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.   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 consist
of Pennsylvania Energy Resources, Inc.  ("PERI") and its wholly-owned subsidiary
Keystone Pipeline Services, Inc.  ("Keystone"),  which was acquired effective as
of December 4, 1995,  Pennsylvania  Energy  Marketing  Company ("PEM") and Theta
Land Corporation ("THETA").  These other  subsidiaries, each of which is engaged
in non-regulated  activities,  have  not  constituted  a  significant portion of
either the Company's assets or operations.

    PGE, incorporated in Pennsylvania in 1867 as Dunmore Gas & Water Company, is
regulated by  the  Pennsylvania  Public  Utility  Commission  ("PPUC").    As of
December 31, 1995, PGE had approximately 141,800 gas customers and 133,400 water
customers.

    PGE's gas operating  revenues  are  highly  seasonal  and  depend on certain
factors that are beyond its control,  such  as  the price of natural gas and the
availability of markets for natural gas.  Other factors include the weather, the
effect of federal and  state  regulation,  the  effect of competition from other
forms of energy, including electricity  and  oil, and the switching of customers
from sales to  transportation  service.    See  "GAS BUSINESS-Transportation and
Storage Service." 

    As  of  December  31,  1995,  the  Company  and  its  subsidiaries  employed
approximately 1,080 persons.  However, as  a  result  of the sale of PGE's water
operations on February 16, 1996  (See  "-Sale of Water Utility Operations"), and
the related transfer, early  retirement  and  displacement of certain employees,
the Company and its subsidiaries  employed  only approximately 680 persons as of
March 1, 1996.

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 approximately $413.5 million, consisting  of  $266.4 million in cash and the
assumption of $147.1 million of  PGE's  liabilities, including $141.1 million of
its long-term debt, subject  to  certain  post-closing adjustments. (See Note 2,
Discontinued Operations, of the  Notes  to  Consolidated Financial Statements in
Item 8 of this Form 10-K).    Until  February 16, 1996, PGE continued to operate
the water utility business.

    The Company and PGE are using  the  $209.1 million of cash proceeds from the
sale, after the payment  of  an  estimated  $56.7  million  of federal and state
income taxes, to  retire  debt,  to  repurchase  stock  and  for working capital
purposes.  (See "Management's Discussion and Analysis of Financial Condition and
Results of  Operations-Liquidity  and  Capital  Resources-Sale  of Water Utility
Operations" in Item 7 of this Form 10-K).   With the sale of PGE's water utility

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operations, the principal assets of the Company and PGE now consist of PGE's gas
utility operations and approximately 46,000 acres of land.

























































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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, 1995, PGE had approximately
141,800 natural gas customers, from which  it derived total natural gas revenues
of $152.8 million during 1995.    The  following  chart shows a breakdown of the
types of customers and the percentages of gas revenues generated by each type of
customer in 1995:
[CAPTION]
            Type of Customer             % of Customers         % of Revenues
       [S]                                  [C]                    [C]
       Residential                           91.4%                  63.0%   
       Commercial                             8.2                   24.0*  
       Industrial                             0.2                   11.6*   
       Other Users                            0.2                    1.4     
          Total                             100.0%                 100.0%    

    * Includes  the  4.6%  of  total  gas  revenues  derived  from interruptible
      customers.

    During 1995, PGE delivered an  estimated  total of 44,800,000 thousand cubic
feet ("MCF") of natural gas to its  customers, of which 54.9% was sold at normal
tariff rates, 43.8% represented gas transported  for customers and 1.3% 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 1995, a total  of  1,142,000 MCF of natural gas was sold by
PGE to  interruptible  customers  and  4,168,000  MCF  was  transported for such
customers, which together represented 11.9%  of  the total deliveries of natural
gas by PGE to its customers during 1995.

    PGE's largest natural gas customer  accounted  for approximately 2.0% of its
operating revenues in 1995.  No other  customer accounted for as much as 2.0% of
such revenues in 1995.

    Transportation and Storage Service.   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.  Prior to March 25,
1993, transportation  service  was  only  provided  to  individual customers, or
groups of not more than  three  customers,  who  consumed at least 50,000 MCF of
natural gas per year.  Transportation service  is provided on both a firm and an
interruptible basis and includes provisions  regarding over and under deliveries
of gas on behalf  of  the  respective  customer.    In addition, 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

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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.

    Since April, 1995, PGE  has  also  offered  a Market Sensitive Sales Service
("MSSS") in conjunction with its  transportation  service.   The MSSS, which was
approved by Order of the PPUC entered January 11, 1995, provides for the sale of
natural gas at contracted rates based on market prices and other specified terms
and conditions.  The MSSS results in  additional sales of natural gas by PGE and
less transportation of natural gas by it  on  behalf of third parties.  PGE sold
1,388,000 MCF under the  MSSS  during  1995,  and  expects to sell approximately
2,344,000 MCF under MSSS in 1996.

