PENNSYLVANIA ENTERPRISES, INC.
                            DIRECTOR RETIREMENT PLAN
                    (Adopted effective as of January 1, 1999)


Pennsylvania  Enterprises,   Inc.  (the  "Company")  establishes  this  Director
Retirement Plan (the "Plan") to provide  retirement  benefits for members of its
Board of Directors (the "Board of  Directors")  and/or the Board of Directors of
PG Energy, Inc. (the "PGE Board" and "PGE,"  respectively) who are not employees
of the  Company  or any of its  subsidiaries,  in order to  provide  appropriate
compensation  for  their  services,  to help  assure  the  Company's  and  PGE's
continued  ability  to attract  and retain  individuals  with  superior  talent,
achievement and experience to serve as directors,  and to help promote continued
loyalty and goodwill among directors after retirement from the Board.

         Section  1.  Eligibility:  Each  director  of the  Company  and/or  PGE
(including each current director but excluding directors who retire prior to the
date set forth in Section  16) who is not an  employee  of the Company or any of
its  subsidiaries  who retires from the Board of Directors  and/or the PGE Board
after  attaining  age 60 and  completion of five or more years of service on the
Board of Directors and/or the PGE Board shall be entitled to receive  retirement
benefits under this Plan. Notwithstanding the foregoing, if a director accepts a
position with any competing institution (as determined by the Board of Directors
in its sole  discretion)  during  or after the  director's  term on the Board of
Directors and/or the PGE Board without approval of the Board of Directors,  then
such director  shall forfeit any interest or right to benefits  under this Plan.
In addition,  if the Board of Directors determines (in its sole discretion) that
a retired  director has acted against the best  interests of the Company or PGE,
such retired director shall forfeit any interest or right to benefits under this
Plan.  As used in this  Plan,  "retirement"  means  termination  of service as a
director under  circumstances which entitle the director to a benefit under this
Plan.

         Section 2. Retainer:  The annual benefit payable  pursuant to this Plan
shall be determined as a percentage of the aggregate of the annual retainers for
directors  in  effect  at the  Company  and PGE on the  date  of the  director's
retirement  (or,  if the  director  served  on the  Board  of  only  one of such
companies, the annual retainer in effect at such company) (the "Retainer").

         Section 3. Annual Benefit: A director's annual retirement benefit shall
be equal to 50% of the Retainer if he retires after  completion of five years of
service,  increasing  5% per year to a  maximum  of 75% of the  Retainer  if the
director retires after ten years of service.

         Section 4. Service: Length of service shall be measured from the date a
director  is elected  to the Board of  Directors  or the PGE Board  (or,  if the
director is or was an employee of the Company or any of its  subsidiaries at the
time of  election to the Board,  ceases to be an  employee),  and shall  include
service before the effective  date of the Plan.  Whole years only shall be used.
(Whole  years shall be measured in 12-month  periods  beginning on the date that
the  director is elected to the Board of Directors or the PGE Board or ceases to
be an employee,  as the case may be.) In the event service is  interrupted,  all
complete  months of service shall be aggregated to determine the number of whole
years of service.  Service  shall not  include  periods of service as a director
with a subsidiary or affiliated company unless the director was at the same time
serving as a director  of the  Company  and/or PGE,  nor shall  service  include
periods during which the director was an employee. Service on the Boards of both
the  Company and PGE in the same year shall  entitle the  director to credit for
only one year of service.

         Section 5. Terms of Payment:  The annual  benefit as  determined  under
Section 3 will be  payable  for a term  equal to the  number  of whole  years of
service  determined  under  Section 4,  provided  such term shall not exceed ten
years.  The annual  benefit will be paid on a quarterly  basis starting with the
first day of the calendar  quarter next  following the day on which the director
retires  from the Board of  Directors  or the PGE Board (or, if the  director is
then serving on the Board of both the Company and PGE, both such Boards).

         Section 6. Event of Death or  Disability:  If a director  dies prior to
retirement  or prior to the  completion  of the payments to which he is entitled
under Section 5, no benefits or further  payments  shall be due under this Plan.
If a director's  service on the Board of  Directors  and/or the PGE Board ceases
due to the director's disability (as determined by the Board of Directors in its
discretion)  after the  effective  date of the Plan and after the  director  has
served  five or more years as a  director,  the  director  shall be  entitled to
benefits  under  the Plan  commencing  with the first  day of the  quarter  next
following  the  director's  cessation  of service  (based on his actual years of
service)  even if the  director's  service  ceased before he had attained age 60
and/or before January 1, 2000.

         Section 7. Change of  Control:  In the event of a Change of Control (as
defined below), (i) a director who has previously retired with an entitlement to
benefits  under the Plan  shall be paid a cash  lump sum equal to the  remaining
benefits  that would be payable to the director  under Section 5 if the director
had lived to receive all benefits  payable to such director under this Plan, and
(ii) a  director  then  serving on the Board of  Directors  and/or the PGE Board
shall be paid a cash lump sum equal to the benefits that would be payable to him
under  Section 5 as if he had  retired on the date of the Change of Control  and
lived to receive all benefits  payable to him under this Plan. If a director has
less than five years of service  (as  determined  pursuant  to Section 4) at the
time of a Change of Control, such director shall be paid a cash lump sum benefit
equal to the  product  of 10% of the  Retainer  for each of his  whole  years of
service multiplied by the number of such years of service.  For purposes of this
Section 7,  payments  shall be made even if the Change of Control  occurs before
the director  attains age 60 and/or before January 1, 2000. For purposes of this
Plan, a "Change of Control" shall be deemed to occur on:

                           (i) the date that any person or group deemed a person
         under Sections  3(a)(9) and 13(d)(3) of the Securities  Exchange Act of
         1934 (the "Exchange  Act") other than the Company and its  subsidiaries
         as  determined  prior to that  date,  in a  transaction  or  series  of
         transactions  has become the beneficial  owner,  directly or indirectly
         (with beneficial ownership determined as provided in Rule 13d-3, or any
         successor  rule,  under  the  Exchange  Act)  of  20%  or  more  of the
         outstanding  securities of the Company  having the right under ordinary
         circumstances  to vote at an election of the Board of  Directors of the
         Company; or

                           (ii)  the  date  on  which  one-third  or more of the
         members  of the Board of  Directors  of the  Company  shall  consist of
         persons other than Current  Directors (for these  purposes,  a "Current
         Director"  shall  mean any member of the Board of  Directors  as of the
         effective  date of the Plan and any  successor  of a  Current  Director
         whose  nomination  or election  has been  approved by a majority of the
         Current Directors then on the Board of Directors); or

                           (iii) the date of approval by the stockholders of the
         Company of an agreement  providing for the merger or  consolidation  of
         the Company with another  corporation where (A) the stockholders of the
         Company,  immediately prior to the merger or  consolidation,  would not
         beneficially own, immediately after the merger or consolidation, shares
         entitling  such  stockholders  to 50% or  more  of all  votes  (without
         consideration of the rights of any class of stock to elect directors by
         a separate  class vote) to which all  stockholders  of the  corporation
         issuing  cash or  securities  in the merger or  consolidation  would be
         entitled in the election of directors,  or (B) where the members of the
         Board of Directors,  immediately  prior to the merger or consolidation,
         would not, immediately after the merger or consolidation,  constitute a
         majority of the board of directors of the  corporation  issuing cash or
         securities in the merger; or

                           (iv) the date of approval by the  stockholders of the
         Company of the sale or other disposition of all or substantially all of
         the assets of the Company.

         Section 8. Director Retirement Policy: Each director who begins service
on the  Board of  Directors  or the PGE Board  after  January  1, 1999  shall be
required to retire  from such Board  effective  as of the date of the  Company's
first annual meeting after his attainment of age 70.

         Section 9. Nature of the Benefit:  The benefit provided by this Plan is
a contractual obligation of the Company which is payable from the general assets
of the  Company  and/or PGE that are subject to the claims of  creditors  of the
Company.  It is not intended that the Plan be funded, but the Company may in its
sole discretion designate or segregate certain of its assets for the purposes of
funding its obligations under the Plan.

         Section 10.       Benefit Plan Only:  Nothing contained in this Plan
shall be construed to affect a director's status as a director or to give any 
director a right to be renominated or reelected to the Board of Directors or
the PGE Board.

         Section 11. Assignability: No right to receive payments hereunder shall
be  transferable  or  assignable  by a  director.  No right to receive  payments
hereunder shall be subject to seizure for the payment of any debts, judgments or
other  obligations of the director or shall be  transferable by operation of law
or otherwise to the creditors of a director.

         Section 12. Plan Administration:  The Plan shall be administered by the
Board of  Directors.  The Board of Directors  shall have the  authority to adopt
rules and regulations  for carrying out the Plan and to interpret,  construe and
implement  the  provisions  of the Plan.  The Board of  Directors  may  delegate
ministerial and  recordkeeping  functions for the Plan to officers and employees
of the Company.  Decisions of the Board of Directors  shall be final and binding
on all directors.

         Section   13.   Allocation   of   Responsibility   to   Pay   Benefits:
Responsibility  for payment of amounts payable under the Plan shall be allocated
between the Company and PGE in proportion to the  allocation of Retainer used in
determining the annual benefit payable.

         Section 14. Amendment: The Plan may be amended,  modified or terminated
by the Board of Directors of the Company at any time. No amendment, modification
or termination  shall,  without the consent of a director  participating  in the
Plan, adversely affect such director's accrued benefits under the Plan as of the
date of such  amendment  or  termination.  For  purposes  of this  provision,  a
director's accrued benefits shall mean the benefits to which such director would
be  entitled  under the Plan based on his years of service and the amount of the
Retainer as of the date of the amendment or  termination,  regardless of whether
the director had attained age 60 as of such date.

         Section 15.       Governing Law:  This Plan shall be interpreted and
enforced in accordance with the laws of the Commonwealth of Pennsylvania.

         Section 16. Effective Date: The Plan was adopted  effective  January 1,
1999.  Except as provided  in Sections 6 and 7, no benefits  shall be paid under
this Plan to  directors  of the  Company or PGE who  retire  prior to January 1,
2000.


IN WITNESS WHEREOF, this Plan has been duly executed by an authorized officer of
the Company and of PGE on this 25th day of January 1999.




                                           PENNSYLVANIA ENTERPRISES, INC.



                                    By
                                               Thomas F. Karam
                                      President and Chief Executive Officer




                                               PG ENERGY, INC.



                                     By
                                                Thomas F. Karam
                                       President and Chief Executive Officer