PART I


ITEM  l.  BUSINESS

GENERAL

    Pennsylvania Enterprises, Inc. (the  "Company")  is a holding company formed
in 1974 whose principal subsidiary,  PG  Energy Inc. ("PGE"), a regulated public
utility formerly known as Pennsylvania Gas  and Water Company, is engaged in the
distribution of natural gas.   In  1996,  PGE accounted for approximately 87% of
the Company's operating revenues.  On February 14, 1997, PGE acquired all of the
outstanding capital stock of  Honesdale  Gas  Company ("Honesdale"), a regulated
public utility engaged in distributing natural gas in portions of Wayne and Pike
Counties, in an area adjacent  to  PGE's  service territory.  Until February 16,
1996, when its water utility operations  were  sold, PGE was also engaged in the
distribution of water (See "-Sale of Water Utility Operations.")  

    The Company's other subsidiaries, each  of  which is engaged in nonregulated
activities, consist of  Pennsylvania  Energy  Resources,  Inc.  ("PERI") and its
wholly-owned subsidiary Keystone Pipeline Services, Inc. ("Keystone"), which was
acquired effective  December  4,  1995,  and  Theta  Land Corporation ("THETA").
Pennsylvania Energy Marketing Company,  previously  a subsidiary of the Company,
was merged into PERI on May 31,  1996.   Prior to 1996, these other subsidiaries
did not constitute  a  significant  portion  of  either  the Company's assets or
operations.  However, it  is  anticipated  that  in  1997  the revenues of these
subsidiaries will account for  15-20%  of  the  Company's operating revenues and
35-40% of its capital expenditures.

    Both PGE, incorporated  in  Pennsylvania  in  1867  as  Dunmore  Gas & Water
Company,  and  Honesdale  are  regulated  by  the  Pennsylvania  Public  Utility
Commission  ("PPUC").    As  of  December  31,  1996,  PGE  provided  service to
approximately 144,200 natural gas  customers  and  Honesdale provided service to
approximately 3,200 customers.  

    The Company and its  subsidiaries  employed  approximately 760 persons as of
December 31, 1996.

Restructuring of Natural Gas Industry

    The  natural  gas  industry,  which  historically  has  included  producers,
interstate pipelines and local distribution companies ("LDCs"), is continuing to
undergo 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.



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<PAGE>

    As a result  of  actions  by  FERC,  the  interstate pipelines now primarily
provide  transportation  and  storage  services,  and  LDCs,  such  as  PGE, 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 PPUC, PGE  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, PGE charged
all its customers bundled rates.   These rates included a commodity charge based
on the cost, as approved by FERC,  which  PGE paid the pipelines for natural gas
delivered to the  entry  point  on  its  distribution  system.    Except for the
approximately 500 customers  currently  receiving  transportation service, PGE'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 PGE for the
purchase of natural gas and  for interstate pipeline transportation capacity and
storage services.  Customers  receiving  transportation service, which accounted
for approximately 43% of PGE's total  gas  deliveries in 1996, are charged rates
approved by the PPUC, which exclude the  commodity cost that is reflected in the
bundled rates charged to other customers.

    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, will be phased in over
a three-year period ending  on  January  1,  2001.   Under this legislation, the
electric utilities  in  Pennsylvania  will  be  required  to unbundle generation
charges from the other  charges  included  in  their currently bundled rates and
customers will 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
networks to distribute electricity to  their customers regardless of supplier, a
function which will remain subject to rate regulation by the PPUC.

    The  Company  and  PGE  believe   that  Pennsylvania  may  consider  similar
legislation with respect to the natural  gas industry in 1997.  Such legislation
may require that PGE provide all of  its customers with unbundled service over a
period of several years.  While the  rates for the transportation of natural gas
through PGE's distribution system and  the  storage  services offered by PGE may
continue to be price regulated by the PPUC, the commodity cost of gas may not be
so regulated.  Essentially, the transportation service which is now available to
a limited number of  PGE's  customers  would  be  extended to all its customers.
Customers would choose the supplier  of  their  natural gas, which could be PGE,
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,  PGE  will  be  faced with significant
competition from other gas utilities and  marketers  for the sale of natural gas
to its customers.  However, under current  regulations of the PPUC, PGE does not
realize a profit or incur any loss with respect to the commodity cost of natural
gas.  Moreover, PGE would not expect  the 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,




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<PAGE>

based on the  recently-enacted  electric  industry  legislation, PGE anticipates
that any 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) it has  or  might incur as a result of legislation
providing for  customer  choice  of  natural  gas  suppliers  would be recovered
through a nonbypassable customer  charge.    Accordingly,  although it cannot be
certain, because the terms of such  legislation  have not been finalized and the
ultimate effect on PGE  cannot  be  determined,  PGE  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 PGE would be
subject regarding the sale of natural gas to its customers.

Expansion of Nonregulated Activities

    The Company intends  that  PGE,  along  with  its  affiliates, will remain a
leading supplier of energy and energy-related  products and services even if the
sale of natural gas to its  customers  is deregulated.  PGE will actively market
the sale of natural gas, and possibly other forms of energy, to its customers on
a  competitive,  nonregulated  basis  and  will  continue  to  aggressively  add
customers to  its  distribution  system.    Additionally,  the  Company plans to
further expand the activities of PERI, which presently provides a broad array of
energy supply and energy management  services,  including the marketing and sale
of natural gas to commercial and  industrial users in northeastern United States
(and in connection therewith enters into  forward contracts for the purchase and
sale of natural gas at variable and fixed  prices for terms up to one year); the
sale of propane on both a retail and wholesale level in central and northeastern
Pennsylvania; the inspection, maintenance and servicing of residential and small
commercial gas-fired equipment; and through its subsidiary Keystone, specialized
pipeline  distribution  services   for   utilities,   including  keyhole  vacuum
excavation, camera inspection and bridge pipeline rehabilitation, as well as the
installation of  mains  and  services  for  the  natural  gas,  water  and sewer
industries.    In  addition,  the  Company,  through  its  subsidiary  Theta, is
presently initiating several  residential  and  commercial development projects,
including a residential development located  at  the Montage Mountain Ski Resort
in Lackawanna County, known as "White  Cliff  at Montage," which will consist of
townhomes and single family  dwellings  and  a  development near Wilkes-Barre in
Luzerne  County,  known  as  "Laurel  Run,"  which  will  consist  of  a  motel,
restaurant, small strip  shopping  center  and  townhomes on Company-owned land.
Theta is also developing plans to  conduct timber, sand and gravel operations on
the Company's land and to increase  the  value being realized from the Company's
extensive land holdings through a more active management of those resources.

Sale of Water Utility Operations

    On February 16, 1996, PGE  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 PGE'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 $203.3 million, net of an
estimated $58.8 million of income  taxes,  were  used  by the Company and PGE to
retire debt, to repurchase stock,  for construction expenditures and for working



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<PAGE>

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

    PGE distributes natural gas  to  an  area in northeastern Pennsylvania lying
within the  Counties  of  Lackawanna,  Luzerne,  Wyoming, Susquehanna, Columbia,
Montour, Northumberland, Lycoming, Union  and  Snyder, a territory that includes
116 municipalities, in  addition  to  the  cities  of Scranton, Wilkes-Barre and
Williamsport.  The total estimated population of PGE's natural gas service area,
based on the 1990 U.S. Census, is 561,000.

    Number and Type of Customers.   At  December 31, 1996, PGE had approximately
144,200 natural gas customers, from which  it derived total natural gas revenues
of $160.6 million during 1996.    The  following  chart shows a breakdown of the
types of customers and the percentages of gas revenues generated by each type of
customer in 1996:
[CAPTION]
            Type of Customer             % of Customers         % of Revenues
       [S]                               [C]                    [C]
       Residential                           91.2%                  61.7%   
       Commercial                             8.4                   24.1*  
       Industrial                             0.2                   12.9*   
       Other Users                            0.2                    1.3     
          Total                             100.0%                 100.0%    

    * Includes  the  4.5%  of  total  gas  revenues  derived  from interruptible
      customers.

    During 1996, PGE delivered an  estimated  total of 47,600,000 thousand cubic
feet ("MCF") of natural gas to its  customers, of which 56.1% was sold at normal
tariff rates, 42.9% represented gas transported  for customers and 1.0% was sold
under the Alternate Fuel Rate (as described below).

    PGE sells gas to "firm"  customers  with  the understanding that it will not
interrupt their supply 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 by PGE at any time under the conditions set forth in their contracts
for gas service.  In 1996, a total  of  1,321,000 MCF of natural gas was sold by
PGE to  interruptible  customers  and  3,681,000  MCF  was  transported for such
customers, which together represented 10.5%  of  the total deliveries of natural
gas by PGE to its customers during 1996.

    PGE's largest natural gas customer accounted for approximately 2.5% of PGE's
operating revenues in 1996.  No other  customer accounted for as much as 2.0% of
such revenues in 1996.

    Transportation and Storage Service.   In accordance with current regulations
of the PPUC, PGE 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.  Transportation service is provided on both



                                         -4-
<PAGE>

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

    Set forth below is a summary of the gas transported by PGE and the number of
its customers using transportation service from 1994 to 1996:
[CAPTION]
                 Number             Volume of Gas Transported (MCF)        
                  of          Interstate      Pennsylvania
     Year      Customers         Gas              Gas              Total   
     [S]          [C]         [C]               [C]              [C]
     1996         503         15,959,000        4,459,000        20,418,000
     1995         480         14,543,000        5,054,000        19,597,000
     1994         574         13,411,000        4,744,000        18,155,000


    During 1997,  PGE  expects  to  transport  approximately  22,000,000  MCF of
natural gas.

    The decrease in the number of customers using transportation service in 1995
was the result of PGE requiring such customers to install telemetering equipment
so that PGE could monitor  the  usage  by  those  customers on a daily basis and
thereby determine  if  the  appropriate  quantities  of  natural  gas were being
delivered for them.  This requirement for telemetering equipment caused a number
of customers, for whom  relatively  small  quantities  of natural gas were being
transported, to revert to sales service.

    The rates charged  by  PGE  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 the
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.

    Alternate Fuel Sales.  In  order  to  be  more competitive in terms of price
with certain alternate fuels,  PGE  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 PGE's normal  tariff  rates,  PGE  is permitted by the PPUC to
lower its price to these customers  so  that PGE can remain competitive with the
alternate fuel.  However, in  no  instance  may  PGE sell gas under this special



                                         -5-
<PAGE>

arrangement for less than its average commodity cost of gas purchased during the
month.  PGE's revenues under the Alternate Fuel Rate amounted to $1.8 million in
1996, $2.0 million in 1995 and  $3.7  million in 1994.  These revenues reflected
the sale of 491,000 MCF, 603,000 MCF  and  1,223,000 MCF in 1996, 1995 and 1994,
respectively.  It is  anticipated  that  approximately  426,000 MCF will be sold
under the Alternate Fuel Rate in  1997.    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.

    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 PGE and other larger LDCs.

    As of February 1, 1994, PGE  began  to recover the Gas Transition Costs that
are being billed to PGE by  its  interstate pipelines through an increase in its
PGC rate.  As of December 31, 1996,  PGE 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 PGE expects.    Of  this amount, $857,000 was recovered by
PGE over a twelve-month period  ended  January  31, 1995, through an increase in
its PGC rate, $252,000 was recovered by PGE in its annual PGC rate that the PPUC
approved effective  December  1,  1995,  and  the  remaining  $213,000  is being
recovered by PGE in its PGC rate that was effective December 1, 1996.





                                         -6-
<PAGE>

    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, PGE 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 $10.1 million of Non-Gas
Transition Costs  will  be  billed  to  PGE,  generally  over  a six-year period
extending through January 1, 1999, of which  $8.0 million had been billed to PGE
and $7.5 million had been recovered from  its customers as of December 31, 1996.
PGE has recorded the estimated transition costs that remained to be billed to it
and the amounts remaining to be recovered from its customers.

    Sources of Supply.  PGE 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 22.5% of  PGE's  total purchases of natural gas in
1996.  Three other suppliers accounted for 18.7%, 17.9% and 16.2% of PGE's total
purchases of natural gas in 1996.  No other suppliers accounted for more than 3%
of PGE's purchases during 1996.

    The purchases of natural gas by PGE  during each of the years 1996, 1995 and
1994 are summarized below:
[CAPTION]
                                 Volume                      Average
          Year               Purchased (MCF)               Cost per MCF
          [S]                  [C]                            [C]
          1996                 27,955,000                     $3.35
          1995                 24,173,000                     $2.62
          1994                 28,364,000                     $2.82

    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.

    During 1997, PGE expects to purchase a total of approximately 28,750,000 MCF
of natural gas under seasonal or  longer-term contracts at a currently projected
average cost of $2.89 per MCF.

    PGE presently has adequate supplies  of  natural  gas to meet the demands of
existing customers through October, 1997, and the Company believes that PGE will
be able to  obtain  sufficient  supplies  to  meet  the  demands of its existing
customers  beyond  October,  1997,  and   to   serve  new  customers  (of  which
approximately 4,000 are expected to be added in 1997).








                                         -7-
<PAGE>

    Pipeline Transportation and Storage Entitlements.   Pursuant to the terms of
Order 636, PGE has entered  into  agreements with its former interstate pipeline
suppliers providing for the firm  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)            55.5%
  Tennessee   1999 and 2000                 48,252                36.2
  Columbia    2004                          11,016                 8.3        
                                           133,368               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  PGE  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  PGE can transport during the period
       December through February pursuant to an agreement with Transco that
       extends through 2011.

    PGE has also contracted  with  its  former interstate pipeline suppliers for
the following volumes of gas storage and storage withdrawals:
[CAPTION]
                                                                 Maximum
                     Expiration          Total Storage       Daily Withdrawal   
  Pipeline            Date (a)             (MCF) (b)        From Storage (MCF)
  [S]           [C]                        [C]                   [C]
  Transco       Various through 2013       6,500,000             131,044
  Tennessee     November 1, 2000           3,500,000              23,031
  Columbia      October 31, 2004           1,100,000              16,036      
                                          11,100,000             170,111      

  (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  PGE  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.

    Based on its present pipeline transportation and storage entitlements, PGE
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)       131,044         205,144           67.6%
  Tennessee         48,252            23,031          71,283           23.5
  Columbia          11,016            16,036          27,052            8.9   
                   133,368           170,111         303,479          100.0%  

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

                                         -8-
<PAGE>

    In accordance with the  provisions  of  Order  636,  PGE  may release to its
customers and other parties the portions of its 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  PGE's  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,  PGE  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.    During 1996, the average daily
capacity so released was 40,689  MCF,  and  the maximum capacity released on any
one day in 1996  was  52,095  MCF.    Through  December  31,  1996, PGE had not,
however, released any of its storage capacity.

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

    Peak Day Requirements.  PGE  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 337,956  MCF,  of  which 252,550 MCF would be required
for customers to  whom  PGE  sells  gas  and  85,406  MCF  would be required for
customers for whom PGE provides  transportation service.  PGE'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  $30.5 million during
1996, including $29.2 million  for  the  construction  of utility plant, and are
estimated to be $45.4 million during  1997, consisting of $27.9 million relative
to utility plant and $17.5  million  with  respect to the Company's nonregulated
activities, including $13.1 million  for  residential and commercial real estate
development.

    Regulation.  PGE'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 PGE's
pipeline facilities and various  other  matters associated with broad regulatory
authority.

    In addition to those  regulations  promulgated  by  the  PPUC, PGE 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 PGE'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 by PGE through rates.

    PGE, like many gas  distribution  companies,  once utilized manufactured gas
plants in connection with providing gas service to its customers.  None of these
plants have been in operation since 1960,  and several of the plant sites are no
longer owned by  PGE.    Pursuant  to  the Comprehensive Environmental Response,



                                         -9-
<PAGE>

Compensation and Liability Act of  1980  ("CERCLA"),  PGE filed notices with the
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.  While this conclusion does  not constitute a legal prohibition against
further regulatory action  under  CERCLA  or  other  applicable federal or state
laws, PGE does not  believe  that  additional  costs,  if  any, related to these
manufactured gas plant  sites  will  be  material  to  its financial position or
results of operations.

    The Company is a "holding company"  within the meaning of the Public Utility
Holding Company Act of 1935, as amended ("PUHCA"), but it is exempt, pursuant to
Section 3(a) of the PUHCA, from all  the provisions of the PUHCA (except Section
9(a)(2) thereof) and  the  rules  and  regulations  promulgated thereunder.  The
Company files an annual exemption statement  on Form U-3A-2 pursuant to Rule U-2
promulgated under the PUHCA.  Pursuant to the PUHCA, certain acquisitions by the
Company or its subsidiaries of  the  stock  or  assets of gas or electric public
utilities  are  subject  to  prior  approval  by  the  Securities  and  Exchange
Commission.

