Company
and the Executive with respect to the subject matter of this Agreement and the
enforcement of rights hereunder, the Executive may, in his sole discretion by
written notice to PEC, require such dispute or difference to be submitted to
arbitration. The arbitrator or arbitrators shall be selected by agreement of the
parties or, if they cannot agree on an arbitrator or arbitrators within 30 days
 
                                     - 8 -
<PAGE>
 
after the Executive has notified PEC of his desire to have the question settled
by arbitration, then the arbitrator or arbitrators shall be selected by the
American Arbitration Association (the "AAA") in Illinois upon the application of
the Executive. The determination reached in such arbitration shall be final and
binding on both parties without any right of appeal of further dispute.
Execution of the determination by such arbitrator may be sought in any court of
competent jurisdiction. The arbitrators shall not be bound by judicial
formalities and may abstain from following the strict rules of evidence and
shall interpret this Agreement as an honorable engagement and not merely as a
legal obligation. Unless otherwise agreed by the parties, any such arbitration
shall take place in Illinois, and shall be conducted in accordance with the
Rules of the AAA.
 
            6. Tax Withholding.
 
               The Company may withhold from any payments made under this
Agreement all federal, state or other taxes, including excise taxes as shall be
required pursuant to any law or governmental regulation or ruling.
 
            7. Waiver and Releases.
 
               In consideration of the covenants under this Agreement,
including, but not limited to, paragraphs 3 and 5, and as a condition precedent
to receiving any payments under this Agreement, the Executive agrees to execute
after the date of his termination as described in paragraph 3.a., a release and
Confidentiality Agreement substantially in the form of Exhibit A and Exhibit B,
respectively, attached hereto and by this reference made a part hereof.
 
            8. Outplacement Services.
 
               During the first twenty-four (24) months of the Coverage Period,
the Executive may request PEC to provide him with outplacement services. At its
election, PEC shall either (i) reimburse the Executive for the cost of
outplacement services actually incurred by the Executive, up to a maximum amount
of Twenty Thousand Dollars ($20,000), or arrange for outplacement services of an
approximate value to the Executive of Twenty Thousand Dollars ($20,000) to be
provided to the Executive.
 
            9. Entire Understanding.
 
               This Agreement contains the entire understanding between the
Company and the Executive with respect to the subject matter hereof and
supersedes any prior severance agreement between the Company and the Executive,
except that this Agreement shall not affect or operate to reduce any benefit or
compensation inuring to the Executive of any kind elsewhere provided and not
expressly provided for in this Agreement.
 
            10. Severability.
 
               If, for any reason, any one or more of the provisions or part of
a provision contained in this Agreement shall be held to be invalid, illegal or
unenforceable in any respect,
 
                                     - 9 -
<PAGE>
 
such invalidity, illegality or unenforceability shall not affect any other
provision or part of a provision of this Agreement not held so invalid, illegal
or unenforceable, and each other provision or part of a provision shall to the
full extent consistent with law continue in full force and effect.
 
            11 Consolidation, Merger, or Sale of Assets.
 
               If PEC consolidates or merges into or with, or transfers all or
substantially all of its assets to, another corporation, limited liability
company, limited partnership, or other entity, the term "the Company" as used
herein shall include such other entity and this Agreement shall continue in full
force and effect.
 
            12. Notices.
 
               All notices, requests, demands and other communications required
or permitted hereunder shall be given in writing and shall be deemed to have
been duly given if delivered or mailed, postage prepaid, first class with return
receipt as follows:
 
                          a. to PEC:
 
                                 Peoples Energy Corporation
                                 130 East Randolph Drive
                                 Chicago, Illinois  60601
                                 Attention:  Secretary
 
                          b. to the Executive:
 
                                 Thomas M. Patrick
                                 Chairman, President and Chief Executive Officer
                                 Peoples Energy Corporation
                                 130 East Randolph Drive
                                 Chicago, Illinois  60601
 
or to such other address as either party shall have previously specified in
writing to the other.
 