    Set forth below is a summary of the gas transported by PGE and the number of
its customers using transportation service from 1993 to 1995:
[CAPTION]
                 Number             Volume of Gas Transported (MCF)        
                  of          Interstate      Pennsylvania
     Year      Customers         Gas              Gas              Total   
     [S]          [C]         [C]               [C]              [C]
     1995         480         14,543,000        5,054,000        19,597,000
     1994         574         13,411,000        4,744,000        18,155,000
     1993         569         10,078,000        4,627,000        14,705,000

    During 1996,  PGE  expects  to  transport  approximately  20,000,000  MCF of
natural gas,  of  which  it  anticipates  approximately  5,100,000  MCF  will be
Pennsylvania gas.

    The decrease in 1995 in the number of customers using transportation service
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.   As  a  result,  the  transportation  of  interstate  gas  has  had no
significant adverse effect  on  earnings.    However,  the  rate charged for the
transportation of gas produced in  Pennsylvania yields 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.    This lower rate for the
transportation of Pennsylvania gas is  the  result of regulations adopted by the
PPUC to encourage the production of natural gas within the state.

    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
arrangement for less than its average commodity cost of gas purchased during the
month.  PGE's revenues under the Alternate Fuel Rate amounted to $2.0 million in
1995, $3.7 million in 1994 and  $4.6  million in 1993.  These revenues reflected

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the sale of 603,000 MCF, 1,223,000 MCF and 1,541,000 MCF in 1995, 1994 and 1993,
respectively.  It is anticipated  that  approximately 1,445,000 MCF will be sold
under the Alternate Fuel Rate in  1996.    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, the Federal Energy Regulatory Commission
("FERC") issued  Order  No.  636  ("Order  636"),  requiring interstate pipeline
suppliers to restructure their services and  operations in an attempt 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 (i.e., the sale,  transportation  and  storage  of gas) provided by the
interstate pipeline suppliers  and  by  making  those  services available to end
users on the same terms as local gas distribution companies, such as PGE.

    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 local gas distribution companies.

    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, 1995,  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, $858,000 was recovered by
PGE over a twelve-month period  ended  January  31, 1995, through an increase in
its PGC rate, $252,000 are being  recovered  by  PGE in its annual PGC rate that
the PPUC has  approved  effective  December  1,  1995,  and  the recovery of the
remaining $217,000 will be  sought  by  PGE  in  its  PGC rate that is effective
December 1, 1996.

    The PGC Order also indicated that  while Gas Supply Realignment and Stranded
Costs (the "Non-Gas Transition Costs")  are  not  natural gas costs eligible for
recovery under the PGC rate  filing  mechanism,  such  costs are subject to full

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<PAGE>

recovery by local distribution companies 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 $9.6
million of Non-Gas Transition  Costs  will  be  billed  to PGE, generally over a
four-year period extending through  the  fourth  quarter  of 1997, of which $6.1
million had been billed to  PGE  and  $4.4  million  had been recovered from its
customers as of December 31,  1995.    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 20.8% of  PGE's  total purchases of natural gas in
1995.   Two  other  suppliers  accounted  for  17.2%  and  15.7%  of PGE's total
purchases of natural gas in 1995.  No other suppliers accounted for more than 7%
of PGE's purchases during 1995.

    The purchases of natural gas by PGE  during each of the years 1995, 1994 and
1993 are summarized below:
[CAPTION]
                                 Volume                      Average
          Year               Purchased (MCF)               Cost per MCF
          [S]                  [C]                            [C]
          1995                 24,173,000                     $2.62
          1994                 28,364,000                     $2.82
          1993                 26,200,000                     $2.98

    During 1996, PGE expects to purchase a total of approximately 28,113,000 MCF
of natural gas under seasonal or  longer-term contracts at a currently projected
average cost of $2.71 per MCF.

    PGE presently has adequate supplies  of  natural  gas to meet the demands of
existing customers through October, 1996, and the Company believes that PGE will
be able to  obtain  sufficient  supplies  to  meet  the  demands of its existing
customers and to serve new customers  (of which approximately 4,000 are expected
to be added in 1996) beyond October, 1996.
















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    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.

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    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.   The maximum capacity so released
on any one day in 1995  was  65,213  MCF.    Through March 1, 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   302,906   MCF.     Based  upon  present  pipeline
transportation and  storage  contracts,  and  assuming  no  curtailments  by its
suppliers, PGE could meet a peak day requirement of 303,479 MCF.  PGE's historic
maximum daily sendout is 293,683  MCF,  which occurred on January 19, 1994, when
service to interruptible customers  and  select  industrial users was curtailed.
The mean temperature  in  its  gas  service  area  on  that  day  was -8 degrees
Fahrenheit.