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

    Rates.  On May 24, 1996, PGE  filed  an application with the PPUC seeking an
increase in its base gas rates,  designed to produce $14.1 million in additional
annual revenue, to be effective  July  23,  1996.    On  June 20, 1996, the PPUC
suspended this rate increase for seven months (until February 23, 1997) in order
to investigate the reasonableness of the  proposed  rates.  On November 7, 1996,
PGE and certain parties filing objections  to  the rate increase request filed a
Settlement Agreement and  Joint  Petition  for  Settlement of Rate Investigation
(the "Settlement  Petition")  with  the  Administrative  Law  Judge  assigned to
conduct the  investigation  of  the  rate  increase  request.    This Settlement
Petition provided for an overall 5.3% rate increase that was designed to produce
$7.5 million of additional annual revenue.   By Order adopted December 19, 1996,
the PPUC approved the Settlement Petition effective January 15, 1997.  Under the
terms of the  Settlement  Petition,  the  billing  for  the  impact  of the rate
increase relative to PGE's residential  heating customers (which it is estimated
will total $6.6 million on an  annual basis) is being deferred, without carrying
charges, until July, 1997.  

    The provisions of the Code require that  the tariffs of LDCs such as PGE, be
adjusted on an annual basis, and 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.







                                        -10-
<PAGE>

    Effective September 14, 1995, the  PPUC adopted regulations that provide for
the quarterly adjustment of the annual  purchased  gas cost rate of larger LDCs,
including PGE.  Such  quarterly  adjustments  are  allowed when the actual costs
vary from the costs reflected in the respective company's tariffs by 2% or more.
Except for reducing the amount  of  any  over  or undercollections of gas costs,
these regulations will not have any  material effect on PGE's financial position
or results of operations, and PGE is  still required to file an annual purchased
gas cost rate.

    In accordance with  these  annual  and  quarterly  procedures,  PGE has been
permitted to make the following changes since  January 1, 1994, to the gas costs
contained in its gas tariff rates:
[CAPTION]
                                    Change in              Calculated
             Effective             Rate per MCF        Increase (Decrease)
                Date              From     To           in Annual Revenue 
           [S]                    [C]     [C]              [C]
           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)*
           December 1, 1994        3.74    3.68             (1,800,000)

    * 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
PGE's 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  PGE  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 PGE's  gas  procurement  and  supply activities.  However, to
date, the PPUC has permitted PGE to  recover  all of its gas supply costs in the
rates charged to customers.   Additionally,  although  it cannot be certain, the
Company believes that PGE 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 its future purchased gas cost rates.

    Tax Surcharge Adjustments.  Regulations of the PPUC provide for PGE to apply
a state tax adjustment surcharge tariff  to  its bills for gas service to recoup
any increased taxes or passthrough 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.  Currently, no state tax
adjustment surcharge is being applied to PGE's bills for gas service.

WATER BUSINESS

    Prior to  the  sale  of  its  water  operations  to Pennsylvania-American on
February 16, 1996, PGE 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.


                                        -11-
<PAGE>

    Number and Type of Customers.   At  December 31, 1995, PGE 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  PGE's water customers were supplied
with filtered water (except for  several  hundred  who were supplied with ground
water from wells).  The filtration of  PGE's water supplies was performed at ten
water treatment plants, located throughout  PGE's  water service area, which had
an aggregate daily capacity of 101.1 million gallons.  

    Construction  Expenditures.    PGE'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.

EXECUTIVE OFFICERS OF THE COMPANY
<TABLE>
<CAPTION>
                                                           Positions and
                                      Officer            Offices with the
           Name               Age      Since                  Company           
<S>                            <C>      <C>       <C>                                              
Kenneth L. Pollock             76       1987      Chairman  of   the   Board  of
                                                  Directors
                                                  
Thomas F. Karam                38       1995      President and  Chief Executive
                                                  Officer
                                                  
Vincent A. Bonaddio            47       1995      Vice President, Operations and
                                                  Engineering Services
                                                  
Harry E. Dowling               47       1984      Vice    President,    Customer
                                                  Services
                                                  
John F. Kell, Jr.              59       1978      Vice    President,   Financial
                                                  Services
                                                  
Joseph F. Perugino             58       1988      Vice President
                                                  
Thomas J. Ward                 46       1988      Vice President, Administrative
                                                  Services, and Secretary
                                                  
Richard N. Marshall            39       1993      Treasurer     and    Assistant
                                                  Secretary
                                                  
Thomas J. Koval                44       1992      Controller    and    Assistant
                                                  Treasurer


    Each of the Executive Officers  has  been  elected  to serve until the first
meeting of the Board  of  Directors  of  the  Company  following the 1997 Annual
Meeting and until his successor  has  been  duly  elected.   Also, each of these
Officers holds the same position with  PGE,  except for Mr. Perugino, who is not
an officer of PGE, but who is the President of PERI.  Other than with respect to
Mr. Karam, who has an  employment  agreement  with  the Company as President and
Chief Executive Officer for a five-year period ending September 1, 2001, and Mr.
Pollock, who has an employment  agreement  with  the  Company as Chairman of the
Board of Directors for a three-year period  ending June 26, 1999, subject to his
re-election  by  the  Company's  shareholders,  there  are  no  arrangements  or
understandings between any officer and any other person pursuant to which he was
selected as an officer.


</TABLE>
                                        -12-
<PAGE>

ITEM 2.  PROPERTIES

    Gas.  PGE's gas system consists of approximately 2,265 miles of distribution
lines, nine city gate and 75 major regulating stations and miscellaneous related
and additional property.    PGE  believes  that  its  gas utility properties are
adequately maintained and in good operating condition in all material respects. 

    Most of PGE'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 PGE  to  First  Trust  of  New  York, National Association, as
Trustee.

    Land.   As  of  March  1,  1997,  PGE  owned  approximately  46,000 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 or its subsidiaries.

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

    During the fourth quarter of 1996, there were no matters submitted to a vote
of security holders of  the  registrant  through  the solicitation of proxies or
otherwise.

































                                        -13-
<PAGE>

                                    PART II

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

    The Company's common stock is  traded  on  the New York Stock Exchange under
the symbol "PNT."  Quotations are shown in the Wall Street Journal as "PennEntr"
and in The New  York  Times  as  "PennEnt."    As  of  March 1, 1997, there were
approximately 6,627 holders of record of the Company's common stock.

    Listed below are the  price  ranges  of  the  Company's common stock and the
dividends per share of common  stock  paid  during  the years ended December 31,
1996 and 1995.  The prices  shown  represent the high and low transaction prices
for the respective quarters without retail mark-up, mark-down or commission.
[CAPTION]

                                         Price Range(1)             Cash
                                        High        Low           Dividends(1)

              1996
          [S]                          [C]        [C]             [C]
          First quarter                $20.000    $18.313         $    .275
          Second quarter                21.313     18.813              .275
          Third quarter                 21.438     19.875              .275
          Fourth quarter                22.938     20.500              .275
            Total                                                 $   1.100

              1995
[CAPTION]
          [S]                          [C]        [C]             [C]
          First quarter                $15.688    $13.563         $    .275
          Second quarter                17.000     15.313              .275
          Third quarter                 17.313     15.375              .275
          Fourth quarter                19.063     17.125              .275
            Total                                                 $   1.100

    (1)  After restatement for  the  two-for-one  split  of the Company's common
         stock effective March 20, 1997,  as  more  fully discussed in Note 5 of
         the Notes to Consolidated Financial  Statements  in Item 8 of this Form
         10-K.

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
















                                        -14-
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

    Selected consolidated financial data  for  the  Company and its subsidiaries
for each of the five years in  the  period ended December 31, 1996, is set forth
below.  This data should be  read in conjunction with the Consolidated Financial
Statements contained in Item 8 of this Form 10-K:
<TABLE>
<CAPTION>
                                           Year Ended December 31,               
                               1996       1995       1994       1993       1992  
                               (Thousands of Dollars, Except Per Share Amounts)
<S>                          <C>        <C>        <C>        <C>        <C>
OPERATING REVENUES:
  Gas sales and services     $173,622   $160,850   $176,830   $159,541   $149,055
  Pipeline construction 
  and services                 10,733        826         44         38         74
  Other                           125        259        223        194        223
    Total operating 
      revenues                184,480    161,935    177,097    159,773    149,352

OPERATING EXPENSES:
  Cost of gas                  98,475     90,478    105,832     91,252     81,996
  Other operation expenses     37,417     24,584     24,133     23,204     23,114
  Maintenance                   5,513      4,967      4,436      3,695      3,405
  Depreciation                  7,833      7,018      6,671      6,389      6,088
  Income taxes                  5,800      3,955      4,541      5,159      5,296
  Taxes other than income
    taxes                      11,182      9,982     10,852     10,110      9,740
      Total operating
        expenses              166,220    140,984    156,465    139,809    129,639

OPERATING INCOME               18,260     20,951     20,632     19,964     19,713

OTHER INCOME (DEDUCTIONS),
  NET                           1,726        355        111       (540)      (173)

INTEREST CHARGES (1)          (10,192)   (15,422)   (13,791)   (12,886)   (12,927)

INCOME FROM CONTINUING
  OPERATIONS                    9,794      5,884      6,952      6,538      6,613

INCOME (LOSS) WITH RESPECT
  TO DISCONTINUED 
  OPERATIONS, NET OF 
  RELATED INCOME TAXES (2)       (363)    (3,834)    10,504      7,909      4,915

INCOME BEFORE SUBSIDIARY'S
  PREFERRED STOCK
  DIVIDENDS AND 
  EXTRAORDINARY LOSS            9,431      2,050     17,456     14,447     11,528

SUBSIDIARY'S PREFERRED
  STOCK DIVIDENDS (1)           1,730      2,763      4,639      6,462      5,065

INCOME (LOSS) BEFORE
  EXTRAORDINARY LOSS            7,701       (713)    12,817      7,985      6,463

EXTRAORDINARY LOSS (NET OF
  RELATED TAX BENEFIT)         (1,117)         -          -          -          -

NET INCOME (LOSS)            $  6,584   $   (713)  $ 12,817   $  7,985   $  6,463

</TABLE>
                    
See page 17 for an explanation of footnotes.

                                        -15-
<PAGE>
<TABLE>
<CAPTION>
                                           Year Ended December 31,               
                               1996       1995       1994       1993       1992  
                               (Thousands of Dollars, Except Per Share Amounts)
<S>                            <C>        <C>        <C>         <C>        <C>
COMMON STOCK INFORMATION:
 Weighted average number
  of shares outstanding in
  thousands (3)                10,222     11,459     10,913      8,790      8,022
 Earnings (loss) per share
  of common stock: (3)
    Continuing operations (1)$    .79   $    .27   $    .21   $    .01   $    .20
    Discontinued operations      (.04)      (.33)       .96        .90        .61
    Net income (loss) before
      premium on repurchase/
      redemption of 
      subsidiary's preferred
      stock and extraordinary
      loss                        .75       (.06)      1.17        .91        .81
    Premium on repurchase/
      redemption of 
      subsidiary's preferred
      stock                      (.13)         -       (.09)         -          -
    Extraordinary loss           (.11)         -          -          -          -
 Earnings (loss) per share
  of common stock            $    .51   $   (.06)  $   1.08   $    .91   $    .81

 Cash dividends per share
   of common stock           $   1.10   $   1.10   $   1.10   $   1.10   $   1.10

CAPITALIZATION AT END
  OF PERIOD:
 Amounts -
  Common shareholders'
   investment                $117,651   $162,739   $172,012   $165,775   $135,144
  Preferred stock of PGE -
   Not subject to mandatory
    redemption, net            18,851     33,615     33,615     33,615     33,615
   Subject to mandatory
    redemption                    739      1,680      1,760     31,840     41,920
  Long-term debt               75,000    106,706    220,705    155,388    148,866
    Total capitalization     $212,241   $304,740   $428,092   $386,618   $359,545

 Ratios -
  Common shareholders'
   investment                   55.4%      53.4%      40.2%      42.9%      37.6%
  Preferred stock of PGE -
   Not subject to mandatory
    redemption, net              8.9       11.0        7.8        8.7        9.3
   Subject to mandatory
    redemption                   0.4        0.6        0.4        8.2       11.7
  Long-term debt                35.3       35.0       51.6       40.2       41.4 
    Total                      100.0%     100.0%     100.0%     100.0%     100.0%


                    
See page 17 for an explanation of footnotes.




                                        -16-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
<S>                          <C>        <C>        <C>        <C>        <C>
UTILITY PLANT AT END OF
  PERIOD:
 Total utility plant         $319,205   $295,895   $284,080   $269,819   $256,663
 Accumulated depreciation      79,783     76,882     74,408     70,954     65,318
    Net utility plant        $239,422   $219,013   $209,672   $198,865   $191,345

TOTAL ASSETS AT END OF
  PERIOD:
  Continuing operations      $366,810   $319,968   $321,236   $318,057   $257,458
  Discontinued operations,
    net (4)                         -    204,250    203,196    193,002    183,702
    Total                    $366,810   $524,218   $524,432   $511,059   $441,160


(1)  None of the Company's interest  charges  and  none of PGE's Preferred Stock
     dividends was allocated to the discontinued operations through the February
     15, 1996,  date  of  disposition.    Prior  to  that  time interest charges
     relating  to  indebtedness  of  PGE  were  allocated  to  the  discontinued
     operations based on the relationship  of  the  gross water utility plant of
     the discontinued operations  to  the  total  of  PGE's  gross gas and water
     utility plant.  This was the  same  method  as  was utilized by PGE and the
     PPUC in establishing the revenue requirements of its utility operations.

(2)  See Note 2 of the Notes  to  Consolidated Financial Statements in Item 8 of
     this Form 10-K.

(3)  Reflects a two-for-one stock split  of the Company's common stock effective
     March 20,  1997,  as  more  fully  discussed  in  Note  5  of  the Notes to
     Consolidated Financial Statements in Item 8 of this Form 10-K.

(4)  Net of  (i)  liabilities  assumed  by  Pennsylvania-American (ii) estimated
     liability for income taxes on  sale  of discontinued operations, (iii) with
     respect to the year ended  December  31,  1995, the anticipated income from
     the discontinued  operations  during  the  phase-out  period  for financial
     statement purposes of April 1,  1995,  through  February 15, 1996, and (iv)
     with respect to periods ended in  1994  and earlier years, other net assets
     of the discontinued operations  (which  were  written  off  as of March 31,
     1995).  See Note 2  of  Notes to Consolidated Financial Statements included
     in Item 8 of this Form 10-K.




















                                        -17-
</TABLE>
<PAGE>

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

RESTRUCTURING OF NATURAL GAS INDUSTRY

    The Company's principal operating subsidiary,  PG  Energy Inc. ("PGE"), is a
regulated public utility engaged  in  the  sale  and distribution of natural gas
which accounted for approximately  87%  of  the  Company's operating revenues in
1996.  The  natural  gas  industry,  which  historically has included producers,
interstate pipelines and local distribution companies ("LDCs"), is continuing to
undergo 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  PGE, 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  ("PPUC"),  PGE
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, PGE charged
all its customers bundled rates.   These rates included a commodity charge based
on the cost, as approved by FERC,  which  PGE paid the pipelines for natural gas
delivered to the  entry  point  on  its  distribution  system.    Except for the
approximately 500 customers  currently  receiving  transportation service, PGE'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 PGE for the
purchase of natural gas and  for interstate pipeline transportation capacity and
storage services.  Customers  receiving  transportation service, which accounted
for approximately 43% of PGE's total  gas  deliveries in 1996, are charged rates
approved by the PPUC, which exclude the  commodity cost that is reflected in the
bundled rates charged to other customers.

    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, will be phased in over
a three-year period ending  on  January  1,  2001.   Under this legislation, the
electric utilities  in  Pennsylvania  will  be  required  to unbundle generation
charges from the other  charges  included  in  their currently bundled rates and
customers will contract with  qualified  suppliers  of their choosing, including



                                        -18-
<PAGE>

the utility currently serving them,  to purchase electric energy at nonregulated
rates.  The  electric  utilities  will  continue  to  utilize their transmission
networks to distribute electricity to  their customers regardless of supplier, a
function which will remain subject to rate regulation by the PPUC.

    The  Company  and  PGE  believe   that  Pennsylvania  may  consider  similar
legislation with respect to the natural  gas industry in 1997.  Such legislation
may require that PGE provide all of  its customers with unbundled service over a
period of several years.  While the  rates for the transportation of natural gas
through PGE's distribution system and  the  storage  services offered by PGE may
continue to be price regulated by the PPUC, the commodity cost of gas may not be
so regulated.  Essentially, the transportation service which is now available to
a limited number of PGE's  customers,  would  be  extended to all its customers.
Customers would choose the supplier  of  their  natural gas, which could be PGE,
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,  PGE  will  be  faced with significant
competition from other gas utilities and  marketers  for the sale of natural gas
to its customers.  However, under current  regulations of the PPUC, PGE does not
realize a profit or incur any loss with respect to the commodity cost of natural
gas.  Moreover, PGE would not expect  the 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 the  recently-enacted  electric  industry  legislation, PGE anticipates
that any transition  costs  (such  as  the  negotiated  buyout of contracts with
interstate pipelines,  the  recovery  of  deferred  purchased  gas  costs or the
recovery of  regulatory  assets)  it  might  incur  as  a  result of legislation
providing for  customer  choice  of  natural  gas  suppliers  would be recovered
through a nonbypassable customer  charge.    Accordingly,  although it cannot be
certain, because the terms of such  legislation  have not been finalized and the
ultimate effect on PGE  cannot  be  determined,  PGE  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 PGE would be
subject regarding the sale of natural gas to its customers.