            13. No attachment.
 
               Except as required by law and as expressly provided in this
paragraph 13, no right to receive payments under this Agreement shall be subject
to anticipation, commutation, alienation, sale, assignment, encumbrance, charge,
pledge or hypothecation or to execution, attachment, levy or similar process or
assignment by operation of law, and any attempt, voluntary or involuntary, to
effect any such action shall be null, void and of no effect. Notwithstanding the
preceding sentence, the Executive may, by giving notice to PEC during the
Executive's lifetime, designate a beneficiary or beneficiaries to whom the
severance benefits described in paragraph 3.a. shall be transferred in the event
of the Executive's death. Any such designation may be revoked or changed by the
Executive at any time and from time to time by
 
                                     - 10 -
<PAGE>
 
similar notice. If there is no such designated beneficiary living upon the death
of the Executive or if all such designated beneficiaries die prior to the
receipt by the Executive of the referenced severance benefits, such severance
benefits shall be transferred to the Executive's surviving spouse or, if none,
then such severance benefits will be transferred to the estate or personal
representative of the Executive. If the Company, after reasonable inquiry, is
unable to determine within twelve months after the Executive's death whether any
designated beneficiary of the Executive did in fact survive the Executive, such
beneficiary shall be conclusively presumed to have died prior to the Executive's
death.
 
            14. Binding Agreement.
 
               This Agreement shall be binding upon, and shall inure to the
benefit of, the Executive and the Company and their respective permitted
successors and assigns.
 
            15. Modification and Waiver.
 
               This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto. No term or condition of this
Agreement shall be deemed to have been waived, nor shall there be any estoppel
against the enforcement of any provision of this Agreement except by written
instrument signed by the party charged with such waiver or estoppel. No such
written waiver shall be deemed a continuing waiver unless specifically stated
therein, and each such waiver shall operate only as to the specific term or
condition waived and shall not constitute a waiver of such term or condition for
the future or as to any act other than that specifically waived.
 
            16. Headings of No Effect.
 
               The paragraph headings contained in this Agreement are included
solely for convenience of reference and shall not in any way affect the meaning
or interpretation of any of the provisions of this Agreement.
 
            17. Governing Law.
 
               This Agreement and its validity, interpretation, performance, and
enforcement shall be governed by the laws of the State of Illinois without
giving effect to the choice of law provisions in effect in such State.
 
            18. Termination of Prior Agreement.
 
               The Prior Agreement is hereby terminated and no longer in effect
as of the Effective Date.
 
                                     - 11 -
<PAGE>
 
            IN WITNESS WHEREOF, PEC has caused this Agreement to be executed,
and the Executive has executed this Agreement, as of the Effective Date.
 
                     PEOPLES ENERGY CORPORATION
 
                     By:   /s/  William J. Brodsky
                           ------------------------------------------------
                           WILLIAM J. BRODSKY
                           Director and Chairman of the
                           Compensation Committee of the Board of Directors
 
                     By:   /s/  Thomas M. Patrick
                           ------------------------------------------------
                           THOMAS M. PATRICK
                           Chairman, President and Chief Executive Officer
 
                                     - 12 -
<PAGE>
 
                                    EXHIBIT A
 
                                RELEASE OF CLAIMS
                                       AND
                               COVENANT NOT TO SUE
 
            THIS RELEASE OF CLAIMS AND COVENANT NOT TO SUE (the "Release") is
executed and delivered by __________________________ (the "Executive"), to
Peoples Energy Corporation, its subsidiaries, and affiliates (collectively
referred to as the "Company").
 
            In consideration of the agreement by the Company to provide the
Executive with the payments and benefits under the Severance Agreement between
the Executive and the Company dated ______________________________, the
Executive hereby agrees as follows:
 