    Construction Expenditures.  PGE's  construction expenditures for gas utility
plant in 1995 totaled $21.1 million  and  are  estimated to be $28.9 million for
1996.  The higher  level  of  expenditures  estimated  for 1996 reflects various
system improvements to permit PGE to meet future customer demands, as well as an
increased emphasis on new business 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,
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

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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.

    Valve Maintenance.  On November 16, 1993, the PPUC staff issued an Emergency
Order, subsequently ratified by the  PPUC (the "Emergency Order"), requiring PGE
to survey its gas distribution system to  verify the location and spacing of its
gas shut off valves,  to  add  or  repair  valves  where needed and to establish
programs for the periodic inspection and  maintenance of all such valves and the
verification of all gas service line  information.   On March 31, 1995, the PPUC
adopted an Order  approving  a  plan  submitted  by  PGE  for complying with the
Emergency Order.  PGE does not  believe  that  compliance with the terms of such
Order will have a material adverse  effect  on its financial position or results
of operations.

    Rates.  As required by the Code, PGE files an annual purchased gas cost rate
with the PPUC.  This rate  is  designed  to  recover purchased gas costs for the
period it  will  be  in  effect.    The  procedure  includes  a  process for the
reconciliation of actual gas  costs  incurred  and  actual revenues received and
also provides for the refund  of  any overcollections, plus interest thereon, or
the recoupment of any undercollections of  gas  costs.  The procedure is limited
to purchased gas costs, to the  exclusion  of other rate matters, and requires a
formal evidentiary proceeding conducted by  the PPUC, the submission of specific
information regarding gas procurement practices and specific findings of fact by
the PPUC regarding the "least  cost  fuel  procurement" policies of the utility.
In accordance with this procedure, PGE placed a purchased gas cost rate of $2.75
per MCF in effect on December 1, 1995, and is required to file a proposed annual
purchased gas cost rate on or before  June  1, 1996, to be effective December 1,
1996.  It is not  presently  possible  to  estimate  how this proposed rate will
compare to the current  purchased  gas  cost  rate  of  $2.75  per MCF, which is
scheduled to remain in effect through November  30, 1996.  The annual changes in
gas rates on account of  purchased  gas  costs  have no effect on PGE's earnings
since the change in revenues is offset  by a corresponding change in the cost of
gas.

    Effective September 14, 1995, the  PPUC adopted regulations that provide for
the quarterly adjustment of the  annual  purchased  gas  cost rate of larger gas
distribution companies, including PGE.    Such  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

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financial position or results of operations,  and  PGE will still be required to
file an annual purchased gas cost rate.   As of March 1, 1996, no such quarterly
gas cost adjustments had been made to PGE's tariffs.

    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 may result in  increased scrutiny by the PPUC as to
the prudence of PGE's gas procurement and supply activities.  Depending upon how
the PPUC views  the  cost  effectiveness  of  such  activities,  PGE  may not be
permitted to recover  all  of  its  gas  supply  costs  in  the rates charged to
customers.  However, although it  cannot  be  certain, the Company believes that
PGE will be able to demonstrate to the PPUC the prudence of its gas supply costs
and, therefore, will be allowed to  recover  all such costs in its purchased gas
cost rate.

    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.  In accordance with such
procedure, PGE filed a revised  state  tax  adjustment surcharge tariff with the
PPUC which became  effective  August  1,  1995,  to  reflect  the  effect of tax
legislation enacted  by  the  Commonwealth  of  Pennsylvania  on  June 30, 1995,
decreasing the Corporate Net Income Tax rate.

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.

    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.  The  following  chart  shows  a  breakdown of the types of
customers and the percentages of water revenues they generated in 1995:
[CAPTION]
           Type of Customer              % of Customers         % of Revenues
       [S]                                   [C]                   [C]
       Residential                            91.5%                 63.0%
       Commercial                              7.2                  18.6
       Industrial                              0.3                   8.5
       Municipal and Other Users               1.0                   9.9     
          Total                              100.0%                100.0%    

    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) which met  all  federal  and state drinking water regulations.
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.  

    Treatment and Testing  of  Water.    All  water  entering PGE's distribution
system was filtered (except for the  small  quantity of ground water pumped from
wells), disinfected, and treated  with  chemicals  to  minimize corrosion of the
distribution system and customers' piping.   Water samples were taken at each of

                                        -10-
<PAGE>

the intake  stations  and  at  selected  locations  in  PGE's  service area, and
turbidity was  monitored  at  each  location  at  which  the  water  entered the
distribution system.  

    Construction  Expenditures.    PGE's  construction  expenditures  for  water
utility plant in 1995 totaled $15.3 million.