EXPANSION OF NONREGULATED ACTIVITIES

    The Company intends  that  PGE,  along  with  its  affiliates, will remain a
leading supplier of energy and energy-related  products and services even if the
sale of natural gas to its  customers  is deregulated.  PGE will actively market
the sale of natural gas, and possibly other forms of energy, to its customers on
a  competitive,  nonregulated  basis  and  will  continue  to  aggressively  add
customers to  its  distribution  system.    Additionally,  the  Company plans to
further expand the activities of Pennsylvania Energy Resources, Inc. ("PERI"), a
nonregulated affiliate of PGE, which presently  provides a broad array of energy
supply and energy  management  services,  including  the  marketing  and sale of
natural gas to commercial  and  industrial  users in northeastern United States;
the sale of  propane  on  both  a  retail  and  wholesale  level  in central and
northeastern  Pennsylvania;  the   inspection,   maintenance  and  servicing  of
residential  and  small   commercial   gas-fired   equipment;  and  through  its
subsidiary, Keystone Pipeline Services,  Inc. ("Keystone"), specialized pipeline
distribution services for utilities, including keyhole vacuum excavation, camera
inspection and bridge pipeline  rehabilitation,  as  well as the installation of
mains and  services  for  the  natural  gas,  water  and  sewer  industries.  In



                                        -19-
<PAGE>

addition, the Company, through its  subsidiary Theta Land Corporation ("Theta"),
is presently initiating several residential and commercial development projects,
including a residential development located  at  the Montage Mountain Ski Resort
in Lackawanna County, known as "White  Cliff  at Montage," which will consist of
townhomes and single family  dwellings  and  a  development near Wilkes-Barre in
Luzerne  County,  known  as  "Laurel  Run,"  which  will  consist  of  a  motel,
restaurant, small strip  shopping  center  and  townhomes on Company-owned land.
Theta is also developing plans to  conduct timber, sand and gravel operations on
the Company's land and to increase  the  value being realized from the Company's
extensive land holdings through a more active management of those resources.

DISCONTINUED OPERATIONS

    Pursuant to an Asset  Purchase  Agreement  dated  April 26, 1995, as amended
(the "Agreement"), among the  Company,  PGE,  American Water Works Company, Inc.
("American") and Pennsylvania-American  Water Company ("Pennsylvania-American"),
a wholly-owned subsidiary of  American,  the  Company and PGE sold substantially
all of the assets, properties  and  rights  of PGE's water utility operations to
Pennsylvania-American on February 16, 1996.    Under the terms of the Agreement,
Pennsylvania-American paid PGE $414.3  million  consisting  of $262.1 million in
cash and the assumption of $152.2 million of PGE's liabilities, including $141.0
million of its long-term  debt.    PGE  continued  to  operate the water utility
business  until  February  16,  1996.    The  cash  proceeds  from  the  sale of
approximately $203.3 million, net of an estimated $58.8 million of income taxes,
were used by the  Company  and  PGE  to  retire  debt,  to repurchase stock, 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 being 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).

    In accordance with generally  accepted  accounting principles, the Company's
consolidated financial  statements  reflect  PGE'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 the Company's
continuing operations.   For  additional  information regarding the discontinued
operations, see Note  2  of  the  accompanying  Notes  to Consolidated Financial
Statements.

STOCK SPLIT

    On February 19, 1997, the Board of  Directors of the Company declared a two-
for-one split of the Company's  Common  Stock  effective March 20, 1997, as more
fully discussed in Note 5  of  the  accompanying Notes to Consolidated Financial
Statements.  All per share data  included  in  this  Item 7 has been restated to
reflect this two-for-one split.











                                        -20-
<PAGE>

RESULTS OF CONTINUING OPERATIONS

    The following table expresses  certain  items  in the Company's consolidated
statements of income  as  percentages  of  operating  revenues  for  each of the
calendar years ended December 31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>
                                                Percentage of Operating Revenues
                                                    Year Ended December 31,     
                                                 1996         1995         1994 

<S>                                              <C>          <C>          <C>
OPERATING REVENUES:
  Gas sales and services.....................     94.1%        99.3%        99.9%
  Pipeline construction and services.........      5.8          0.5            -
  Other......................................      0.1          0.2          0.1
    Total operating revenues.................    100.0%       100.0%       100.0%

OPERATING EXPENSES:
  Cost of gas................................     53.4         55.9         59.8
  Other operation expenses...................     20.3         15.2         13.6
  Maintenance................................      3.0          3.1          2.5
  Depreciation...............................      4.2          4.3          3.8
  Income taxes...............................      3.6          2.4          2.5
  Taxes other than income taxes..............      6.1          6.2          6.1
    Total operating expenses.................     90.6         87.1         88.3

OPERATING INCOME.............................      9.4         12.9         11.7

OTHER INCOME, NET............................      1.4          0.2            -

INTEREST CHARGES(1)..........................     (5.5)        (9.5)        (7.8)

INCOME FROM CONTINUING OPERATIONS............      5.3          3.6          3.9

INCOME (LOSS) WITH RESPECT TO DISCONTINUED
  OPERATIONS.................................     (0.2)        (2.3)         5.9

INCOME BEFORE SUBSIDIARY'S PREFERRED
  STOCK DIVIDENDS AND EXTRAORDINARY LOSS.....      5.1          1.3          9.8

SUBSIDIARY'S PREFERRED STOCK DIVIDENDS(1)....     (0.9)        (1.7)        (2.6)

INCOME (LOSS) BEFORE EXTRAORDINARY LOSS......      4.2         (0.4)         7.2

EXTRAORDINARY LOSS...........................     (0.6)           -            -

NET INCOME (LOSS)............................      3.6%        (0.4)%        7.2%
                    
(1)  None of  the  Company's  interest  expense  and  none  of  the subsidiary's
     preferred stock dividends was allocated to the discontinued operations.

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

    Operating Revenues.  Operating revenues increased $22.5 million (13.9%) from
$161.9 million for 1995 to $184.5 million  for 1996 largely as a result of $10.7
million of operating revenues relative to the pipeline construction and services
activities of Keystone, which was acquired in December, 1995, and a $4.9 million
increase in operating revenues relative  to  energy  sales and services by PERI.
Also contributing to the increase  in  operating  revenues was a higher level of
revenues attributable to PGE's gas  sales  and  services which increased by $7.8

                                        -21-

</TABLE>
<PAGE>

million, 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 the purchased gas
cost component of PGE's tariffs (the "gas cost rate").  See "-Rate Matters."

    Operating Expenses.  Operating  expenses,  including depreciation and income
taxes, increased $25.2 million (17.9%)  from  $141.0  million for 1995 to $166.2
million for 1996.    As  a  percentage  of  operating  revenues, total operating
expenses increased from 87.1% during 1995 to 90.6% during 1996.

    The cost of gas increased $8.0 million (8.8%) from $90.5 million for 1995 to
$98.5 million for 1996 primarily because of  a $4.1 million increase in the cost
of gas relative to PERI's  gas  sales  and  services and a $3.9 million increase
resulting from the aforementioned increase  in  sales  by PGE to residential and
commercial heating customers,  the  effects  of  which  were partially offset by
lower levels in PGE's gas cost rate (see "-Rate Matters"). 

    Other than the cost of gas and income taxes, operating expenses increased by
$15.4 million (33.1%) from $46.6  million  for  1995  to $61.9 million for 1996.
This increase was largely attributable  to  a  $12.8 million (52.2%) increase in
other operation expenses, primarily  as  a  result  of  $9.5 million of expenses
relative to Keystone's pipeline construction and services activities, and a $2.6
million (11.7%) increase in expenses with respect to PGE's operations, which was
principally the result of higher payroll and payroll-related costs.  Payroll and
payroll-related costs increased largely  because  of charges, which had formerly
been allocated to  PGE's  discontinued  operations,  now  being  absorbed by its
continuing operations.  Also contributing  to  the higher operating expenses was
an $815,000 (11.6%) increase in depreciation  expense as a result of $170,000 of
depreciation relative to Keystone  and  $641,000 of depreciation attributable to
additions to PGE's utility plant.

    Income taxes increased  $1.8  million  from  $4.0  million  in  1995 to $5.8
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
$2.7 million (12.9%) from $21.0 million  for  1995 to $18.3 million for 1996 and
decreased as a percentage  of  total  operating  revenues  for such periods from
12.9% in 1995  to  9.4%  in  1996,  primarily  because  of  the  higher level of
operating expenses.

    Other Income, Net.  Other  income,  net increased $1.4 million from $355,000
for 1995 to $1.7  million  for  1996  largely  as  a result of investment income
totaling $2.5 million relative to the  temporary  investment of a portion of the
proceeds from the sale of PGE's regulated water utility operations.  The effects
of this increase were partially  offset  by  charges of $548,000 relative to the
sale and abandonment of PGE's interest  in  certain gas rights and properties in
western Pennsylvania.

    Interest Charges.  Interest charges  decreased  by $5.2 million (33.9%) from
$15.4 million for 1995 to  $10.2  million  for  1996.  This decrease was largely
attributable to the lower level of  indebtedness resulting from the repayment of
PGE'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



                                        -22-
<PAGE>

operations on such date and the Company's defeasance of its 10.125% Senior Notes
on September 30, 1996.

    Income  From  Continuing  Operations.    Income  from  continuing operations
increased $3.9 million (66.5%) from  $5.9  million  for 1995 to $9.8 million for
1996.  This increase  was  largely  the  result  of the matters discussed above,
principally the increase in  operating  revenues  and  other income, net and the
decrease in interest charges,  the  effects  of  which  were partially offset by
increased operating expenses.

    Subsidiary's  Preferred  Stock  Dividends.    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 PGE 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. 

    Income (Loss) Before  Extraordinary  Loss.    The  increase in income before
extraordinary loss of $8.4 million from a loss of $713,000 for 1995 to income of
$7.7 million for 1996 was  largely  the  result  of  the increase in income from
continuing operations and the lower level of dividends on subsidiary's preferred
stock, as discussed above, and the  reduction of $3.5 million, from $3.8 million
to $363,000, in the loss with respect to discontinued operations.

    Extraordinary Loss.  On September  30,  1996, the Company defeased the $28.7
million outstanding principal amount of  its  10.125% Senior Notes, due June 15,
1999, and recorded an extraordinary loss  of  $1.1 million ($1.6 million, net of
$575,000 of related income tax benefit).   The loss on the defeasance represents
the interest expense on the  Senior  Notes  from  the date of defeasance through
June 15, 1997, the date on  which  the  Senior  Notes will be redeemed, plus the
writeoff of the unamortized balance  of  issuance expenses related to the Senior
Notes, less (i) the interest income that  will  be earned on the funds that were
deposited with  the  Trustee  for  the  Senior  Notes  in  connection with their
defeasance and (ii) the related income tax benefit.

    Net Income (Loss).  The increase in  net  income of $7.3 million from a loss
of $713,000 for 1995,  to  income  of  $6.6  million  for  1996,  as well as the
increase in earnings per share of common  stock  of $.57 from a loss of $.06 per
share for 1995 to earnings of $.51  per  share  for 1996 (after a $.13 per share
charge for the premium on repurchase of subsidiary's preferred stock and an $.11
per share charge relative to  the  extraordinary  loss),  were the result of the
higher  income  from  continuing   operations   and  the  reduced  dividends  on
subsidiary's preferred stock, as discussed  above,  and the decrease of $.29 per
share, from $.33 per share for 1995 to $.04 per share for 1996, in the loss with
respect to discontinued operations.

 o  Year Ended December 31, 1995, Compared With Year Ended December 31, 1994

    Operating Revenues.  Operating revenues  decreased $15.2 million (8.6%) from
$177.1 million for 1994 to $161.9 million for 1995.  This decrease was primarily
the result of a reduction in PGE's gas cost rate effective May 16, 1995.  See "-
Rate Matters."  Also contributing to  the decrease in revenues was the switching
of  certain  of  PGE's  commercial   and  industrial  customers  from  sales  to
transportation service and a 179 million  cubic feet (0.8%) decrease in sales by
PGE to residential and  commercial  heating  customers,  caused  by a 133 (2.2%)
decrease in heating degree days.  There were 6,029 heating degree days (95.8% of
normal) during 1995 compared to 6,162 (97.9% of normal) during 1994.


                                        -23-
<PAGE>

    Operating Expenses.  Operating  expenses,  including depreciation and income
taxes, decreased $15.5 million  (9.9%)  from  $156.5  million for 1994 to $141.0
million for 1995.    As  a  percentage  of  operating  revenues, total operating
expenses decreased from 88.3% during 1994 to 87.1% during 1995.

    The cost of gas decreased $15.4 million (14.5%) from $105.8 million for 1994
to $90.5 million for 1995, primarily  because of the aforementioned reduction in
PGE's gas cost  rate  effective  May  16,  1995.    See  "-Rate  Matters."  Also
contributing to the  decrease  was  the  reduced  consumption by residential and
commercial heating customers.

    Other than the cost of  gas  and  income taxes, operating expenses increased
$459,000 (1.0%) from $46.1 million  for  1994  to  $46.6 million for 1995.  This
increase  was  attributable  to  a  $531,000  (12.0%)  increase  in  maintenance
expenses, principally as a result of  charges relative to the maintenance of gas
valves, a $451,000 (1.9%) increase  in  other  operation expenses and a $347,000
(5.2%) increase in depreciation  expense  as  a  result  of additions to utility
plant.  The effect of the  increase  was  partially offset by an $870,000 (8.0%)
decrease in taxes other than  income  taxes,  primarily because of a decrease in
gross receipts tax as a result of the lower level of operating revenues. 

    Income taxes decreased $586,000 (12.9%)  from  $4.5  million in 1994 to $4.0
million in 1995 due  to  a  decrease  in  income  before  income taxes (for this
purpose, operating income  net  of  interest  charges)  and  a  reduction in the
Pennsylvania corporate net income tax rate.

    Operating Income.    As  a  result  of  the  above,  total  operating income
increased $319,000 (1.5%) from $20.6  million  in  1994 to $21.0 million in 1995
and increased as a percentage of  total operating revenues for such periods from
11.7% in 1994 to 12.9% in 1995.

    Other Income, Net.  Other  income,  net  increased $244,000 from $111,000 in
1994 to $355,000 in  1995,  primarily  as  a  result  of a $227,000 write-off of
expired advances related to income taxes and a $226,000 decrease in amortization
of preferred stock issuance costs.

    Interest Charges.  Interest charges  increased  by $1.6 million (11.8%) from
$13.8 million for 1994 to  $15.4  million  for  1995.  This increase was largely
attributable to interest on overcollections of purchased gas costs and increased
borrowings primarily as  a  result  of  the  Company's  May  31, 1994, term loan
agreement.  None of the interest  expense on borrowings under the Company's term
loan agreement or the Company's  senior  notes was allocated to the discontinued
operations.

    Income  From  Continuing  Operations.    Income  from  continuing operations
decreased $1.1 million (15.4%) from  $7.0  million  for 1994 to $5.9 million for
1995.  This decrease  was  largely  the  result  of the matters discussed above,
principally the decrease in operating  margin  resulting from the lower level of
sales by PGE to residential and commercial heating customers.  The effect of the
decreased operating margin was partially offset by the lower levels of taxes.

    Subsidiary's  Preferred  Stock  Dividends.    Dividends  on  preferred stock
decreased $1.9 million (40.4%) from  $4.6  million  for 1994 to $2.8 million for
1995, as a result of the redemption  by  PGE  on May 31, 1994, of 150,000 shares
($15.0 million) of its 9.50% cumulative  preferred stock, $100 par value, and on
December 16, 1994, of  150,000  shares  ($15.0  million) of its 8.90% cumulative



                                        -24-
<PAGE>

preferred stock, $100 par value.  No dividends on preferred stock were allocated
to the discontinued operations.

    Net Income (Loss).  The decrease in  net income (loss) of $13.5 million from
income of $12.8 million for 1994 to a  loss of $713,000 for 1995, as well as the
decrease in earnings per share of  common  stock of $1.14 from earnings of $1.08
per share for 1994 (after an $.09 per share charge for the premium on redemption
of subsidiary's preferred stock) to  a  loss  of  $.06  per share for 1995, were
largely the result of the estimated  loss  (equivalent to $.52 per share) on the
sale of PGE's water utility  operations,  as discussed above.  Also contributing
to the decreases in net income  and  earnings  per  share for 1995 was the lower
income from continuing operations.  The  effects of these factors were partially
offset by the reduced dividends on subsidiary's preferred stock and, in the case
of earnings  per  share,  the  absence  of  any  premium  on  the  redemption of
subsidiary's preferred stock.