            1. Release and Covenant.
 
            The Executive, of his own free volition, forever waives and releases
any and all claims the Executive, his dependents, relatives, heirs, executors,
administrators, successors and assigns has or may have against the Company, its
directors, officers, employees, agents, stockholders, successors and assigns
(both individually and in their official capacities with the Company) of any
kind or nature whatsoever arising from facts, assertions, circumstances,
omissions or matters occurring on or before the date hereof, including all
claims arising from or relating in any way to the Executive's employment with
the Company or the conclusion of employment (whether such claims are presently
known or hereafter discovered). This release includes, but is not limited to, a
release of any claims in tort or contract, including claims for wrongful
discharge, breach of any employment contract or any other agreement, contract,
practice or policy. In addition to any other claims, the Executive specifically
waives, releases, and covenants not to sue or to file any charges or
administrative actions with respect to any and all claims against the Company
under the Americans With Disabilities Act, the Age Discrimination in Employment
Act, Title VII (or any other title) of the Civil Rights Act of 1964 (including
all claims of sex, race, national origin, and religious discrimination), Section
1981 of the Civil Rights Act, the Federal Equal Pay Act, the Illinois Human
Rights Act, the Illinois Wage Payment and Collection Act, the Cook County Human
Rights Ordinance, the City of Chicago Human Rights Ordinance, the Employee
Retirement Income Security Act, the Family Medical and Leave Act, or any other
federal, state or local statute, law, regulation, ordinance, or doctrine of
common law or public policy, contract or tort law having any bearing whatsoever
on the terms and conditions of employment or termination of employment. This
Release shall not, however, constitute a waiver of any of the Employee's rights
under the Severance Agreement. The Executive acknowledges that, in his decision
to enter into this Release, he has not relied on any representations, promises
or agreements of any kind, including oral statements by representatives of the
Company, except as set forth in this Release.
 
            2. Due Care.
 
            This Release contains a release of all claims under the Age
Discrimination in Employment Act ("ADEA") and, therefore, pursuant to the
requirements of the ADEA, the Employee acknowledges that he has been advised (i)
that this release includes, but is not limited
 
<PAGE>
 
to, all claims under the ADEA arising up to and including the date of execution
of this release; (ii) to consult with an attorney and or other advisor of his
choosing concerning his rights and obligations under this release; (iii) to
fully consider this release before executing it, and that he has been offered
ample time and opportunity, in excess of 21 days, to do so; and (iv) that this
release shall become effective and enforceable 7 days following execution of
this Release by the Executive, during which 7-day period the Executive may
revoke his acceptance of this Release by delivering written notice to: Corporate
Secretary, Peoples Energy Corporation, 130 East Randolph Drive, Chicago,
Illinois 60601.
 
            3. No Assignment of Claims.
 
            The Executive represents and warrants that there has been no
assignment or other transfer of any interest in any claim which the Executive
may have against the Company. The Executive agrees to indemnify and hold the
Company harmless from any liability, claims, demands, damages, cost, expenses
and attorney's fees incurred as a result of any person asserting such assignment
or transfer of any rights or claims under any such assignment or transfer. It is
the intention of the Executive and the Company that this indemnity does not
require payment as a condition precedent to recovery by the Company from the
Executive under this indemnity.
 
            4. Modification and Waiver.
 
            This Release may not be modified or amended except by an instrument
in writing signed by the Executive and the Company. No term or condition of this
Release shall be deemed to have been waived, nor shall there be any estoppel
against the enforcement of any provision of this Release except by written
instrument signed by the party charged with such waiver or estoppel. No such
written waiver shall be deemed a continuing waiver unless specifically stated
therein, and each such waiver shall operate only as to the specific term or
condition waived and shall not constitute a waiver of such term or condition for
the future or as to any act other than that specifically waived.
 
            5. Governing Law.
 
            To the extent not governed by federal law, this Release and its
validity, interpretation, performance, and enforcement shall be governed by the
laws of the State of Illinois without giving effect to the choice of law
provisions in effect in such State.
 
            IN WITNESS WHEREOF, the Executive has executed this Release and
delivered it to the Company on _____________________________.
 
                               By: ____________________________________
                                   ____________________________________
 
                                     - 2 -
<PAGE>
 
                                    EXHIBIT B
 
                 CONFIDENTIALITY AND NON-SOLICITATION AGREEMENT
                                     BETWEEN
                           PEOPLES ENERGY CORPORATION
                                       AND
 
            THIS CONFIDENTIALITY AND NON-SOLICITATION AGREEMENT (the
"Agreement"), effective as of ______________________, by and between Peoples
Energy Corporation, including any of its subsidiaries, affiliates and related
entities (the "Company") and _______________________________________ (the
"Executive").
 
