PART I


ITEM  l.  BUSINESS

GENERAL

    PG Energy Inc. ("PG Energy"),  formerly  known as Pennsylvania Gas and Water
Company, is a subsidiary of Pennsylvania  Enterprises, Inc. ("PEI").  PG Energy,
incorporated in Pennsylvania in 1867 as  Dunmore Gas & Water Company, is engaged
in the distribution of natural gas.    On  February 14, 1997, PG Energy acquired
all of the outstanding capital  stock  of Honesdale Gas Company ("Honesdale"), a
regulated public utility  engaged  in  distributing  natural  gas to portions of
Wayne and Pike Counties, in an  area  adjacent to PG Energy's service territory.
Until February 16, 1996, when its  water utility operations were sold, PG Energy
was also engaged in  the  distribution  of  water  (See  "-Sale of Water Utility
Operations.").  Both PG Energy  and  Honesdale are regulated by the Pennsylvania
Public Utility Commission ("PPUC").  As of December 31, 1997, PG Energy provided
service to approximately 147,000  natural  gas  customers and Honesdale provided
service to approximately 3,300 customers.

    PG Energy and Honesdale  employed  approximately  570 persons as of December
31, 1997.

Restructuring of Natural Gas Industry

    The  natural  gas  industry,  which  historically  has  included  producers,
interstate pipelines and  local  distribution  companies ("LDCs"), is undergoing
significant restructuring.  The  industry  is  rapidly progressing from a highly
regulated environment to one in which  there is competition, customer choice and
only partial regulation.  The  same  change  is  also  beginning to occur in the
electric industry which competes with the  natural  gas industry for many of the
same energy uses.

    The restructuring of  the  natural  gas  industry  has  already involved the
decontrol of the wellhead price  of  natural  gas, and interstate pipelines have
been required by the Federal  Energy  Regulatory Commission ("FERC") to separate
the merchant function of selling natural gas from the transportation and storage
services they provide (frequently referred to as "unbundling") and to make those
services available to end users on the same terms as LDCs.  These changes in the
operations of the interstate pipelines  were designed to enhance competition and
maximize the benefits of wellhead price decontrol.

    As a result  of  actions  by  FERC,  the  interstate pipelines now primarily
provide transportation and storage services,  and  LDCs,  such as PG Energy, are
presently  responsible  for  procuring  competitively-priced  gas  supplies  and
arranging for the appropriate transportation  capacity and storage services with
the  interstate  pipelines.     Additionally,  in  accordance  with  regulations
promulgated by the PPUC,  PG  Energy  currently offers transportation service to
certain customers.

    Prior to the unbundling of  services  by  the interstate pipelines and those
services being made available to end users  as  well as LDCs, and until the PPUC
adopted regulations providing for the  transportation  of natural gas, PG Energy
charged all its  customers  bundled  rates.    These  rates included a commodity
charge based on  the  cost,  as  approved  by  FERC,  which  PG  Energy paid the
pipelines for natural  gas  delivered  to  the  entry  point on its distribution
system.    Except  for  the  approximately  560  customers  currently  receiving

                                         -1-
<PAGE>

transportation service, PG  Energy's  customers  continue  to be charged bundled
rates as approved by the  PPUC,  which  include  a commodity charge based on the
costs prudently incurred by PG Energy  for  the  purchase of natural gas and for
interstate pipeline transportation  capacity  and  storage  services.  Customers
receiving transportation service, which  accounted  for  approximately 48% of PG
Energy's total gas deliveries in 1997,  are  charged rates approved by the PPUC,
which exclude the commodity cost that  is reflected in the bundled rates charged
to other customers.

    Although the regulations promulgated by the  PPUC only require LDCs to offer
transportation service to individual  customers  having an annual consumption of
at least 5,000 thousand cubic feet ("MCF") of natural gas and groups of not more
than ten customers having a combined consumption of at least 5,000 MCF per year,
the PPUC has allowed certain  LDCs  to  make transportation service available to
other customers, regardless of  their  consumption.    One of these companies is
Honesdale which, with the  approval  of  the PPUC, began offering transportation
service to all of its some  3,300  customers  effective November 1, 1997.  As of
February 1, 1998, approximately  1,250  of  Honesdale's customers had elected to
receive transportation service and to  purchase  their natural gas supplies from
PG Energy Services  Inc.  ("Energy  Services"),  a  nonregulated affiliate of PG
Energy and the  only  marketer  currently  selling  gas  to  customers served by
Honesdale.  PG Energy is also planning to file tariffs with the PPUC in the near
future seeking approval to make  transportation  service available to all of its
147,000 customers.  Moreover, as noted  below, PG Energy currently believes that
Pennsylvania may enact legislation in 1998  requiring that all customers of LDCs
have the right, within the next several years, to receive transportation service
and to choose the supplier of their natural gas.

    In December, 1996, legislation  was  enacted  in Pennsylvania which provides
all customers of electric utilities in  the  state  with the right to choose the
generator of their electricity.    This  customer  choice,  which is intended to
increase competition and to lower costs for electricity, is being phased in over
a three-year period ending  on  January  1,  2001.   Under this legislation, the
electric utilities in Pennsylvania  are  required to unbundle generation charges
from the other charges included  in  their currently bundled rates and customers
can contract with qualified suppliers  of  their choosing, including the utility
currently serving them, to purchase electric  energy at nonregulated rates.  The
electric utilities will continue to  utilize their transmission and distribution
networks to distribute electricity to  their customers regardless of supplier, a
function which will remain subject to rate regulation by the PPUC.

    PG Energy believes  that  Pennsylvania  may  enact  similar legislation with
respect to the natural  gas  industry  in  1998.   As currently envisioned, such
legislation would require  that  PG  Energy  provide  all  of its customers with
unbundled transportation service within one to  two  years.  While the rates for
the transportation of natural  gas  through  PG Energy's distribution system and
the storage services offered by PG  Energy  would continue to be price regulated
by the PPUC, the commodity cost  of  gas  purchased from suppliers other than PG
Energy would not be so regulated.  Customers could, however, continue to receive
a bundled  sales  service  from  PG  Energy  which  would  be  subject  to price
regulation  by  the  PPUC.    Essentially,  the  legislation  would  extend  the
transportation service which is now available to a limited number of PG Energy's
customers to all its customers, and customers could choose to have their natural
gas provided by a supplier  other  than  PG Energy, based on nonregulated market
prices and other considerations.




                                         -2-
<PAGE>

    If Pennsylvania enacts legislation  which  permits  all customers of LDCs to
choose their supplier of natural gas,  PG  Energy will be faced with significant
competition from marketers  and  brokers  for  the  sale  of  natural gas to its
customers.  However, under current regulations  of  the PPUC, PG Energy does not
realize a profit or incur any loss with respect to the commodity cost of natural
gas.  Moreover, PG Energy would not  expect the pending legislation to result in
the bypass of its  distribution  system  by  any significant number of customers
because of the nature of  its  customer  base  and  the cost of any such bypass.
Additionally, based on  various  provisions  of  the legislation currently being
considered, PG Energy does not believe  that  the legislation will result in any
significant amount  of  transition  costs  (such  as  the  negotiated  buyout of
contracts with interstate  pipelines,  the  recovery  of  deferred purchased gas
costs or the recovery of  regulated  assets).   Further, PG Energy believes that
any transition costs it may  incur  would generally be recoverable through rates
or other customer charges.  Accordingly,  although it cannot be certain, because
the terms of such legislation have not been finalized and the ultimate effect on
PG Energy cannot be determined, PG Energy does not believe that the enactment of
legislation providing for customers  to  purchase  their  natural gas from third
parties would have any  material  adverse  impact  on  its earnings or financial
condition despite the increased competition to  which PG Energy would be subject
regarding the sale of natural gas to its customers.

Sale of Water Utility Operations

    On February 16, 1996,  PG  Energy  sold  its  regulated water operations and
certain related assets  to  Pennsylvania-American  Water Company ("Pennsylvania-
American"), a wholly-owned  subsidiary  of  American  Water  Works Company, Inc.
("American"), for $414.3 million, consisting  of  $262.1 million in cash and the
assumption of  $152.2  million  of  PG  Energy's  liabilities,  including $141.0
million of its long-term debt.    (See  Note  2, Discontinued Operations, of the
Notes to Consolidated Financial Statements in Item 8 of this Form 10-K).  

    The cash proceeds from  the  sale  of  approximately  $205.4 million, net of
$56.7 million of income taxes, were used by PEI and PG Energy to retire debt, to
repurchase  stock,  for  construction   expenditures  and  for  working  capital
purposes.  (See "Management's Discussion and Analysis of Financial Condition and
Results of  Operations-Liquidity  and  Capital  Resources-Sale  of Water Utility
Operations" in Item 7 of this Form 10-K).  

GAS BUSINESS

    PG  Energy  and  Honesdale  (collectively  referred  to  as  the  "Company")
distribute natural gas to an area  in northeastern Pennsylvania lying within the
Counties  of  Luzerne,  Lackawanna,  Lycoming,  Wyoming,  Northumberland, Wayne,
Columbia, Union, Montour,  Snyder,  Susquehanna,  Pike  and Clinton, a territory
that includes the cities of Scranton,  Wilkes-Barre and Williamsport.  The total
estimated population of the  Company's  natural  gas  service area, based on the
1990 U.S. Census, is 760,000.











                                         -3-
<PAGE>

    Number and Type  of  Customers.    At  December  31,  1997,  the Company had
approximately 150,300 natural gas customers, from which it derived total natural
gas revenues of  $190.6  million  during  1997.    The  following  chart shows a
breakdown of  the  types  of  customers  and  the  percentages  of  gas revenues
generated by each type of customer in 1997:
[CAPTION]
            Type of Customer             % of Customers         % of Revenues
       [S]                                  [C]                    [C]
       Residential                           90.8%                  66.4%   
       Commercial                             9.0                   24.3*  
       Industrial                             0.2                    7.8*   
       Other Users                              -                    1.5     
          Total                             100.0%                 100.0%    

    * Includes  the  2.7%  of  total  gas  revenues  derived  from interruptible
      customers.

    During 1997, the Company delivered  an  estimated total of 48,300,000 MCF of
natural gas to its customers, of  which  51.2%  was sold at normal tariff rates,
47.5% represented gas transported  for  customers  and  1.3%  was sold under the
Alternate Fuel Rate (as described below).

    The Company sells gas to "firm"  customers with the understanding that their
supply will not be  interrupted  except  during  periods of supply deficiency or
emergency conditions.    "Interruptible"  gas  customers  are  required  to have
equipment installed capable of  using  an  alternate energy form.  Interruptible
customers, therefore, do not require a continuous supply of gas and their supply
can be interrupted at any time under the conditions set forth in their contracts
for gas service.  In 1997, a total  of  5,484,000 MCF of natural gas was sold to
interruptible  customers,  of  which  5,042,000  MCF  was  transported  for such
customers, which together represented 11.4%  of  the total deliveries of natural
gas to customers during 1997.

    PG Energy's largest natural gas customer  accounted  for less than 1% of its
operating revenues in 1997.

    Transportation and Storage Service.   In accordance with current regulations
of the PPUC, PG Energy provides  transportation service to natural gas customers
who consume at least  5,000  MCF  of  natural  gas  per year, meet certain other
conditions and execute a transportation agreement.  In addition, groups of up to
ten customers, with a combined consumption  of  at least 5,000 MCF per year, are
eligible for transportation service.    The  PPUC  has, however, allowed certain
LDCs to make transportation service  available to other customers, regardless of
their consumption.  One of these companies is Honesdale which, with the approval
of the PPUC, began  offering  transportation  service  to  all of its some 3,300
customers effective November 1,  1997.    As  of February 1, 1998, approximately
1,250 of Honesdale's customers had elected to receive transportation service and
to purchase their natural gas  supplies  from Energy Services, the only marketer
currently selling gas to customers served by Honesdale.

    Transportation service is provided on both a firm and an interruptible basis
and includes provisions regarding over and  under deliveries of gas on behalf of
the respective customer.  In addition, firm transportation customers are offered
a "storage service" pursuant  to  which  such  customers  may have gas delivered
during the period from April  through  October for storage and redelivery during
the winter period.   The  Company  also  offers  firm transportation customers a
"standby service" under the terms  of  which  the customer will be supplied with
gas in  the  event  the  customer's  transportation  service  is  interrupted or
curtailed by its broker, supplier or other third party.

                                         -4-
<PAGE>

    Set forth below is  a  summary  of  gas  transported  by the Company and the
number of customers using transportation service from 1995 to 1997:
[CAPTION]
                 Number             Volume of Gas Transported (MCF)        
                  of          Interstate      Pennsylvania
     Year      Customers         Gas              Gas              Total   
     [S]       [C]            [C]               [C]              [C]
     1997      1,244 (a)      22,584,000           99,000        22,683,000
     1996        503          15,959,000        4,459,000        20,418,000
     1995        480          14,543,000        5,054,000        19,597,000

     (a)  Includes  729  residential  and   commercial  customers  of  Honesdale
          receiving transportation service as of December 31, 1997.

    During 1998, the Company  expects  to transport approximately 25,676,000 MCF
of natural gas.

    The rates charged by the  Company  for  the transportation of interstate gas
are essentially equal to its tariff rates for the sale of gas with all gas costs
removed.    Accordingly,  the  transportation  of  interstate  gas  has  had  no
significant adverse effect on earnings.    Prior  to January 15, 1997, the rates
charged   for   the   transportation   of   Pennsylvania-produced   natural  gas
("Pennsylvania gas") were lower  than  those  charged  for the transportation of
interstate gas.   As  a  result,  the  rates  charged  for the transportation of
Pennsylvania gas yielded considerably  less  revenue  than the gross margin (gas
operating revenues less the cost of gas) that would be realized from sales under
normal tariff rates.  However,  as  of  January  15, 1997, in connection with PG
Energy's rate increase which  was  effective  on  such  date (see "-Rates"), the
lower rates charged for the  transportation  of Pennsylvania gas were eliminated
and those rates were conformed with  the rates charged for the transportation of
interstate gas.  The elimination of such differential was the primary reason for
the dramatic decrease in the  volume of Pennsylvania-produced gas transported by
the Company in 1997.

    Alternate Fuel Sales.  In  order  to  be  more competitive in terms of price
with certain alternate  fuels,  PG  Energy  offers  an  Alternate  Fuel Rate for
eligible customers.    This  rate  applies  to  large  commercial and industrial
accounts that have the capability of using No.  2, 4 or 6 fuel oil or propane as
an alternate source of energy.   Whenever  the cost of such alternate fuel drops
below the cost of natural gas at  PG  Energy's normal tariff rates, PG Energy is
permitted by the PPUC to lower  its  price  to these customers so that PG Energy
can remain competitive with the alternate fuel.   However, in no instance may PG
Energy sell  gas  under  this  special  arrangement  for  less  than its average
commodity cost of gas purchased  during  the  month.  PG Energy's revenues under
the Alternate Fuel Rate amounted to  $2.4  million in 1997, $1.8 million in 1996
and $2.0 million in 1995.    These  revenues  reflected the sale of 651,000 MCF,
491,000 MCF and  603,000  MCF  in  1997,  1996  and  1995,  respectively.  It is
anticipated that approximately 666,000 MCF will be sold under the Alternate Fuel
Rate in 1998.  The change in volumes sold under the Alternate Fuel Rate reflects
the  switching  by  certain   customers   between  alternate  fuel  service  and
transportation service as a result of  periodic  changes in the relative cost of
natural gas and alternate fuels.

    FERC Order 636.  On April 8,  1992, FERC issued Order No. 636 ("Order 636"),
requiring interstate pipelines to  restructure  their services and operations in
order to  enhance  competition  and  maximize  the  benefits  of  wellhead price
decontrol.  The objectives of  Order  636  were  to be accomplished primarily by
unbundling the services provided by the interstate pipelines and by making those
services available to end users on the same terms as LDCs.

                                         -5-
<PAGE>

    Pursuant to Order 636, the  interstate  pipelines have been required to: (1)
unbundle transportation  service  from  sales  service;  (2) allocate sufficient
storage capacity, together with firm transportation, to replicate previous sales
services; (3)  provide  a  no-notice  transportation  service;  (4) provide open
access storage service; (5)  reallocate  upstream pipeline capacity and upstream
storage for the benefit  of  downstream  interstate  pipeline suppliers; and (6)
implement a straight fixed-variable rate  design  to replace all modified fixed-
variable rate designs.   The  interstate  pipelines  have been granted a blanket
sales certificate  to  make  unbundled  sales  in  competition with non-pipeline
merchants and  are  being  permitted  recovery  of  all  reasonable  and prudent
transition costs incurred in order  to  comply  with Order 636.  Such transition
costs include: (1) the cost of  renegotiating existing gas supply contracts with
producers ("Gas Supply Realignment Costs");  (2)  recovery of gas costs included
in the interstate pipelines' purchased gas  adjustment accounts at the time they
adopted  market-based  pricing  for   gas   sales  ("Account  191  Costs");  (3)
unrecovered costs of assets that  cannot  be  assigned to customers of unbundled
services ("Stranded Costs");  and  (4)  costs  of  new  facilities to physically
implement Order  636  ("New  Facility  Costs").    Additionally,  the interstate
pipelines have been allowed pre-granted  abandonment of sales and transportation
services to  customers  upon  expiration  of  applicable  contracts,  subject to
customers' rights of first refusal.

    On October 15, 1993, the PPUC  adopted  an annual purchased gas cost ("PGC")
order (the "PGC Order") regarding  the  recovery  of Order 636 transition costs.
The PGC  Order  stated  that  Account  191  and  New  Facility  Costs  (the "Gas
Transition Costs") are subject to  recovery  through  the annual PGC rate filing
made with the PPUC by PG Energy and other larger LDCs.

    As of February 1, 1994, PG Energy  began to recover the Gas Transition Costs
billed by its interstate pipelines through an  increase  in its PGC rate.  As of
December 31, 1997, PG Energy  had  been  billed  a  total of $1.3 million of Gas
Transition Costs by its interstate pipelines, which is the entire amount of such
billings that PG Energy expects.   Of  this amount, $857,000 was recovered by PG
Energy over a twelve-month period ended January 31, 1995, through an increase in
its PGC rate, $252,000 was recovered  by  PG  Energy in its annual PGC rate that
the PPUC approved effective  December  1,  1995,  and the remaining $213,000 was
recovered by PG Energy in its PGC rate that was effective December 1, 1996.

    The PGC Order also indicated that  while Gas Supply Realignment and Stranded
Costs (the "Non-Gas Transition Costs")  are  not  natural gas costs eligible for
recovery under the PGC rate  filing  mechanism,  such  costs are subject to full
recovery by LDCs through the filing of  a tariff pursuant to either the existing
surcharge or base rate provisions  of  the Pennsylvania Public Utility Code (the
"Code").  By  Order  of  the  PPUC  entered  August  26,  1994,  PG Energy began
recovering the Non-Gas Transition Costs that  it estimates it will ultimately be
billed pursuant to Order 636 through the billing of a surcharge to its customers
effective September 12, 1994.  It  is  currently estimated that $10.7 million of
Non-Gas Transition Costs will be billed to PG Energy, generally over a five-year
period extending through January 1, 1999,  of which $9.6 million had been billed
to PG Energy and  $9.5  million  had  been  recovered  from  its customers as of
December 31, 1997.  In addition,  during  1997 $1.1 million of take-or-pay costs
refunded to PG Energy by its suppliers  were applied as a reduction of the total
Non-Gas Transition Costs recoverable from  customers.   The remaining balance of
Non-Gas Transition  Costs,  which  is  presently  estimated  to  be $134,000, is
expected to be recovered by PG Energy from its customers during 1998.




                                         -6-
<PAGE>

    Sources of  Supply.    The  Company  purchases  natural  gas from marketers,
producers, and integrated energy companies,  generally under the terms of supply
arrangements that extend for the  heating  season (i.e., November through March)
or for periods of one year or  longer.  These contracts typically provide for an
adjustment each month in the cost of gas purchased pursuant thereto based on the
then current market prices for natural gas.  The largest individual supplier, an
integrated energy company, accounted for 21% of the Company's total purchases of
natural  gas  in  1997.    Two  other  suppliers  accounted  for  20%  and  17%,
respectively, of the Company's total purchases of natural gas in 1997.  No other
suppliers accounted for more than 10% the Company's purchases during 1997.