NONREGULATED SUBSIDIARIES

    Certain of  the  Company's  operations  are  also  conducted by Pennsylvania
Energy  Resources,  Inc.  ("PERI")  and  its  wholly-owned  subsidiary  Keystone
Pipeline Services,  Inc.  ("Keystone"),  Pennsylvania  Energy  Marketing Company
("PEM") and Theta Land Corporation  ("THETA").  Operating revenues and operating
income (after taxes on income) attributable  to PERI, Keystone (from December 4,
1995, the effective date of  its  acquisition  by  PERI), PEM and THETA have not
been significant relative to the Company's regulated operations.

    PERI.  PERI sells materials and  supplies  used in the distribution of water
and natural gas and engages in  service activities, primarily the maintenance of
gas heating appliances for PGE customers.

    Keystone.    Keystone  is  engaged  in  the  construction,  maintenance  and
rehabilitation of natural gas distribution pipelines.

    PEM.  PEM is engaged in the  marketing and brokering of natural gas directly
to large industrial and commercial users.

    THETA.  Theta owns a small  amount  of  real  estate which is being held for
sale or future development.    Theta  also  periodically  engages in the sale of
forest products.





























                                        -11-
<PAGE>

EXECUTIVE OFFICERS OF THE COMPANY

                                                           Positions and
                                        Officer           Offices with the
           Name               Age        Since                 Company        
                                                      
Kenneth L. Pollock             75         1987        Chairman of the Board of
                                                      Directors
                                                      
William D. Davis               64         1991        Vice  Chairman   of  the
                                                      Board of Directors
                                                      
Dean T. Casaday                64         1991        President and Chief
                                                      Executive Officer
                                                      
Thomas F. Karam                40         1995        Executive Vice President
                                                      
Vincent A. Bonaddio            46         1995        Vice          President,
                                                      Operations           and
                                                      Engineering Services
                                                      
Harry E. Dowling               46         1984        Vice President, Customer
                                                      Services
                                                      
John F. Kell, Jr.              58         1978        Vice          President,
                                                      Financial Services
                                                      
Joseph F. Perugino             57         1988        Vice  President,  Energy
                                                      Services
                                                      
Thomas J. Ward                 45         1988        Vice President,
                                                      Administrative Services,
                                                      and Secretary
                                                      
Richard N. Marshall            38         1993        Treasurer  and Assistant
                                                      Secretary
                                                      
Thomas J. Koval                43         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 1996 Annual
Meeting and until his successor  has  been  duly  elected.   Also, each of these
Officers holds the same  position  with  PGE.    Other  than with respect to Mr.
Casaday, who has an employment agreement with the Company as President and Chief
Executive Officer for a one-year period  ending  September 1, 1996, there are no
arrangements or understandings between any officer and any other person pursuant
to which he was selected as an officer.










                                        -12-
<PAGE>

ITEM 2.  PROPERTIES

    Gas.  PGE's gas system consists of approximately 2,221 miles of distribution
lines, nine city gate and 67 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.
Continued expenditures will, however, be  required with regard to PGE's on-going
valve maintenance program.  See "Business-Gas Business-Valve Maintenance."

    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.

    Water.  Prior to the  sale  of its water operations to Pennsylvania-American
on February 16, 1996, PGE's water  system consisted principally of 36 active and
standby reservoirs and stream intakes,  ten  water treatment plants, five wells,
various  distribution  system  storage   tanks,  approximately  1,730  miles  of
aqueducts  and  pipelines,  related   watershed  land  and  miscellaneous  other
property.  Approximately 8,000  acres  of  land representing reservoir sites and
land adjacent to such  reservoirs,  as  well  as  the  location of various water
facilities, were also sold by PGE to Pennsylvania-American on February 16, 1996,
as part of the sale of its water operations.

    Land.   As  of  March  1,  1996,  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

    At a special meeting held  on  October  11, 1995, the common shareholders of
the Company  approved  the  Asset  Purchase  Agreement  among  the Company, PGE,
Pennsylvania-American and American dated as of April 26, 1995, providing for the
sale by the Company  and  PGE  of  PGE's  regulated water operations and certain
related assets  to  Pennsylvania-American  for  $413.5  million  (including debt
assumed),  subject  to  certain  post-closing  adjustments.    Shareholders cast
3,669,946 votes for the proposal, 126,204 votes against it, and 36,297 abstained
from voting on the proposal.
















                                        -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, 1996, there were
approximately 7,861 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,
1995 and 1994.  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                  Cash
                                        High        Low              Dividends

              1995
          [S]                          [C]        [C]                [C]
          First quarter                $31.375    $27.125            $     .55
          Second quarter                34.000     30.625                  .55
          Third quarter                 34.625     30.750                  .55
          Fourth quarter                38.125     34.250                  .55
            Total                                                    $    2.20

              1994

          First quarter                $33.000    $29.250            $     .55
          Second quarter                30.875     29.000                  .55
          Third quarter                 31.875     29.375                  .55
          Fourth quarter                30.125     26.875                  .55
            Total                                                    $    2.20