                                   WITNESSETH
 
            WHEREAS, the Executive is an employee of the Company;
 
            WHEREAS, the Company and the Executive have entered into a severance
agreement dated ___________________ (the "Severance Agreement") under which the
Company has covenanted to provide the Executive with certain payments and
benefits in the event that the Executive's employment with the Company is
terminated under the circumstances described therein;
 
            WHEREAS, in consideration of the Company's covenants under the
Severance Agreement, and as a condition precedent to the Executive receiving any
payments or benefits under the Severance Agreement, the Executive has agreed to
execute after the date of his termination of employment as described in
paragraph 3a of the Severance Agreement, a confidentiality agreement;
 
            NOW, THEREFORE, as a condition precedent, and in consideration of
the covenants by the Company to provide the Executive with the payments and
benefits under the Severance Agreement, the Executive hereby agrees as follows:
 
            1. Confidential Information; Acknowledgement of Legitimate Business
Interest of the Company.
 
            The Executive expressly recognizes and acknowledges that during his
employment with the Company, he became entrusted with, had access to, or gained
possession of confidential and proprietary information, data, documents,
records, materials, and other trade secrets and/or other proprietary business
information of the Company that is not readily available to competitors, outside
third parties and/or the public, including without limitation, information about
(i) current or prospective customers and/or suppliers, (ii) employees, research,
goodwill, production, and prices, (iii) business methods, processes, practices
or procedures; (iv) computer software and technology development, (v) the
Company's hydrocarbon interests and prospects, and (vi) business strategy,
including acquisition, merger and/or divestiture strategies, (collectively or
with respect to any of the foregoing, the "Confidential Information"). Executive
further recognizes and acknowledges that the Confidential Information is the
sole and exclusive property of the Company and that the Company has a legitimate
interest in protecting its Confidential Information.
 
<PAGE>
 
            2. Non-Disclosure of Confidential Information.
 
            Executive agrees that following his termination of employment, he
shall keep and retain in confidence all Confidential Information and will not,
without the consent of the Company, disclose or divulge any Confidential
Information obtained during his employment with the Company to any third party
for so long as the Confidential Information is valuable and unique, or until
either the Company has either itself released the Confidential Information into
the public domain or the Confidential Information has clearly become publicly
available by means other than the Company or the Executive. No individual piece
of Confidential Information shall be deemed to have become publicly available
merely because other pieces of Confidential Information shall have become
publicly available, and no individual piece of Confidential Information shall be
deemed to have become publicly available unless all of its substantive
provisions shall have become publicly available. This paragraph 2 shall not
prevent Executive from using general skills and experience developed in
positions with the Company or other employers, or from accepting a position of
employment with another company, firm, or other organization, provided that such
position does not require divulgence or use of the Confidential Information.
 
            3. Cooperation with the Company.
 
            If the Executive receives a subpoena or other judicial or
administrative process demanding that he disclose Confidential Information
("Subpoena"), the Executive agrees that he will promptly notify the Company and
cooperate fully with the Company if the Company elects to challenge or otherwise
resist disclosure of the Confidential Information sought by the Subpoena. Any
such challenge or resistance by the Company shall be at the Company's own
expense. Should the Executive promptly notify the Company of the receipt of a
Subpoena and the Company declines or fails to challenge or resist the Subpoena,
or if after intervention by the Company in the judicial or administrative
process, the Company is unsuccessful in quashing or opposing the disclosure, the
Executive may produce the Confidential Information or respond to the Subpoena as
he deems appropriate.
 
            4. Return of Property.
 
            The Executive understands and agrees that all business information,
files, research, records, memoranda, books, lists and other documents and
tangible materials, including computer disks, and other hardware and software
that he receives during employment, whether confidential or not, are the
property of Employer and that, immediately upon the termination of the
Executive's employment, he will promptly deliver to Employer all such materials,
including copies thereof, in his possession or under his control.
 
            5. Non-Solicitation.
 
            Executive covenants and agrees that for a period commencing on the
date of the Executive's termination of employment with the Company and ending on
the date that is one (1) year from such employment termination date, Executive
shall not, directly or indirectly, solicit, induce, influence, or attempt to
induce any employee of the
 
                                     - 2 -
<PAGE>
 
Company to terminate his employment with, or compete against the Company or any
present or future affiliates of the Company. In particular, and without limiting
the foregoing, the Executive agrees that during the one-year (1-year) period
commencing on the Executive's employment termination date with the Company, the
Executive shall not directly or indirectly attempt to hire any other employee of
the Company or otherwise encourage any other employee to leave the employ of the
Company, or (ii) advise or recommend to any other person that they employ or
solicit for employment, any employee of the Company.
 