    The purchases of natural gas  by  the  Company  during 1997 and by PG Energy
during 1996 and 1995 are summarized below:
[CAPTION]
                                 Volume                      Average
          Year               Purchased (MCF)               Cost per MCF
          [S]                  [C]                            [C]
          1997                 25,831,000                     $3.27
          1996                 27,955,000                     $3.35
          1995                 24,173,000                     $2.62

    The higher average cost  for  1996  reflected  the  increase in the wellhead
price of natural gas during much  of  the  year that resulted from the unusually
cold weather experienced in the northeastern  United States during the winter of
1995/96 and the associated reduction in  the  volumes  of gas held in storage to
abnormally low levels in the spring  of  1996.   The average cost decreased only
slightly in 1997 because of market demand and concerns regarding the adequacy of
storage levels. 

    During 1998, the Company expects to purchase approximately 29,306,000 MCF of
natural gas under seasonal  or  longer-term  contracts  at a currently projected
average cost of $2.82 per MCF.

    The Company presently  has  adequate  supplies  of  natural  gas to meet the
demands of existing customers  through  October,  1998,  and believes it will be
able to obtain sufficient  supplies  to  meet  the demands of existing customers
beyond October, 1998, and to  serve  new customers (of which approximately 4,000
are expected to be added in 1998).





















                                         -7-
<PAGE>

    Pipeline Transportation and Storage Entitlements.   Pursuant to the terms of
Order 636, the Company has  entered  into  agreements with its former interstate
pipeline suppliers providing  for  the  firm  long  haul transportation by those
pipelines on a daily basis of the following quantities of gas:
[CAPTION]
                                           Daily           Percentage of Total
                   Expiration          Transportation        Transportation
  Pipeline          Date (a)          Entitlement (MCF)        Entitlement    
  [S]         [C]                          [C]                   [C]
  Transco     Various through 2015          74,100 (b)            59.8%
  Tennessee   1999 and 2000                 38,894 (c)            31.4
  Columbia    2004                          11,016                 8.8        
                                           124,010               100.0%       

  (a)  Agreements are automatically  extended  from month-to-month or year-
       to-year after their expiration unless notice of termination is given
       by one of the parties  and  the  Company agrees to such termination.
       In no event may any of  the agreements be unilaterally terminated by
       the pipelines without the approval of the FERC.

  (b)  Includes 3,300 MCF per day  that  PG Energy can transport during the
       period December  through  February  pursuant  to  an  agreement with
       Transco that extends through 2011.

  (c)  Includes up to 2,300 MCF per day that Honesdale can transport during
       the period November through  January  pursuant  to an agreement with
       Tennessee that extends through November, 2000.

    The  Company  has  also  contracted  with  its  former  interstate  pipeline
suppliers and the New  York  State  Electric  and  Gas Company ("NYSEG") for the
following volumes of gas storage and storage withdrawals:
<TABLE>
<CAPTION>
                                                                  Maximum
                         Expiration         Total Storage     Daily Withdrawal   
  Pipeline/Party          Date (a)            (MCF) (b)      From Storage (MCF)
  <S>               <C>                      <C>                  <C> 
  Transco           Various through 2013      6,500,000           131,044
  Tennessee         November 1, 2000          3,800,000            25,885
  Columbia          October 31, 2004          1,100,000            16,036      
  NYSEG (c)         March 31, 2002              290,000            29,000      
                                             11,690,000           201,965      
</TABLE>
  (a)  Agreements are automatically  extended  from month-to-month or year-
       to-year after their expiration unless notice of termination is given
       by one of the parties  and  the  Company agrees to such termination.
       In no event may any of  the agreements be unilaterally terminated by
       the pipelines without the approval of the FERC.

  (b)  Storage is utilized in order to meet peak day and seasonal demands.

  (c)  Storage gas is delivered via Transco.








                                         -8-
<PAGE>

    Based on its present  pipeline  transportation and storage entitlements, the
Company is entitled to a maximum  daily  delivery of the following quantities of
gas:
[CAPTION]
                Firm Pipeline      Withdrawals
                Transportation     From Storage                     Percentage
  Pipeline          (MCF)             (MCF)        Total (MCF)       of Total 
  [S]              [C]               [C]             [C]              [C]
  Transco           74,100 (a)       160,044 (c)     234,144           71.8%
  Tennessee         38,894 (b)        25,885          64,779           19.9
  Columbia          11,016            16,036          27,052            8.3   
                   124,010           201,965         325,975          100.0%  

  (a)  Includes 3,300 MCF that may  be  transported by PG Energy during the
       period December through February.

  (b)  Includes up to 2,300 MCF that may be transported by Honesdale during
       the period November through January.

  (c)  Includes 29,000 MCF that  may  be  withdrawn  under the terms of the
       storage contract with NYSEG.

    In accordance with the provisions of  Order  636, the Company may release to
customers and other parties  the  portions  of  firm pipeline transportation and
storage entitlements which are in excess of its requirements.  Such releases may
be made upon notice in accordance  with  the  provisions  of Order 636 and for a
consideration not in excess of the cost of the respective entitlement.  Releases
may be made for  periods  ranging  from  one  day  to  the remaining term of the
entitlement.

    Since September  1,  1993,  PG  Energy  has  released  portions  of its firm
pipeline transportation capacity to certain  of  its customers and third parties
for varying periods extending up  to  three  years.  Honesdale has also released
portions of its  firm  pipeline  transportation  capacity  since August 1, 1997.
During 1997, the average  daily  capacity  so  released  was 42,296 MCF, and the
maximum capacity released on  any  one  day  in  1997  was  55,114 MCF.  Through
December 31, 1997, the Company has not, however, released any storage capacity.

    The Company believes  it  has  sufficient  firm  pipeline transportation and
storage entitlements to meet the demands of its existing customers and to supply
new customers.

    Peak Day Requirements.  The Company  plans  for peak day demand on the basis
of a daily mean temperature of  0  degrees  Fahrenheit.  Requirements for such a
design peak day, assuming the curtailment of service to interruptible customers,
are currently estimated  to  be  338,000  MCF,  of  which  247,000  MCF would be
required for customers to whom  the  Company  sells  gas and 91,000 MCF would be
required for customers  for  whom  the  Company provides transportation service.
The Company's historic maximum daily  sendout  is 307,237 MCF, which occurred on
January 17, 1997, when service  to interruptible customers and select industrial
users was curtailed.  The mean temperature  in  its gas service area on that day
was 5 degrees Fahrenheit.

    Capital Expenditures.   Capital  expenditures  totaled  $30.2 million during
1997 and are estimated to be $36.3 million during 1998.




                                         -9-
<PAGE>

    Regulation.  The Company's natural  gas  utility operations are regulated by
the PPUC, particularly as  to  utility  rates, service and facilities, accounts,
issuance of certain securities, the encumbering or disposition of public utility
properties, the design, installation,  testing, construction, and maintenance of
pipeline facilities and various  other  matters associated with broad regulatory
authority.

    In addition to those regulations  promulgated  by the PPUC, the Company must
also comply with federal, state and  local regulations relating generally to the
discharge of  materials  into  the  environment  or  otherwise  relating  to the
protection of the environment.  Compliance with such regulations has not had any
material effect upon the capital  expenditures, earnings or competitive position
of the Company's gas business.  Although  it cannot predict the future impact of
these regulations, the  Company  believes  that  any additional expenditures and
costs made necessary by them would be fully recoverable through rates.

    PG Energy, like many gas  distribution companies, once utilized manufactured
gas plants in connection with providing  gas  service to its customers.  None of
these plants has been in operation  since  1972,  and several of the plant sites
are no longer owned by PG  Energy.   Pursuant to the Comprehensive Environmental
Response, Compensation and Liability  Act  of  1980  ("CERCLA"), PG Energy filed
notices with the United States  Environmental Protection Agency (the "EPA") with
respect to the former plant sites.  None  of the sites is or was formerly on the
proposed or  final  National  Priorities  List.    The  EPA  has  conducted site
inspections and made preliminary assessments of each site and has concluded that
no further remedial action  is  planned.   Notwithstanding this determination by
the EPA, some of the sites  may  ultimately  require remediation.  One site that
was owned by PG Energy from 1951 to 1967 and at which it operated a manufactured
gas plant from 1951 to 1954 was subject to remediation in 1996.  The remediation
at this site, which was performed by  the party from whom PG Energy acquired the
site in 1951, required the  removal  of  materials  from two former gas holders.
The cost of such remediation  is  purported to have been approximately $525,000,
of which the party performing the  remediation  is seeking to recover a material
portion from PG Energy.  PG Energy,  however, believes that any liability it may
have with respect to such remediation would be considerably less than the amount
that the other party is seeking.    While  the final resolution of the matter is
uncertain, PG Energy does not believe  that  it will have any material impact on
its financial position or results of operations.  Although the conclusion by the
EPA that it anticipates no further remedial  action with respect to the sites at
which PG Energy operated  manufactured  gas  plants  does not constitute a legal
prohibition against further regulatory  action  under CERCLA or other applicable
federal or state law, the  Company  does  not  believe that additional costs, if
any, related to these  manufactured  gas  plant  sites  would be material to its
financial position  or  results  of  operations  since environmental remediation
costs generally are recoverable through rates over a period of time.

    The Company's gas distribution and transportation activities are not subject
to the Natural Gas Act, as amended.

    Rates.  By Order adopted  December  19,  1996,  the PPUC approved an overall
5.3% increase in PG Energy's base gas rates, designed to produce $7.5 million of
additional annual revenue, effective January 15,  1997.   Under the terms of the
Order, the billing for the impact  of  the rate increase relative to PG Energy's
residential heating customers, which totaled $2.4 million through June 30, 1997,
was deferred, without carrying charges, until July, 1997.  




                                        -10-
<PAGE>

    The provisions of the Code require  that  the tariffs of LDCs be adjusted on
an annual basis, and, in  the  case  of  larger  LDCs  such  as PG Energy, on an
interim basis when circumstances dictate,  to reflect changes in their purchased
gas costs.  The procedure  includes  a  process for the reconciliation of actual
gas costs incurred and actual revenues received and also provides for the refund
of  any  overcollections,  plus  interest  thereon,  or  the  recoupment  of any
undercollections of gas costs.  The procedure is limited to purchased gas costs,
to the exclusion  of  other  rate  matters,  and  requires  a formal evidentiary
proceeding  conducted  by  the  PPUC,  the  submission  of  specific information
regarding gas procurement practices and  specific  findings  of fact by the PPUC
regarding the "least cost fuel procurement" policies of the utility.

    In accordance with these procedures PG Energy has been permitted to make the
following changes since January  1,  1995,  to  the  gas  costs contained in its
tariff rates:
[CAPTION]
                                    Change in              Calculated
             Effective             Rate per MCF        Increase (Decrease)
                Date              From     To           in Annual Revenue 
           [S]                    [C]     [C]             [C]
           March 1, 1998          $4.05   $3.95           $ (2,100,000)
           December 1, 1997        4.49    4.05            (12,100,000)
           March 1, 1997           4.18    4.49              8,300,000
           December 1, 1996        3.01    4.18             32,400,000
           September 1, 1996       2.88    3.01              3,600,000
           June 1, 1996            2.75    2.88              3,400,000
           December 1, 1995        2.42    2.75              9,600,000
           May 15, 1995            3.68    2.42             (8,200,000)*

    * Represents estimated reduction in  revenue  for  the  period May 15, 1995,
      through November 30, 1995.

    The changes in gas rates on account of purchased gas costs have no effect on
earnings since the change in revenue is  offset by a corresponding change in the
cost of gas.

    FERC Order 636, among other matters,  requires that the Company contract for
sufficient gas supplies, pipeline  capacity  and  storage  for its annual needs.
These added responsibilities have resulted in  increased scrutiny by the PPUC as
to the prudence of gas procurement and supply activities.  However, to date, the
PPUC has permitted the Company  to  recover  its  gas  supply costs in the rates
charged to customers.  Additionally, although  it cannot be certain, the Company
believes that it will be able to continue demonstrating to the PPUC the prudence
of its gas supply costs  and,  therefore,  will  be  allowed to recover all such
costs in future purchased gas cost rates.

    Tax Surcharge Adjustments.  Regulations of  the PPUC provide for the Company
to apply a state tax adjustment surcharge tariff to its bills for gas service to
recoup any increased taxes or  pass  through  any decreased taxes resulting from
changes in the law with respect to the Pennsylvania Capital Stock Tax, Corporate
Net Income Tax, Gross Receipts Tax  or  Public Utility Realty Tax.  Honesdale is
currently recovering approximately $20,000 of increased taxes on an annual basis
in accordance with these regulations, while no state tax adjustment surcharge is
presently being applied to PG Energy's bills for gas service.





                                        -11-
<PAGE>

WATER BUSINESS

    Prior to  the  sale  of  its  water  operations  to Pennsylvania-American on
February 16, 1996, PG  Energy  distributed  water  to  an  area lying within the
Counties of  Lackawanna,  Luzerne,  Susquehanna  and  Wayne,  which included the
Cities of Scranton and  Wilkes-Barre  and  63  other  municipalities.  The total
estimated population of the water service  area,  based on the 1990 U.S. Census,
was 373,000.

    Number and  Type  of  Customers.    At  December  31,  1995,  PG  Energy had
approximately 133,400 water customers from which it derived total water revenues
of $66.3 million  during  1995  and  $7.5  million  during  the period January 1
through February 15, 1996. 

    Filtration of Water  Supplies.    All  of  PG  Energy's water customers were
supplied with filtered water (except for  several hundred who were supplied with
ground water from wells).    The  filtration  of  PG Energy's water supplies was
performed at ten water  treatment  plants,  located throughout PG Energy's water
service area, which had an aggregate daily capacity of 101.1 million gallons.  

    Construction Expenditures.  PG  Energy's construction expenditures for water
utility plant totaled  $15.3  million  in  1995  and  $815,000 during the period
January 1 through February 15, 1996.

ITEM 2.  PROPERTIES

    Gas.  The Company's  gas  system  consists  of  approximately 2,400 miles of
distribution lines,  eleven  city  gate  and  80  major  regulating stations and
miscellaneous related and additional  property.    The Company believes that its
gas utility properties are adequately maintained and in good operating condition
in all material respects. 

    Most of PG Energy's gas utility  properties  are subject to a first mortgage
lien pursuant to the Indenture of Mortgage  and  Deed of Trust dated as of March
15, 1946, as supplemented  by  thirty supplemental indentures (collectively, the
"Indenture") from PG Energy to First Trust of New York, National Association, as
Trustee.

    Land.  As of February 25,  1998,  PG Energy owned approximately 45,000 acres
of undeveloped land situated in northeastern Pennsylvania.  

ITEM 3.  LEGAL PROCEEDINGS

    There are  no  legal  proceedings  other  than  ordinary  routine litigation
incidental to the business of the Company.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

    During the fourth quarter of 1997, there were no matters submitted to a vote
of security holders of  the  registrant  through  the solicitation of proxies or
otherwise.








                                        -12-
<PAGE>

                                    PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER
         MATTERS                                                          

    The Registrant's common stock is owned entirely by PEI and is not traded.

    The cash dividends per share of  common  stock  paid by PG Energy during the
years ended December 31, 1997 and 1996 were as follows:
[CAPTION]
                                                  1997              1996 
         [S]                                    [C]              [C]         
         First quarter                          $      -         $10.2170
         Second quarter                                -                -
         Third quarter                                 -                -
         Fourth quarter                                -                -
           Total                                $      -         $10.2170

    The cash dividends per share for  the  first quarter of 1996 include $9.0770
with respect to a  special  $30.0  million  dividend  in  the  form of a 10.125%
promissory note that was issued by  PG  Energy  to  PEI on February 16, 1996, in
connection with the sale of PG  Energy's  water utility operations on such date.
The 10.125% promissory note was paid in full by PG Energy on March 8, 1996.

    Information relating to  restrictions  on  the  payment  of  dividends by PG
Energy is set forth in Note 7  of the Notes to Consolidated Financial Statements
in Item 8 of this Form 10-K.
































                                        -13-
<PAGE>

ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
         OF OPERATIONS                                                          

RESTRUCTURING OF NATURAL GAS INDUSTRY

    PG Energy Inc. ("PG Energy"), a subsidiary of Pennsylvania Enterprises, Inc.
("PEI"),  and  PG  Energy's   wholly-owned  subsidiary,  Honesdale  Gas  Company
("Honesdale"),  are  regulated  public   utilities   engaged  in  the  sale  and
distribution of natural gas.   The  natural gas industry, which historically has
included  producers,  interstate  pipelines  and  local  distribution  companies
("LDCs"), is undergoing  significant  restructuring.    The  industry is rapidly
progressing from  a  highly  regulated  environment  to  one  in  which there is
competition, customer choice and only  partial  regulation.   The same change is
also beginning to occur in the electric industry which competes with the natural
gas industry for many of the same energy uses.

    The restructuring of  the  natural  gas  industry  has  already involved the
decontrol of the wellhead price  of  natural  gas, and interstate pipelines have
been required by the Federal  Energy  Regulatory Commission ("FERC") to separate
the merchant function of selling natural gas from the transportation and storage
services they provide (frequently referred to as "unbundling") and to make those
services available to end users on the same terms as LDCs.  These changes in the
operations of the interstate pipelines  were designed to enhance competition and
maximize the benefits of wellhead price decontrol.

    As a result  of  actions  by  FERC,  the  interstate pipelines now primarily
provide transportation and storage services,  and  LDCs,  such as PG Energy, are
presently responsible for the  procurement  of competitively-priced gas supplies
and arranging for the  appropriate  transportation capacity and storage services
with the interstate  pipelines.    Additionally,  in accordance with regulations
promulgated by  the  Pennsylvania  Public  Utility  Commission  (the "PPUC"), PG
Energy currently offers transportation service to certain customers.

    Prior to the unbundling of  services  by  the interstate pipelines and those
services being made available to end users  as  well as LDCs, and until the PPUC
adopted regulations providing for the  transportation  of natural gas, PG Energy
charged all its  customers  bundled  rates.    These  rates included a commodity
charge based on  the  cost,  as  approved  by  FERC,  which  PG  Energy paid the
pipelines for natural  gas  delivered  to  the  entry  point on its distribution
system.    Except  for  the  approximately  560  customers  currently  receiving
transportation service, PG  Energy's  customers  continue  to be charged bundled
rates as approved by the  PPUC,  which  include  a commodity charge based on the
costs prudently incurred by PG Energy  for  the  purchase of natural gas and for
interstate pipeline transportation  capacity  and  storage  services.  Customers
receiving transportation service, which  accounted  for  approximately 48% of PG
Energy's total gas deliveries in 1997,  are  charged rates approved by the PPUC,
which exclude the commodity cost that  is reflected in the bundled rates charged
to other customers.

    Although the regulations promulgated by the  PPUC only require LDCs to offer
transportation service to individual  customers  having an annual consumption of
at least 5,000 thousand cubic feet ("MCF") of natural gas and groups of not more
than ten customers having a combined consumption of at least 5,000 MCF per year,
the PPUC has allowed certain  LDCs  to  make transportation service available to
other customers, regardless of  their  consumption.    One of these companies is
Honesdale which, with the  approval  of  the PPUC, began offering transportation
service to all of its some  3,300  customers  effective November 1, 1997.  As of
February 1, 1998, approximately  1,250  of  Honesdale's customers had elected to

                                        -14-
<PAGE>

receive transportation service and to  purchase  their natural gas supplies from
PG Energy Services  Inc.  ("Energy  Services"),  a  nonregulated affiliate of PG
Energy and the  only  marketer  currently  selling  gas  to  customers served by
Honesdale.  PG Energy is also planning to file tariffs with the PPUC in the near
future seeking approval to make  transportation  service available to all of its
147,000 customers.  Moreover, as noted  below, PG Energy currently believes that
Pennsylvania may enact legislation in 1998  requiring that all customers of LDCs
have the right, within the next several years, to receive transportation service
and to choose the supplier of their natural gas.