RATE MATTERS

    Rate Increase.  On May  24,  1996,  PGE  filed  an application with the PPUC
seeking an increase in its base gas  rates, designed to produce $14.1 million in
additional annual revenue, to be effective July 23, 1996.  On June 20, 1996, the
PPUC suspended this rate increase for  seven months (until February 23, 1997) in
order to investigate the reasonableness of  the  proposed rates.  On November 7,
1996, PGE and certain  parties  filing  objections  to the rate increase request
filed  a  Settlement  Agreement  and  Joint  Petition  for  Settlement  of  Rate
Investigation (the  "Settlement  Petition")  with  the  Administrative Law Judge
assigned to conduct  the  investigation  of  the  rate  increase  request.  This
Settlement Petition provided for an overall 5.3% rate increase that was designed
to produce $7.5 million of additional annual revenue.  By Order adopted December
19, 1996, the PPUC approved  the Settlement Petition effective January 15, 1997.
Under the terms of the Settlement  Petition,  the  billing for the impact of the
rate increase relative  to  PGE's  residential  heating  customers  (which it is
estimated will total $6.6 million on an annual basis) is being deferred, without
carrying charges, until July, 1997.  

    Gas Cost Adjustments.   The  provisions  of  the Pennsylvania Public Utility
Code require that the tariffs  of  LDCs  such  as  PGE, be adjusted on an annual
basis, and 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.

    Effective September 14, 1995, the  PPUC adopted regulations that provide for
the quarterly adjustment of the annual  purchased  gas cost rate of larger LDCs,
including PGE.  Such  quarterly  adjustments  are  allowed when the actual costs
vary from the costs reflected in the respective company's tariffs by 2% or more.
Except for reducing the amount  of  any  over  or undercollections of gas costs,
these regulations will not have any  material effect on PGE's financial position
or results of operations, and PGE is  still required to file an annual purchased
gas cost rate.




                                        -25-
<PAGE>

    In accordance with  these  annual  and  quarterly  procedures,  PGE has been
permitted to make the following changes since  January 1, 1994, to the gas costs
contained in its gas tariff rates:
[CAPTION]
                                    Change in              Calculated
             Effective             Rate per MCF        Increase (Decrease)
                Date              From     To           in Annual Revenue 
           [S]                    [C]     [C]              [C]
           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)*
           December 1, 1994        3.74    3.68             (1,800,000)

    * 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
PGE's 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") are subject to  recovery  through the annual PGC rate filings
made with the PPUC by PGE and  other  larger LDCs.  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 Code.   The  PGC  Order  further  stated that all such filings
would be evaluated on a case-by-case basis.

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

    By Order of the PPUC entered August  26, 1994, PGE 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 $10.1 million of Non-Gas
Transition Costs  will  be  billed  to  PGE,  generally  over  a six-year period
extending through January 1, 1999, of which  $8.0 million had been billed to PGE
and $7.5 million had been recovered from  its customers as of December 31, 1996.
PGE has recorded the estimated Non-Gas Transition Costs that remain to be billed
to it and the amounts remaining to be recovered from its customers.







                                        -26-
<PAGE>

    Effects of Inflation.  When utility  property  reaches the end of its useful
life and must be replaced, PGE 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 its books of account.
However, the cost of such replacement property would be includable in PGE's rate
base, and PGE 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, PGE  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 PGE's liabilities,
including $141.0 million of its long-term  debt.    The Company and PGE used the
$203.3 million of cash proceeds from  the sale, after an estimated $58.8 million
of federal and state income taxes  (of  which  $44.6 million had been paid as of
December 31,  1996),  to  retire  debt,  to  repurchase  stock, for construction
expenditures and for other working capital purposes.  In this regard, PGE repaid
its $50.0 million term  loan  due  1996  and  all  of  its then outstanding bank
borrowings on February 16, 1996,  and  the  Company and PGE temporarily invested
the balance of the proceeds.  A portion of these proceeds were subsequently used
by the Company to repurchase  2,025,928  shares  of its common stock during 1996
for an aggregate consideration of $39.8  million, of which 1,781,204 shares were
acquired in April  pursuant  to  a  self  tender  offer  and 241,874 shares were
acquired from time  to  time  through  open  market  transactions  and an oddlot
buyback program.   Also  during  1996  and  using  proceeds  from  the sale, PGE
repurchased 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, PGE 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.    As of December 31,
1996, the only unexpended proceeds  from  the  sale were $31.4 million which the
Company had temporarily lent to PGE for its working capital needs.

Liquidity

    The primary capital needs of the Company continue to be the funding of PGE's
construction program  and  the  seasonal  funding  of  PGE's  gas  purchases and
increases in  its  customer  accounts  receivable.    PGE'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.

    Additionally, as the Company's  nonregulated activities expand, capital will
be required for those activities, especially the residential and commercial real
estate development projects  that  are  planned  for certain Company-owned land.
The projects that  are  currently  planned  by  the  Company  are in the initial
planning and design  phases,  and  the  amount  and  type  of funding that those
projects will require has  not  yet  been  finalized.   However, it is currently
anticipated that approximately $13.1  million  will  be expended with respect to



                                        -27-
<PAGE>

those  projects  in  1997  and  that  such  expenditures  will  be  funded  by a
combination of capital provided by  the  Company, bank borrowings and other debt
financing.

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

    With the repayment of its term loan  and all its bank borrowings on February
16, 1996, and the availability of  cash  proceeds from the sale of its regulated
water operations,  PGE  terminated  its  $60.0  million  bank  credit agreement.
However, in order to finance construction  expenditures and to meet its seasonal
borrowing requirements, PGE has  since  made  arrangements  for a total of $65.5
million of unsecured revolving  bank  credit,  which  is deemed adequate for its
immediate needs.  Specifically, PGE currently  has six bank lines of credit with
an aggregate borrowing capacity of $65.5 million which provide for borrowings at
interest rates generally less than prime  and  which mature during mid-1997.  As
of March 1, 1997, PGE  had  $27.2  million of borrowings outstanding under these
bank lines of credit.  

    The Company believes that PGE will be  able to raise in a timely manner such
funds as are required for its future construction expenditures, refinancings and
other working capital requirements.    Likewise,  the  Company believes that its
nonregulated subsidiaries will be able to  raise  such funds as are required for
their needs, including that  required  for  the  residential and commercial real
estate development that is planned.

Long-Term Debt and Capital Stock Financings

    Both the Company and its subsidiaries, particularly PGE, periodically engage
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  1995,  exclusive of interim bank borrowings
and indebtedness that was  assumed  by  Pennsylvania-American in connection with
its purchase of PGE's water utility operations.

    On July 28, 1994,  the  Company  implemented  a Customer Stock Purchase Plan
(the "Customer Plan") which  provided  the  residential  customers of PGE with a
method of purchasing newly-issued shares of  the  Company's common stock at a 5%
discount from the market price.   Under  the terms of the Customer Plan, 176,462
shares ($2.4 million) and 119,074 shares  ($1.7 million) of the Company's common
stock were issued  in  1995  and  1994,  respectively.    The  proceeds from the
issuance of shares  through  the  Customer  Plan  were  used  by  the Company to
purchase PGE common stock.   Effective  May  9,  1995, the Company suspended the
Customer Plan because of the  significant  reduction in its capital requirements
resulting from the  sale  of  PGE's  water  utility  operations to Pennsylvania-
American.

    The Company also obtains external  funds  from  the sale of its common stock
through its Dividend Reinvestment and Stock  Purchase Plan (the "DRP"), its 1992
Stock Option Plan and its Employees' Savings Plan.  However, from June 14, 1996,
through December 31, 1996, the Company  temporarily suspended the sale of newly-



                                        -28-
<PAGE>

issued stock to both the  DRP  and  Employees'  Savings  Plan as a result of the
proceeds received from the sale  of  PGE's  water utility operations, and during
that  period  the  two  plans  obtained  shares  of  Company  common  stock  for
participants through open  market  purchases.    Effective  January 1, 1997, the
Company resumed  selling  newly-issued  stock  to  both  the  DRP and Employees'
Savings Plan.

    Through the  DRP,  holders  of  shares  of  the  Company's  common stock may
reinvest cash dividends and/or  make  cash  investments  in  common stock of the
Company.    Under  the  DRP,  17,664  shares  ($340,000),  232,610  shares ($3.3
million), and 124,542 shares ($1.8  million)  of common stock were issued during
1996, 1995 and 1994,  respectively.  The  DRP  was  amended  on  May 5, 1994, to
provide the Company's shareholders with  a  method of reinvesting cash dividends
and making cash investments  to  purchase  newly-issued  shares of the Company's
common stock at a 5% discount from  the  market price.  Prior to such amendment,
cash dividends were  reinvested  at  100%  of  the  market price in newly-issued
shares and cash investments were used to purchase shares of the Company's common
stock on the open market.  Effective May 9, 1995, the Company 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  PGE's  water utility
operations to Pennsylvania-American.  The  cash investment feature was, however,
reinstated effective June 1, 1996.

    Under the Company's Employees'  Savings  Plan  (a section 401(k) plan) which
became effective January 1, 1992, the Company issued an additional 10,198 shares
($195,000)  in  1996,  38,936  shares  ($628,000)  in  1995  and  36,200  shares
($540,000) in 1994.  Additionally,  under  the  Company's 1992 Stock Option Plan
37,400 shares ($561,000) and  9,600  shares  ($144,000)  were issued in 1996 and
1995, respectively.

    On October 12, 1995, PGE borrowed $50.0 million under a term loan agreement.
The proceeds from the term loan,  along  with  other funds provided by PGE, were
utilized on October 13, 1995,  to  redeem  the $50.0 million principal amount of
PGE's 9.57% Series First  Mortgage  Bonds  due  September 1, 1996, in connection
with the then-pending sale  of  PGE's  water utility operations to Pennsylvania-
American.  PGE repaid its  $50.0  million  term  loan on February 16, 1996, with
proceeds from the sale of its water utility operations to Pennsylvania-American.

    On December 7, 1995, PERI borrowed $2.0 million pursuant to a five-year term
loan agreement.  PERI used  the  proceeds  it  so received, along with an equity
investment from the Company, to acquire all of the outstanding stock of Keystone
(formerly known as Ford, Bacon & Davis  Sealants, Inc.) from Ford, Bacon & Davis
Companies, Inc., a  wholly-owned  subsidiary  of  Deutsche Babcock Technologies,
Inc.  On May 31, 1996,  PERI  repaid all principal amounts outstanding under the
loan with an advance it received from the Company.

Capital Expenditures and Related Financings

    Capital expenditures  totaled  $30.5  million  during  1996, including $29.2
million of expenditures for the construction  of utility plant.  During 1995 and
1994, respectively, expenditures for  the  construction of utility plant totaled
$21.1  million  and  $19.6  million.    Such  expenditures  were  financed  with
internally-generated funds and bank borrowings, pending the periodic issuance of
stock and long-term debt.




                                        -29-
<PAGE>

    The Company estimates that its capital expenditures will total $45.4 million
during 1997, consisting of  $27.9  million  relative  to utility plant and $17.5
million with respect to  the  Company's nonregulated activities, including $13.1
million  for  residential  and  commercial  real  estate  development.   Capital
expenditures are currently expected to range  from $35.0-40.0 million in each of
the years 1998 and 1999, of  which $25.0-30.0 million will involve utility plant
and the balance will relate  to the Company's nonregulated activities, primarily
residential and commercial real estate  development projects.  It is anticipated
that such capital 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.

Current Maturities of Long-Term Debt and Preferred Stock

    As of December 31, 1996, $38.7 million of PGE's long-term debt, and $115,000
of PGE's preferred stock was required to be repaid within twelve months.

    On September 30, 1996,  the  Company  defeased the $28.7 million outstanding
principal amount of its 10.125%  Senior  Notes,  due  June 15, 1999 (the "Senior
Notes").  Specifically, on that  date,  the Company deposited $29.9 million with
the trustee for the Senior  Notes,  which  will  be used, together with interest
earned on the funds so  deposited,  to  pay the Company's interest and principal
obligations through June 15, 1997, the  date  on  which the Senior Notes will be
redeemed.  The deposit of  such  funds  acted  to discharge all of the Company's
obligations with respect to the Senior Notes.   Of the $29.9 million required to
defease the Senior Notes, $17.2 million  was obtained through the liquidation of
the Company's temporary cash investments  and $12.7 million was obtained through
the repayment of loans that had been made by the Company to PGE.

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 relating to  new  projects like the residential and
commercial development projects on Company-owned land.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The consolidated financial statements  of  the  Company and its subsidiaries
and the report of independent public  accountants thereon are presented on pages
31 through 57 of this Form 10-K.  All per share data included in this Item 8 has
been restated to reflect  the  two-for-one  split  of the Company's Common Stock
effective March 20, 1997, as  more  fully  discussed  in  Note 5 of the Notes to
Consolidated Financial Statements contained herein.










                                        -30-
<PAGE>


                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Pennsylvania Enterprises, Inc.:

We have audited the  accompanying  consolidated  balance sheets and consolidated
statements of capitalization of  Pennsylvania  Enterprises, Inc. (a Pennsylvania
corporation) and subsidiaries (the "Company") as  of December 31, 1996 and 1995,
and  the  related  consolidated   statements  of  income,  common  shareholders'
investment, and cash flows  for  each  of  the  three  years in the period ended
December  31,  1996.      These   consolidated   financial  statements  are  the
responsibility of the Company's management.  Our responsibility is to express an
opinion on these consolidated 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  consolidated  financial statements are
free of material misstatement.   An  audit  includes examining, on a test basis,
evidence supporting the amounts  and  disclosures  in the consolidated 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 consolidated  financial statements referred to above present
fairly,  in  all  material  respects,  the  financial  position  of Pennsylvania
Enterprises, Inc. and subsidiaries as  of  December  31,  1996 and 1995, and the
results of their operations and their cash  flows for each of the three 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
consolidated 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
consolidated financial  statements.    This  schedule  has  been  subject to the
auditing procedures applied in  the  audit  of  the basic consolidated 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
consolidated financial statements taken as a whole.






                                                 ARTHUR ANDERSEN LLP


New York, N.Y.
February 19, 1997





                                        -31-
<PAGE>

                PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                              December 31,    
                                                          1996          1995  
                                                        (Thousands of Dollars)
ASSETS
<S>                                                     <C>           <C>
UTILITY PLANT:
  At original cost                                      $319,205      $295,895
  Accumulated depreciation                               (79,783)      (76,882)
                                                         239,422       219,013

OTHER PROPERTY AND INVESTMENTS:
  Nonutility property and equipment                       12,502        11,553
  Accumulated depreciation                                (4,674)       (5,394)
  Other                                                    1,720           983
                                                           9,548         7,142

CURRENT ASSETS:
  Cash and cash equivalents                                1,126           629
  Accounts receivable -
    Customers                                             22,464        21,066
    Others                                                   565           815
    Reserve for uncollectible accounts                    (1,233)         (788)
  Unbilled revenues                                       12,966        10,319
  Materials and supplies, at average cost                  2,865         2,876
  Gas held by suppliers, at average cost                  20,265        15,140
  Natural gas transition costs collectible                 2,525         4,612
  Deferred cost of gas and supplier refunds, net          19,316             -
  Prepaid expenses and other                               1,438         3,486
                                                          82,297        58,155

DEFERRED CHARGES:
  Regulatory assets -
    Deferred taxes collectible                            29,771        30,015
    Other                                                  4,274         3,013
  Unamortized debt expense                                 1,498         2,630
                                                          35,543        35,658



NET ASSETS OF DISCONTINUED OPERATIONS (Note 2)                 -       204,250







TOTAL ASSETS                                            $366,810      $524,218




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

</TABLE>
                                        -32-
<PAGE>

                   PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                             CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                              December 31,    
                                                          1996          1995  
                                                        (Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
<S>                                                     <C>           <C>
CAPITALIZATION (see accompanying statements):
 Common shareholders' investment (Notes 5 and 8)        $117,651      $162,739
 Preferred stock of PGE (Note 6) -
   Not subject to mandatory redemption, net               18,851        33,615
   Subject to mandatory redemption                           739         1,680
 Long-term debt (Note 7)                                  75,000       106,706
                                                         212,241       304,740

CURRENT LIABILITIES:
  Current portion of long-term debt (Notes 7 and 9)       38,721       116,001
  Preferred stock subject to repurchase or mandatory
    redemption (Note 6)                                      115            80
  Notes payable (Note 9)                                  10,000        10,180
  Accounts payable                                        19,945        18,531
  Deferred cost of gas and supplier refunds, net               -           434
  Accrued general business and realty taxes                2,350         1,493
  Accrued income taxes                                    14,525           526
  Accrued interest                                         1,243         2,307
  Accrued natural gas transition costs (Note 3)            2,095         2,278
  Other                                                    3,904         3,534
                                                          92,898       155,364

DEFERRED CREDITS:
  Deferred income taxes                                   49,270        48,835
  Accrued natural gas transition costs (Note 3)                -         1,144
  Unamortized investment tax credits                       4,767         4,938
  Operating reserves                                       3,086         3,709
  Other                                                    4,548         5,488
                                                          61,671        64,114






COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)





TOTAL CAPITALIZATION AND LIABILITIES                    $366,810      $524,218




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


                                        -33-
</TABLE>
<PAGE>
<TABLE>
<CAPTION>
                  PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                         CONSOLIDATED STATEMENTS OF INCOME

                                                      Year Ended December 31,      
                                                    1996        1995        1994   
                                                       (Thousands of Dollars)
<S>                                              <C>         <C>         <C>
OPERATING REVENUES:
  Gas sales and services                         $  173,622  $  160,850  $  176,830
  Pipeline construction and services                 10,733         826          44
  Other                                                 125         259         223
    Total operating revenues                        184,480     161,935     177,097