    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
<TABLE>
<CAPTION>
    Selected consolidated financial data for  the Company and its subsidiaries for
each of the five years in the period  ended December 31, 1995, 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:

                                           Year Ended December 31,               
                               1995      1994(1)    1993(1)    1992(1)    1991(1)
                               (Thousands of Dollars, Except Per Share Amounts)
<S>                          <C>        <C>        <C>        <C>        <C>
OPERATING REVENUES           $152,756   $167,992   $153,325   $143,227   $138,465
  Cost of gas                  84,372     98,653     86,557     77,720     77,801
OPERATING MARGIN               68,384     69,339     66,768     65,507     60,664

OTHER OPERATING EXPENSES:
 Operation                     22,438     22,652     21,797     21,514     20,589
 Maintenance                    4,967      4,436      3,695      3,405      3,957
 Depreciation                   6,971      6,667      6,388      6,087      5,545
 Income taxes                   3,556      4,290      4,935      4,962      2,513
 Taxes other than income
   taxes                        9,918     10,807     10,055      9,670      8,663
   Total other operating
     expenses                  47,850     48,852     46,870     45,638     41,267

OPERATING INCOME               20,534     20,487     19,898     19,869     19,397
OTHER INCOME (DEDUCTIONS),
  NET                             763        258       (472)       (92)       604
INTEREST CHARGES (2)          (15,413)   (13,793)   (12,888)   (13,164)   (14,722)
INCOME FROM CONTINUING
 OPERATIONS                     5,884      6,952      6,538      6,613      5,279

DISCONTINUED OPERATIONS (3):
  Income from discontinued
    operations                  2,127(4)  10,504      7,909      4,915      3,130
  Estimated loss on disposal
    of discontinued
    operations, net of
    anticipated income during
    the phase-out period       (5,961)         -          -          -          -

  Income (loss) with respect
    to discontinued
    operations                 (3,834)    10,504      7,909      4,915      3,130

INCOME BEFORE SUBSIDIARY'S
  PREFERRED STOCK DIVIDENDS     2,050     17,456     14,447     11,528      8,409
SUBSIDIARY'S PREFERRED STOCK
  DIVIDENDS (2)                 2,763      4,639      6,462      5,065      4,236
NET INCOME (LOSS)            $   (713)  $ 12,817   $  7,985   $  6,463   $  4,173


</TABLE>

                    
See page 16 for an explanation of footnotes.



                                        -15-
<PAGE>
<TABLE>
<CAPTION>
                                           Year Ended December 31,               
                               1995      1994(1)    1993(1)    1992(1)    1991(1)
                               (Thousands of Dollars, Except Per Share Amounts)
<S>                          <C>        <C>        <C>       <C>         <C>
COMMON STOCK INFORMATION:
 Weighted average number
  of shares outstanding in
  thousands                     5,729      5,457      4,395      4,011      2,734
 Earnings (loss) per share
  of common stock:
    Continuing operations (2)$    .55   $    .43   $    .02   $    .39   $    .38
    Discontinued operations      (.67)      1.92       1.80       1.22       1.15
    Net income (loss) before
      premium on redemption
      of subsidiary's
      preferred stock            (.12)      2.35       1.82       1.61       1.53
    Premium on redemption
      of subsidiary's
      preferred stock               -       (.18)         -          -          -
 Earnings (loss) per share
  of common stock            $   (.12)  $   2.17   $   1.82   $   1.61   $   1.53

 Cash dividends per share
   of common stock           $   2.20   $   2.20   $   2.20   $   2.20   $   2.20

CAPITALIZATION AT END
  OF PERIOD:
 Amounts -
  Common shareholders'
   investment                $162,739   $172,012   $165,775   $135,144   $109,965
  Preferred stock of PGE -
   Not subject to mandatory
    redemption, net            33,615     33,615     33,615     33,615      9,916
   Subject to mandatory
    redemption                  1,680      1,760     31,840     41,920     42,000
  Long-term debt              106,706    220,705    155,388    148,866    128,267
    Total capitalization     $304,740   $428,092   $386,618   $359,545   $290,148

 Ratios -
  Common shareholders'
   investment                   53.4%      40.2%      42.9%      37.6%      37.9%
  Preferred stock of PGE -
   Not subject to mandatory
    redemption, net             11.0        7.8        8.7        9.3        3.4
   Subject to mandatory
    redemption                   0.6        0.4        8.2       11.7       14.5
  Long-term debt                35.0%      51.6       40.2       41.4       44.2 
    Total                      100.0%     100.0%     100.0%     100.0%     100.0%

UTILITY PLANT AT END OF
  PERIOD:
 Total utility plant         $295,895   $284,080   $269,819   $256,663   $246,323
 Accumulated depreciation      76,882     74,408     70,954     65,318     61,628
    Net utility plant        $219,013   $209,672   $198,865   $191,345   $184,695