    In December, 1996, legislation  was  enacted  in Pennsylvania which provides
all customers of electric utilities in  the  state  with the right to choose the
generator of their electricity.    This  customer  choice,  which is intended to
increase competition and to lower costs for electricity, is being phased in over
a three-year period ending  on  January  1,  2001.   Under this legislation, the
electric utilities in Pennsylvania  are  required to unbundle generation charges
from the other charges included  in  their currently bundled rates and customers
can contract with qualified suppliers  of  their choosing, including the utility
currently serving them, to purchase electric  energy at nonregulated rates.  The
electric utilities will continue to  utilize their transmission and distribution
networks to distribute electricity to  their customers regardless of supplier, a
function which will remain subject to rate regulation by the PPUC.

    PG Energy believes  that  Pennsylvania  may  enact  similar legislation with
respect to the natural  gas  industry  in  1998.   As currently envisioned, such
legislation would require  that  PG  Energy  provide  all  of its customers with
unbundled transportation service within one to  two  years.  While the rates for
the transportation of natural  gas  through  PG Energy's distribution system and
the storage services offered by PG  Energy  would continue to be price regulated
by the PPUC, the commodity cost  of  gas  purchased from suppliers other than PG
Energy would not be so regulated.  Customers could, however, continue to receive
a bundled  sales  service  from  PG  Energy  which  would  be  subject  to price
regulation  by  the  PPUC.    Essentially,  the  legislation  would  extend  the
transportation service which is now available to a limited number of PG Energy's
customers to all its customers, and customers could choose to have their natural
gas provided by a supplier  other  than  PG Energy, based on nonregulated market
prices and other considerations.

    If Pennsylvania enacts legislation  which  permits  all customers of LDCs to
choose their supplier of natural gas,  PG  Energy will be faced with significant
competition from marketers  and  brokers  for  the  sale  of  natural gas to its
customers.  However, under current regulations  of  the PPUC, PG Energy does not
realize a profit or incur any loss with respect to the commodity cost of natural
gas.  Moreover, PG Energy would not  expect the pending legislation to result in
the bypass of its  distribution  system  by  any significant number of customers
because of the nature of  its  customer  base  and  the cost of any such bypass.
Additionally, based on  various  provisions  of  the legislation currently being
considered, PG Energy does not believe  that  the legislation will result in any
significant amount  of  transition  costs  (such  as  the  negotiated  buyout of
contracts with interstate  pipelines,  the  recovery  of  deferred purchased gas
costs or the recovery of  regulated  assets).   Further, PG Energy believes that
any transition costs it may  incur  would generally be recoverable through rates
or other customer charges.  Accordingly,  although it cannot be certain, because
the terms of such legislation have not been finalized and the ultimate effect on
PG Energy cannot be determined, PG Energy does not believe that the enactment of
legislation providing for customers  to  purchase  their  natural gas from third
parties would have any  material  adverse  impact  on  its earnings or financial
condition despite the increased competition to  which PG Energy would be subject
regarding the sale of natural gas to its customers.

                                        -15-
<PAGE>

DISCONTINUED OPERATIONS

    Pursuant to an Asset  Purchase  Agreement  dated  April 26, 1995, as amended
(the "Agreement"), among  PEI,  PG  Energy,  American  Water Works Company, Inc.
("American") and Pennsylvania-American  Water Company ("Pennsylvania-American"),
a wholly-owned subsidiary of American, PEI  and PG Energy sold substantially all
of the assets, properties and rights  of PG Energy's water utility operations to
Pennsylvania-American on February 16, 1996 (see "Liquidity and Capital Resources
- Sale of Water Utility Operations"). 

    In  accordance   with   generally   accepted   accounting   principles,  the
consolidated financial statements reflect  PG  Energy's water utility operations
as  "discontinued  operations"  effective  March  31,  1995,  and  the following
sections of Management's Discussion  and  Analysis  generally  relate only to PG
Energy's  continuing  operations.    For  additional  information  regarding the
discontinued operations, see Note  2  of  the accompanying Notes to Consolidated
Financial Statements.

RESULTS OF CONTINUING OPERATIONS

    The following table expresses  certain  items  in  PG Energy's statements of
income as percentages of operating revenues for each of the calendar years ended
December 31, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
                                                Percentage of Operating Revenues
                                                    Year Ended December 31,     
                                                 1997         1996         1995 
<S>                                              <C>          <C>          <C>
OPERATING REVENUES...........................    100.0%       100.0%       100.0%
  Cost of gas................................     58.2         55.0         55.3
OPERATING MARGIN.............................     41.8         45.0         44.7

OTHER OPERATING EXPENSES:
  Operation..................................     12.9         15.6         14.7
  Maintenance................................      2.7          3.4          3.2
  Depreciation...............................      4.7          4.7          4.6
  Income taxes...............................      3.9          4.0          3.4
  Taxes other than income taxes..............      6.1          6.9          6.5
    Total operating expenses.................     30.3         34.6         32.4

OPERATING INCOME.............................     11.5         10.4         12.3

OTHER INCOME, NET............................      0.1          0.1          0.2

INTEREST CHARGES.............................     (5.2)        (4.6)        (7.0)

INCOME FROM CONTINUING OPERATIONS............      6.4          5.9          5.5

LOSS WITH RESPECT TO DISCONTINUED
  OPERATIONS.................................        -         (0.2)        (2.5)

NET INCOME...................................      6.4          5.7          3.0

DIVIDENDS ON PREFERRED STOCK(1)..............     (0.7)        (1.1)        (1.8)

EARNINGS APPLICABLE TO COMMON STOCK..........      5.7%         4.6%         1.2%
</TABLE>
                    
(1)  None  of  the  dividends  on  preferred  stock  has  been  allocated to the
discontinued operations.

                                        -16-
<PAGE>

o  Year Ended December 31, 1997, Compared With Year Ended December 31, 1996

    Operating Revenues.  Operating revenues increased $30.0 million (18.7%) from
$160.6 million for 1996 to  $190.6  million  for  1997, primarily as a result of
higher levels in PG Energy's gas cost  rate  and the effect of the rate increase
granted PG Energy by the PPUC  which  became  effective on January 15, 1997 (see
"Rate Matters").  The effect of the increases in rates was partially offset by a
749,000 cubic feet (2.9%) decrease in  deliveries to PG Energy's residential and
commercial heating customers.  There was a decrease of 130 (2.0%) heating degree
days from 6,627 (105.3%  of  normal)  during  1996  to  6,497 (103.3% of normal)
during 1997.  Operating  revenues  of  Honesdale  totaling $3.0 million from its
February 14, 1997, acquisition date  through December 31, 1997, also contributed
to the increased operating revenues.

    Cost of Gas.  The  cost  of  gas  increased $22.6 million (25.6%) from $88.3
million for 1996 to $110.9 million  for 1997, primarily because of higher levels
in PG Energy's gas cost rate  (see  "-Rate  Matters").  Also contributing to the
increase was $2.0 million of  gas  costs  related to Honesdale from its February
14, 1997, acquisition date through December 31, 1997.

    Operating Margin.  The operating  margin increased $7.4 million (10.2%) from
$72.3 million in  1996  to  $79.7  million  in  1997,  primarily  because of the
aforementioned rate increase granted to PG  Energy and $1.0 million of operating
margin of Honesdale  since  its  February  14,  1997,  acquisition  date.   As a
percentage of operating revenues,  the  margin  decreased  from 45.0% in 1996 to
41.8% in 1997, largely as a  result  of the proportionately higher ratio of cost
of gas to operating revenues.

    Other Operating Expenses.   Other operating expenses, including depreciation
and income taxes, increased $2.1 million  (3.8%)  from $55.6 million for 1996 to
$57.7 million for 1997.  As  a percentage of operating revenues, total operating
expenses decreased from 34.6% during  1996  to  30.3%  during 1997, largely as a
result of the  proportionately  greater  increase  in  operating revenues.  This
increase was  primarily  the  result  of  a  $1.4  million  (18.1%)  increase in
depreciation expense attributable to additions  to  utility plant and a $629,000
(5.7%) increase in taxes other than  income  taxes resulting from a higher level
of gross receipts tax because of the  increased sales by PG Energy and the sales
by Honesdale from its acquisition date.

    Income taxes increased $957,000 (15.0%)  from  $6.4  million in 1996 to $7.3
million in 1997 due  to  an  increase  in  income  before income taxes (for this
purpose, operating income net of interest charges).

    Operating Income.  As a result  of  the above, operating income increased by
$5.2 million (31.4%) from $16.7 million for  1996 to $22.0 million for 1997, and
increased as a percentage  of  total  operating  revenues  from 10.4% in 1996 to
11.5% in 1997.

    Other Income,  Net.    Other  income,  net  decreased  $43,000  (30.1%) from
$143,000 for 1996 to  $100,000  for  1997,  largely because 1996 included income
from the temporary investment of certain  proceeds  from the sale of PG Energy's
regulated water utility operations in February, 1996.







                                        -17-
<PAGE>

    Interest Charges.  Interest charges increased $2.6 million (35.5%) from $7.3
million  for  1996  to  $9.9  million  for  1997.    This  increase  was largely
attributable to bank  borrowings  to  finance  construction expenditures and for
other working capital needs and the reduction in PG Energy's interest expense in
1996 resulting from the repayment of its  $50.0 million term loan and all of its
then outstanding bank borrowings on  February  16,  1996, with proceeds from the
sale of its regulated water utility operations on such date.
 
    Income  From  Continuing  Operations.    Income  from  continuing operations
increased $2.6 million (27.3%) from $9.5  million  for 1996 to $12.1 million for
1997.  This increase  was  largely  the  result  of the matters discussed above,
principally  the  increase  in  operating  margin,  the  effects  of  which were
partially offset by increased operating expenses and interest charges.

    Net Income (Loss).  The increase in  net income of $3.0 million (32.3%) from
$9.2 million for 1996 to $12.1  million  for  1997  was the result of the higher
income from continuing operations, as  discussed  above,  and the absence of any
loss with respect to discontinued operations.

    Dividends on  Preferred  Stock.    Dividends  on  preferred  stock decreased
$418,000 (24.2%) from $1.7 million  for  1996  to  $1.3 for 1997, primarily as a
result of the repurchase  by  PG  Energy  in  1996  of  134,359 shares of its 9%
cumulative preferred stock, 9,408 shares of its 5.75% cumulative preferred stock
and 20,330 shares of its  4.10%  cumulative  preferred stock, largely during the
second quarter of that year, as  well  as its repurchase of an additional 30,560
shares of the 4.10% cumulative preferred stock in 1997.

    Earnings (Loss)  Applicable  to  Common  Stock.    The  increase in earnings
applicable to common stock of $3.4 million (45.5%) from $7.4 million for 1996 to
$10.8 million for 1997, as well as  the increase in earnings per share of common
stock of $1.80 from $1.69 per share for  1996 (after a $.37 per share charge for
premiums on the repurchase  of  preferred  stock)  to  $3.49  per share for 1997
(including a $.23 per share discount  on the repurchase of preferred stock) were
the result of  the  higher  income  from  continuing  operations and the reduced
dividends on preferred stock, as  discussed  above,  and the absence of any loss
with respect to discontinued operations.  The increase in earnings applicable to
common stock also reflected a  8.0%  decrease  in the weighted average number of
shares outstanding as a result of the  repurchase  by PG Energy of shares of its
common stock on February 16, 1996, with  proceeds from the sale of its regulated
water utility operations.

o   Year Ended December 31, 1996, Compared With Year Ended December 31, 1995

    Operating Revenues.  Operating  revenues  increased $7.8 million (5.1%) from
$152.8 million for 1995 to $160.6  million  for  1996 primarily as a result of a
1.5 billion cubic feet (6.8%)  increase  in  sales to residential and commercial
heating customers.  There was a 598  (9.9%) increase in heating degree days from
6,029 (95.8% of normal) during  1995  to  6,627  (105.3% of normal) during 1996.
The effects of the increased sales to heating customers were partially offset by
lower levels in PG Energy's gas cost rate.  See "-Rate Matters."

    Cost of Gas.   The  cost  of  gas  increased  $3.9 million (4.6%) from $84.4
million  for  1995  to  $88.3   million   for  1996  primarily  because  of  the
aforementioned  increase  in  sales   to   residential  and  commercial  heating
customers, the effects of  which  were  partially  offset  by lower levels in PG
Energy's gas cost rate (see "-Rate Matters"). 



                                        -18-
<PAGE>

    Operating Margin.  The operating  margin  increased $3.9 million (5.7%) from
$68.4 million in 1995 to  $72.3  million  in  1996, primarily because of the 1.5
billion cubic feet (6.8%) increase  in consumption by residential and commercial
heating customers.  As a percentage  of operating revenues, the margin increased
from 44.7% in 1995 to 45.0% in 1996.

    Other Operating Expenses.   Other  operating expenses increased $6.1 million
(12.4%) from $49.5 million for 1995 to  $55.6 million for 1996, and increased as
a percentage of operating revenues from  32.4% during 1995 to 34.6% during 1996.
The $6.1 million increase  in  other  operating  expenses  was attributable to a
number of factors, the  most  significant  of  which  was a $2.6 million (11.7%)
increase in operation expenses,  primarily  as  a  result  of higher payroll and
payroll-related costs.    Payroll  and  payroll-related  costs increased largely
because  of  charges,  which  had   formerly   been  allocated  to  PG  Energy's
discontinued operations, being  absorbed  by  its  continuing  operations.  Also
contributing to the higher operating expenses  was a $641,000 (9.2%) increase in
depreciation expense attributable to additions  to PG Energy's utility plant, as
well as a $546,000 (11.0%)  increase  in  maintenance expenses caused by charges
relating to the maintenance of gas valves and a $1.1 million (11.2%) increase in
taxes other than income taxes as a result of increased gross receipts tax.

    Income taxes increased $1.2  million  (23.1%)  from  $5.2 million in 1995 to
$6.4 million in 1996 due to an  increase in income before income taxes (for this
purpose, operating income net of interest charges).

    Operating Income.  As a result  of  the above, operating income decreased by
$2.2 million (11.7%) from $18.9 million for  1995 to $16.7 million for 1996, and
decreased as a percentage  of  total  operating  revenues  for such periods from
12.3% in 1995 to 10.4% in 1996,  primarily  because of the higher level of other
operating expenses.

    Other Income,  Net.    Other  income,  net  decreased  $158,000 (52.5%) from
$301,000 for 1995 to $143,000 for 1996, largely as a result of a $548,000 charge
relative to the sale  and  abandonment  of  PG  Energy's interest in certain gas
rights and properties in western Pennsylvania.

    Interest Charges.  Interest charges  decreased  by $3.4 million (31.7%) from
$10.8 million for 1995 to  $7.3  million  for  1996.   This decrease was largely
attributable to the lower level of  indebtedness resulting from the repayment of
PG Energy's $50.0  million  term  loan  and  all  of  its  then outstanding bank
borrowings on February 16, 1996,  with  proceeds  from the sale of its regulated
water utility operations on such date.

    Income  From  Continuing  Operations.    Income  from  continuing operations
increased $1.0 million (12.3%) from  $8.5  million  for 1995 to $9.5 million for
1996.  This increase  was  largely  the  result  of the matters discussed above,
principally the  increase  in  operating  margin  and  the  decrease in interest
charges, the effects of which were partially offset by the higher level of other
operating expenses.

    Net Income.  The increase in  net  income  of $4.5 million from $4.6 million
for 1995 to $9.1 million for 1996,  was  largely the result of the higher income
from continuing operations,  as  discussed  above,  and  the decreased loss with
respect to discontinued operations.





                                        -19-
<PAGE>

    Dividends on Preferred Stock.   Dividends  on preferred stock decreased $1.0
million (37.4%) from $2.8 million for  1995  to $1.7 million for 1996, primarily
as a result of the repurchase by PG  Energy  in 1996 of 134,359 shares of its 9%
cumulative preferred stock, 9,408 shares of its 5.75% cumulative preferred stock
and 20,330 shares of its  4.10%  cumulative  preferred stock, largely during the
second quarter of the year.

    Earnings Applicable to Common Stock.  The increase in earnings applicable to
common stock of $5.6 million  from  $1.9  million  for  1995 to $7.4 million for
1996, as well as the increase  in  earnings  per  share of common stock of $1.36
from $.33 per share for 1995 to $1.69 per share for 1996 (after a $.37 per share
charge for premiums on the  repurchase  of  preferred stock), were the result of
higher income from  continuing  operations  and  reduced  dividends on preferred
stock, as discussed above, and  the  decrease  of  $.59 per share, from $.69 per
share for 1995  to  $.10  per  share  for  1996,  in  the  loss  with respect to
discontinued operations.  The  increase  in  earnings applicable to common stock
reflected a 35.3% decrease in the  weighted average number of shares outstanding
for 1996  resulting  from  the  aforementioned  repurchase  of  common  stock on
February 16, 1996.

RATE MATTERS

    Rate Increase.  By Order  adopted  December  19,  1996, the PPUC approved an
overall 5.3% increase in PG  Energy's  base  gas rates, designed to produce $7.5
million of additional annual  revenue,  effective  January 15,  1997.  Under the
terms of the Order, the billing for  the impact of the rate increase relative to
PG Energy's residential heating  customers,  which  totaled $2.4 million through
June 30, 1997, was deferred, without carrying charges, until July, 1997.  

    Gas Cost Adjustments.   The  provisions  of  the Pennsylvania Public Utility
Code require that the tariffs of  LDCs  be  adjusted on an annual basis, and, in
the  case  of  larger  LDCs  such  as  PG  Energy,  on  an  interim  basis  when
circumstances dictate, to reflect  changes  in  their  purchased gas costs.  The
procedure includes a process for the reconciliation of actual gas costs incurred
and  actual  revenues  received  and  also   provides  for  the  refund  of  any
overcollections,   plus   interest   thereon,   or   the   recoupment   of   any
undercollections of gas costs.

    In accordance with these procedures PG Energy has been permitted to make the
following changes since January  1,  1995,  to  the  gas  costs contained in its
tariff rates:
[CAPTION]
                                    Change in              Calculated
             Effective             Rate per MCF        Increase (Decrease)
                Date              From     To           in Annual Revenue 
           [S]                    [C]     [C]             [C]
           March 1, 1998          $4.05   $3.95           $ (2,100,000)
           December 1, 1997        4.49    4.05            (12,100,000)
           March 1, 1997           4.18    4.49              8,300,000
           December 1, 1996        3.01    4.18             32,400,000
           September 1, 1996       2.88    3.01              3,600,000
           June 1, 1996            2.75    2.88              3,400,000
           December 1, 1995        2.42    2.75              9,600,000
           May 15, 1995            3.68    2.42             (8,200,000)*

    * Represents estimated reduction in  revenue  for  the  period May 15, 1995,
      through November 30, 1995.


                                        -20-
<PAGE>

    The changes in gas rates on account of purchased gas costs have no effect on
earnings since the change in revenue is  offset by a corresponding change in the
cost of gas.

    Effects of Inflation.  When utility  property  reaches the end of its useful
life and must be replaced, PG  Energy and Honesdale (collectively referred to as
the "Company") will incur replacement costs  in  amounts that due to the effects
of inflation would materially  exceed  either  the  original cost or the accrued
depreciation of such property as reflected  on their books of account.  However,
the cost of such replacement property would  be includable in rate base, and the
Company would be entitled  to  recover  depreciation  expense  and earn a return
thereon, to the  extent  that  its  investment  in  such  property was prudently
incurred and the  property  is  used  and  useful  in  furnishing public utility
service.