OPERATING EXPENSES:
  Cost of gas                                        98,475      90,478     105,832
  Other operation expenses                           37,417      24,584      24,133
  Maintenance                                         5,513       4,967       4,436
  Depreciation                                        7,833       7,018       6,671
  Income taxes                                        5,800       3,955       4,541
  Taxes other than income taxes                      11,182       9,982      10,852
    Total operating expenses                        166,220     140,984     156,465

OPERATING INCOME                                     18,260      20,951      20,632

OTHER INCOME, NET (Note 4)                            1,726         355         111

INCOME BEFORE INTEREST CHARGES                       19,986      21,306      20,743

INTEREST CHARGES:
  Interest on long-term debt                          9,609      13,672      12,589
  Other interest                                        760       1,844       1,223
  Allowance for borrowed funds used
    during construction                                (177)        (94)        (21)
      Total interest charges                         10,192      15,422      13,791

INCOME FROM CONTINUING OPERATIONS                     9,794       5,884       6,952

INCOME (LOSS) WITH RESPECT TO DISCONTINUED
  OPERATIONS (Note 2)                                  (363)     (3,834)     10,504

INCOME BEFORE SUBSIDIARY'S PREFERRED
  STOCK DIVIDENDS                                     9,431       2,050      17,456

SUBSIDIARY'S PREFERRED STOCK DIVIDENDS                1,730       2,763       4,639

INCOME (LOSS) BEFORE EXTRAORDINARY LOSS               7,701        (713)     12,817

EXTRAORDINARY LOSS (NET OF TAX BENEFIT
  OF $575,000) (Note 7)                              (1,117)          -           -

NET INCOME (LOSS)                                $    6,584  $     (713) $   12,817

COMMON STOCK: (Note 5)
  Earnings (loss) per share of common stock:
    Continuing operations                        $      .79  $      .27  $      .21
    Discontinued operations                            (.04)       (.33)        .96
    Net income (loss) before premium on
      repurchase/redemption of subsidiary's
      preferred stock and extraordinary loss            .75        (.06)       1.17
    Premium on repurchase/redemption of
      subsidiary's preferred stock                     (.13)          -        (.09)
    Extraordinary loss                                 (.11)          -           -
    Earnings (loss) per share of common stock    $      .51  $     (.06) $     1.08

  Weighted average number of shares outstanding  10,222,002  11,458,872  10,913,136




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







</TABLE>
                                        -34-
<PAGE>

                   PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                        Year Ended December 31,   
                                                     1996       1995       1994   
                                                        (Thousands of Dollars)
<S>                                                 <C>        <C>        <C>
CASH FLOW FROM OPERATING ACTIVITIES:
  Income from continuing operations, net of
    subsidiary's preferred stock dividends          $  8,064   $  3,121   $  2,313
  Effects of noncash charges to income -
    Depreciation                                       7,896      7,018      6,693
    Deferred income taxes, net                         2,104       (251)       752
    Provisions for self insurance                      1,042      2,652      1,030
    Extraordinary loss, net of tax benefit            (1,117)         -          -
    Other, net                                         2,335      5,572      3,074
  Changes in working capital, exclusive of cash 
   and current portion of long-term debt -
    Receivables and accrued utility revenues          (3,350)      (219)     1,435
    Gas held by suppliers                             (5,125)     4,885      6,625
    Accounts payable                                   2,057        321     (4,375)
    Deferred cost of gas and supplier refunds, net   (18,493)     5,715      5,784
    Other current assets and liabilities, net          2,235     (6,509)      (763)
  Other operating items, net                          (5,458)     2,628     (6,588)
      Net cash provided by (used for) continuing
        operations                                    (7,810)    24,933     15,980
  Net cash provided by (used for) discontinued
    operations                                       (45,173)     3,764        552
      Net cash provided by (used for) operating
        activities                                   (52,983)    28,697     16,532

CASH FLOW FROM INVESTING ACTIVITIES:
  Additions to utility plant                         (29,312)   (20,615)   (16,960)
  Proceeds from the sale of discontinued operations  261,752          -          -
  Acquisition of nonregulated business                     -     (3,169)         -
  Other, net                                          (1,803)    (4,934)     1,098 
      Net cash provided by (used for) investing
        activities                                   230,637    (28,718)   (15,862) 

CASH FLOW FROM FINANCING ACTIVITIES:
  Issuance of common stock                             1,291      4,045      3,887
  Repurchase of common stock                         (40,452)         -          -
  Common stock subscribed, net                             -          -      2,515 
  Repurchase/redemption of preferred stock of PGE    (15,670)       (80)   (30,080) 
  Dividends on common stock                          (11,174)   (12,605)   (12,002)
  Issuance of long-term debt                               -     52,000     50,000
  Repayment of long-term debt                        (81,906)   (53,535)   (31,055)
  Net increase (decrease) in bank borrowings         (27,903)    10,500     15,370
  Other, net                                          (1,343)        (5)    (1,724) 
      Net cash provided by (used for) financing
        activities                                  (177,157)       320     (3,089) 

NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                            497        299     (2,419)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR           629        330      2,749 
CASH AND CASH EQUIVALENTS AT END OF YEAR            $  1,126   $    629   $    330

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the year for:
    Interest (net of amount capitalized)            $ 10,423   $ 27,951   $ 24,622
    Income taxes                                    $ 46,605   $  8,748   $  7,460






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




</TABLE>
                                        -35-
<PAGE>

                     PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>

                                                          December 31,        
                                                   1996                1995     
                                                    (Thousands of Dollars)
<S>                                              <C>                 <C>
COMMON SHAREHOLDERS' INVESTMENT (Notes 5 and 8):
  Common stock, no par value
    (stated value $5 per share) 
    Authorized - 30,000,000 shares
    Outstanding - 9,607,972 shares and
      11,568,638 shares, respectively            $  48,040           $  57,843
  Additional paid-in capital                        20,391              49,749
  Retained earnings                                 49,220              55,147
     Total common shareholders' investment         117,651   55.4%     162,739   53.4%

PREFERRED STOCK of PGE, par value $100 per share 
  Authorized - 997,500 shares (Note 6):
    Not subject to mandatory redemption, net -
      4.10% cumulative preferred,
        79,670 and 100,000 shares outstanding,
        respectively                                 7,967              10,000
      Less current repurchases                         (35)                  -
      9% cumulative preferred, 115,641 and
        250,000 shares outstanding, respectively,
        net of issuance costs                       10,919              23,615
    Total preferred stock not subject to
        mandatory redemption, net                   18,851    8.9%      33,615   11.0%
    Subject to mandatory redemption -
      5.75% cumulative preferred, 8,192 and 
        17,600 shares outstanding, respectively        819               1,760
      Less current redemption requirements             (80)                (80)

    Total preferred stock subject to
        mandatory redemption                           739    0.4%       1,680    0.6%

LONG-TERM DEBT (Note 7):
  First mortgage bonds                              55,000              55,000
  Notes                                             58,721             167,707
  Less current maturities and sinking
    fund requirements                              (38,721)           (116,001)
     Total long-term debt                           75,000   35.3%     106,706   35.0%

TOTAL CAPITALIZATION                             $ 212,241  100.0%   $ 304,740  100.0%










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



</TABLE>
                                        -36-
<PAGE>

                  PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' INVESTMENT

               FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
<TABLE>
<CAPTION>

                                          Common   Additional
                                Common    Stock     Paid-In   Retained
                                 Stock  Subscribed  Capital   Earnings   Total 
                                            (Thousands of Dollars)
<S>                             <C>     <C>        <C>        <C>      <C>
Balance at December 31, 1993    $54,140 $        - $   43,005 $ 68,630 $165,775

Net income for 1994                   -          -          -   12,817   12,817
Issuance of common stock          1,399          -      2,488        -    3,887
Common stock subscribed, net          -      2,515          -        -    2,515
Premium on redemption of
  preferred stock of PGE              -          -          -     (980)    (980)
Cash dividends on common stock 
  ($1.10 per share)                   -          -          -  (12,002) (12,002)

Balance at December 31, 1994     55,539      2,515     45,493   68,465  172,012

Net loss for 1995                     -          -          -     (713)    (713)
Issuance of common stock          2,304          -      4,256        -    6,560
Common stock subscribed, net          -     (2,515)         -        -   (2,515)
Cash dividends on common stock
  ($1.10 per share)                   -          -          -  (12,605) (12,605)

Balance at December 31, 1995     57,843          -     49,749   55,147  162,739

Net income for 1996                   -          -          -    6,584    6,584
Issuance of common stock            328          -        963        -    1,291
Repurchase of common stock      (10,131)         -    (30,321)       -  (40,452)
Premium on repurchase of
  preferred stock of PGE              -          -          -   (1,337)  (1,337)
Cash dividends on common stock 
  ($1.10 per share)                   -          -          -  (11,174) (11,174)

Balance at December 31, 1996    $48,040 $        - $   20,391 $ 49,220 $117,651














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



</TABLE>
                                        -37-
<PAGE>

                PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Nature of the Business.  Pennsylvania Enterprises, Inc. ("the Company") is a
holding company whose principal subsidiary,  PG Energy Inc. ("PGE"), a regulated
public utility formerly known as Pennsylvania Gas and Water Company, distributes
natural gas to a ten-county area  in northeastern Pennsylvania, a territory that
includes 116 municipalities, in addition to the cities of Scranton, Wilkes-Barre
and Williamsport.  On February  14,  1997,  PGE  acquired all of the outstanding
capital stock of Honesdale  Gas  Company  ("Honesdale"), also a regulated public
utility, which  distributes  natural  gas  to  approximately  3,200 customers in
portions of Pike and Wayne Counties in northeastern Pennsylvania.  

    The Company, through its  other subsidiaries, Pennsylvania Energy Resources,
Inc. ("PERI"),  Theta  Land  Corporation  and  Keystone  Pipeline Services, Inc.
("Keystone"), a wholly-owned  subsidiary  of  PERI,  is  also engaged in various
nonregulated activities, including the  marketing  and  sale  of natural gas and
propane  and  other  energy-related  services,  as  well  as  the  construction,
maintenance  and   rehabilitation   of   natural   gas  distribution  pipelines.
Additionally, Theta is presently  initiating  several residential and commercial
real estate development projects  on  Company-owned land, for which construction
will commence in 1997.  Prior to  1996, these activities were not significant to
the operations  of  the  Company  as  a  whole.    Pennsylvania Energy Marketing
Company, previously a subsidiary of the Company, was merged into PERI on May 31,
1996.

    Principles of Consolidation.   The consolidated financial statements include
the accounts of the Company  and  its  subsidiaries,  PGE,  PERI and Theta.  The
consolidated  financial  statements  also   include  the  accounts  of  Keystone
beginning December 4,  1995,  the  date  Keystone  was  acquired  by  PERI.  All
material intercompany accounts have been eliminated in consolidation.

    PGE, a  wholly-owned  subsidiary  of  Pennsylvania  Enterprises,  Inc., is a
regulated public utility subject to  the jurisdiction of the Pennsylvania Public
Utility Commission ("PPUC") for  rate  and  accounting  purposes.  The financial
statements  of  PGE  that  are  incorporated  in  these  consolidated  financial
statements 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.


                                        -38-
<PAGE>

    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 9% in 1996, 8% in 1995 and 7% in 1994.

    PGE 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 2.60% in
1996, 2.75% in 1995 and 2.77% in 1994, 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.    PGE  bills  its  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.

    PGE generally passes on to its customers increases or decreases in gas costs
from those reflected in its tariff  charges.  In accordance with this procedure,
PGE defers any current under  or  over-recoveries  of  gas costs and collects or
refunds such amounts in  subsequent  periods.    PGE  had underrecoveries of gas
costs totaling $29.6 million, $10.4 million and $15.8 million as of December 31,
1996, 1995 and 1994, respectively.

    Deferred Charges  (Regulatory  Assets).    PGE  generally  accounts  for and
reports its 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, 1996 and 1995:
[CAPTION]
                                                   1996              1995 
                                                   (Thousands of Dollars)
    [S]                                          [C]               [C]
    Computer software costs                      $ 1,293           $   415
    Early retirement plan charges                    664               710
    Rate case expense                                588                11
    Low income usage reduction program               492               429
    Extraordinary charges due to flooding            426                 -
    Customer assistance program                      219               109
    Corrosion control costs                          194               341
    Natural gas transition costs collectible           -               497
    Other                                            398               501

      Total                                      $ 4,274           $ 3,013

                                        -39-
<PAGE>

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

    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 Company's net
deferred  income  tax  liability   relative   to  continuing  operations  as  of
December 31, 1996 and 1995, are shown below:
[CAPTION]

                                                   1996              1995 
                                                   (Thousands of Dollars)
    [S]                                          [C]               [C]
    Utility plant basis differences              $53,132           $51,822
    FERC Order 636 transition costs                  181               700
    Postretirement benefits                         (726)             (536)
    Take-or-pay costs, net                          (467)             (467)
    Alternative minimum tax                            -            (1,947)
    Operating reserves                            (1,406)           (1,300)
    Other                                         (1,444)              563

        Net deferred income tax liability        $49,270           $48,835

    The provision for income taxes relative to continuing operations consists of
the following components:
[CAPTION]
                                                  1996       1995       1994  
                                                    (Thousands of Dollars)
    [S]                                          [C]        [C]        [C]
    Included in operating expenses:
      Currently payable -
        Federal                                  $ 2,513    $ 3,129    $ 1,814
        State                                      1,519      1,284      1,219
          Total currently payable                  4,032      4,413      3,033
      Deferred, net -
        Federal                                    2,059        198      1,785
        State                                       (119)      (463)      (105)
          Total deferred, net                      1,940       (265)     1,680
      Amortization of investment tax credits        (172)      (193)      (172)
          Total included in operating expenses     5,800      3,955      4,541

    Included in other income, net:
      Currently payable -
        Federal                                      806        126        185
        State                                        (19)        44         79
          Total currently payable                    787        170        264
      Deferred, net -
        Federal                                        -          -         10
        State                                          -          -         12
          Total deferred, net                          -          -         22
          Total included in other income, net        787        170        286

          Total provision for income taxes       $ 6,587    $ 4,125    $ 4,827



                                        -40-
<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]
                                                   1996       1995       1994 
                                                    (Thousands of Dollars)
    [S]                                          [C]        [C]        [C]
    Income before income taxes                   $16,381    $10,009    $11,828
    Tax expense at statutory federal
      income tax rate                            $ 5,733    $ 3,503    $ 4,140
    Increases (reductions) in taxes
      resulting from -
        State income taxes, net of
          federal income tax benefit                 898        562        942  
        Amortization of investment tax 
          credits                                   (172)      (193)      (172)
        Other, net                                   128        253        (83)

      Total provision for income taxes           $ 6,587    $ 4,125    $ 4,827

    Long Lived Assets.  FASB  Statement  121,  "Accounting for the Impairment of
Long-Lived Assets" requires  that  long-lived  assets, identifiable intangibles,
capital leases and goodwill be reviewed  for impairment whenever events occur or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable.  In addition, FASB Statement 121 requires that regulatory assets
meet the recovery criteria  of  FASB  Statement  71,  "Accounting for Effects of
Certain Types of Regulation", on an ongoing basis in order to avoid a writedown.
The implementation of FASB  Statement  121  in  1996  did not have a significant
impact on the Company or  PGE.    The  carrying  amount of all assets, including
regulatory assets, is considered recoverable.

(2)  DISCONTINUED OPERATIONS

    Pursuant to an Asset  Purchase  Agreement  dated  April 26, 1995, as amended
(the "Agreement"), among the  Company,  PGE,  American Water Works Company, Inc.
("American") and Pennsylvania-American  Water Company ("Pennsylvania-American"),
a wholly-owned subsidiary of  American,  the  Company and PGE sold substantially
all of the assets, properties  and  rights  of PGE's water utility operations to
Pennsylvania-American on February 16, 1996.    Under the terms of the Agreement,
Pennsylvania-American paid PGE $414.3  million  consisting  of $262.1 million in
cash and the assumption of $152.2 million of PGE's liabilities, including $141.0
million of its long-term  debt.    PGE  continued  to  operate the water utility
business  until  February  16,  1996.    The  cash  proceeds  from  the  sale of
approximately $203.3 million,  net  of  the  estimated  $58.8  million of income
taxes, were used by the Company and PGE to retire debt, to repurchase stock (see
Note 5 of these  Notes  to  Consolidated Financial Statements), for construction
expenditures and for working capital for their continuing operations.  

    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  estimated  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).  The sale involved a  gain  for income tax purposes, primarily because of



                                        -41-
<PAGE>

the accelerated depreciation that had  been  claimed  by PGE with respect to the
water utility plant that  was  sold.    It  is  estimated  that the income taxes
payable on  the  sale,  for  which  deferred  income  taxes  had previously been
provided, will be approximately $58.8  million,  of which $44.6 million had been
paid as of December 31, 1996.