TOTAL ASSETS AT END OF
  PERIOD:
  Continuing operations      $319,968   $321,236   $318,057   $257,458   $247,538
  Discontinued operations,
    net (5)                   204,250    203,196    193,002    183,702    144,815

                                        -16-
<PAGE>

    Total                    $524,218   $524,432   $511,059   $441,160   $392,353

</TABLE>
                    
See page 16 for an explanation of footnotes.























































                                        -17-
<PAGE>

(1)  Restated to reflect discontinued operations.
(2)  None of PEI's interest charges  nor  any of PGE's Preferred Stock dividends
     have been  allocated  to  the  discontinued  operations.   Interest charges
     relating to indebtedness of  PGE  have  been  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 is the same method as had been utilized by PGE and the
     PPUC in establishing the revenue requirements of its utility operations.
(3)  All amounts are shown net of related income taxes.
(4)  Reflects income only through  March  31,  1995,  the  effective date of the
     discontinuance of PGE's  water  utility  operations for financial statement
     purposes.
(5)  Net  of  (i)  liabilities   being  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.






































                                        -18-
<PAGE>

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

DISCONTINUED OPERATIONS

    On April 26, 1995, the  Company  and  PGE signed a definitive agreement (the
"Agreement")  with  American   Water   Works   Company,  Inc.  ("American")  and
Pennsylvania-American Water  Company  ("Pennsylvania-American"),  a wholly-owned
subsidiary of  American,  providing  for  the  sale  to Pennsylvania-American of
substantially all of the assets,  properties  and  rights of PGE's water utility
operations.

    Under the terms of  the  Agreement, Pennsylvania-American paid approximately
$413.5 million consisting of $266.4 million in cash and the assumption of $147.1
million of PGE's liabilities, including $141.1 million of its long-term debt, to
PGE on the February 16, 1996, closing date  for the sale.  This price is subject
to certain post-closing adjustments.  PGE continued to operate the water utility
business until the closing date.

    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, principally  the  write-off  of  certain  deferred  regulatory assets and
deferred credits and  the  impact  of  pension  and other postretirement benefit
expenses relative to the early  retirement  plan  (see  Note  10 of the Notes to
Consolidated Financial  Statements  in  Item  8  of  this  Form  10-K), the sale
resulted in an estimated after  tax  loss  of  $6.0 million, net of the expected
income  from  the  water  operations  during  the  phase-out  period  (which for
financial reporting purposes was April 1, 1995, through February 15, 1996.)

    The net cash proceeds from the  sale of approximately $209.1 million, net of
an estimated $56.7 million  payable  for  income  taxes,  are  being used by the
Company and PGE to retire debt, to  repurchase stock and for working capital for
their continuing operations.    After  the  sale,  the  principal  assets of the
Company and PGE consist of PGE's gas utility operations and approximately 46,000
acres of land.

    Operating revenues from water  utility  operations decreased $425,000 (0.6%)
from $66.7 million for 1994 to $66.3  million for 1995, primarily as a result of
a 1.2% decrease in consumption.  Operating expenses related to the water utility
operations, excluding income  taxes,  increased  $2.4  million (6.4%) from $36.7
million for 1994 to  $39.0  million  for  1995.    This increase was principally
attributable to an increase in operation and maintenance expenses as a result of
higher levels of leak repairs and sludge removal costs in 1995 compared to 1994.
Income taxes with respect to the  water utility operations decreased by $983,000
(14.4%) from $6.9 million in 1994 to  $5.9  million in 1995 due to a lower level
of income  before  income  taxes  (for  this  purpose,  operating  income net of
interest charges) and a decrease  in  the  Pennsylvania Corporate Net Income Tax
rate.  As a  result  of  the  foregoing,  operating  income of the water utility
operations decreased $1.8 million (7.8%)  from  $23.2  million for 1994 to $21.4
million for 1995.  After allocated interest and other charges (see Note 2 of the
Notes to Consolidated Financial Statements  in  Item  8  of this Form 10-K), the
income from the water  utility  operations  decreased  $1.8 million (16.7%) from
$10.5 million in 1994 to $8.7 million in 1995.

    Operating revenues from water utility  operations increased by $13.4 million
(25.1%) from $53.4 million in 1993 to  $66.7  million in 1994.  This increase in
revenues was principally the  result  of  various  rate increases allowed by the
PPUC during 1993.  Operating  expenses  related to the water utility operations,