LIQUIDITY AND CAPITAL RESOURCES

Sale of Water Utility Operations

    On February 16, 1996,  PG  Energy  sold  its  regulated water operations and
certain related assets to  Pennsylvania-American  for $414.3 million, consisting
of $262.1 million in cash and  the  assumption  of $152.2 million of PG Energy's
liabilities, including $141.0 million of its  long-term debt.  PEI and PG Energy
used the $205.4 million of cash proceeds  from the sale, net of $56.7 million of
income taxes, to retire debt, to repurchase stock, for construction expenditures
and for other working capital purposes.    In this regard, PG Energy repurchased
2,297,297 shares of its common stock  from PEI for an aggregate consideration of
$85.0 million, repaid its $50.0 million term  loan  due 1996 and all of its then
outstanding bank  borrowings  on  February  16,  1996,  and  PEI  and  PG Energy
temporarily invested the balance of the  proceeds.   A portion of these proceeds
were subsequently used by PG Energy  (i)  on  March  8, 1996, to repay the $30.0
million principal amount of its 10.125% promissory note (the "10.125% Promissory
Note") which was issued to PEI as  a  common stock dividend on February 16, 1996
(proceeds from the repayment of the 10.125% Promissory Note were used by PEI for
the defeasance of PEI's 10.125% Senior Notes  on September 30, 1996) and (ii) to
repurchase 134,359 shares of its 9%  cumulative preferred stock for an aggregate
consideration of  $14.5  million  and  20,330  shares  of  its  4.10% cumulative
preferred stock for an aggregate consideration of $1.0 million, largely pursuant
to self tender offers conducted during  March and April, 1996.  Additionally, on
June 17, 1996,  PG  Energy  repurchased  9,408  shares  of  its 5.75% cumulative
preferred stock (including 800 shares redeemed in accordance with annual sinking
fund provisions) for an aggregate consideration of $838,000.  

Liquidity

    The primary capital needs of the  Company  continue to be the funding of its
construction program and the seasonal funding of its gas purchases and increases
in customer accounts receivable.  The Company's revenues are highly seasonal and
weather-sensitive,  with  approximately  75%  of  its  revenues  normally  being
realized in  the  first  and  fourth  quarters  of  the  calendar  year when the
temperatures in its service area are the coldest.

    The cash flow from the Company's  operations is generally sufficient to fund
a portion of its  construction  expenditures.    However, to the extent external
financing is required, it is  the  Company's  practice to use bank borrowings to
fund such expenditures, pending  the  periodic  issuance  of stock and long-term
debt.  Bank borrowings are also  used  for the seasonal funding of the Company's
gas purchases and increases in its customer accounts receivable.

                                        -21-
<PAGE>

    In order to temporarily  finance  construction  expenditures and to meet its
seasonal borrowing requirements, the Company  has  made arrangements for a total
of $69.5 million of unsecured  revolving  bank  credit, which is deemed adequate
for its immediate needs.  Specifically, PG Energy currently has seven bank lines
of credit with an aggregate  borrowing  capacity  of $68.5 million which provide
for borrowings at interest rates generally  less  than prime and which mature at
various times during 1998 and 1999.  Honesdale has a $1.0 million revolving bank
line of credit which provides for  borrowing at the prime rate (currently 8.50%)
and which matures in June, 1998.   The Company intends to renew or replace these
lines of credit as they expire.  As  of February 25, 1998, the Company had $15.5
million of  borrowings  outstanding  under  these  bank  lines  of  credit.   In
addition, PG Energy can borrow up to $70.0 million from PEI through December 31,
1999 (at interest rates generally less than prime), to repay bank borrowings and
for construction expenditures  and  other  working  capital requirements, to the
extent that PEI has funds available  for  lending  to PG Energy.  As of February
25, 1998,  PG  Energy  had  approximately  $23.5  million  outstanding under its
borrowing arrangement with PEI.  Such  interim  borrowings by PG Energy from PEI
will be repaid with proceeds from bank borrowings by PG Energy.  PG Energy plans
to arrange new and replacement  bank  lines  of  credit  when the funds that are
available for borrowing from  PEI  are  no  longer  available and as it requires
additional funding for working capital and other purposes.

    The Company believes it will be able  to raise in a timely manner such funds
as are required  for  future  construction  expenditures, refinancings and other
working capital requirements.

Long-Term Debt and Capital Stock Financings

    The  Company  periodically  engages  in  long-term  debt  and  capital stock
financings in order to obtain  funds required for construction expenditures, the
refinancing of existing debt and  various  working  capital purposes.  Set forth
below is a summary of such  financings  consummated since the beginning of 1996,
exclusive of interim bank borrowings. 

    On September 12, 1997, PG Energy  borrowed $25.0 million pursuant to a five-
year term loan agreement  dated  August  14,  1997  (the "Term Loan Agreement"),
which matures on August 14, 2002.  Borrowings under the Term Loan Agreement bear
interest at LIBOR ("London  Interbank  Offered  Rates")  plus one-quarter of one
percent (5.880% as of February  25,  1998).    Under  the terms of the Term Loan
Agreement, PG Energy can choose interest rate  periods of one, two, three or six
months.  PG Energy utilized the  proceeds  from such loan to repay $25.0 million
of its bank borrowings.

    On September 30, 1997, PG  Energy  issued  $25.0 million of its 6.92% Senior
Notes due September 30, 2004 (the "6.92%  Senior Notes").  The proceeds from the
issuance of the 6.92% Senior Notes were used by PG Energy to repay $25.0 million
of its bank borrowings.

    Under the terms of PEI's Customer Stock Purchase Plan (the "Customer Plan"),
which then provided the  residential  customers  of  PG  Energy with a method of
purchasing newly-issued shares of PEI's common  stock  at a 5% discount from the
market price, 176,462 shares ($2.4 million) of PEI's common stock were issued in
1995.  PEI used proceeds from  the  issuance of shares through the Customer Plan
to purchase common stock of PG Energy.  PG Energy realized $2.4 million from the
issuance of common stock  to  PEI  in  connection  with the Customer Plan during
1995.  Effective May 9,  1995,  PEI  suspended  the Customer Plan because of the
significant reduction in its capital requirements  resulting from the sale of PG
Energy's water utility operations  to  Pennsylvania-American  and because of the

                                        -22-
<PAGE>

proceeds received from such sale.    However, based on its currently-anticipated
funding requirements  and  in  order  to  help  maintain  an appropriate capital
structure, PEI reinstated the Customer  Plan,  effective February 4, 1998.  Upon
such reinstatement, the Customer  Plan  was  amended  to provide the residential
customers of all PEI's subsidiaries,  including  PG Energy and Honesdale, with a
method of purchasing newly-issued shares of  PEI's common stock at a 5% discount
from the market price.

    PG Energy also obtains funds from  the  sale  of  its common stock to PEI in
connection with PEI's Dividend Reinvestment and Stock Purchase Plan (the "DRP").
Effective May 9, 1995, PEI suspended the  cash investment feature of the DRP and
the 5% discount from the market price on the reinvestment of dividends under the
DRP because of the significant  reduction  in its capital requirements resulting
from the sale of PG  Energy's  water utility operations to Pennsylvania-American
and because of  the  proceeds  received  from  such  sale.   The cash investment
feature was, however, reinstated  effective  June  1,  1996.  Additionally, from
June 14, 1996, through December 31,  1996, PEI temporarily suspended the sale of
newly-issued stock to the DRP as a result of the proceeds received from the sale
of PG Energy's water utility operations, and during that period the DRP obtained
shares of PEI  common  stock  for  participants  through  open market purchases.
Effective January 1, 1997, PEI  resumed  selling  newly-issued stock to the DRP.
On January 30, 1998,  the  DRP  was  amended  to reinstate the provision whereby
shareholders may reinvest cash dividends  and make supplemental cash investments
to purchase newly-issued shares of PEI's common  stock at a 5% discount from the
market price.

    Although PEI resumed selling newly-issued stock to the DRP effective January
1, 1997, PG Energy did  not  issue  any  shares  of  its  common stock to PEI in
connection with the DRP  during  1997  because  of  the reduction in its capital
requirements resulting from the sale of  PG Energy's water utility operations to
Pennsylvania-American and  because  of  the  proceeds  received  from such sale.
During  1996  and  1995,   PG   Energy   realized  $340,000  and  $3.3  million,
respectively, from the issuance of  common  stock  to PEI in connection with the
DRP.  However, based  on  its  currently-anticipated funding requirements and in
order to help maintain  an  appropriate  capital  structure,  PG Energy plans to
resume selling shares of its  common  stock  to  PEI  in connection with the DRP
during 1998.

Construction Expenditures and Related Financings

    Expenditures for the construction  of  utility  plant totaled $30.2 million,
$29.2 million and $21.1  million  in  1997,  1996  and 1995, respectively.  Such
expenditures were financed with  internally-generated funds and bank borrowings,
and to the extent  necessary  by  the  periodic  issuance of stock and long-term
debt.

    The Company currently  estimates  that  its  capital expenditures will total
$36.3 million during  1998.    Capital  expenditures  are  currently expected to
approximate $37.0 million in each of the years 1999 and 2000.  It is anticipated
that such expenditures will be financed with internally generated funds and bank
borrowings, pending the periodic issuance of stock and long-term debt.

Current Maturities of Long-Term Debt and Preferred Stock

    As of December 31, 1997,  $24.8  million  of PG Energy's long-term debt, and
$80,000 of PG Energy's preferred stock  was  required to be repaid within twelve
months.


                                        -23-
<PAGE>

Year 2000

    The Company is currently  replacing  its  financial and customer information
systems with purchased software packages.    In connection with the installation
of these new systems, the primary  year  2000  issues will be resolved.  The new
financial systems are anticipated  to  be  operational  in  mid-1998 and the new
customer information system is anticipated to be operational in early 1999.

    The  Company  has  completed  a  review  of  the  program  coding  of  other
significant  in-house  developed  applications  and  determined  that  they  are
presently year 2000  compliant.    Additionally,  the  Company  is reviewing its
installed base of  personal  computers  to  identify non-compliant machines that
would be in service at year 2000.

Forward-Looking Statements

    Certain statements made above relating  to plans, conditions, objectives and
economic  performance  go  beyond  historical  information  and  may  provide an
indication  of  future  results.    To  that  extent,  they  are forward-looking
statements within the meaning of Section  21E  of the Securities Exchange Act of
1934, and each is subject to  factors  that could cause actual results to differ
from those in the forward-looking statement,  such as the nature of Pennsylvania
legislation  restructuring  the  natural   gas  industry  and  general  economic
conditions and uncertainties.  The  Company undertakes no obligation to publicly
release any revision to  these  forward-looking  statements to reflect events or
circumstances after the date of this filing.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The consolidated financial  statements  of  the  Company  and the reports of
independent accountants thereon are  presented  on  pages  25 through 49 of this
Form 10-K.



























                                        -24-
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Shareholders
of PG Energy Inc.

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing under Item 14  (a)  (1)  and  (2)  on  page  51 present fairly, in all
material respects, the financial position  of  PG Energy Inc. and its subsidiary
at December 31, 1997, and the  results  of their operations and their cash flows
for the year ended  December  31,  1997,  in  conformity with generally accepted
accounting principles.  These financial statements are the responsibility of the
Company's management; our  responsibility  is  to  express  an  opinion on these
financial statements based on  our  audits.    We  conducted our audits of these
statements  in  accordance  with  generally  accepted  auditing  standards which
require that we plan and perform  the audit to obtain reasonable assurance about
whether the financial statements are  free  of  material misstatement.  An audit
includes examining,  on  a  test  basis,  evidence  supporting  the  amounts and
disclosures in the  financial  statements,  assessing  the accounting principles
used and significant estimates  made  by  management, and evaluating the overall
financial  statement  presentation.    We  believe  that  our  audits  provide a
reasonable basis for the opinion  expressed  above.  The financial statements of
PG Energy Inc. for the two  years  in  the  period ended December 31, 1996, were
audited by other independent accountants  whose  report dated February 19, 1997,
expressed an unqualified opinion on those statements.


PRICE WATERHOUSE LLP


Philadelphia, Pennsylvania
February 18, 1998


























                                        -25-
<PAGE>

                       REPORT OF INDEPENDENT ACCOUNTANTS



To PG Energy Inc.:

We have audited the accompanying  balance  sheet and statement of capitalization
of PG Energy Inc. ("PG  Energy"),  formerly  known as Pennsylvania Gas and Water
Company  (a  Pennsylvania   corporation   and   a   wholly-owned  subsidiary  of
Pennsylvania Enterprises,  Inc.)  as  of  December  31,  1996,  and  the related
statements of income, common shareholder's  investment,  and cash flows for each
of the two  years  in  the  period  ended  December  31,  1996.  These financial
statements are the responsibility of PG Energy's management.  Our responsibility
is to express an opinion on these financial statements based on our audits.

We  conducted  our  audits  in   accordance  with  generally  accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used  and  significant  estimates made by
management, as well as evaluating  the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial  statements  referred  to above present fairly, in
all material respects, the financial position  of  PG Energy Inc. as of December
31, 1996, and the results of its  operations  and its cash flows for each of the
two years in the period  ended  December  31, 1996, in conformity with generally
accepted accounting principles.

Our audit was made for the purpose  of forming an opinion on the basic financial
statements taken as a whole.  Supplemental Schedule II, Valuation and Qualifying
Accounts for  the  three-year  period  ended  December  31,  1996  (see index of
financial statements) is presented for purposes of complying with the Securities
and  Exchange  Commission's  rules  and  is  not  part  of  the  basic financial
statements.  This schedule has been subjected to the auditing procedures applied
in the audit of  the  basic  financial  statements  and,  in our opinion, fairly
states in all material  respects  the  financial  data  required to be set forth
therein in relation to the basic financial statements taken as a whole.



                                                       ARTHUR ANDERSEN LLP


New York, N.Y.
February 19, 1997












                                        -26-
<PAGE>
<TABLE>
<CAPTION>
                           PG ENERGY INC. AND SUBSIDIARY

                         CONSOLIDATED STATEMENTS OF INCOME

                                                      Year Ended December 31,     
                                                    1997        1996        1995  
                                                       (Thousands of Dollars)
<S>                                              <C>         <C>         <C>
OPERATING REVENUES                               $ 190,567   $ 160,594   $ 152,756 
  Cost of gas                                      110,905      88,291      84,372
OPERATING MARGIN                                    79,662      72,303      68,384

OTHER OPERATING EXPENSES:
  Operation                                         24,534      25,070      22,438
  Maintenance                                        5,201       5,513       4,967
  Depreciation                                       8,986       7,612       6,971
  Income taxes                                       7,321       6,364       5,168
  Taxes other than income taxes                     11,657      11,028       9,918
    Total other operating expenses                  57,699      55,587      49,462

OPERATING INCOME                                    21,963      16,716      18,922

OTHER INCOME, NET                                      100         143         301

INCOME BEFORE INTEREST CHARGES                      22,063      16,859      19,223

INTEREST CHARGES:
  Interest on long-term debt                         9,481       6,862       9,304
  Other interest                                       700         658       1,543
  Allowance for borrowed funds used
    during construction                               (231)       (177)        (94)
      Total interest charges                         9,950       7,343      10,753

INCOME FROM CONTINUING OPERATIONS                   12,113       9,516       8,470

LOSS WITH RESPECT TO DISCONTINUED
  OPERATIONS (Note 2)                                    -        (363)     (3,834)

NET INCOME                                          12,113       9,153       4,636 

DIVIDENDS ON PREFERRED STOCK                         1,312       1,730       2,763

EARNINGS APPLICABLE TO COMMON STOCK              $  10,801   $   7,423   $   1,873

COMMON STOCK:
  Earnings (loss) per share of common stock:
    Continuing operations                        $    3.26   $    2.16   $    1.02
    Discontinued operations                              -        (.10)       (.69)
    Income before discount (premium) on
      repurchase/redemption of preferred stock        3.26        2.06         .33
    Discount (premium) on repurchase/redemption
      of preferred stock                               .23        (.37)          -
    Total                                        $    3.49   $    1.69   $     .33

Weighted average number of shares outstanding    3,314,155   3,601,072   5,569,765



The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
                                        -27-
<PAGE>
<TABLE>
<CAPTION>
                         PG ENERGY INC. AND SUBSIDIARY

                          CONSOLIDATED BALANCE SHEETS


                                                              December 31,    
                                                          1997          1996  
                                                        (Thousands of Dollars)
ASSETS
<S>                                                     <C>           <C>
UTILITY PLANT:
  At original cost                                      $351,106      $319,205
  Accumulated depreciation                               (88,129)      (79,783)
                                                         262,977       239,422

OTHER PROPERTY AND INVESTMENTS                             4,459         4,894

CURRENT ASSETS:
  Cash and cash equivalents                                  304           690
  Accounts receivable -
    Customers                                             23,551        17,183
    Affiliates, net                                           63            58
    Others                                                   280           565
    Reserve for uncollectible accounts                    (1,168)       (1,140)
  Accrued utility revenues                                11,680        11,830
  Materials and supplies, at average cost                  2,716         2,460
  Gas held by suppliers, at average cost                  21,933        20,265
  Natural gas transition costs collectible                   134         2,525
  Deferred cost of gas and supplier refunds, net           6,182        19,316
  Prepaid expenses and other                               1,633         1,313
                                                          67,308        75,065


DEFERRED CHARGES:
  Regulatory assets -
    Deferred taxes collectible                            30,592        29,771
    Other                                                  4,415         4,274
  Unamortized debt expense                                 1,164         1,153
  Other                                                      225             -
                                                          36,396        35,198













TOTAL ASSETS                                            $371,140      $354,579



The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
                                        -28-
<PAGE>
<TABLE>
<CAPTION>
                            PG ENERGY INC. AND SUBSIDIARY

                             CONSOLIDATED BALANCE SHEETS


                                                              December 31,    
                                                          1997          1996  
                                                        (Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
<S>                                                     <C>           <C>
CAPITALIZATION (see accompanying statements):
  Common shareholder's investment                       $107,425      $ 96,005
  Preferred stock of PG Energy -
    Not subject to mandatory redemption, net              15,864        18,851
    Subject to mandatory redemption                          640           739
  Long-term debt                                         129,500        55,000
                                                         253,429       170,595

CURRENT LIABILITIES:
  Current portion of long-term debt 
    Parent                                                     -        31,400
    Other                                                 24,776        38,721
  Preferred stock subject to repurchase or mandatory
    redemption                                                80           115
  Note payable                                             2,170        10,000
  Accounts payable -
    Suppliers                                             14,515        17,831
    Parent                                                   199           348
  Accrued general business and realty taxes                2,797         2,239
  Accrued income taxes                                     4,946        14,559
  Accrued interest                                         1,844         1,936
  Accrued natural gas transition costs                     1,087         2,095
  Other                                                    1,188         3,375
                                                          53,602       122,619


DEFERRED CREDITS:
  Deferred income taxes                                   52,207        49,119
  Unamortized investment tax credits                       4,596         4,767
  Operating reserves                                       2,825         3,086
  Other                                                    4,481         4,393
                                                          64,109        61,365

COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)









TOTAL CAPITALIZATION AND LIABILITIES                    $371,140      $354,579



The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
                                        -29-
<PAGE>
<TABLE>
<CAPTION>
                            PG ENERGY INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF CASH FLOWS
                                                       Year Ended December 31,    
                                                      1997       1996       1995  
                                                       (Thousands of Dollars)
<S>                                                <C>         <C>        <C>
CASH FLOW FROM OPERATING ACTIVITIES:
  Income from continuing operations                $  12,113   $   9,516  $  8,470
  Effects of noncash charges to income -
    Depreciation                                       9,034       7,675     7,018
    Deferred income taxes, net                         1,863       1,940      (265)
    Provisions for self insurance                        711       1,042     2,652
    Other, net                                         1,902       1,390     5,190
  Changes in working capital, exclusive of cash 
   and current portion of long-term debt -
    Receivables and accrued utility revenues          (5,220)         46    (3,309)
    Gas held by suppliers                             (1,668)     (5,125)    4,885
    Accounts payable                                  (4,425)        215       839
    Deferred cost of gas and supplier refunds, net    14,397     (18,493)    5,715
    Other current assets and liabilities, net          1,526       2,958    (6,622)
  Other operating items, net                          (1,809)     (5,644)    2,675
      Net cash provided by (used for) continuing
        operations                                    28,424      (4,480)   27,248
  Net cash provided by (used for) discontinued
    operations                                       (13,655)    (45,173)    3,764
      Net cash provided by (used for) operating
        activities                                    14,769     (49,653)   31,012