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

    Selected  financial  information  for  the  discontinued  operations  as  of
December 31, 1995, and for the  years  ended  December 31, 1995 and 1994, is set
forth below:
                    Net Assets of Discontinued Operations

[CAPTION]
                                                              As of
                                                        December 31, 1995
                                                     (Thousands of Dollars)
[S]                                                     [C]
Net utility plant                                       $         368,742
Other assets                                                       38,508
Total assets being acquired by
  Pennsylvania-American                                           407,250
Liabilities being assumed by
  Pennsylvania-American                                           147,080
Net assets being acquired by
  Pennsylvania-American                                           260,170
Estimated liability for income taxes on
  sale of discontinued operations                                 (56,710)
Estimated net income of discontinued operations
  during the remainder of the phase-out period                        790

Total net assets of discontinued operations             $         204,250

                      Income From Discontinued Operations

[CAPTION]
                                              Years ended December 31,
                                                1995*           1994  
                                               (Thousands of Dollars)
[S]                                           [C]             [C]
Operating revenues                            $ 15,640        $ 66,731
Operating expenses, excluding income taxes       8,875          36,677
Operating income before income taxes             6,765          30,054
Income taxes                                     1,403           6,850
Operating income                                 5,362          23,204
Other income                                         9              49
Allocated interest charges                      (3,244)        (12,749)

Income from discontinued operations           $  2,127        $ 10,504

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

                                        -42-
<PAGE>

                 Net Cash Provided by Discontinued Operations
[CAPTION]
                                              Years ended December 31,
                                               1995*            1994  
                                               (Thousands of Dollars)
[S]                                           [C]             [C]
Income from discontinued operations           $  2,127        $ 10,504
Noncash charges (credits) to income:
    Depreciation                                 1,946           7,672
    Deferred treatment plant costs, net            145             581
    Deferred income taxes                          447           5,146
    Deferred water utility billings                  -          (5,574)
Changes in working capital, exclusive
  of long-term debt                              1,648             353
Additions to utility plant                      (2,276)        (20,980)
Utilization of restricted funds                      -           9,753
Net increase (decrease) in long-term
   debt                                          1,010          (6,834)
Other, net                                      (1,283)            (69)

Net cash provided by discontinued
  operations                                  $  3,764        $    552

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

(3)  RATE MATTERS

    Rate Increase.  On May  24,  1996,  PGE  filed  an application with the PPUC
seeking an increase in its base gas  rates, designed to produce $14.1 million in
additional annual revenue, to be effective July 23, 1996.  On June 20, 1996, the
PPUC suspended this rate increase for  seven months (until February 23, 1997) in
order to investigate the reasonableness of  the  proposed rates.  On November 7,
1996, PGE and certain  parties  filing  objections  to the rate increase request
filed  a  Settlement  Agreement  and  Joint  Petition  for  Settlement  of  Rate
Investigation (the  "Settlement  Petition")  with  the  Administrative Law Judge
assigned to conduct  the  investigation  of  the  rate  increase  request.  This
Settlement Petition provided for an overall 5.3% rate increase that was designed
to produce $7.5 million of additional annual revenue.  By Order adopted December
19, 1996, the PPUC approved  the Settlement Petition effective January 15, 1997.
Under the terms of the Settlement  Petition,  the  billing for the impact of the
rate increase relative  to  PGE's  residential  heating  customers  (which it is
estimated will total $6.6 million on an annual basis) is being deferred, without
carrying charges, until July, 1997.  

    Gas Cost Adjustments.   The  provisions  of  the Pennsylvania Public Utility
Code require that the tariffs of  local gas distribution companies ("LDCs") such
as  PGE,  be  adjusted  on  an  annual  basis,  and  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. 





                                        -43-
<PAGE>

    In accordance with  these  procedures  PGE  has  been  permitted to make the
following changes since January 1, 1994,  to  the gas costs contained in its gas
tariff rates:
[CAPTION]

                                    Change in              Calculated
             Effective             Rate per MCF        Increase (Decrease)
                Date              From     To           in Annual Revenue 
           [S]                     [C]     [C]             [C]
           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)*
           December 1, 1994        3.74    3.68             (1,800,000)

    * 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
PGE's 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") are subject to  recovery  through the annual PGC rate filings
made with the PPUC by PGE  and  other  LDCs.   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 Code.  The PGC Order further stated that all such filings would be evaluated
on a case-by-case basis.

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

    By Order of the PPUC entered August  26, 1994, PGE 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 $10.1 million of Non-Gas
Transition Costs  will  be  billed  to  PGE,  generally  over  a six-year period
extending through January 1, 1999, of which  $8.0 million had been billed to PGE
and $7.5 million had been recovered from  its customers as of December 31, 1996.
PGE has recorded the estimated Non-Gas Transition Costs that remain to be billed
to it and the amounts remaining to be recovered from its customers.









                                        -44-
<PAGE>

(4)  OTHER INCOME, NET

    Other income, net was comprised of the following elements: 

                                                     Year Ended December 31,  
                                                   1996       1995       1994 
                                                     (Thousands of Dollars)
    [S]                                          [C]        [C]        [C]
    Interest income on the temporary investment
      of proceeds from the sale of PGE's
      water utility operations, net of related 
      income taxes                               $ 1,895    $     -    $     -
    Loss on sale and retirement of gas wells
      and related abandonment of subsurface
      gas rights, net of related income taxes       (321)         -          -
    Gain on sale of land and other property,
      net of related income taxes                    141          -        165
    Write-off of expired advances relating
      to income taxes, net of related
      income taxes                                     -        227          -
    Amortization of preferred stock issuance
      costs, net of related income tax benefits    (13)          (1)      (227)
    Other                                             24        129        173
      Total                                      $ 1,726    $   355    $   111

(5)  COMMON STOCK

    Common Stock Split.  On  February  19,  1997, the Board of Directors adopted
resolutions to amend the  Company's  Restated  Articles  of Incorporation to (i)
increase the number of authorized  shares  of  its  common stock from 15 million
shares to 30 million shares and (ii) reduce the stated value of such shares from
$10.00 per share  to  $5.00  per  share  upon  the  filing  of  a Certificate of
Amendment with the Secretary of  the  State  of  Pennsylvania on March 20, 1997.
Such actions will have no effect on the Company's capital accounts.  On February
19, 1997, the Board of Directors also  declared a two-for-one stock split of the
Company's Common Stock effective March 20, 1997.  The number of shares of common
stock reflected in these consolidated  financial statements and the earnings per
share of common  stock  for  each  year  presented  have  been  restated to give
retroactive effect to this stock split.

    Repurchase of Common  Stock.    During  1996,  the  Company used proceeds it
received in connection  with  PGE's  sale  of  its  water  utility operations to
Pennsylvania-American on February 16, 1996,  to  repurchase shares of its common
stock.  Specifically, a portion of  these  proceeds  were used by the Company to
repurchase 2,025,928 shares of  its  common  stock  during 1996 for an aggregate
consideration of $39.8 million, of which 1,781,204 shares were acquired in April
pursuant to a self tender offer  and  244,724  shares were acquired from time to
time through open market purchases and an oddlot buyback program.

    Customer Stock Purchase Plan.  On  July  28, 1994, the Company implemented a
Customer  Stock  Purchase  Plan   (the   "Customer  Plan")  which  provided  the
residential customers of PGE with a  method of purchasing newly-issued shares of
the Company's common stock at a  5%  discount  from the market price.  Under the
terms of the Customer  Plan,  176,462  shares  ($2.4 million) and 119,074 shares
($1.7 million) of the Company's common  stock  were issued during 1995 and 1994,
respectively.  Effective May 9,  1995,  the  Company suspended the Customer Plan
because of the significant reduction  in its capital requirements resulting from
the sale of PGE's water utility operations to Pennsylvania-American.

    Dividend Reinvestment  and  Stock  Purchase  Plan.    Through  the Company's
Dividend Reinvestment and Stock Purchase Plan  ("DRP"), holders of shares of the

                                        -45-
<PAGE>

Company's common stock may reinvest  cash dividends and/or make cash investments
in the common stock of the  Company.    Under the DRP, 17,664 shares ($340,000),
233,010 shares ($3.3 million) and 124,542  shares ($1.8 million) of common stock
were issued during 1996, 1995 and 1994, respectively.  

    Employees' Savings Plan.   Under  the  Company's  Employees' Savings Plan (a
section 401(k) plan) which became effective  January 1, 1992, the Company issued
an additional 10,198 shares ($195,000) in 1996, 38,936 shares ($628,000) in 1995
and 36,200 shares ($540,000) in 1994.

    Stock Option Plan.  On June 3, 1992, the Company's shareholders approved the
Pennsylvania Enterprises, Inc. 1992 Stock  Option  Plan (the "Plan").  Under the
terms of the Plan, a total  of  430,000 shares of authorized but unissued shares
of the  Company's  common  stock  have  been  reserved  and  made  available for
distribution to eligible employees.  Stock options awarded under the Plan may be
either Incentive Stock Options or Nonqualified Stock Options.  

    In  October,  1995,   FASB   Statement   123,  "Accounting  For  Stock-Based
Compensation," was issued.   The  Company  adopted  the disclosure provisions of
FASB Statement 123 in 1996,  but  opted  to remain under the expense recognition
provisions of Accounting Principles Board  (APB) Opinion No. 25, "Accounting for
Stock Issued to  Employees,"  in  accounting  for  stock  option and stock award
plans.  Accordingly, for the years  ended  December  31, 1996, 1995 and 1994, no
compensation expense was recognized  for  options  granted  under the Plan.  Had
compensation expense for stock  options  granted  under the Plan been determined
based on fair value at the  grant  dates consistent with the method required for
1996 in  accordance  with  FASB  Statement  123,  the  Company's  net income and
earnings per share for 1996  would  have  been  reduced to the pro forma amounts
shown below:
[CAPTION]
         [S]                                           [C]
         Net income:
           As reported                                 $6.6 million
           Pro forma                                   $5.9 million
         
         Earnings per common share:
           As reported                                 $    .51
           Pro forma                                   $    .44
         
    A summary of the stock options outstanding during each of the three years in
the period ended December 31, 1996,  pursuant  to  the terms of the Plan, all of
which were Nonqualified Stock Options, is set forth below:
[CAPTION]
                                              Number of           Weighted
                                           shares subject     average exercise
                                              to option            price      
[S]                                        [C]                [C]
Outstanding at December 31, 1993                   90,000     $          15.00
Expired during 1994                                  (800)               15.00

Outstanding at December 31, 1994                   89,200                15.00
Exercised during 1995                              (9,600)               18.63

Outstanding at December 31, 1995                   79,600                15.00
Granted during 1996                               340,000                20.38
Exercised during 1996                             (37,400)               20.05

Outstanding at December 31, 1996                  382,200     $          18.09

Options exercisable at December 31, 1996           42,200                15.00
Options available for future grant at
  December 31, 1996                                   800
Weighted average fair value of options
  granted during 1996                               $3.66

                                        -46-
<PAGE>

    The weighted average fair value of  options granted in 1996 was estimated as
of the date of grant using  the  Black-Scholes stock option pricing model, based
on the following  weighted  average  assumptions:    quarterly dividend yield of
1.25%, annual expected return of 5.3%, annual standard deviation (volatility) of
20.5%, risk free interest rate of 6.91%, and expected term of 7 years.

    The following  table  summarizes  information  regarding  the  stock options
outstanding at December 31, 1996, pursuant to the terms of the Plan:
[CAPTION]
                Options outstanding                      Options exercisable   
                                 Weighted Average                     Weighted
     At          Range of      Remaining                    At         average
December 31,     exercise     contractual   Exercise   December 31,   exercise
    1996          prices         life        price         1996         price  
[S]            [C]             [C]            [C]      [C]               [C]
      42,200   $15.00          6.27 Years     $15.00         42,200      $15.00
     340,000   $19.50-20.75    9.56 Years     $20.38              -
     382,200                                                 42,200

    Shareholder  Rights  Plan.    On  April  26,  1995,  the  Company  adopted a
Shareholder Rights Plan under the terms  of  which each shareholder of record at
the close of business on May  16,  1995, will receive a dividend distribution of
one right ("Right" or "Rights") for each share of common stock held.

    Each Right will entitle shareholders  to  purchase from the Company one-half
of a share  of  common  stock.    No  less  than  two  Rights, and only integral
multiples of two Rights, may be  exercised  by  holders of Rights at an exercise
price of $50 per share  of  common  stock  (equivalent  to $25 for each one-half
share of common stock), subject to  certain adjustments.  The Rights will become
exercisable only if a person  or  group  acquires  15%  or more of the Company's
common stock, or commences  a  tender  or  exchange offer which, if consummated,
would result in that person or  group  owning  at least 15% of the common stock.
Prior to that time, the Rights will not trade separately from the common stock.

    If a person or group acquires 15% or more of the Company's common stock, all
other holders of Rights will then be entitled to purchase, by payment of the $50
exercise price upon the exercise of two Rights, the Company's common stock (or a
common stock equivalent) with a value of twice the exercise price.  In addition,
at any time after a 15% position is acquired and prior to the acquisition by any
person or group of 50% or  more  of  the outstanding common stock, the Company's
Board of Directors may,  at  its  option,  require each outstanding Right (other
than Rights held by the acquiring person or group) to be exchanged for one share
of common stock (or one common stock equivalent).

    If, following an acquisition of 15%  or  more of the Company's common stock,
the Company is acquired by any person  in a merger or other business combination
transaction or sells more than 50% of  its assets or earning power to any person
(other  than  the  sale  of  PGE's  water  utility  operations  to Pennsylvania-
American), all other holders of  Rights  will  then  be entitled to purchase, by
payment of the $50 exercise price upon  the exercise of two Rights, common stock
of the acquiring company with a value of twice the exercise price.

    The Company may redeem the Rights at  $.0025  per Right at any time prior to
the time that a person or group  has  acquired  15% or more of its common stock.
The Rights, which expire on May 16,  2005, do not have voting or dividend rights
and, until they become exercisable, have  no dilutive effect on the earnings per
share of the Company.


                                        -47-
<PAGE>

(6)  PREFERRED STOCK

    Preferred Stock of PGE Subject  to  Mandatory  Redemption.  On May 31, 1994,
PGE redeemed the remaining 150,000  outstanding  shares of its 9.50% 1988 series
cumulative preferred stock, $100 par value,  at  a price of $103.5625 per share,
which included a voluntary redemption premium  of $3.5625 per share ($534,375 in
the aggregate), plus accrued dividends. 

    On  December  16,  1994,  PGE  redeemed  all  150,000  shares  of  its 8.90%
cumulative preferred stock at a  price  of  $102.97  per share, which included a
voluntary redemption premium of $2.97 per share ($445,500 in the aggregate). 

    The holders of the  5.75%  cumulative  preferred  stock have a noncumulative
right each year to tender to PGE  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 less  (b)  the  number  of  such  shares  which  PGE may already have
purchased during the year at  a  per  share  price  of  not  more than $100.  On
June 17, 1996, PGE 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.   Eight hundred such
shares  were  acquired  and  cancelled  by  PGE  in  each  of  the  years  ended
December 31, 1995 and 1994,  for  an  aggregate  purchase  price in each year of
$80,000.

    As of December 31,  1996,  the  sinking  fund requirements relative to PGE'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 1997 through 2001.  At PGE's option, the 5.75% cumulative preferred
stock may currently be redeemed at a price of $102.00 per share ($836,000 in the
aggregate).

    Preferred Stock of PGE Not Subject to Mandatory Redemption.  During the year
ended December 31, 1996,  PGE  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 not redeemable at the option
of PGE prior to September 15, 1997.   Thereafter, it is redeemable at the option
of PGE, 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 from  September  15,  1997,  to  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,  PGE 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.    An  additional  350 shares of 4.10% cumulative
preferred  stock  were   repurchased   in   January,   1997,  for  an  aggregate
consideration of $19,000.  At PGE'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 $8,368,260.  







                                        -48-
<PAGE>

    Dividend Information.  The dividends on  the  preferred stock of PGE in each
of the three years in the period ended December 31, 1996, were as follows:
[CAPTION]
         Series                        1996         1995         1994 
                                           (Thousands of Dollars)
          [S]                         [C]          [C]          [C]
          4.10%                       $  348       $  410       $  410
          5.75%                           72          103          108
          8.90%                            -            -        1,280
          9.00%                        1,310        2,250        2,250
          9.50% 1988 series                -            -          591

           Total                      $1,730       $2,763       $4,639

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

(7)  LONG-TERM DEBT

    Long-term debt consisted of  the  following  components at December 31, 1996
and 1995:
[CAPTION]
                                                          1996          1995  
                                                        (Thousands of Dollars)
  [S]                                                   [C]           [C]
  Indebtedness of the Company:
    10.125% senior notes, due 1999, net of
      unamortized discount                              $      -      $ 29,906
    Term loan, due 1999                                   20,000        20,000
      Total long-term debt of the Company                 20,000        49,906

  Indebtedness of PGE:
    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 -
      Term loan, due 1996                                      -        50,000
      Bank borrowings, at weighted average interest
        rates of 6.18% and 6.62%, respectively (Note 9)   38,721        65,801
                                                          38,721       115,801
    Less current maturities and sinking
      fund requirements                                  (38,721)     (115,801)
      Total long-term debt of PGE                         55,000        55,000

  Indebtedness of PERI:
    Term loan, due 2000                                        -         2,000
    Less current maturities                                    -          (200)
      Total long-term debt of PERI                             -         1,800
      Total consolidated long-term debt                 $ 75,000      $106,706









                                        -49-
<PAGE>

    Term Loan Agreements.   Borrowings  under  the  Company's $20.0 million term
loan which matures on May  31,  1999,  bear interest at LIBOR ("London Interbank
Offered Rates") plus one-half  of  one  percent  (5.906%  as  of March 1, 1997).
Under the terms of the  loan,  the  Company  can choose interest rate periods of
one, two, three or six months.  