                                        -19-
<PAGE>

excluding income taxes, increased  $3.6  million  (11.0%)  from $33.1 million in
1993 to $36.7 million in 1994.  The  major reasons for this increase were a $1.8
million (29.8%) increase in  depreciation  expense (primarily because of capital
additions and the change in  December,  1993,  from  a 4% compound interest to a
straight-line method of depreciation with respect  to certain water plant) and a
$1.9 million increase  in  other  operating  expenses,  largely  as  a result of
increased payroll and other postemployment  benefit  costs, the effects of which
were partially offset by a  decrease  in  the amortization of rate case expense.
Income taxes with respect  to  the  water  utility  operations increased by $3.9
million from $2.9 million in 1993 to $6.9  million in 1994 due to a higher level
of income  before  income  taxes  (for  this  purpose,  operating  income net of
interest charges).  As a result of  the foregoing, operating income of the water
utility operations increased $5.8 million (33.6%)  from $17.4 million in 1993 to
$23.2 million in 1994.   After  allocated  interest  charges  (see Note 2 of the
Notes to Consolidated Financial Statements  in  Item  8  of this Form 10-K), the
income from the water  utility  operations  increased  $2.6 million (32.8%) from
$7.9 million in 1993 to $10.5 million in 1994.

    In accordance with generally  accepted  accounting principles, the Company's
consolidated financial statements for the periods prior to 1995 were restated to
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, which
consist primarily of PGE's gas  utility  operations.  For additional information
regarding the discontinued operations, see  Note  2 of the Notes to Consolidated
Financial Statements in Item 8 of this Form 10-K.

































                                        -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, 1995, 1994 and 1993:
<TABLE>
<CAPTION>
                                                Percentage of Operating Revenues
                                                    Year Ended December 31,     
                                                 1995         1994         1993 
<S>                                              <C>          <C>          <C>
OPERATING REVENUES...........................    100.0%       100.0%       100.0%
  Cost of gas................................     55.3         58.7         56.5
OPERATING MARGIN.............................     44.7         41.3         43.5

OTHER OPERATING EXPENSES:
  Operation..................................     14.7         13.5         14.2
  Maintenance................................      3.2          2.6          2.4
  Depreciation...............................      4.6          4.0          4.2
  Income taxes...............................      2.3          2.6          3.2
  Taxes other than income taxes..............      6.5          6.4          6.5
    Total other operating expenses...........     31.3         29.1         30.5

OPERATING INCOME.............................     13.4         12.2         13.0

OTHER INCOME (DEDUCTIONS), NET...............      0.5          0.1         (0.3)

INTEREST CHARGES(1)..........................    (10.1)        (8.2)        (8.4)

INCOME FROM CONTINUING OPERATIONS............      3.8          4.1          4.3

INCOME (LOSS) WITH RESPECT TO DISCONTINUED
  OPERATIONS.................................     (2.5)         6.3          5.1

INCOME BEFORE SUBSIDIARY'S PREFERRED
  STOCK DIVIDENDS............................      1.3         10.4          9.4

SUBSIDIARY'S PREFERRED STOCK DIVIDENDS(1)....      1.8          2.8          4.2

NET INCOME (LOSS)............................     (0.5)%        7.6%         5.2%
</TABLE>
                    
(1)   None  of  the  Company's  interest  expense  nor  any  of the subsidiary's
preferred stock dividends has been allocated to the discontinued operations.

 o  Year Ended December 31, 1995, compared with year ended December 31, 1994

    Operating Revenues.  Operating revenues  decreased $15.2 million (9.1%) from
$168.0 million for 1994 to $152.8 million for 1995.  This decrease was primarily
the result of a reduction in the gas  cost  rate effective May 16, 1995.  See "-
Rate Matters."  Also contributing to  the decrease in revenues was the switching
of certain commercial  and  industrial  customers  from  sales to transportation
service and a 179 million cubic feet (0.8%) decrease in sales 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.

    Cost of Gas.  The  cost  of  gas  decreased $14.3 million (14.5%) from $98.7
million  for  1994  to  $84.4  million   for  1995,  primarily  because  of  the
aforementioned reduction in the gas cost  rate  effective  May 16, 1995.  See "-

                                        -21-
<PAGE>

Rate Matters."  Also contributing to the decrease was the reduced consumption by
residential and commercial heating customers.

























































                                        -22-
<PAGE>

    Operating Margin.  The operating margin decreased $955,000 (1.4%) from $69.3
million in 1994 to $68.4 million  in  1995, primarily because of the 179 million
cubic feet (0.8%) decrease in  consumption by residential and commercial heating
customers.  However, as a percentage of operating revenues, the margin increased
from 41.3% in 1994 to 44.7% in 1995  primarily as a result of the higher average
charge per cubic foot to residential and commercial heating customers because of
their lower consumption due to the warmer weather.

    Other Operating Expenses.   Other  operating expenses decreased $1.0 million
(2.1%) from $48.9 million for 1994 to $47.9 million for 1995.  This decrease was
partially the result of a  $734,000  (17.1%)  decrease in income taxes from $4.3
million in 1994 to $3.6  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.  Also contributing
to the decrease  in  other  operating  expenses  was  a  slightly lower level of
operation expenses,  which  declined  $214,000  (0.9%),  and  an $889,000 (8.2%)
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.  The
effect of the decreases in taxes  and operation expenses was partially offset by
a $531,000 (12.0%) increase in maintenance  expenses, principally as a result of
charges relative  to  the  maintenance  of  gas  valves,  and  a $304,000 (4.6%)
increase in depreciation expense  as  a  result  of  additions to utility plant.
Notwithstanding  the  decrease  in   other  operating  expenses,  such  expenses
increased as a percentage of operating  revenues from 29.1% during 1994 to 31.3%
during 1995 because of the relatively greater decrease in revenues.