CASH FLOW FROM INVESTING ACTIVITIES:
  Additions to utility plant                         (30,971)    (29,312)  (20,615)
  Proceeds from the sale of discontinued 
    operations                                             -     261,752         -
  Acquisition of regulated business                   (2,019)          -         -
  Other, net                                             557       1,078    (4,934) 
      Net cash provided by (used for) investing
        activities                                   (32,433)    233,518   (25,549)

CASH FLOW FROM FINANCING ACTIVITIES:
  Issuance of common stock                                 -         339     5,720
  Repurchase of common stock                               -     (85,008)        -
  Redemption of preferred stock                       (3,121)    (15,670)      (80)
  Dividends on common and preferred stock             (1,312)    (35,498)  (18,032)
  Issuance of long-term debt                          25,000           -    50,000
  Issuance of long-term debt to parent                     -      49,900         -
  Repayment of long-term debt                              -     (50,000)  (53,535)
  Repayment of long-term debt to parent               (7,900)    (18,500)        -
  Net increase (decrease) in bank borrowings           4,053     (27,723)   10,519
  Other, net                                             558      (1,343)      (31)
      Net cash provided by (used for)
        financing activities                          17,278    (183,503)   (5,439)

NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                           (386)        362        24 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR           690         328       304 
CASH AND CASH EQUIVALENTS AT END OF YEAR           $     304   $     690  $    328

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the year for:
    Interest (net of amount capitalized)           $   9,395   $   7,139  $ 23,802   
    Income taxes                                   $  15,548   $  46,483  $  8,694

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
                                        -30-
<PAGE>
<TABLE>
<CAPTION>
                              PG ENERGY INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF CAPITALIZATION

                                                         December 31,        
                                                    1997               1996  
                                                    (Thousands of Dollars)
<S>                                              <C>                <C>
COMMON SHAREHOLDER'S INVESTMENT:
  Common stock, no par value
    (stated value $10 per share) 
    Authorized - 15,000,000 shares
    Outstanding - 3,314,155 shares               $  33,142          $  33,142
  Additional paid-in capital                        32,677             32,677
  Retained earnings                                 41,606             30,186
     Total common shareholder's investment         107,425    42.4%    96,005    56.3%

PREFERRED STOCK, par value $100 per share 
  Authorized - 997,500 shares:
    Not subject to mandatory redemption, net -
      4.10% cumulative preferred,
         49,110 and 79,670 shares outstanding,
         respectively                                4,911              7,967  
      Less current repurchases                           -                (35) 
      9% cumulative preferred, 115,641 shares
        outstanding, net of issuance costs          10,953             10,919  

    Total preferred stock not subject to
        mandatory redemption, net                   15,864     6.3%    18,851    11.1%

    Subject to mandatory redemption -
      5.75% cumulative preferred, 7,200 and 
        8,192 shares outstanding, respectively         720                819  
      Less current redemption requirements             (80)               (80) 

    Total preferred stock subject to
        mandatory redemption                           640     0.2%       739     0.4%

LONG-TERM DEBT:
  First mortgage bonds                              55,000             55,000  
  Notes                                             99,276             70,121  
  Less current maturities and sinking
    fund requirements                              (24,776)           (70,121) 
     Total long-term debt                          129,500    51,1%    55,000    32.2%

TOTAL CAPITALIZATION                             $ 253,429   100.0% $ 170,595   100.0%









The accompanying notes are an integral part of the consolidated financial statements.


</TABLE>

                                        -31-
<PAGE>
<TABLE>
<CAPTION>
                              PG ENERGY INC. AND SUBSIDIARY

                      STATEMENTS OF COMMON SHAREHOLDER'S INVESTMENT

                  FOR THE YEARS ENDED DECEMBER 31, 1995, 1996 AND 1997


                                             Additional 
                                    Common    Paid-In      Retained 
                                    Stock     Capital      Earnings      Total  
                                             (Thousands of Dollars)
<S>                                 <C>         <C>         <C>         <C>
Balance at December 31, 1994        54,567       90,201      71,264     216,032 

Net income for 1995                      -            -       4,636       4,636 
Issuance of common stock             1,458        4,262           -       5,720 
Dividends on:
  Preferred stock                        -            -      (2,763)     (2,763)
  Common stock                           -            -     (15,269)    (15,269)

Balance at December 31, 1995        56,025       94,463      57,868     208,356 

Net income for 1996                      -            -       9,153       9,153 
Issuance of common stock                90          249           -         339 
Repurchase of common stock         (22,973)     (62,035)          -     (85,008)
Premium on repurchase of
  preferred stock                        -            -      (1,337)     (1,337)
Dividends on:
  Preferred stock                        -            -      (1,730)     (1,730)
  Common stock                           -            -     (33,768)    (33,768)

Balance at December 31, 1996        33,142       32,677      30,186      96,005 

Net income for 1997                      -            -      12,113      12,113 
Discount on redemption of
  preferred stock                        -            -         746         746 
Dividends on:
  Preferred stock                        -            -      (1,312)     (1,312)
  Common stock                           -            -        (127)       (127)

Balance at December 31, 1997       $33,142   $   32,677    $ 41,606    $107,425 














The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>


                                        -32-
<PAGE>

                         PG ENERGY INC. AND SUBSIDIARY

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Nature of the Business.   PG  Energy  Inc.  ("PG Energy"), formerly known as
Pennsylvania Gas and Water  Company,  a  wholly-owned subsidiary of Pennsylvania
Enterprises,  Inc.  ("PEI"),  and  its  wholly-owned  subsidiary,  Honesdale Gas
Company ("Honesdale"),  acquired  on  February  14,  1997,  are regulated public
utilities  subject  to  the  jurisdiction  of  the  Pennsylvania  Public Utility
Commission ("PPUC") for rate and  accounting  purposes.   Together PG Energy and
Honesdale distribute  natural  gas  to  a  thirteen-county  area in northeastern
Pennsylvania, a territory that includes the cities of Scranton, Wilkes-Barre and
Williamsport.

    Principles of Consolidation.   The consolidated financial statements include
the accounts of PG Energy and  Honesdale,  beginning February 14, 1997, the date
Honesdale was acquired by PG  Energy.    All material intercompany accounts have
been eliminated in consolidation.

    Both PG Energy and Honesdale (collectively referred to as the "Company") are
subject to the jurisdiction of the  PPUC  for rate and accounting purposes.  The
consolidated  financial  statements  of  the   Company  have  been  prepared  in
accordance  with  generally   accepted   accounting  principles,  including  the
provisions  of  Financial  Accounting  Standards  Board  ("FASB")  Statement 71,
"Accounting  for  the  Effects  of  Certain  Types  of  Regulation,"  which give
recognition to the rate and accounting  practices of regulatory agencies such as
the PPUC.

    Use of Accounting Estimates.    The  preparation  of financial statements in
conformity with generally accepted  accounting principles requires management to
make estimates and assumptions that  affect  the  reported amounts of assets and
liabilities and disclosure of contingent  assets  and liabilities at the date of
the financial statements  and  the  reported  amounts  of  revenues and expenses
during the reporting period.  These estimates involve judgments with respect to,
among other things, various future  economic factors and regulatory matters (see
"Management's Discussion and  Analysis  of  Financial  Conditions and Results of
Operations - Restructuring of Natural Gas Industry" in Item 7 of this Form 10-K)
which are difficult  to  predict  and  are  beyond  the  control of the Company.
Therefore, actual amounts could differ from these estimates.

    Utility Plant and Depreciation.    Utility  plant  is  stated at cost, which
represents the original cost  of construction, including payroll, administrative
and general costs, and an allowance for funds used during construction.

    The allowance for funds used during construction ("AFUDC") is defined as the
net cost  during  the  period  of  construction  of  borrowed  funds  used and a
reasonable rate upon other funds  when  so  used.   Such allowance is charged to
utility plant and reported as a  reduction  of interest expense (with respect to
the cost of  borrowed  funds)  in  the  accompanying  consolidated statements of
income.  AFUDC varies according to changes  in the level of construction work in
progress and in the sources and costs of capital.  The weighted average rate for
such allowance was approximately 8% in 1997, 9% in 1996 and 8% in 1995.




                                        -33-
<PAGE>

    The Company provides for depreciation  on  a straight-line basis.  Exclusive
of transportation and work equipment,  the annual provision for depreciation, as
related to the average depreciable original  cost of utility plant, was 2.81% in
1997, 2.60% in 1996 and 2.75% in 1995, respectively.

    When depreciable property is retired, the  original cost of such property is
removed from the utility plant accounts  and  is charged, together with the cost
of removal less  salvage,  to  accumulated  depreciation.    No  gain or loss is
recognized in connection with retirements of depreciable property, other than in
the case of significant involuntary conversions or extraordinary retirements.

    Revenues and Cost of  Gas.    The  Company  bills customers monthly based on
estimated or actual meter readings  on  cycles that extend throughout the month.
The estimated unbilled amounts from the  most recent meter reading dates through
the end of the period being reported on are recorded as accrued revenues.

    The Company generally passes on  to  its customers increases or decreases in
gas costs from those reflected in  its  tariff charges.  In accordance with this
procedure, the Company defers any current  under or over-recoveries of gas costs
and collects or refunds such  amounts  in  subsequent  periods.  The Company had
underrecoveries of gas costs  totaling  $17.0  million,  $29.6 million and $10.4
million as of December 31, 1997, 1996 and 1995, respectively.

    Deferred Charges (Regulatory Assets).    The  Company generally accounts for
and reports costs in accordance with the  economic effect of rate actions by the
PPUC.  To this extent,  certain  costs  are recorded as deferred charges pending
their recovery in rates.   These  amounts  relate to previously-issued orders of
the PPUC and are of  a  nature  which,  in  the  opinion of the Company, will be
recoverable in future rates, based on such rate orders.  In addition to deferred
taxes collectible, which  represent  the  probable  future  rate recovery of the
previously unrecorded deferred  taxes  primarily  relating  to certain temporary
differences in the basis of utility plant not previously recorded because of the
regulatory rate  practices  of  the  PPUC,  the  following  deferred charges are
included as "Other" regulatory assets as of December 31, 1997 and 1996:
[CAPTION]
                                                   1997              1996 
                                                   (Thousands of Dollars)
    [S]                                          [C]               [C]
    Computer software costs                      $ 1,945           $ 1,293
    Early retirement plan charges                    618               664
    Low income usage reduction program               432               492
    Rate case expense                                356               588
    Extraordinary charges due to flooding            348               426
    Customer assistance program                      181               219
    Other postretirement benefits                    174                 -
    Corrosion control costs                           46               194
    Other                                            315               398

      Total                                      $ 4,415           $ 4,274

    The Company also records,  as  deferred  charges, the direct financing costs
incurred in  connection  with  the  issuance  of  long-term  debt  and equitably
amortizes such amounts over the life of the securities.






                                        -34-
<PAGE>

    Cash and Cash Equivalents.  For  the purposes of the consolidated statements
of  cash  flows,  the  Company  considers  all  highly  liquid  debt instruments
purchased, which generally have a maturity  of  three months or less, to be cash
equivalents.  Such instruments  are  carried  at cost, which approximates market
value.

    Income Taxes.  The Company  provides  for  deferred taxes in accordance with
the provisions of FASB Statement 109.  The components of the net deferred income
tax liability relative to  continuing  operations  as  of  December 31, 1997 and
1996, are shown below:
[CAPTION]
                                                   1997              1996 
                                                   (Thousands of Dollars)
    [S]                                          [C]               [C]
    Utility plant basis differences              $55,497           $53,132
    FERC Order 636 transition costs                 (394)              181
    Postretirement benefits                         (700)             (726)
    Take-or-pay costs, net                             -              (467)
    Operating reserves                            (1,181)           (1,406)
    Other                                         (1,015)           (1,595)

        Net deferred income tax liability        $52,207           $49,119

    The provision for income taxes relative to continuing operations consists of
the following components:
[CAPTION]
                                                  1997       1996       1995  
                                                    (Thousands of Dollars)
    [S]                                          [C]         [C]       [C]
    Included in operating expenses:
      Currently payable -
        Federal                                  $ 4,196    $ 3,235    $ 4,457
        State                                      1,357      1,361      1,169
          Total currently payable                  5,553      4,596      5,626
      Deferred, net -
        Federal                                    1,844      2,059        198
        State                                         96       (119)      (463)
          Total deferred, net                      1,940      1,940       (265)
      Amortization of investment tax credits        (172)      (172)      (193)
          Total included in operating expenses     7,321      6,364      5,168

    Included in other income, net:
      Currently payable -
        Federal                                       33        (59)       135
        State                                         11        (19)        43
          Total currently payable                     44        (78)       178
      Deferred, net -
        Federal                                        -          -          -
        State                                          -          -          -
          Total deferred, net                          -          -          -
          Total included in other income, net         44        (78)       178

          Total provision for income taxes       $ 7,365    $ 6,286    $ 5,346







                                        -35-
<PAGE>

    The total provision for income taxes relative to continuing operations shown
in the accompanying consolidated  statements  of  income differs from the amount
which would be computed by  applying  the  statutory  federal income tax rate to
income before income taxes.   The  following  table summarizes the major reasons
for this difference:
[CAPTION]
                                                   1997       1996       1995 
                                                    (Thousands of Dollars)
    [S]                                          [C]        [C]        [C]
    Income before income taxes                   $19,478    $15,802    $13,816
    Tax expense at statutory federal
      income tax rate                            $ 6,817    $ 5,531    $ 4,836
    Increases (reductions) in taxes
      resulting from -
        State income taxes, net of
          federal income tax benefit                 952        795        487
        Amortization of investment tax 
          credits                                   (172)      (172)      (193)
        Other, net                                  (232)       132        216

      Total provision for income taxes           $ 7,365    $ 6,286    $ 5,346

    Earnings Per Share.  In  February,  1997,  FASB Statement 128, "Earnings Per
Share" was issued.  The provisions  of this statement, which the Company adopted
in 1997, simplify the computation of  earnings  per share.  The adoption of FASB
Statement 128 did not have an impact on the Company since it has a basic capital
structure and has not issued any stock options or warrants.

    Reporting  Comprehensive  Income.    In   June,  1997,  FASB  Statement  130
"Reporting Comprehensive Income", was issued.  The provisions of this statement,
which  are  effective  for  fiscal  years  beginning  after  December  15, 1997,
establish standards for reporting  and  display  of comprehensive income and its
components in financial statements.   The reporting provisions of FASB Statement
130, which the Company will adopt in  1998,  are not expected to have a material
impact on the reported results of operations of the Company.

(2)  DISCONTINUED OPERATIONS

    Pursuant to an Asset  Purchase  Agreement  dated  April 26, 1995, as amended
(the "Agreement"), among  PEI,  PG  Energy,  American  Water Works Company, Inc.
("American") and Pennsylvania-American  Water Company ("Pennsylvania-American"),
a wholly-owned subsidiary of American, PEI  and PG Energy sold substantially all
of the assets, properties and rights  of PG Energy's water utility operations to
Pennsylvania-American on February 16, 1996.    Under the terms of the Agreement,
Pennsylvania-American paid PG Energy $414.3 million consisting of $262.1 million
in cash  and  the  assumption  of  $152.2  million  of  PG Energy's liabilities,
including $141.0 million of its long-term  debt.  PG Energy continued to operate
the water utility business until February 16,  1996.  The cash proceeds from the
sale of approximately $205.4 million, net of $56.7 million of income taxes, were
used by PEI and PG Energy  to  retire  debt,  to repurchase stock (see Note 4 of
these Notes to Consolidated Financial Statements), for construction expenditures
and for other working capital purposes.

    The sale price reflected a $6.5  million  premium over the book value of the
assets sold.  However,  after  transaction  costs  and  the  net effect of other
items, the sale resulted in an after tax loss of approximately $6.2 million, net
of the income from the water  operations  during the phase-out period (which for
financial reporting purposes was April 1, 1995, through February 15, 1996).  

                                        -36-
<PAGE>

    The accompanying consolidated financial statements reflect PG Energy's water
utility  operations  as  "discontinued  operations"  effective  March  31, 1995.
Interest charges relating to  indebtedness  of  PG Energy were allocated through
the date of disposition to the discontinued operations based on the relationship
of the gross water utility plant that was sold to the total of PG Energy's gross
gas and water utility plant.   This  is  the  same  method as was utilized by PG
Energy and the PPUC in establishing the revenue requirements of both PG Energy's
gas and  water  utility  operations.    None  of  the  dividends  on PG Energy's
preferred stock  nor  any  of  PEI's  interest  expense  were  allocated  to the
discontinued operations.

    Selected financial information for the  discontinued operations for the year
ended December 31, 1995, is set forth below:
[CAPTION]
                     Income From Discontinued Operations*
                           (Thousands of Dollars)
[S]                                                           [C]
Operating revenues                                            $ 15,640
Operating expenses, excluding income taxes                       8,875
Operating income before income taxes                             6,765
Income taxes                                                     1,403
Operating income                                                 5,362
Other income                                                         9
Allocated interest charges                                      (3,244)

Income from discontinued operations                           $  2,127

                 Net Cash Provided by Discontinued Operations*
                           (Thousands of Dollars)

Income from discontinued operations                           $  2,127
Noncash charges (credits) to income:
    Depreciation                                                 1,946
    Deferred treatment plant costs, net                            145
    Deferred income taxes                                          447
Changes in working capital, exclusive
  of long-term debt                                              1,648
Additions to utility plant                                      (2,276)
Net increase (decrease) in long-term debt                        1,010
Other, net                                                      (1,283)

Net cash provided by discontinued operations                  $  3,764

*   Reflects amounts only through  March  31,  1995,  the  effective date of the
    discontinuance  of  PG  Energy's  water  utility  operations  for  financial
    statement purposes.

(3)  RATE MATTERS

    Rate Increase.  By Order  adopted  December  19,  1996, the PPUC approved an
overall 5.3% increase in PG  Energy's  base  gas rates, designed to produce $7.5
million of additional annual  revenue,  effective  January 15,  1997.  Under the
terms of the Order, the billing for  the impact of the rate increase relative to
PG Energy's residential heating  customers,  which  totaled $2.4 million through
June 30, 1997, was deferred, without carrying charges, until July, 1997.  




                                        -37-
<PAGE>

    Gas Cost Adjustments.   The  provisions  of  the Pennsylvania Public Utility
Code require that the tariffs  of  local  gas distribution companies ("LDCs") be
adjusted on an annual basis, and, in the  case of larger LDCs such as PG Energy,
on an interim basis  when  circumstances  dictate,  to  reflect changes in their
purchased gas costs.  The procedure includes a process for the reconciliation of
actual gas costs incurred and actual revenues received and also provides for the
refund of any overcollections, plus  interest  thereon, or the recoupment of any
undercollections of gas costs. 

    In accordance with these procedures PG Energy has been permitted to make the
following changes since January  1,  1995,  to  the  gas  costs contained in its
tariff rates:
[CAPTION]
                                    Change in              Calculated
             Effective             Rate per MCF        Increase (Decrease)
                Date              From     To           in Annual Revenue 
           [S]                    [C]     [C]             [C]
           December 1, 1997       $4.49   $4.05           $(12,100,000)
           March 1, 1997           4.18    4.49              8,300,000
           December 1, 1996        3.01    4.18             32,400,000
           September 1, 1996       2.88    3.01              3,600,000
           June 1, 1996            2.75    2.88              3,400,000
           December 1, 1995        2.42    2.75              9,600,000
           May 15, 1995            3.68    2.42             (8,200,000)*

    * Represents estimated reduction in  revenue  for  the  period May 15, 1995,
      through November 30, 1995.

    The changes in gas rates on account of purchased gas costs have no effect on
earnings since the change in revenue is  offset by a corresponding change in the
cost of gas.