    On October 12, 1995,  PGE  borrowed  $50.0  million  pursuant to a term loan
agreement.  Proceeds from the loan, along with other funds provided by PGE, were
utilized on October 13, 1995,  to  redeem  the $50.0 million principal amount of
PGE's 9.57% Series First Mortgage Bonds  due  September 1, 1996.  PGE repaid its
$50.0 million term loan on February 16, 1996, with proceeds from the sale of its
water operations to Pennsylvania-American.

    On December 7, 1995, PERI borrowed $2.0 million pursuant to a five-year term
loan agreement.  PERI used  the  proceeds  it  so  received along with an equity
investment from the Company to acquire  all of the outstanding stock of Keystone
effective December 4, 1995.  On May  31, 1996, PERI repaid all principal amounts
outstanding under the loan with an advance it received from the Company. 

    10.125% Senior Notes/Extraordinary  Loss.    On  May  26,  1996, the Company
repurchased $1.3 million principal amount  of  its 10.125% Senior Notes due June
15, 1999 (the "Senior  Notes")  which  the  holders  thereof elected pursuant to
terms of the Senior Notes to  require  the  Company to repurchase as a result of
the sale of PGE's water utility  operations  on February 16, 1996.  On September
30, 1996, the Company defeased  the  remaining $28.7 million principal amount of
the Senior Notes  and  recorded  an  extraordinary  loss  of  $1.1 million ($1.6
million, net of $575,000 of related income tax benefits).

    Specifically, on that date,  the  Company  deposited  $29.9 million with the
trustee for the Senior Notes which  will  be used, together with interest earned
on  the  funds  so  deposited,  to  pay  the  Company's  interest  and principal
obligations through June 15, 1997, the  date  on  which the Senior Notes will be
redeemed.  The deposit of  such  funds  acted  to discharge all of the Company's
obligations with respect to the Senior Notes.   Of the $29.9 million required to
defease the Senior Notes, $17.2 million  was obtained through the liquidation of
the Company's temporary cash investments  and $12.7 million was obtained through
the repayment of loans that had been made by the Company to PGE.

    Maturities and Sinking Fund  Requirements.    As  of  December 31, 1996, 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]
                           1997           $ 38,721,000 (a)
                           1998           $          -
                           1999           $ 30,000,000 (b)
                           2000           $          -
                           2001           $          -

    (a) Represents the $38.7 million  of  PGE  bank borrowings outstanding as of
        December 31, 1996.

    (b) Includes the $20.0 million of  borrowings outstanding as of December 31,
        1996, under the Company's  Term  Loan  Agreement  due  May 31, 1999, and
        PGE's 9.23% Series First Mortgage Bonds in the principal amount of $10.0
        million due September 1, 1999.


                                        -50-
<PAGE>

(8)  DIVIDEND RESTRICTIONS

    There are no dividend  restrictions  in  the  Company's Restated Articles of
Incorporation.   However,  the  preferred  stock  provisions  of  PGE's Restated
Articles of Incorporation and certain of  the agreements under which the Company
and PGE have issued  long-term  debt  provide for certain dividend restrictions.
As of December 31, 1996, $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.

(9)  BANK NOTES PAYABLE

    As of April 19, 1993, PGE entered into a revolving bank credit agreement, as
subsequently amended (the "Credit Agreement"),  with  a group of six banks under
the terms of which  $60.0  million  was  available  for borrowing by PGE through
May 31, 1996.    The  Credit  Agreement  was  terminated  on  February 26, 1996,
following  the  sale  of  PGE's  water  operations  to  Pennsylvania-American on
February 16, 1996, and  the  repayment  of  all borrowings outstanding under the
Credit Agreement with proceeds from such  sale.  The interest rate on borrowings
under the Credit Agreement was generally  less than prime.  The Credit Agreement
required the payment of a commitment fee of .195% per annum on the average daily
amount of the unused portion of the available funds.  

    PGE currently has arrangements for  six  revolving bank lines of credit with
an aggregate borrowing capacity of $65.5 million which provide for borrowings at
interest rates generally less than prime  and  which mature during mid-1997.  As
of March 1, 1997, PGE had  $27.2  million  outstanding under these bank lines of
credit.  

    Because of limitations imposed by the terms of PGE's preferred stock, PGE 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.  PGE had $10.0 million due
on demand or within one year from issuance outstanding as of December 31, 1996.

    Information relating to  PGE's  bank  lines  of  credit and borrowings under
those lines of credit is set forth below:
<TABLE>
<CAPTION>
                                                    As of December 31,        
                                              1996         1995         1994  
                                                  (Thousands of Dollars)
      <S>                                   <C>          <C>          <C>
      Borrowings under lines of credit
        Short-term                          $ 10,000     $ 10,000     $      -
        Long-term                             38,721       65,801       65,500
                                            $ 48,721     $ 75,801     $ 65,500

      Unused lines of credit
        Short-term                          $      -     $      -     $      -
        Long-term                             16,779        4,699        2,000
                                            $ 16,779     $  4,699     $  2,000

      Total lines of credit
        Prime rate                          $      -     $      -     $      -
        Other than prime rate                 65,500       80,500       67,500
                                            $ 65,500     $ 80,500     $ 67,500

      Short-term bank borrowings (a)
        Maximum amount outstanding          $ 10,000     $ 10,000     $  5,692
        Daily average amount outstanding    $  1,392     $  2,581     $    441
        Weighted daily average interest 
          rate                                6.241%       6.513%       3.984%
        Weighted average interest rate at
          year-end                            6.206%       6.334%           -    
        Range of interest rates               5.875-       6.290-       3.700-
                                              6.438%       6.660%       6.000%

    (a) PGE had no short-term  bank  borrowings  outstanding  as of December 31,
        1994.

                                        -51-
</TABLE>
<PAGE>

(10)  POSTEMPLOYMENT BENEFITS

    Pension  Benefits.     The   Company's   retirement   plan  is  a  trusteed,
noncontributory, defined benefit  pension  plan  which  covers substantially all
employees of the Company, except those  of Keystone.  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.  To the  extent  that  the  present  value of these obligations is
fully covered by assets in  the  trust,  a  contribution  may  not be made for a
particular year.  

    Under the terms of the agreement  regarding  the sale of PGE's water utility
operations to Pennsylvania-American, on February 16, 1996, Pennsylvania-American
assumed the accumulated benefit  obligations  relating  to  employees of PGE 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 PGE's water utility operations.

    In December, 1995, the Company  offered  an Early Retirement Plan ("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 ERP.  Such
amount was charged to the estimated loss  on the disposal of PGE's water utility
operations.

    Net pension  costs  relative  to  continuing  operations,  including amounts
capitalized, were  $385,000,  $353,000  and  $309,000  in  1996,  1995 and 1994,
respectively.  The  following  items  were  the  components  of such net pension
costs:
[CAPTION]
                                                 1996        1995        1994  
                                                    (Thousands of Dollars)
    [S]                                        [C]         [C]         [C]
    Present value of benefits earned 
      during the year                          $    799    $    430    $    549
    Interest cost on projected benefit 
      obligations                                 2,731       1,459       1,400
    Return on plan assets                        (5,875)     (1,502)        535
    Net amortization and deferral                   (79)        (34)        (55)
    Deferral of investment (loss) gain            2,809           -      (2,120)
        Net pension cost                       $    385    $    353    $    309










                                        -52-
<PAGE>

    The funded status of the  plan  as  of  December  31,  1996 and 1995, was as
follows:
[CAPTION]
                                                             1996        1995  
                                                          (Thousands of Dollars)
    [S]                                                    [C]         [C]
    Actuarial present value of the projected
      benefit obligations:
        Accumulated benefit obligations
          Vested                                           $ 28,613    $ 29,100
          Nonvested                                              21          47
            Total                                            28,634      29,147
        Provision for future salary increases                 6,933       7,841
        Projected benefit obligations                        35,567      36,988
    Approximate market value of plan assets, 
      primarily invested in equities and bonds               39,000      34,000
    Plan assets in excess of (less than) projected
      benefit obligations                                     3,433      (2,988)
    Unrecognized net transition asset as of 
      January 1, 1986, being amortized over 20 years         (1,939)     (2,155)
    Unrecognized prior service costs                          2,258       1,507
    Unrecognized net (gain) loss                             (4,259)      2,155

    Accrued pension cost at year-end                       $   (507)   $ (1,481)

    The assumptions used in determining pension obligations were:
<TABLE>
<CAPTION>

                                                 1996       1995       1994 
         <S>                                    <C>        <C>        <C>                                   
         Discount rate                          7.75 %     7.00 %     8.75 %
         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 %     5.50 %

    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 Keystone, 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 PGE'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 PGE'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, will  be  transferred  to trusts established by Pennsylvania-
American,  which  is  expected  to   occur   in  the  second  quarter  of  1997.
Pennsylvania-American is  reimbursing  PGE  for  benefit  plan  payments made on
behalf of  the  retired  employees  for  whom  Pennsylvania-American has assumed
responsibility.  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 PGE's water utility operations.




</TABLE>
                                        -53-
<PAGE>

    In conjunction with  the  ERP  offered  by  the  Company  to  certain of its
employees, PGE 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
ERP.  Such amount was charged to  the  estimated loss on disposal of PGE's water
utility operations.

    The following items were the  components  of  the net cost of postretirement
benefits other than pensions  relative  to  continuing  operations for the years
1996, 1995 and 1994:
<TABLE>
<CAPTION>
                                                   1996       1995       1994  
                                                     (Thousands of Dollars)
    <S>                                          <C>        <C>        <C>
    Present value of benefits earned during
      the year                                   $    253   $    127   $    148
    Interest cost on accumulated benefit
      obligation                                      506        577        532
    Return on plan assets                               -        (69)        (4) 
    Net amortization and deferral                     314        391        360

    Net cost of postretirement benefits other
      than pensions                                 1,073      1,026      1,036
    Less disbursements for benefits                  (501)      (555)      (543)

    Increase in liability for postretirement
      benefits other than pensions               $    572   $    471   $    493

</TABLE>
    Reconciliations  of  the  accumulated  benefit  obligation  to  the  accrued
liability for postretirement benefits  other  than  pensions  as of December 31,
1996 and 1995, follow:
[CAPTION]
                                                        1996       1995  
                                                    (Thousands of Dollars)
    [S]                                               [C]        [C]
    Accumulated benefit obligation:
      Retirees                                        $  4,359   $  6,514
      Fully eligible active employees                    1,033        850
      Other active employees                             1,552      1,074
                                                         6,944      8,438
    Plan assets at fair value                              169          -
    Accumulated benefit obligation 
      in excess of plan assets                           6,775      8,438
    Unrecognized transition obligation
      being amortized over 20 years                     (5,022)    (5,438)
    Unrecognized net gain (loss)                         1,116       (703)

    Accrued liability for postretirement
      benefits other than pensions                    $  2,869   $  2,297










                                        -54-
<PAGE>

    The assumptions used in determining other postretirement benefit obligations
were:
[CAPTION]
                                                 1996       1995       1994 
         [S]                                    [C]        [C]        [C]
         Discount rate                          7.75 %     7.00 %     8.75 %
         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 %     5.50 %

    It was also assumed that the per capita cost of covered health care benefits
would increase at an annual  rate  of  8-1/2%  in  1997 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  percentage  point  in  each  year would increase the transition
obligation as of January 1, 1997, by approximately $294,000 and the aggregate of
the service and  interest  cost  components  of  the  net cost of postretirement
benefits other than pensions for the year 1996 by approximately $31,000.

    Since PGE did not seek to  increase  its  base  gas rates prior to 1996, the
$442,000 ($259,000 net  of  related  income  taxes),  $441,000  ($258,000 net of
related income taxes) and  $447,000  ($256,000  net  of related income taxes) of
additional cost incurred in 1996,  1995  and  1994, respectively, as a result of
the adoption of the provisions of  FASB  Statement 106 were expensed without any
adjustment being made to its  gas  rates.    Effective with its January 15, 1997
base rate  increase  (see  Note  3  of  these  Notes  to  Consolidated Financial
Statements), PGE will  begin  funding  and  recovering  in rates its accumulated
benefit obligations with respect to other postretirement benefits.

(11)  CAPITAL EXPENDITURES

    The Company estimates the cost of  its 1997 capital expenditure program will
be $45.4 million, consisting  of  $27.9  million  relative to PGE's construction
program and $17.5 million with respect to the Company's nonregulated activities,
including $13.1  million  relative  to  residential  and  commercial real estate
development.  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.

(12)  COMMITMENTS AND CONTINGENCIES

    Environmental Matters.   PGE,  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 1960, and several
of the plant sites are no  longer  owned  by PGE.  Pursuant to the Comprehensive
Environmental Response, Compensation and  Liability  Act of 1980 ("CERCLA"), PGE
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.    While  this  conclusion  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.


                                        -55-
<PAGE>

(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
[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              $  74,087  $ 30,257  $      19,354  $     60,782
Operating income (loss)            10,223       995           (751)        7,793
Income (loss) from continuing
  operations                        7,337      (455)        (2,940)        4,122
Loss with respect to 
  discontinued operations            (365)      (21)             -            23
Extraordinary loss, net                 -         -         (1,117)            -
Net income (loss)               $   6,972  $   (476) $      (4,057) $      4,145

Earnings (loss) per share
  of common stock (a):
 Continuing operations          $     .63  $   (.05) $        (.30) $        .43
 Discontinued operations             (.03)        -              -             -
 Net income (loss) before
   premium on repurchase/
   redemption of subsidiary's
   preferred stock and
   extraordinary loss                 .60      (.05)          (.30)          .43
 Premium on repurchase/redemption 
   of subsidiary's preferred 
   stock                                -      (.13)          (.01)            -
 Extraordinary loss, net                -         -           (.11)            -
 Earnings (loss) per share of
   common stock (a)             $     .60  $   (.18) $        (.42) $        .43

<TABLE>
<CAPTION>
                                                 QUARTER ENDED                  
                                March 31,  June 30,  September 30,  December 31,
                                  1995       1995        1995           1995    
                                (Thousands of Dollars, Except Per Share Amounts)
<S>                             <C>        <C>       <C>            <C>
Operating revenues              $  70,882  $ 27,397  $      13,547  $     50,109
Operating income                    9,910     2,478            506         8,057
Income (loss) from continuing
  operations                        5,669    (2,133)        (4,159)        3,744
Loss with respect to
  discontinued operations          (3,704)        -              -          (130)
Net income (loss)               $   1,965  $ (2,133) $      (4,159) $      3,614

Earnings (loss) per share
  of common stock: (a)
 Continuing operations          $     .50  $   (.19) $        (.36) $        .32
 Discontinued operations             (.33)        -              -          (.01)
 Earnings (loss) per share of
   common stock (a)             $     .17  $   (.19) $        (.36) $        .31


    (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 the  Company's  issuance  of  additional  shares  of  common stock at
        various dates in 1994 and  1995  and  its repurchase of shares of common
        stock at various dates during 1996.

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

                                        -56-
</TABLE>
<PAGE>

(14) 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  both the Company's and PGE's 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 PGE'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 the Company's and PGE's
financial instruments at December 31, 1996 and 1995, were as follows:
[CAPTION]
                                               1996                 1995        
                                        Carrying Estimated   Carrying Estimated
                                         Amount  Fair Value   Amount  Fair Value
                                                 (Thousands of Dollars)
[S]                                     [C]      [C]         [C]      [C]
Long-term debt (including current
  portion):
    Company                             $ 20,000 $   20,000  $ 49,906 $   50,300
    PGE                                   93,721     99,222   170,801    175,431
    PERI                                       -          -     2,000      2,000
Preferred stock of PGE subject to
  mandatory redemption (including
  current portion)                           819        836     1,760      1,795

    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  PGE's  rates over a prescribed
amortization period.  Accordingly, any settlement would not result in a material
impact on PGE's financial position  or  the  results of operations of either the
Company or PGE.

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

    None.












                                        -57-
<PAGE>

                                   PART III

ITEM 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

(a)  Identification of Directors

    The information required by  this  item  concerning directors of the Company
has been omitted from  this  Form  10-K  since  the  Company expects to file its
definitive proxy statement not later than 120 days after the close of its fiscal
year covered by this Form 10-K.

(b)  Identification of Executive Officers

    Information concerning the Company's executive officers is set forth in Part
I of this Form 10-K under the heading "Executive Officers of the Company."

ITEM 11.  EXECUTIVE COMPENSATION

    This information has been  omitted  from  this  Form  10-K since the Company
expects to file its definitive proxy statement not later than 120 days after the
close of its fiscal year covered by this Form 10-K.