            6. Equitable Relief.
 
            The Executive acknowledges that the Confidential Information to be
disclosed to the Executive during his employment is of a special and unique
character, and that the breach of any provision of this Agreement, including
without limitation, its non-solicitation provision, will cause the Company
irreparable injury and damage. Accordingly, the Company shall be entitled, in
addition to all other remedies available to it, to injunctive and equitable
relief to prevent a breach of any part of this Agreement or to enforce any part
of this Agreement.
 
            7. Assignment.
 
            This Agreement is not assignable, in whole or in part, and shall not
be assigned, by the Executive; and any purported assignment by the Executive
shall be considered null and void. This Agreement is assignable and may be so
assigned by Employer; and this Agreement shall inure to the Benefit of, and
shall be binding upon, any and all successors and assigns of Employer.
 
            8. Entire Understanding.
 
            This Agreement contains the entire understanding between the Company
and the Executive with respect to the subject matter hereof.
 
            9. Severability.
 
            If, for any reason, any one or more of the provisions or part of a
provision contained in this Agreement shall be held to be invalid, illegal or
unenforceable in any respect, such invalidity, illegality or unenforceability
shall not affect any other provision or part of a provision of this Agreement
not held so invalid, illegal or unenforceable, and each other provision or part
of a provision shall to the full extent consistent with law continue in full
force and effect.
 
            10. Consolidation, Merger, or Sale of Assets.
 
            If the Company consolidates or merges into or with, or transfers all
or substantially all of its assets to, another corporation the term "the
Company" as used herein shall include such other corporation and this Agreement
shall continue in full force and effect.
 
                                     - 3 -
<PAGE>
 
            11. Notices.
 
            All notices, requests, demands and other communications required or
permitted hereunder shall be given in writing and shall be deemed to have been
duly given if delivered or mailed, postage prepaid, first class with return
receipt as follows:
 
                          a.     to the Company:
 
                                 Peoples Energy Corporation
                                 130 East Randolph Drive
                                 Chicago, Illinois  60601
                                 Attention:  Secretary
 
                          b.     to the Executive:
 
                                 the Executive's most recent home address
                                 on file with the Company
 
or to such other address as either party shall have previously specified in
writing to the other.
 
            14. Binding Agreement.
 
            This Agreement shall be binding upon, and shall inure to the benefit
of, the Executive and the Company and their respective permitted successors and
assigns.
 
            15. Modification and Waiver.
 
            This Agreement may not be modified or amended except by an
instrument in writing signed by the parties hereto. No term or condition of this
Agreement shall be deemed to have been waived, nor shall there be any estoppel
against the enforcement of any provision of this Agreement except by written
instrument signed by the party charged with such waiver or estoppel. No such
written waiver shall be deemed a continuing waiver unless specifically stated
therein, and each such waiver shall operate only as to the specific term or
condition waived and shall not constitute a waiver of such term or condition for
the future or as to any act other than that specifically waived.
 
            16. Headings of No Effect.
 
            The paragraph headings contained in this Agreement are included
solely for convenience of reference and shall not in any way affect the meaning
or interpretation of any of the provisions of this Agreement.
 
            17. Governing Law.
 
            This Agreement and its validity, interpretation, performance, and
enforcement shall be governed by the laws of the State of Illinois without
giving effect to the choice of law provisions in effect in such State.
 
                                     - 4 -
<PAGE>
 
            IN WITNESS WHEREOF, Peoples Energy Corporation, on behalf of itself
and its subsidiaries, affiliates and related entities, has caused this Agreement
to be executed, and the Executive has executed this Agreement, as of the
effective date written above.
 
By: ______________________________     PEOPLES ENERGY CORPORATION
    ______________________________
 
                                       By: _____________________________________
 
                                       WILLIAM J. BRODSKY
                                       Director and Chairman of the
                                       Compensation Committee of the Board of
                                       Directors
 
                                       By: _____________________________________
 
                                     - 5 -
 
</TEXT>
</DOCUMENT>