    Recovery of FERC Order 636 Transition Costs.   On October 15, 1993, the PPUC
adopted an annual purchased gas  cost  ("PGC") order (the "PGC Order") regarding
recovery of Federal Energy  Regulatory  Commission ("FERC") Order 636 transition
costs.  The PGC Order stated that  Account  191 and New Facility Costs (the "Gas
Transition Costs") were subject to recovery  through the annual PGC rate filings
made with the PPUC by PG Energy  and  other  LDCs.  The PGC Order also indicated
that while Gas Supply  Realignment  and  Stranded Costs (the "Non-Gas Transition
Costs") were not natural  gas  costs  eligible  for  recovery under the PGC rate
filing mechanism, such costs were subject  to  full recovery by LDCs through the
filing of a  tariff  pursuant  to  either  the  existing  surcharge or base rate
provisions of the Code.   The  PGC  Order  further  stated that all such filings
would be evaluated on a case-by-case basis.

    PG Energy was billed a total of  $1.3 million of Gas Transition Costs by its
interstate pipelines.  Of this amount,  $857,000 was recovered by PG Energy over
a twelve-month period ended January  31,  1995,  through  an increase in its PGC
rate, $252,000 was recovered by PG Energy  in  its annual PGC rate that the PPUC
approved effective December 1, 1995, and the remaining $213,000 was recovered by
PG Energy in its PGC rate that was effective December 1, 1996.

    By Order of the PPUC entered August 26, 1994, PG Energy began recovering the
Non-Gas Transition Costs that it estimates it will ultimately be billed pursuant
to FERC Order 636 through the billing  of a surcharge to its customers effective
September 12, 1994.  It  is  currently  estimated  that $10.7 million of Non-Gas
Transition Costs will be billed to  PG  Energy, generally over a six-year period
extending through January 1, 1999, of  which  $9.6 million had been billed to PG
Energy and $9.5 million had been recovered from its customers as of December 31,

                                        -38-
<PAGE>

1997.  In addition, during 1997 $1.1 million of take-or-pay costs refunded to PG
Energy by its  suppliers  were  applied  as  a  reduction  of  the total Non-Gas
Transition Costs recoverable from customers.    The remaining balance of Non-Gas
Transition Costs, which is presently estimated to be $134,000, is expected to be
recovered by PG Energy during 1998.

(4)  COMMON STOCK

    On July 28,  1994,  PEI  implemented  a  Customer  Stock  Purchase Plan (the
"Customer Plan") which provided the  residential  customers  of PG Energy with a
method of purchasing newly-issued shares of  PEI's common stock at a 5% discount
from the market price.  PEI  used  proceeds  from the issuance of shares through
the Customer Plan to purchase  common  stock  of  PG Energy.  PG Energy realized
$2.4 million from the issuance  of  common  stock  to PEI in connection with the
Customer Plan during 1995.   Effective  May  9, 1995, PEI suspended the Customer
Plan because of the significant  reduction in its capital requirements resulting
from the sale of PG  Energy's  water utility operations to Pennsylvania-American
and because of the proceeds received from such sale.  

    PG Energy also obtains funds from  the  sale  of  its common stock to PEI in
connection with PEI's Dividend Reinvestment and Stock Purchase Plan (the "DRP").
Effective May 9, 1995, PEI suspended the  cash investment feature of the DRP and
the 5% discount from the market price on the reinvestment of dividends under the
DRP because of the significant  reduction  in its capital requirements resulting
from the sale of PG  Energy's  water utility operations to Pennsylvania-American
and because of  the  proceeds  received  from  such  sale.   The cash investment
feature was, however, reinstated  effective  June  1,  1996.  Additionally, from
June 14, 1996, through December 31,  1996, PEI temporarily suspended the sale of
newly-issued stock to the DRP as a result of the proceeds received from the sale
of PG Energy's water utility operations, and during that period the DRP obtained
shares of PEI  common  stock  for  participants  through  open market purchases.
Effective January 1, 1997, PEI resumed selling newly-issued stock to the DRP.

    Although PEI resumed selling newly-issued stock to the DRP effective January
1, 1997, PG Energy did  not  issue  any  shares  of  its  common stock to PEI in
connection with the DRP  during  1997  because  of  the reduction in its capital
requirements resulting from the sale of  PG Energy's water utility operations to
Pennsylvania-American and  because  of  the  proceeds  received  from such sale.
During  1996  and  1995,   PG   Energy   realized  $340,000  and  $3.3  million,
respectively, from the issuance of  common  stock  to PEI in connection with the
DRP.

    On February 16, 1996, PG  Energy  repurchased 2,297,297 shares of its common
stock from PEI for an aggregate  consideration  of $85.0 million, with a portion
of the proceeds from the sale  of  its water utility operations to Pennsylvania-
American.

(5)  PREFERRED STOCK

    Preferred Stock of PG Energy  Subject  to Mandatory Redemption.  The holders
of the 5.75% cumulative preferred stock  have a noncumulative right each year to
tender to PG Energy and  to  require  it  to  purchase  at a per share price not
exceeding $100,  up  to  (a)  that  number  of  shares  of  the 5.75% cumulative
preferred stock which can be acquired for an aggregate purchase price of $80,000





                                        -39-
<PAGE>

less (b) the number of such  shares  which  PG Energy may already have purchased
during the year at a per share  price  of  not  more than $100.  During 1997 and
1996, PG Energy repurchased  992  and  9,408  shares, respectively, of its 5.75%
cumulative preferred stock (including 800  shares  redeemed in each of the years
in  accordance  with   annual   sinking   fund   provisions)  for  an  aggregate
consideration of $99,000 in  1997  and  $838,000  in  1996.   Eight hundred such
shares were acquired and cancelled by  PG  Energy in the year ended December 31,
1995, for an aggregate purchase price of $80,000.

    As of December  31,  1997,  the  sinking  fund  requirements  relative to PG
Energy's 5.75% cumulative preferred  stock  (the  only series of preferred stock
subject to mandatory  redemption  that  was  outstanding  as  of such date) were
$80,000 for each of the years  1998  through  2002.   At PG Energy's option, the
5.75% cumulative preferred stock may currently be redeemed at a price of $102.00
per share ($734,400 in the aggregate).

    Preferred Stock of PG Energy  Not  Subject  to Mandatory Redemption.  During
the year ended December 31, 1996, PG Energy repurchased 134,359 shares of its 9%
cumulative preferred stock, $100  par  value,  for an aggregate consideration of
$14.5 million, largely pursuant to  a  self  tender offer conducted during March
and April, 1996.  The 9% cumulative  preferred stock is redeemable at the option
of PG Energy, in whole or in part,  upon  not less than 30 days' notice, at $100
per share plus accrued dividends to the  date  of redemption and at a premium of
$8 per share if redeemed on or  before  September  14, 1998, and a premium of $4
per share if redeemed from September 15, 1998, to September 14, 1999.  

    During the year ended December 31, 1996, PG Energy repurchased 20,330 shares
of its 4.10%  cumulative  preferred  stock,  $100  par  value,  for an aggregate
consideration of $1.0 million, largely pursuant to a self tender offer conducted
during March and April,  1996.    During  the  year  ended December 31, 1997, PG
Energy repurchased 30,560 shares of its  4.10% cumulative preferred stock for an
aggregate consideration of $2.1 million, largely pursuant to a self tender offer
conducted during  April  and  May,  1997.    At  PG  Energy's  option, the 4.10%
cumulative preferred stock may currently  be  redeemed  at a redemption price of
$105.50 per share or for an aggregate redemption price of $5,181,105.

    Dividend Information.  The dividends on  the preferred stock of PG Energy in
each of the three years in the period ended December 31, 1997, were as follows:
[CAPTION]
         Series                        1997         1996         1995 
                                           (Thousands of Dollars)
          [S]                         [C]          [C]          [C]
          4.10%                       $  228       $  348       $  410
          5.75%                           44           72          103
          9.00%                        1,040        1,310        2,250

           Total                      $1,312       $1,730       $2,763

    Dividends on all series of PG Energy's preferred stock are cumulative and PG
Energy may not declare dividends on its  common stock if any dividends on shares
of preferred stock then outstanding are in default.








                                        -40-
<PAGE>

(6)  LONG-TERM DEBT

    Long-term debt consisted of  the  following  components at December 31, 1997
and 1996:
<TABLE>
<CAPTION>
                                                          1997          1996  
                                                        (Thousands of Dollars)
    <S>                                                 <C>           <C>
    First mortgage bonds -
       8.375% Series, due 2002                          $ 30,000      $ 30,000    
       9.23 % Series, due 1999                            10,000        10,000    
       9.34 % Series, due 2019                            15,000        15,000    
                                                          55,000        55,000    
    Notes -
      6.92% Senior Notes, due 2004                        25,000             -
      Term loan, due 2002                                 25,000             -    
      Bank borrowings, at weighted average interest
        rates of 6.11% and 6.18%, respectively (Note 8)   25,776        38,721    
      Note payable to PEI                                 23,500        31,400
                                                          99,276        70,121    
    Less current maturities and sinking
      fund requirements                                  (24,776)      (70,121)   
      Total long-term debt                              $129,500      $ 55,000    
</TABLE>
    On September 12, 1997, PG Energy  borrowed $25.0 million pursuant to a five-
year term loan agreement  dated  August  14,  1997  (the "Term Loan Agreement"),
which matures on August 14, 2002.  Borrowings under the Term Loan Agreement bear
interest at London Interbank  Offered  Rates  ("LIBOR")  plus one-quarter of one
percent.  Under the  terms  of  the  Term  Loan  Agreement, PG Energy can choose
interest rate periods of one, two, three  or six months.  PG Energy utilized the
proceeds from such loan to repay $25.0 million of its bank borrowings.

    On September 30, 1997, PG  Energy  issued  $25.0 million of its 6.92% Senior
Notes due September 30, 2004 (the "6.92%  Senior Notes").  The proceeds from the
issuance of the 6.92% Senior Notes were used by PG Energy to repay $25.0 million
of its bank borrowings.

    PG Energy can borrow up to $70.0 million from PEI through December 31, 1999,
at interest rates generally less  than  prime,  to repay bank borrowings and for
construction expenditures and other working  capital requirements, to the extent
that PEI has funds available for lending to  PG Energy.  As of December 31, 1997
and  1996,  PG  Energy  had  $23.5  million  and  $31.4  million,  respectively,
outstanding under its borrowing arrangement  with  PEI.  Such interim borrowings
by PG Energy from PEI will  be  repaid  with proceeds from bank borrowings by PG
Energy.
















                                        -41-
<PAGE>

    Maturities and Sinking Fund  Requirements.    As  of  December 31, 1997, the
aggregate annual maturities and sinking  fund requirements of long-term debt for
each of the next five years ending December 31, were:
[CAPTION]
                           Year              Amount   
                           [S]            [C]
                           1998           $ 24,776,000 (a)
                           1999           $ 34,500,000 (b)
                           2000           $          -
                           2001           $          -
                           2002           $ 55,000,000 (c)

    (a) Represents the $24.8 million of PG Energy bank borrowings outstanding as
        of December 31, 1997.

    (b) Includes PG Energy's 9.23% Series  First Mortgage Bonds in the principal
        amount of $10.0 million  due  September  1,  1999,  and $23.5 million of
        borrowings payable to PEI.

    (c) Represents the $25.0 million  of  borrowings  outstanding as of December
        31, 1997, under PG Energy's Term Loan Agreement due August 14, 2002, and
        PG Energy's 8.375% Series First  Mortgage  Bonds in the principal amount
        of $30.0 million due December 1, 2002.

(7)  DIVIDEND RESTRICTIONS

    The  preferred  stock  provisions  of   PG  Energy's  Restated  Articles  of
Incorporation and certain of  the  agreements  under  which PG Energy has issued
long-term debt provide for certain  dividend  restrictions.   As of December 31,
1997, $5,416,000 of  the  consolidated  retained  earnings  of  the Company were
restricted against the payment of cash  dividends on common stock under the most
restrictive of these covenants.

(8)  BANK NOTES PAYABLE

    The Company currently has  arrangements  for  eight  revolving bank lines of
credit with an aggregate borrowing  capacity  of $69.5 million which provide for
borrowings at interest  rates  generally  less  than  prime  and which mature at
various times during 1998 and 1999.

    Because of limitations imposed by the  terms of PG Energy's preferred stock,
PG Energy is prohibited, without the consent of the holders of a majority of the
outstanding shares of its preferred stock,  from issuing more than $12.0 million
of unsecured debt due on demand or within one year from issuance.  PG Energy had
$2.0 million due on demand or  within  one  year from issuance outstanding as of
December 31, 1997.













                                        -42-
<PAGE>

    Information relating to the  Company's  bank  lines of credit and borrowings
under those lines of credit is set forth below:
<TABLE>
<CAPTION>
                                                         As of December 31,      
                                                     1997       1996       1995  
                                                         (Thousands of Dollars)
     <S>                                           <C>        <C>        <C>
     Borrowings under lines of credit
       Short-term                                  $  2,170   $ 10,000   $ 10,000
       Long-term                                     25,776     38,721     65,801
                                                   $ 27,946   $ 48,721   $ 75,801

     Unused lines of credit
       Short-term                                  $  5,830   $      -   $      -
       Long-term                                     35,724     16,779      4,699
                                                   $ 41,554   $ 16,779   $  4,699

     Total lines of credit
       Prime rate                                  $  1,000   $      -   $      -
       Less than prime rate                          68,500     65,500     80,500
                                                   $ 69,500   $ 65,500   $ 80,500

     Short-term bank borrowings 
       Maximum amount outstanding                  $ 10,000   $ 10,000   $ 10,000
       Daily average amount outstanding            $  3,740   $  1,392   $  2,581
       Weighted daily average interest rate          6.343%     6.241%     6.513%
       Weighted average interest rate at year-end    6.536%     6.206%     6.334%
       Range of interest rates                       5.800-     5.875-     6.290-
                                                     8.500%     6.438%     6.660%
</TABLE>
(9)  POSTEMPLOYMENT BENEFITS

    Pension Benefits.  Substantially all  employees of the Company, except those
of Honesdale, are covered  by  PEI's  trusteed, noncontributory, defined benefit
pension plan.  Pension benefits are based  on years of service and average final
salary.  The Company's funding  policy  is  to contribute an amount necessary to
provide for benefits based on service to  date, as well as for benefits expected
to be earned in the future by current participants.  

    Under the terms of the  agreement  regarding  the  sale of PG Energy's water
utility operations to Pennsylvania-American, on February 16, 1996, Pennsylvania-
American assumed the accumulated benefit obligations relating to employees of PG
Energy who  accepted  employment  with  Pennsylvania-American  (the "Transferred
Employees").  In this regard, plan  assets  in  an amount equal to the actuarial
present  value  of  accumulated  plan   benefits  relative  to  the  Transferred
Employees, with  interest  from  February  16,  1996,  were  transferred  to the
American pension plan in June, 1996.  As a result of this and other actions, the
Company recognized, as of  December  31,  1995,  an estimated settlement loss of
$200,000 ($117,000 net of the  related  income tax benefit) and curtailment gain
of $2.7 million ($1.6 million net  of related income taxes) in its determination
of the estimated loss on the disposal of PG Energy's water utility operations.

    In December, 1995, the Company  offered  an Early Retirement Plan (the "1995
ERP") to its employees who would be 59  years  of age or older and had a minimum
of five years of service as of December 31, 1995.  Of the 63 eligible employees,
50 elected to accept this offer  and  retired as of December 31, 1995, resulting
in the recording, as of December 31, 1995, of an additional pension liability of
$1.6 million reflecting the increased costs  associated with the 1995 ERP.  Such
amount was charged to the estimated  loss  on  the disposal of PG Energy's water
utility operations.

                                        -43-
<PAGE>

    In January, 1998, as part of its cost reduction efforts, the Company offered
an Early Retirement Plan (the "1998 ERP")  to its 41 active employees who are or
will be at least age 59 on or before  March 31, 1998, and have a minimum of five
years of service on  or  before  February  28,  1998.    A total of 27 employees
elected to accept this offer and retire as of March 1, 1998.  The Company is not
presently able to estimate the related  termination benefits expected to be paid
as a result of the  1998  ERP.    However,  in accordance with FASB Statement 88
"Employers' Accounting  for  Settlements  and  Curtailments  of  Defined Benefit
Pension Plans and for  Termination  Benefits,"  the  Company  will record, as of
March 1, 1998,  an  additional  pension  liability  not  expected to exceed $1.4
million.  This liability will  reflect  the  increased costs associated with the
1998 ERP.  Since this  liability  will  be  offset  by an asset representing the
probable  future  rate  recovery  of  such  liability,  the  provisions  of FASB
Statement 88 are not  expected  to  have  a  significant effect on the Company's
results of operations.

    Net pension  costs  relative  to  continuing  operations,  including amounts
capitalized, were a  credit  of  $247,000  in  1997  and  costs  of $385,000 and
$353,000  in  1996  and  1995,  respectively.    The  following  items  were the
components of such net pension costs:
[CAPTION]
                                                 1997        1996        1995  
                                                    (Thousands of Dollars)
    [S]                                        [C]         [C]         [C]
    Present value of benefits earned 
      during the year                          $    622    $    799    $    430
    Interest cost on projected benefit 
      obligations                                 2,697       2,731       1,459
    Return on plan assets                        (7,231)     (5,875)     (1,502)
    Net amortization and deferral                  (122)        (79)        (34)
    Deferral of investment gain                   3,787       2,809           -
        Net pension cost                       $   (247)   $    385    $    353

    The funded status of the  plan  as  of  December  31,  1997 and 1996, was as
follows:
<TABLE>
<CAPTION>
                                                             1997        1996  
                                                          (Thousands of Dollars)
    <S>                                                    <C>         <C>
    Actuarial present value of the projected
      benefit obligations:
        Accumulated benefit obligations
          Vested                                           $ 32,843    $ 28,613    
          Nonvested                                              15          21    
            Total                                            32,858      28,634    
        Provision for future salary increases                 9,526       6,933    
        Projected benefit obligations                        42,384      35,567    
    Approximate market value of plan assets, 
      primarily invested in equities and bonds               45,106      39,000    
    Plan assets in excess of projected benefit
      obligations                                             2,722       3,433    
    Unrecognized net transition asset as of 
      January 1, 1986, being amortized over 20 years         (1,724)     (1,939)   
    Unrecognized prior service costs                          4,138       2,258    
    Unrecognized net gain                                    (4,315)     (4,259)   

    Prepaid (accrued) pension cost at year-end             $    821    $   (507)   




</TABLE>
                                        -44-
<PAGE>

    The assumptions used in determining pension obligations were:
[CAPTION]
                                                 1997       1996       1995 
         [S]                                    [C]        [C]        [C]
         Discount rate                          7.00 %     7.75 %     7.00 %
         Expected long-term rate of return
           on plan assets                       9.00 %     9.00 %     9.00 %
         Projected increase in future
           compensation levels                  5.00 %     5.00 %     5.00 %

    Other Postretirement Benefits.  In addition to pension benefits, the Company
provides certain health care and  life insurance benefits for retired employees.
All of the Company's employees,  except  those of Honesdale, may become eligible
for those benefits if they reach  retirement  age while working for the Company.
The Company records the cost of  retiree health care and life insurance benefits
as a liability  over  the  employees'  active  service  periods  instead of on a
benefits-paid basis.

    Under the terms of the  agreement  regarding  the  sale of PG Energy's water
utility operations to Pennsylvania-American, on February 16, 1996, Pennsylvania-
American assumed the Company's  obligation  to  provide  retiree health care and
life insurance benefits to  the  Transferred  Employees,  as  well  as 45% of PG
Energy's retired employees as of that date.    In this regard, plan assets in an
amount proportional to the actuarial  present value of accumulated plan benefits
relative to the Transferred Employees  and  45%  of  the retired employees as of
February 16,  1996,  were  transferred  to  trusts  established by Pennsylvania-
American  in  1997.    As  a  result  of  the  transfer,  early  retirement  and
displacement of employees, the  Company  recognized  an estimated settlement and
curtailment loss of $385,000 ($225,000 net of the related income tax benefit) as
part of the loss on the disposal of PG Energy's water utility operations.

    In conjunction with the 1995 ERP  offered  by  the Company to certain of its
employees, PG Energy recorded, as of  December 31, 1995, an additional liability
of $805,000, ($471,000 net  of  the  related  income tax benefit) reflecting the
cost of future health  care  benefits  required  to be recognized in conjunction
with the 1995 ERP.  Such amount was charged to the estimated loss on disposal of
PG Energy's water utility operations.