ITEM 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

    This information has been  omitted  from  this  Form  10-K since the Company
expects to file its definitive proxy statement not later than 120 days after the
close of its fiscal year covered by this Form 10-K.

ITEM 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

    This information has been  omitted  from  this  Form  10-K since the Company
expects to file its definitive proxy statement not later than 120 days after the
close of its fiscal year covered by this Form 10-K.


























                                        -58-
<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  report  of  independent public
         accountants for the Company and  its subsidiaries are presented in Item
         8 of this Form 10-K. 
                                                                           Page 

           Report of Independent Public Accountants . . . . . . . . . . .   31

           Consolidated Balance Sheets as of December 31, 1996 and 1995 .   32

           Consolidated Statements of Income for each of the three years 
             in the period ended December 31, 1996. . . . . . . . . . . .   34

           Consolidated Statements of Cash Flows for each of the three 
             years in the period ended December 31, 1996. . . . . . . . .   35

           Consolidated Statements of Capitalization as of December 31, 
             1996 and 1995. . . . . . . . . . . . . . . . . . . . . . . .   36

           Consolidated Statements of Common Shareholders' Investment
             for each of the three years in the period ended December
             31, 1996 . . . . . . . . . . . . . . . . . . . . . . . . . .   37

           Notes to Consolidated Financial Statements . . . . . . . . . .   38

     2.  Financial Statement Schedules
             The following  consolidated  financial  statement  schedule for the
         Company and its subsidiaries  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, 1996 . . . . . . . . . . . .   61

     3.  Exhibits
             See "Index to Exhibits" located  on  page  63  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.













                                        -59-
<PAGE>
<TABLE>
<CAPTION>
<S>      <C>       <C>       <C>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - continued

(b)  Reports on Form 8-K
         No reports on Form 8-K were filed during the last quarter of 1996.

(c)  Executive Compensation Plans and Arrangements

     The following listing includes  the  Company's executive compensation plans
     and arrangements in effect as of December 31, 1996.

     Exhibit

     10-23  Form of Change in Control  Agreement between the Company and certain
            of its Officers -- filed  as  Exhibit  10-38 to the Company's Annual
            Report on Form 10-K for 1989, File No. 0-7812.

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

     10-25  Agreement by and between the Company,  PGE and Robert L. Jones dated
            as of March 15, 1991 -- filed  as Exhibit No. 10-44 to the Company's
            Annual Report on Form 10-K for 1990, File No. 0-7812.

     10-26  Employment  Agreement  effective  September  1,  1995,  between  the
            Company and  Dean  T.  Casaday  --  filed  as  Exhibit  10-2  to the
            Company's Quarterly  Report  on  Form  10-Q  for  the  quarter ended
            September 30, 1995, File No. 0-7812.

     10-27  Supplemental Retirement Agreement,  dated  as  of December 23, 1991,
            between the Company and Dean T. Casaday -- filed as Exhibit 10-17 to
            the Company's Common Stock Form S-2, Registration No. 33-43382.

     10-28  First Amendment to the  Supplemental  Retirement Agreement, dated as
            of September 1, 1994,  between  the  Company  and Dean T. Casaday --
            filed as Exhibit 10-37 to  the  Company's Annual Report on Form 10-K
            for 1994, File No. 0-7812.

     10-29  Pennsylvania Enterprises,  Inc.  1992  Stock  Option Plan, effective
            June 3, 1992 -- filed as  Exhibit A to the Company's 1993 definitive
            Proxy Statement, File No. 0-7812.

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

     10-31  Employment Agreement dated as of  August  28, 1996, by and among the
            Company, PGE and Thomas F.  Karam  --  filed  as Exhibit 10-2 to the
            Company's Quarterly  Report  on  Form  10-Q  for  the  quarter ended
            September 30, 1996, File No. 0-7812.

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




</TABLE>
                                        -60-
<PAGE>

SCHEDULE II


























































                                        -61-
<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.

[CAPTION]
                                              PENNSYLVANIA ENTERPRISES, INC.    

                                                       (Registrant)
[S]       [C]                           [C]
Date:     March 6, 1997                 By:         /s/ Thomas F. Karam         
                                                        Thomas F. Karam
                                           President and Chief Executive Officer
                                             (Principal Executive Officer)

Date:     March 6, 1997                 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 6, 1997
      Kenneth L. Pollock            Directors

  /s/ William D. Davis             Vice Chairman of the Board     March 6, 1997
      William D. Davis              of Directors

  /s/ Thomas F. Karam              Director, President and        March 6, 1997
      Thomas F. Karam               Chief Executive Officer

  /s/ Paul R. Freeman                     Director                March 6, 1997
      Paul R. Freeman

  /s/ Robert J. Keating                   Director                March 6, 1997
      Robert J. Keating

  /s/ John D. McCarthy                    Director                March 6, 1997
      John D. McCarthy

  /s/ John D. McCarthy, Jr.               Director                March 6, 1997
      John D. McCarthy, Jr.

  /s/ Kenneth M. Pollock                  Director                March 6, 1997
      Kenneth M. Pollock

  /s/ Richard A. Rose, Jr.                Director                March 6, 1997
      Richard A. Rose, Jr.

  /s/ James A. Ross                       Director                March 6, 1997
      James A. Ross

  /s/ Ronald W. Simms                     Director                March 6, 1997
      Ronald W. Simms

                                        -62-
<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 the
            Company, PGE, American Water  Works Company, Inc., and Pennsylvania-
            American Water Company --  filed  as  Exhibit 2-1 to PGE'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  of  the  Company, as amended --
            filed  as  Exhibit  3-1  to  the  Company's  Senior  Note  Form S-2,
            Registration No. 33-47581.

 3-2        By-Laws of the Company, as amended  and restated on January 18, 1995
            -- filed as Exhibit 3-2 to  the Company's Annual Report on Form 10-K
            for 1994, File No. 0-7812.

(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 PGE) 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 PGE'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 PGE'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 PGE'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 PGE'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 PGE'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  PGE'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  PGE'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 PGE'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  PGE's  Bond  Form  S-7, Registration No.
            2-55419.                                                            



                                        -63-
<PAGE>

Exhibit
Number                                                                          

 4-10       Eighteenth Supplemental Indenture, dated as  of May 1, 1970 -- filed
            as Exhibit 2(1) to PGE'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 PGE'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 PGE'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 PGE'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  the  Company's  Annual Report on Form 10-K
            for 1989, File No. 0-7812.                                          

 4-15       Twenty-third Supplemental Indenture, dated  as of August 15, 1989 --
            filed as Exhibit 4-23 to  the  Company's  Annual Report on Form 10-K
            for 1989, File No. 0-7812.                                          

 4-16       Twenty-fourth Supplemental Indenture, dated as of September 1, 1991,
            -- filed as Exhibit  4-3  to  the  Company'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 4-17 to the Company's Annual Report on Form 10-K
            for 1992, File No. 0-7812.                                          

 4-18       Twenty-sixth Supplemental Indenture, dated  as  of December 1, 1992,
            -- filed as Exhibit 4-18 to the Company's Annual Report on Form 10-K
            for 1992, File No. 0-7812.                                          

 4-19       Twenty-seventh Supplemental Indenture, dated as of December 1, 1992,
            -- filed as Exhibit 4-19 to the Company'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  PGE'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  PGE'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 PGE'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.




                                        -64-
<PAGE>

Exhibit
Number                                                                          

 4-23       Rights Agreement dated as of April 26, 1995, between the Company and
            Chemical Bank, as  Rights  Agent  --  filed  as  Exhibit  4-1 to the
            Company's Quarterly Report on Form  10-Q for the quarter ended March
            31, 1995, File No. 0-7812.

(10) Material Contracts:

10-1        Service Agreement for storage service under Rate Schedule LGA, dated
            August 6,  1974,  between  PGE  and  Transcontinental  Gas Pipe Line
            Corporation -- filed as Exhibit 10-3  to PGE'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 PGE and Transcontinental Gas
            Pipe Line Corporation  --  filed  as  Exhibit  10-4  to PGE'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  PGE and Transcontinental Gas Pipe Line
            Corporation -- filed as Exhibit  10-8  to the Company'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  PGE  and  Transcontinental  Gas Pipe Line
            Corporation -- filed as Exhibit  10-6 to the Company's Annual Report
            on Form 10-K for 1991, File No. 0-7812.                             

10-5        Service Agreement for transportation service under Rate Schedule FT,
            dated August 1, 1991, between PGE and Transcontinental Gas Pipe Line
            Corporation -- filed as Exhibit  10-10 to the Company'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  PGE  and  Transcontinental  Gas
            Pipeline Corporation  --  filed  as  Exhibit  10-8  to the Company's
            Annual Report on Form 10-K for 1991, File No. 0-7812.               

10-7        Service Agreement for storage service under Rate Schedule LSS, dated
            October 1, 1993, by  and  between  PGE and Transcontinental Gas Pipe
            Line Corporation -- filed as Exhibit  10-7 to PGE'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  PGE  and  Transcontinental Gas
            Pipeline Corporation  Company  --  filed  as  Exhibit  10-8 to PGE's
            Annual Report on Form 10-K for 1993, File No. 1-3490.               










                                        -65-
<PAGE>

Exhibit
Number                                                                          

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

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

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

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

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

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

10-15       Service Agreement  (Contract  No.  946)  for  transportation service
            under Rate Schedule FT-A,  dated  September  1, 1993, by and between
            PGE and Tennessee Gas Pipeline  Company  -- filed as Exhibit 10-1 to
            PGE's Quarterly Report on Form  10-Q for the quarter ended September
            30, 1993, File No. 1-3490.                                          

10-16       Service  Agreement  (Service  Package  No.  171)  for transportation
            service under Rate Schedule  FT-A,  dated  September 1, 1993, by and
            between PGE and Tennessee Gas  Pipeline  Company -- filed as Exhibit
            10-2 to PGE's Quarterly Report  on  Form  10-Q for the quarter ended
            September 30, 1993, File No. 1-3490.                                

10-17       Service  Agreement  (Service  Package  No.  187)  for transportation
            service under Rate Schedule  FT-A,  dated  September 1, 1993, by and
            between PGE and Tennessee Gas  Pipeline  Company -- filed as Exhibit
            10-3 to PGE'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.  190)  for transportation
            service under Rate Schedule  FT-A,  dated  September 1, 1993, by and
            between PGE and Tennessee Gas  Pipeline  -- filed as Exhibit 10-4 to
            PGE's Quarterly Report on Form  10-Q for the quarter ended September
            30, 1993, File No. 1-3490.                                          



                                        -66-
<PAGE>

Exhibit
Number                                                                          

10-19       Service Agreement (Contract No. 2289) for storage service under Rate
            Schedule FS,  dated  September  1,  1993,  by  and  between  PGE and
            Tennessee Gas Pipeline -- filed  as  Exhibit 10-5 to PGE's Quarterly
            Report on Form 10-Q for  the  quarter ended September 30, 1993, File
            No. 1-3490.                                                         

10-20       Service Agreement for transportation service under Rate Schedule FT,
            dated April 1, 1995,  by  and  between  PGE and Transcontinental Gas
            Pipe Line Corporation --  filed  as  Exhibit 10-1 to PGE's Quarterly
            Report on Form 10-Q for the  quarter  ended March 31, 1995, File No.
            1-3490.

10-21       Service Agreement for storage service dated October 13, 1995, by and
            between PGE and Avoca Natural  Gas  Storage -- filed as Exhibit 10-1
            to PGE's  Quarterly  Report  on  Form  10-Q  for  the  quarter ended
            September 30, 1995, File No. 1-3490.

10-22       Bond Purchase Agreement, dated September  1, 1989, relating to PGE'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  PGE -- filed as
            Exhibit 10-34 to the Company's Annual  Report on Form 10-K for 1989,
            File No. 0-7812.                                                    

10-23       Form of Change in Control  Agreement between the Company and certain
            of its Officers -- filed  as  Exhibit  10-38 to the Company's Annual
            Report on Form 10-K for 1989, File No. 0-7812.                      

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

10-25       Agreement, dated as of March  15,  1991, by and between the Company,
            PGE and Robert L. Jones --  filed  as Exhibit 10-38 to the Company's
            Annual Report on Form 10-K for 1990, File No. 0-7812.               

10-26       Employment  Agreement  effective  September  1,  1995,  between  the
            Company and  Dean  T.  Casaday  --  filed  as  Exhibit  10-2  to the
            Company's Quarterly  Report  on  Form  10-Q  for  the  quarter ended
            September 30, 1995, File No. 0-7812.

10-27       Supplemental Retirement Agreement,  dated  as  of December 23, 1991,
            between the Company and Dean T. Casaday -- filed as Exhibit 10-17 to
            the Company's Common Stock Form S-2, Registration No. 33-43382.     

10-28       First Amendment to the  Supplemental  Retirement Agreement, dated as
            of September 1, 1994,  between  the  Company  and Dean T. Casaday --
            filed as Exhibit 10-37 to  the  Company's Annual Report on Form 10-K
            for 1994, File No. 0-7812.

10-29       Pennsylvania Enterprises,  Inc.  1992  Stock  Option Plan, effective
            June 3, 1992 - filed as  Exhibit  A to the Company's 1993 definitive
            Proxy Statement, File No. 0-7812.                                   


                                        -67-
<PAGE>

Exhibit
Number

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

10-31       Employment Agreement dated as of  August  28, 1996, by and among the
            Company, PGE and Thomas F.  Karam  --  filed  as Exhibit 10-2 to the
            Company's Quarterly  Report  on  Form  10-Q  for  the  quarter ended
            September 30, 1996, File No. 0-7812.

(11) Statement Re Computation of Per Share Earnings:

11-1        Statement Re Computation of Per Share Earnings -- filed herewith.

(21) Subsidiaries of the Registrant:

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

(23) Consents of Experts and Counsel:

23-1        Consent of Independent Public Accountants -- filed herewith.



































                                        -68-
<PAGE>

                                  TABLE OF CONTENTS
<TABLE>
<CAPTION>


PART I                                                                       PAGE
    <S>                                                                      <C>
    Item  l.  BUSINESS . . . . . . . . . . . . . . . . . . . . . . . . . . .   1

    Item  2.  PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . .  13

    Item  3.  LEGAL PROCEEDINGS  . . . . . . . . . . . . . . . . . . . . . .  13

    Item  4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  . . . . .  13


PART II

    Item  5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
                STOCKHOLDER MATTERS  . . . . . . . . . . . . . . . . . . . .  14

    Item  6.  SELECTED FINANCIAL DATA  . . . . . . . . . . . . . . . . . . .  15

    Item  7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                CONDITION AND RESULTS OF OPERATIONS  . . . . . . . . . . . .  18

    Item  8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  . . . . . . . . .  30

    Item  9.  CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                ACCOUNTING AND FINANCIAL DISCLOSURE  . . . . . . . . . . . .  57


PART III

    Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . .  58

    Item 11.  EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . .  58

    Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                OWNERS AND MANAGEMENT  . . . . . . . . . . . . . . . . . . .  58

    Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . .  58


PART IV

    Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
                ON FORM 8-K  . . . . . . . . . . . . . . . . . . . . . . . .  59*

              SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . .  62






________________________
* The "Index to Exhibits" is located on page 63.


</TABLE>
<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>
                                                PENNSYLVANIA ENTERPRISES, INC.    
                                                         (Registrant)
<S>       <C>                             <C>
Date:     March 6, 1997                   By:                                     
                                                        Thomas F. Karam
                                             President and Chief Executive Officer
                                                 (Principal Executive Officer)

Date:     March 6, 1997                   By:                                     
                                                       John F. Kell, Jr.
                                              Vice President, Financial Services
                                                 (Principal Financial Officer
                                              and Principal Accounting Officer)
</TABLE>
    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    


                                   Chairman of the Board of       March 6, 1997
      Kenneth L. Pollock            Directors

                                   Vice Chairman of the Board     March 6, 1997
      William D. Davis              of Directors

                                   Director, President and        March 6, 1997
      Thomas F. Karam               Chief Executive Officer

                                          Director                March 6, 1997
      Paul R. Freeman

                                          Director                March 6, 1997
      Robert J. Keating

                                          Director                March 6, 1997
      John D. McCarthy

                                          Director                March 6, 1997
      John D. McCarthy, Jr.

                                          Director                March 6, 1997
      Kenneth M. Pollock

                                          Director                March 6, 1997
      Richard A. Rose, Jr.

                                          Director                March 6, 1997
      James A. Ross

                                          Director                March 6, 1997
      Ronald W. Simms


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<PAGE>
<TABLE>
<CAPTION>
                                  PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
                                  SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                 FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1996

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

  Reserve for uncollectible accounts-

    Year ended December 31, 1996                      $      788   $ 2,103    $      -   $    1,658(a)   $ 1,233

    Year ended December 31, 1995                      $      937   $ 1,538    $      -   $    1,687(a)   $   788

    Year ended December 31, 1994                      $      817   $ 1,776    $      -   $    1,656(a)   $   937

Shown as operating reserves on the consolidated
  balance sheets:

    Insurance -

        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

        Year ended December 31, 1994                  $    1,863   $ 1,695    $      -   $    1,175(b)   $ 2,383



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

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



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