    The Company is not presently able to estimate the cost of the related future
health care benefits required to  be  recognized  as  a  result of the 1998 ERP.
However, in accordance with FASB  Statement  88  the  Company will record, as of
March 1, 1998, an additional other postretirement benefit liability not expected
to exceed $600,000.  This  liability  will reflect the increased costs resulting
from the 1998 ERP.  Since this liability will be offset by an asset representing
the probable future rate  recovery  of  such  liability,  the provisions of FASB
Statement 88 are not  expected  to  have  a  significant effect on the Company's
results of operations.












                                        -45-
<PAGE>

    The following items were the  components  of  the net cost of postretirement
benefits other than pensions  relative  to  continuing  operations for the years
1997, 1996 and 1995:
[CAPTION]
                                                   1997       1996       1995  
                                                     (Thousands of Dollars)
    [S]                                          [C]        [C]        [C]
    Present value of benefits earned during
      the year                                   $    282   $    253   $    127
    Interest cost on accumulated benefit
      obligation                                      673        506        577
    Return on plan assets                              23          -        (69)
    Net amortization and deferral                     278        314        391

    Net cost of postretirement benefits other
      than pensions                                 1,256      1,073      1,026
    Less disbursements for benefits                  (669)      (501)      (555)

    Increase in liability for postretirement
      benefits other than pensions               $    587   $    572   $    471

    Reconciliations  of  the  accumulated  benefit  obligation  to  the  accrued
liability for postretirement benefits  other  than  pensions  as of December 31,
1997 and 1996, follow:
[CAPTION]
                                                        1997       1996  
                                                    (Thousands of Dollars)
    [S]                                               [C]        [C]
    Accumulated benefit obligation:
      Retirees                                        $  5,682   $  4,359       
      Fully eligible active employees                    1,722      1,033       
      Other active employees                             2,307      1,552       
                                                         9,711      6,944       
    Plan assets at fair value                              580        169       
    Accumulated benefit obligation 
      in excess of plan assets                           9,131      6,775       
    Unrecognized transition obligation
      being amortized over 20 years                     (4,708)    (5,022)      
    Unrecognized net gain (loss)                        (1,390)     1,116       

    Accrued liability for postretirement
      benefits other than pensions                    $  3,033   $  2,869

    The assumptions used in determining other postretirement benefit obligations
were:
[CAPTION]
                                                 1997       1996       1995 
         [S]                                    [C]        [C]        [C]
         Discount rate                          7.00 %     7.75 %     7.00 %
         Expected long-term rate of return
           on plan assets                       9.00 %     9.00 %     9.00 %
         Projected increase in future
           compensation levels                  5.00 %     5.00 %     5.00 %

    It was also assumed that the per capita cost of covered health care benefits
would increase at an annual rate of 8% in 1998 and that this rate would decrease
gradually to 5-1/2% for the year 2003  and remain at that level thereafter.  The
health care cost trend rate assumption  had  a significant effect on the amounts
accrued.  To illustrate, increasing the assumed health care cost trend rate by 1


                                        -46-
<PAGE>

percentage point in each  year  would  increase  the transition obligation as of
January 1, 1998, by approximately $493,000  and the aggregate of the service and
interest cost components of the  net  cost of postretirement benefits other than
pensions for the year 1997 by approximately $58,000.

    Effective with its January 15, 1997, base rate increase (see Note 3 of these
Notes  to  Consolidated  Financial  Statements),  PG  Energy  began  funding and
recovering in rates its  accumulated  benefit  obligations with respect to other
postretirement benefits.  In this  regard,  the  PPUC Order adopted December 19,
1996, specified that any  excess  or  deficiency in other postretirement benefit
costs over the amount of such  costs  included in rates be deferred and included
in PG Energy's next rate  filing.    As  of  December 31, 1997, $174,000 of such
costs relative to the year  1997  had  been  so deferred.  In addition, $442,000
($259,000 net of related  income  taxes)  and  $441,000 ($258,000 net of related
income taxes) of additional cost incurred  in  1996 and 1995, respectively, as a
result of the adoption of  the  provisions  of  FASB Statement 106 were expensed
without any adjustment being made to PG Energy's gas rates.  

(10)  CAPITAL EXPENDITURES

    The Company estimates the cost of  its 1998 capital expenditure program will
be $36.3 million.  It  is  anticipated  that  such expenditures will be financed
with  internally  generated  funds  and  bank  borrowings  and,  to  the  extent
necessary, by the periodic issuance of stock and long-term debt.

(11)  COMMITMENTS AND CONTINGENCIES

    Environmental Matters.   PG  Energy,  like  many gas distribution companies,
once utilized manufactured gas plants  in  connection with providing gas service
to its customers.  None of  these  plants  has been in operation since 1972, and
several of the plant sites are no  longer  owned  by PG Energy.  Pursuant to the
Comprehensive Environmental Response,  Compensation  and  Liability  Act of 1980
("CERCLA"),  PG  Energy  filed  notices  with  the  United  States Environmental
Protection Agency (the "EPA") with respect  to  the former plant sites.  None of
the sites is or was formerly on  the proposed or final National Priorities List.
The EPA has conducted site inspections  and made preliminary assessments of each
site  and  has  concluded   that   no   further   remedial  action  is  planned.
Notwithstanding this determination by the EPA,  some of the sites may ultimately
require remediation.  One site that was owned by PG Energy from 1951 to 1967 and
at which it operated a manufactured gas  plant  from 1951 to 1954 was subject to
remediation in 1996.  The remediation  at  this site, which was performed by the
party from whom PG Energy  acquired  the  site  in 1951, required the removal of
materials from  two  former  gas  holders.    The  cost  of  such remediation is
purported to have been approximately $525,000, of which the party performing the
remediation is seeking to recover a material portion from PG Energy.  PG Energy,
however,  believes  that  any  liability  it  may  have  with  respect  to  such
remediation would be considerably less than  the  amount that the other party is
seeking.  While the final resolution of  the matter is uncertain, PG Energy does
not believe that it will have  any  material impact on its financial position or
results of operations.  Although the  conclusion  by the EPA that it anticipates
no further remedial action with respect to the sites at which PG Energy operated
manufactured gas plants does not  constitute a legal prohibition against further
regulatory action under CERCLA  or  other  applicable  federal or state law, the
Company does  not  believe  that  additional  costs,  if  any,  related to these
manufactured gas plant sites  would  be  material  to  its financial position or
results  of  operations  since  environmental  remediation  costs  generally are
recoverable through rates over a period of time.


                                        -47-
<PAGE>

(12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

    The following methods and assumptions  were  used to estimate the fair value
of each class of financial instruments  for  which it is practicable to estimate
that value:

  o Long-term debt.  The fair value  of  long-term debt has been estimated based
    on the quoted market price  as  of  the  respective dates for the portion of
    such debt which is publicly traded and,  with respect to the portion of such
    debt which is not publicly traded, on the estimated borrowing rate as of the
    respective dates  for  long-term  debt  of  comparable  credit  quality with
    similar terms and maturities.

  o Preferred stock subject  to  mandatory  redemption.    The  fair value of PG
    Energy's preferred stock subject to  mandatory redemption has been estimated
    based on the market value as of  the respective dates for preferred stock of
    comparable credit quality with similar terms and maturities.

    The carrying amounts and estimated  fair  values of financial instruments at
December 31, 1997 and 1996, were as follows:
[CAPTION]
                                               1997                 1996        
                                        Carrying Estimated   Carrying Estimated
                                         Amount  Fair Value   Amount  Fair Value
                                                 (Thousands of Dollars)
[S]                                     [C]      [C]         [C]      [C]
Long-term debt (including current
  portion)                              $130,776 $  136,914  $ 93,721 $   99,222
Preferred stock subject to
  mandatory redemption (including
  current portion)                           720        734       819        836

    The  Company  believes  that  the  regulatory  treatment  of  any  excess or
deficiency of fair value relative  to  the  carrying  amounts of these items, if
such items were settled at amounts approximating those above, would dictate that
these amounts  be  used  to  increase  or  reduce  its  rates  over a prescribed
amortization period.  Accordingly, any settlement would not result in a material
impact on the financial position or the results of operations of the Company.






















                                        -48-
<PAGE>

(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
[CAPTION]
                                                 QUARTER ENDED                  
                                March 31,  June 30,  September 30,  December 31,
                                  1997       1997        1997           1997    
                                (Thousands of Dollars, Except Per Share Amounts)
[S]                             [C]        [C]       [C]            [C]
Operating revenues              $  79,939  $ 33,229  $      16,276  $     61,123
Operating income                   10,864     2,104           (484)        9,479
Income (loss) from continuing
  operations                        8,421      (622)        (3,195)        6,197
Net income (loss)               $   8,421  $   (622) $      (3,195) $      6,197

Earnings (loss) per share
  of common stock:
 Continuing operations          $    2.54  $   (.19) $        (.96) $       1.87
 Discount (premium) on
   repurchase/redemption
   of preferred stock                   -       .24           (.01)            -
 Earnings (loss) per share of
   common stock                 $    2.54  $    .05  $        (.97) $       1.87

[CAPTION]
                                                 QUARTER ENDED                  
                                March 31,  June 30,  September 30,  December 31,
                                  1996       1996        1996           1996    
                                (Thousands of Dollars, Except Per Share Amounts)
[S]                             [C]        [C]       [C]            [C]
Operating revenues              $  69,415  $ 25,457  $      13,998  $     51,724
Operating income (loss)            10,033       803           (659)        6,539
Income (loss) from continuing
  operations                        7,485      (757)        (2,690)        3,748
Loss with respect to
  discontinued operations            (365)      (21)             -            23
Net income (loss)               $   7,120  $   (778) $      (2,690) $      3,771

Earnings (loss) per share
  of common stock: (a)
 Continuing operations          $    1.67  $   (.23) $        (.81) $       1.13
 Discontinued operations             (.08)     (.01)             -           .01
 Net income (loss) before
   discount (premium) on
   repurchase/redemption of
   preferred stock                   1.59      (.24)          (.81)         1.14
 Discount (premium) on
   repurchase/redemption of
   preferred stock                      -      (.39)          (.03)          .01
 Earnings (loss) per share of
   common stock (a)             $    1.59  $   (.63) $        (.84) $       1.15



(a)  The total of the earnings  per  share  for  the quarters does not equal the
     earnings per share for  the  year,  as  shown elsewhere in the consolidated
     financial statements and supplementary data of  this report, as a result of
     PG Energy's repurchase of shares of common stock during 1996.

    Because of the seasonal nature of  the Company's gas heating business, there
are substantial variations in operations reported on a quarterly basis.

                                        -49-
<PAGE>

ITEM 9.  CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
         FINANCIAL DISCLOSURE

    In its Form 8-K  dated  May  22,  1997,  the  Company  reported a "Change in
Registrant's Certifying Accountant"  for  its  fiscal  year beginning January 1,
1997.  Because the Form  8-K  dated  May  22,  1997,  did not include a reported
disagreement on any matter  of  accounting  principles or practices or financial
statement disclosure, no disclosure pursuant  to  Item  304 of Regulation S-K of
the Commission's Rules and Regulations is required in Item 9.


















































                                        -50-
<PAGE>

                                    PART IV


ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K

(a)  1.  Financial Statements
             The  following   consolidated   financial   statements,   notes  to
         consolidated   financial   statements   and   reports   of  independent
         accountants for PG Energy and its subsidiary are presented in Item 8 of
         this Form 10-K.
                                                                            Page

           Report of Independent Accountants on the Consolidated
             Financial Statements as of December 31, 1997 . . . . . . . .    25 

           Report of Independent Accountants on the Financial
             Statements as of December 31, 1996 . . . . . . . . . . . . .    26

           Consolidated Statements of Income for each of the three years 
             in the period ended December 31, 1997. . . . . . . . . . . .    27

           Consolidated Balance Sheets as of December 31, 1997 and 1996 .    28

           Consolidated Statements of Cash Flows for each of the three 
             years in the period ended December 31, 1997. . . . . . . . .    30

           Consolidated Statements of Capitalization as of December 31, 
             1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . .    31

           Consolidated Statements of Common Shareholder's Investment
             for each of the three years in the period ended December
             31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . .    32

           Notes to Consolidated Financial Statements . . . . . . . . . .    33

     2.  Financial Statement Schedules
             The following  consolidated  financial  statement  schedule  for PG
         Energy and its  subsidiary  is  filed  as  a  part  of  this Form 10-K.
         Schedules  not  included  have  been   omitted  because  they  are  not
         applicable or the  required  information  is  shown in the consolidated
         financial statements or notes thereto.

           Schedule Number                                                  Page
             II  Valuation and Qualifying Accounts for the three-year
                   period ended December 31, 1997 . . . . . . . . . . . . .  54

     3.  Exhibits
             See "Index to Exhibits" located  on  page  56  for a listing of all
         exhibits filed herein  or  incorporated  by  reference  to a previously
         filed registration statement or report with the Securities and Exchange
         Commission.








                                        -51-
<PAGE>
<TABLE>
<CAPTION>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - continued
<S>  <C>
(b)  Reports on Form 8-K
         No reports on Form 8-K were filed during the last quarter of 1997.

(c)  Executive Compensation Plans and Arrangements

     The following listing includes  the  Company's executive compensation plans
     and arrangements in effect as of December 31, 1997.

     Exhibit

     10-27  Form of Change in Control  Agreement  between PEI and certain of its
            Officers -- filed as Exhibit  10-34  to PG Energy's Annual Report on
            Form 10-K for 1989, File No. 1-3490.

     10-28  First Amendment to Form of Change  in Control Agreement, dated as of
            May 24, 1995, between PEI  and  certain  of its Officers -- filed as
            Exhibit 10-29 to PEI's Annual Report on Form 10-K for 1995, File No.
            0-7812.

     10-29  Agreement, dated as of March 15, 1991, by and between PEI, PG Energy
            and Robert L. Jones --  filed  as  Exhibit  No. 10-38 to PG Energy's
            Annual Report on Form 10-K for 1990, File No. 1-3490.

     10-30  Employment Agreement effective  September  1,  1995, between PEI and
            Dean T. Casaday -- filed  as  Exhibit 10-2 to PEI's Quarterly Report
            on Form 10-Q for  the  quarter  ended  September  30, 1995, File No.
            0-7812.

     10-31  Supplemental Retirement Agreement,  dated  as  of December 23, 1991,
            between PEI and Dean T. Casaday  --  filed as Exhibit 10-17 to PEI's
            Common Stock Form S-2, Registration No. 33-43382.

     10-32  First Amendment to the  Supplemental  Retirement Agreement, dated as
            of September 1, 1994, between  PEI  and  Dean T. Casaday -- filed as
            Exhibit 10-37 to PEI's Annual Report on Form 10-K for 1994, File No.
            0-7812.

     10-33  Pennsylvania Enterprises,  Inc.  1992  Stock  Option Plan, effective
            June 3, 1992 -- filed  as  Exhibit  A to PEI's 1993 definitive Proxy
            Statement, File No. 0-7812.

     10-34  Form of Stock Option Agreement,  dated  as of June 20, 1997, between
            PEI and certain of its  Officers  --  filed as Exhibit 10-1 to PEI's
            Quarterly Report on Form  10-Q  for  the quarter ended September 30,
            1997, File No. 0-7812.

     10-35  Form of Stock Option Agreement,  dated  as of June 20, 1997, between
            PEI and certain of  its  non-employee  directors -- filed as Exhibit
            10-2 to PEI's Quarterly Report  on  Form  10-Q for the quarter ended
            September 30, 1997, File No. 0-7812.

     10-36  Pennsylvania Enterprises, Inc.  Stock  Incentive Plan, effective May
            14, 1997 --  filed  as  Exhibit  A  to  PEI's  1997 definitive Proxy
            Statement, File No. 0-7812.


</TABLE>
                                        -52-
<PAGE>

     Exhibit

     10-37  Employment Agreement dated as of June 26, 1996, by and among PEI, PG
            Energy and Kenneth L.  Pollock  --  filed  as  Exhibit 10-1 to PEI's
            Quarterly Report on Form  10-Q  for  the quarter ended September 30,
            1996, File No. 0-7812.

     10-38  Employment Agreement dated as of August  28, 1996, by and among PEI,
            PG Energy and Thomas  F.  Karam  --  filed  as Exhibit 10-2 to PEI's
            Quarterly Report on Form  10-Q  for  the quarter ended September 30,
            1996, File No. 0-7812.

     10-39  Director Deferred Compensation Plan  dated  as  of April 23, 1997 --
            filed as Exhibit 10-1 to PEI's Quarterly Report on Form 10-Q for the
            quarter ended June 30, 1997, File No. 0-7812.

     10-40  First Amendment to the  Director Deferred Compensation Plan, Amended
            and Restated as of November  19,  1997  -- filed as Exhibit 10-40 to
            PEI's Annual Report on Form 10-K for 1997, File No. 0-7812.

     10-41  1995 Directors' Stock Compensation  Plan, effective January 18, 1995
            -- filed as Exhibit A to PEI's 1995 definitive Proxy Statement, File
            No. 0-7812.

     10-42  First Amendment  to  the  1995  Directors'  Stock Compensation Plan,
            amended and restated effective as  of  November 19, 1997 -- filed as
            Exhibit 10-42 to PEI's Annual Report on Form 10-K for 1997, File No.
            0-7812. 

(d)  Statements Excluded from Annual Report to Shareholders
         Not applicable.




























                                        -53-
<PAGE>

Schedule II


























































                                        -54-
<PAGE>

                                  SIGNATURES

    Pursuant to the  requirements  of  Section  13  or  15(d)  of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
                                                         PG ENERGY INC.          
                                                         (Registrant)
<S>       <C>
Date:     March 5, 1998                  By:         /s/ Thomas F. Karam         
                                                         Thomas F. Karam
                                            President and Chief Executive Officer
                                                 (Principal Executive Officer)

Date:     March 5, 1998                  By:        /s/ John F. Kell, Jr.        
                                                        John F. Kell, Jr.
                                             Vice President, Financial Services
                                                 (Principal Financial Officer
                                              and Principal Accounting Officer)

    Pursuant to the requirements of  the  Securities  Exchange Act of 1934, this
report has  been  signed  below  by  the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.

          Signature                         Capacity                   Date    


   /s/ Kenneth L. Pollock          Chairman of the Board of       March 5, 1998
       Kenneth L. Pollock           Directors

   /s/ William D. Davis            Vice Chairman of the Board     March 5, 1998
       William D. Davis             of Directors

   /s/ Thomas F. Karam             Director, President and        March 5, 1998
       Thomas F. Karam              Chief Executive Officer

  /s/ Paul R. Freeman                     Director                March 5, 1998
      Paul R. Freeman

   /s/ Robert J. Keating                  Director                March 5, 1998
       Robert J. Keating

   /s/ John D. McCarthy                   Director                March 5, 1998
       John D. McCarthy

  /s/ John D. McCarthy, Jr.               Director                March 5, 1998
      John D. McCarthy, Jr.

  /s/ Kenneth M. Pollock                  Director                March 5, 1998
      Kenneth M. Pollock

  /s/ Richard A. Rose, Jr.                Director                March 5, 1998
      Richard A. Rose, Jr.

   /s/ James A. Ross                      Director                March 5, 1998
       James A. Ross

   /s/ Ronald W. Simms                    Director                March 5, 1998
       Ronald W. Simms

</TABLE>
                                        -55-
<PAGE>

                                INDEX TO EXHIBITS
Exhibit
Number

(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:

 2-1        Asset Purchase Agreement dated as  of  April 26, 1995, among PEI, PG
            Energy,  American  Water  Works  Company,  Inc.,  and  Pennsylvania-
            American Water  Company  --  filed  as  Exhibit  2-1  to PG Energy's
            Quarterly Report on Form 10-Q for  the quarter ended March 31, 1995,
            File No. 1-3490.

(3) Articles of Incorporation and By-Laws:

 3-1        Restated Articles of Incorporation  --  filed  as  Exhibit 3-1 to PG
            Energy's Annual Report on Form 10-K for 1995, File No. 1-3490.

 3-2        By-Laws of PG Energy, as amended and restated -- filed as Exhibit 3-
            2 to PG Energy's Annual Report  on  Form  10-K for 1995, File No. 1-
            3490.

(4) Instruments Defining the Rights of Security Holders, Including Debentures:

 4-1        Indenture of Mortgage and Deed of Trust, dated as of March 15, 1946,
            between Scranton-Spring Brook Water  Service Company (now PG Energy)
            and First Trust  of  New  York,  National  Association, as Successor
            Trustee to Morgan Guaranty  Trust  Company  of  New York -- filed as
            Exhibit 2(c) to PG Energy's Bond Form S-7, Registration No. 2-55419.

 4-2        Fourth Supplemental Indenture, dated as  of  March 15, 1952 -- filed
            as Exhibit 2(d) to PG  Energy's  Bond  Form S-7, Registration No. 2-
            55419.

 4-3        Ninth Supplemental Indenture, dated as of March 15, 1957 -- filed as
            Exhibit 2(e) to PG Energy's Bond Form S-7, Registration No. 2-55419.

 4-4        Tenth Supplemental Indenture, dated as of September 1, 1958 -- filed
            as Exhibit 2(f) to PG  Energy's  Bond  Form S-7, Registration No. 2-
            55419.

 4-5        Twelfth Supplemental Indenture, dated as  of  July 15, 1960 -- filed
            as Exhibit 2(g) to PG  Energy's  Bond  Form S-7, Registration No. 2-
            55419.
 
 4-6        Fourteenth Supplemental Indenture, dated as  of December 15, 1961 --
            filed as Exhibit 2(h) to PG Energy's Bond Form S-7, Registration No.
            2-55419.
 
 4-7        Fifteenth Supplemental Indenture, dated  as  of December 15, 1963 --
            filed as Exhibit 2(i) to PG Energy's Bond Form S-7, Registration No.
            2-55419.

 4-8        Sixteenth Supplemental Indenture, dated as of June 15, 1966 -- filed
            as Exhibit 2(j) to PG  Energy's  Bond  Form S-7, Registration No. 2-
            55419.

 4-9        Seventeenth Supplemental Indenture, dated as  of October 15, 1967 --
            filed as Exhibit 2(k) to PG Energy's Bond Form S-7, Registration No.
            2-55419.

                                        -56-
<PAGE>

Exhibit
Number

 4-10       Eighteenth Supplemental Indenture, dated as  of May 1, 1970 -- filed
            as Exhibit 2(1) to PG  Energy's  Bond  Form S-7, Registration No. 2-
            55419.

 4-11       Nineteenth Supplemental Indenture, dated as of June 1, 1972 -- filed
            as Exhibit 2(m) to PG  Energy's  Bond  Form S-7, Registration No. 2-
            55419.

 4-12       Twentieth Supplemental Indenture, dated as of March 1, 1976 -- filed
            as Exhibit 2(n) to PG  Energy's  Bond  Form S-7, Registration No. 2-
            55419.

 4-13       Twenty-first Supplemental Indenture, dated as of December 1, 1976 --
            filed as Exhibit 4-16 to PG  Energy's Annual Report on Form 10-K for
            1982, File No. 1-3490.

 4-14       Twenty-second Supplemental Indenture, dated as of August 15, 1989 --
            filed as Exhibit 4-22 to PG  Energy's Annual Report on Form 10-K for
            1989, File No. 1-3490.

 4-15       Twenty-third Supplemental Indenture, dated  as of August 15, 1989 --
            filed as Exhibit 4-23 to PG  Energy's Annual Report on Form 10-K for
            1989, File No. 1-3490.

 4-16       Twenty-fourth Supplemental Indenture, dated  as of September 1, 1991
            -- filed as Exhibit 4-3 to PEI's Common Stock Form S-2, Registration
            No. 33-43382.

 4-17       Twenty-fifth Supplemental Indenture, dated  as  of September 1, 1992
            -- filed as Exhibit 4-1 to PG Energy's Quarterly Report on Form 10-Q
            for the quarter ended September 30, 1992, File No. 1-3490.

 4-18       Twenty-sixth Supplemental Indenture, dated as of December 1, 1992 --
            filed as Exhibit 4-20 to PG Energy's Bond Form S-2, Registration No.
            33-54278.

 4-19       Twenty-seventh Supplemental Indenture, dated  as of December 1, 1992
            -- filed as Exhibit 4-19 to  PG  Energy's Annual Report on Form 10-K
            for 1992, File No. 0-7812.

 4-20       Twenty-eighth Supplemental Indenture, dated  as  of December 1, 1993
            -- filed as Exhibit 4-20 to  PG  Energy's Annual Report on Form 10-K
            for 1993, File No. 1-3490.

 4-21       Twenty-ninth Supplemental Indenture, dated as of November 1, 1994 --
            filed as Exhibit 4-21 to PG  Energy's Annual Report on Form 10-K for
            1994, File No. 1-3490.

 4-22       Thirtieth Supplemental Indenture, dated  as  of  December 1, 1995 --
            filed as Exhibit 4-22 to PG  Energy's Annual Report on Form 10-K for
            1995, File No. 1-3490.


            NOTE:  The First,  Second,  Third,  Fifth,  Sixth,  Seventh, Eighth,
                   Eleventh and Thirteenth Supplemental Indentures merely convey
                   additional properties to the Trustee.

                                        -57-
<PAGE>

Exhibit
Number

(10) Material Contracts:

10-1        Service Agreement for storage service under Rate Schedule LGA, dated
            August 6, 1974, between PG Energy and Transcontinental Gas Pipe Line
            Corporation -- filed as Exhibit 10-3 to PG Energy's Annual Report on
            Form 10-K for 1984, File No. 1-3490.

10-2        Service Agreement for transportation service under Rate Schedule FT,
            dated  February   1,   1992,   by   and   between   PG   Energy  and
            Transcontinental Gas Pipe Line Corporation  -- filed as Exhibit 10-4
            to PG Energy's Annual Report on Form 10-K for 1991, File No. 1-3490.

10-3        Service Agreement  for  storage  service  under  Rate Schedule SS-2,
            dated April 1, 1990, between PG Energy and Transcontinental Gas Pipe
            Line Corporation -- filed as Exhibit 10-8 to PEI's Common Stock Form
            S-2, Registration No. 33-43382.

10-4        Service Agreement for sales  service  under  Rate Schedule FS, dated
            August 1, 1991, between PG Energy and Transcontinental Gas Pipe Line
            Corporation -- filed as Exhibit 10-6 to PG Energy's Annual Report on
            Form 10-K for 1991, File No. 1-3490.

10-5        Service Agreement for transportation service under Rate Schedule FT,
            dated August 1,  1991,  between  PG  Energy and Transcontinental Gas
            Pipe Line Corporation  --  filed  as  Exhibit  10-10 to PEI's Common
            Stock Form S-2, Registration No. 33-43382.

10-6        Service Agreement for transportation service under Rate Schedule IT,
            dated January 31, 1992,  between  PG Energy and Transcontinental Gas
            Pipe Line Corporation -- filed as Exhibit 10-8 to PG Energy's Annual
            Report on Form 10-K for 1991, File No. 1-3490.

10-7        Service Agreement for storage service under Rate Schedule LSS, dated
            October 1, 1993, by and  between  PG Energy and Transcontinental Gas
            Pipe Line Corporation -- filed as Exhibit 10-7 to PG Energy's Annual
            Report on Form 10-K for 1993, File No. 1-3490.

10-8        Service Agreement for storage service under Rate Schedule GSS, dated
            October 1, 1993, by and  between  PG Energy and Transcontinental Gas
            Pipeline Corporation Company -- filed as Exhibit 10-8 to PG Energy's
            Annual Report on Form 10-K for 1993, File No. 1-3490.

10-9        Service Agreement for transportation service under Rate Schedule FT,
            dated April 1, 1995, by  and  between PG Energy and Transcontinental
            Gas Pipe Line Corporation --  filed  as  Exhibit 10-1 to PG Energy's
            Quarterly Report on Form 10-Q for  the quarter ended March 31, 1995,
            File No. 1-3490.

10-10       Service Agreement  for  transportation  service  under Rate Schedule
            FTPO, dated  July  10,  1997,  effective  November  1,  1997, by and
            between PG Energy and Transcontinental  Gas Pipe Line Corporation --
            filed herewith.




                                        -58-
<PAGE>

Exhibit
Number

10-11       Service Agreement  for  transportation  service  under Rate Schedule
            FTS, dated November 1, 1993,  by  and between PG Energy and Columbia
            Gas Transmission Corporation -- filed as Exhibit 10-9 to PG Energy's
            Annual Report on Form 10-K for 1993, File No. 1-3490.

10-12       Service Agreement  for  transportation  service  under Rate Schedule
            SST, dated November 1, 1993,  by  and between PG Energy and Columbia
            Gas  Transmission  Corporation  --  filed  as  Exhibit  10-10  to PG
            Energy's Annual Report on Form 10-K for 1993, File No. 1-3490.

10-13       Service Agreement for storage service under Rate Schedule FSS, dated
            November  1,  1993,  by  and  between  PG  Energy  and  Columbia Gas
            Transmission Corporation -- filed  as  Exhibit  10-11 to PG Energy's
            Annual Report on Form 10-K for 1993, File No. 1-3490.

10-14       Service Agreement  for  transportation  service  under Rate Schedule
            FTS-1, dated November 1, 1993, by and between PG Energy and Columbia
            Gulf Transmission Company -- filed  as  Exhibit 10-12 to PG Energy's
            Annual Report on Form 10-K for 1993, File No. 1-3490.

10-15       Service Agreement  for  transportation  service  under Rate Schedule
            ITS-1, dated November 1, 1993, by and between PG Energy and Columbia
            Gulf Transmission Company -- filed  as  Exhibit 10-13 to PG Energy's
            Annual Report on Form 10-K for 1993, File No. 1-3490.

10-16       Service Agreement  for  transportation  service  under Rate Schedule
            ITS, dated November 1, 1993,  by  and between PG Energy and Columbia
            Gas  Transmission  Corporation  --  filed  as  Exhibit  10-14  to PG
            Energy's Annual Report on Form 10-K for 1993, File No. 1-3490.

10-17       Service Agreement  (Contract  No.  946)  for  transportation service
            under Rate Schedule FT-A, dated September 1, 1993, by and between PG
            Energy and Tennessee Gas Pipeline  Company  -- filed as Exhibit 10-1
            to PG Energy's Quarterly Report  on  Form 10-Q for the quarter ended
            September 30, 1993, File No. 1-3490.

10-18       Service  Agreement  (Service  Package  No.  171)  for transportation
            service under Rate Schedule  FT-A,  dated  September 1, 1993, by and
            between PG Energy and  Tennessee  Gas  Pipeline  Company -- filed as
            Exhibit 10-2 to PG Energy's  Quarterly  Report  on Form 10-Q for the
            quarter ended September 30, 1993, File No. 1-3490.

10-19       Service  Agreement  (Service  Package  No.  187)  for transportation
            service under Rate Schedule  FT-A,  dated  September 1, 1993, by and
            between PG Energy and  Tennessee  Gas  Pipeline  Company -- filed as
            Exhibit 10-3 to PG Energy's  Quarterly  Report  on Form 10-Q for the
            quarter ended September 30, 1993, File No. 1-3490.

10-20       Service  Agreement  (Service  Package  No.  190)  for transportation
            service under Rate Schedule  FT-A,  dated  September 1, 1993, by and
            between PG Energy and Tennessee Gas Pipeline -- filed as Exhibit 10-
            4 to PG Energy's Quarterly Report on Form 10-Q for the quarter ended
            September 30, 1993, File No. 1-3490.



                                        -59-
<PAGE>

Exhibit
Number

10-21       Service Agreement (Contract No. 2289) for storage service under Rate
            Schedule FS, dated September 1,  1993,  by and between PG Energy and
            Tennessee Gas Pipeline  --  filed  as  Exhibit  10-5  to PG Energy's
            Quarterly Report on Form  10-Q  for  the quarter ended September 30,
            1993, File No. 1-3490.

10-22       Service  Agreement  for  storage  service,  dated  April  15,  1997,
            effective November 1, 1997, by  and  between  PG Energy and New York
            State Electric & Gas Corporation -- filed herewith.

10-23       Service Agreement for transportation service under Rate Schedule FT,
            dated April 30, 1997, effective November  1, 1997, by and between PG
            Energy and CNG Transmission Corporation -- filed herewith.

10-24       Bond Purchase Agreement,  dated  September  1,  1989, relating to PG
            Energy's First  Mortgage  Bonds  9.23%  Series  due  1999  and First
            Mortgage Bonds 9.34% Series  due  2019 among Allstate Life Insurance
            Company, Allstate Life Insurance Company  of  New York and PG Energy
            -- filed as Exhibit 10-33 to  PG Energy's Annual Report on Form 10-K
            for 1989, File No. 1-3490.

10-25       Term Loan Agreement  dated  August  14,  1997,  among PG Energy, the
            Banks parties thereto  and  PNC  Bank,  National Association, in its
            capacity as Agent for the Banks -- filed herewith

10-26       6.92% Senior Notes  Purchase  Agreement,  dated  September 30, 1997,
            between PG Energy and the Purchasers -- filed herewith

10-27       Form of Change in Control  Agreement  between PEI and certain of its
            Officers -- filed as Exhibit  10-34  to PG Energy's Annual Report on
            Form 10-K for 1989, File No. 1-3490.

10-28       First Amendment to Form of Change  in Control Agreement, dated as of
            May 24, 1995, between PEI  and  certain  of its Officers -- filed as
            Exhibit 10-29 to PEI's Annual Report on Form 10-K for 1995, File No.
            0-7812.

10-29       Agreement, dated as of March 15, 1991, by and between PEI, PG Energy
            and Robert L. Jones -- filed  as Exhibit 10-38 to PG Energy's Annual
            Report on Form 10-K for 1990, File No. 1-3490.

10-30       Employment Agreement, effective September  1,  1995, between PEI and
            Dean T. Casaday -- filed  as  Exhibit 10-2 to PEI's Quarterly Report
            on Form 10-Q for  the  Quarter  ended  September  30, 1995, File No.
            0-7812. 

10-31       Supplemental Retirement Agreement,  dated  as  of December 23, 1991,
            between PEI and Dean T. Casaday  --  filed as Exhibit 10-17 to PEI's
            Common Stock Form S-2, Registration No. 33-43382.

10-32       First Amendment to the  Supplemental  Retirement Agreement, dated as
            of September 1, 1994, between  PEI  and  Dean T. Casaday -- filed as
            Exhibit 10-37 to PEI's Annual Report on Form 10-K for 1994, File No.
            0-7812.


                                        -60-
<PAGE>

Exhibit
Number

10-33       Pennsylvania Enterprises,  Inc.  1992  Stock  Option Plan, effective
            June 3, 1992 -- filed  as  Exhibit  A to PEI's 1993 definitive Proxy
            Statement, File No. 0-7812.

10-34       Form of Stock Option Agreement,  dated  as of June 20, 1997, between
            PEI and certain of its  Officers  --  filed as Exhibit 10-1 to PEI's
            Quarterly Report on Form  10-Q  for  the quarter ended September 30,
            1997, File No. 0-7812.

10-35       Form of Stock Option Agreement,  dated  as of June 20, 1997, between
            PEI and certain of  its  non-employee  directors -- filed as Exhibit
            10-2 to PEI's Quarterly Report  on  Form  10-Q for the quarter ended
            September 30, 1997, File No. 0-7812.

10-36       Pennsylvania Enterprises, Inc.  Stock  Incentive Plan, effective May
            14, 1997 --  filed  as  Exhibit  A  to  PEI's  1997 definitive Proxy
            Statement, File No. 0-7812.

10-37       Employment Agreement dated as of June 26, 1996, by and among PEI, PG
            Energy and Kenneth L.  Pollock  --  filed  as  Exhibit 10-1 to PEI's
            Quarterly Report on Form  10-Q  for  the quarter ended September 30,
            1996, File No. 0-7812.

10-38       Employment Agreement dated as of August  28, 1996, by and among PEI,
            PG Energy and Thomas  F.  Karam  --  filed  as Exhibit 10-2 to PEI's
            Quarterly Report on Form  10-Q  for  the quarter ended September 30,
            1996, File No. 0-7812.

10-39       Director Deferred Compensation Plan  dated  as  of April 23, 1997 --
            filed as Exhibit 10-1 to PEI's Quarterly Report on Form 10-Q for the
            quarter ended June 30, 1997, File No. 0-7812.

10-40       First Amendment to the  Director Deferred Compensation Plan, amended
            and restated effective as of  November  19, 1997 -- filed as Exhibit
            10-40 to PEI's Annual Report on Form 10-K for 1997, File No. 0-7812.

10-41       1995 Directors' Stock Compensation  Plan, effective January 18, 1995
            -- filed as Exhibit A to PEI's 1995 definitive Proxy Statement, File
            No. 0-7812.

10-42       First Amendment  to  the  1995  Directors'  Stock Compensation Plan,
            amended and restated effective as  of  November 19, 1997 -- filed as
            Exhibit 10-42 to PEI's Annual Report on Form 10-K for 1997, File No.
            0-7812. 

(21) Subsidiaries of the Registrant:

21-1        Subsidiaries of the Registrant -- filed herewith.








                                        -61-
<PAGE>

                                  TABLE OF CONTENTS



PART I                                                                     PAGE

    Item  l.  BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . .   1

    Item  2.  PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . .  12

    Item  3.  LEGAL PROCEEDINGS  . . . . . . . . . . . . . . . . . . . . .  12

    Item  4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  . . . .  12


PART II

    Item  5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
                STOCKHOLDER MATTERS  . . . . . . . . . . . . . . . . . . .  13

    Item  6.  SELECTED FINANCIAL DATA  . . . . . . . . . . . . . . . . . .   *

    Item  7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                CONDITION AND RESULTS OF OPERATIONS  . . . . . . . . . . .  14

    Item  8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  . . . . . . . .  24

    Item  9.  CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                ACCOUNTING AND FINANCIAL DISCLOSURE  . . . . . . . . . . .  50


PART III

    Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . .   *

    Item 11.  EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . .   *

    Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                OWNERS AND MANAGEMENT  . . . . . . . . . . . . . . . . . .   *

    Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . .   *


PART IV

    Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
                ON FORM 8-K  . . . . . . . . . . . . . . . . . . . . . . .  51**

              SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . .  55


________________________
  * These items have been omitted  from  this  Form 10-K as Registrant meets the
    conditions set forth in General  Instructions  I(1)(a)  and (b) of Form 10-K
    and is therefore filing this form with the reduced disclosure format.

 ** The "Index to Exhibits" is located on page 56.



<PAGE>
<TABLE>
<CAPTION>
                                                  PG ENERGY INC.
                                  SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                 FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1997

                                                      Balance at    Charged   Charged                    Balance
                                                      beginning       to      to other                   at end 
             Description                               of year      income    accounts   Deductions      of year
                                                                          (Thousands of Dollars)
<S>                                                   <C>          <C>        <C>        <C>             <C>
Deducted from the asset to which it applies:

  Reserve for uncollectible accounts-

    Year ended December 31, 1997                      $    1,140   $ 2,112    $      4   $    2,088(a)   $ 1,168

    Year ended December 31, 1996                      $      781   $ 2,015    $      -   $    1,656(a)   $ 1,140

    Year ended December 31, 1995                      $      921   $ 1,541    $      -   $    1,681(a)   $   781






Shown as operating reserves on the balance sheets:

    Insurance -

       Year ended December 31, 1997                   $    3,086   $   711    $      -   $      972(b)   $ 2,825

       Year ended December 31, 1996                   $    3,709   $ 1,042    $      -   $    1,665(b)   $ 3,086

       Year ended December 31, 1995                   $    2,383   $ 2,652    $      -   $    1,326(b)   $ 3,709






NOTES:
(a)  Deductions represent uncollectible balances of accounts receivable written off, net of recoveries.

(b)  Deductions are principally payments made in settlement of claims.

















</TABLE>
<PAGE>