    Operating Income.  As a result of the above, total operating income of $20.5
million remained relatively unchanged,  increasing  $47,000  (0.2%) in 1995 from
1994.  Total operating income also  increased as a percentage of total operating
revenues for such periods from 12.2% in 1994 to 13.4% in 1995, primarily because
of the decrease in the cost of gas as a percentage of operating revenues.

    Other Income (Deductions), Net.    Other  income (deductions), net increased
$505,000 from $258,000 in 1994 to $763,000  in  1995, primarily as a result of a
$256,000 increase in earnings  of  non-regulated subsidiaries, 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 (11.7%) 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 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


                                        -23-
<PAGE>

December 16, 1994, of  150,000  shares  ($15.0  million) of its 8.90% cumulative
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 $2.29 from earnings of $2.17
per share for 1994 (after an $.18 per share charge for the premium on redemption
of subsidiary's preferred stock) to  a  loss  of  $.12  per share for 1995, were
largely the result of the estimated loss  (equivalent to $1.04 per share) on the
disposal  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.

 o  Year ended December 31, 1994, compared with year ended December 31, 1993

    Operating Revenues.  Operating  revenues  increased  by $14.7 million (9.6%)
from $153.3 million for 1993 to  $168.0  million for 1994, primarily as a result
of a price increase  averaging  19.0%  (designed  to  total  $28.8 million on an
annual basis) effective December 1,  1993,  due  to increased costs of purchased
gas.  See "-Rate Matters-Rate  Filings."    Also contributing to the increase in
operating revenues in 1994 was a 224 million cubic feet (1.0%) increase in sales
to residential and commercial heating customers.  This increase was attributable
to the  addition  of  approximately  2,200  new  customers  and occurred despite
heating degree days that were 2.1% lower than normal and 0.3% less than in 1993.
Additionally,  the  implementation  of  surcharges  to  recover  FERC  Order 636
transition costs  (as  more  fully  discussed  below  under  "-Rate Matters-Rate
Filings") acted to increase gas operating revenues by $1.8 million in 1994.  The
effects of the price  increase  and  the  surcharges  on operating revenues were
partially offset by the switching of certain commercial and industrial customers
from sales  to  transportation  service  and  a  price  decrease  averaging 1.1%
(designed to total $1.8 million on  an annual basis) effective December 1, 1994,
due to decreased costs of purchased gas, see"-Rate Matters-Rate Filings."

    Cost of Gas.  The  cost  of  gas  increased $12.1 million (14.0%) from $86.6
million for 1993 to $98.7 million for  1994.  The effect of this increase, which
was the result of  higher  costs  for  purchased  gas  and the implementation of
surcharges to recover FERC Order  636  transition costs, see "-Rate Matters-Rate
Filings", was partially offset by  a  9.0%  (2.6 billion cubic feet) decrease in
the volume of gas sold during 1994  compared to 1993.  This decreased volume was
largely attributable to the  aforementioned  switching of certain customers from
sales to transportation service.

    Operating Margin.  The operating margin  increased $2.6 million or 3.9% from
$66.8 million in 1993 to $69.3  million  in  1994,  primarily as a result of the
increased sales to residential and commercial  heating customers.  However, as a
percentage of operating revenues,  the  margin  decreased  from 43.5% in 1993 to
41.3% in 1994 primarily because of the increased cost of purchased gas.

    Other Operating Expenses.   Other  operating expenses increased $2.0 million
(4.2%) from $46.9 million for 1993 to $48.9 million for 1994.  This increase was
largely attributable to a $729,000 increase in gross receipts tax as a result of
the higher level of  gas  revenues,  an  $855,000 increase in operation expenses
(primarily because  of  a  $285,000  increase  in  payroll  costs  and increased
provisions for uncollectible accounts  of  $603,000)  and a $741,000 increase in

                                        -24-
<PAGE>

maintenance expenses (principally as a result  of a $319,000 increase in payroll
costs  and  a  $146,000  increase  in  maintenance  of  gas  mains  and services
attributable to the extremely cold  weather experienced in January and February,
1994).  Income taxes decreased by $645,000  (13.1%) from $4.9 million in 1993 to
$4.3 million in 1994 due to  a  lower  level  of income before income taxes (for
this purpose, operating income  net  of  interest charges).  Notwithstanding the
increase in other operating expenses, such expenses decreased as a percentage of
operating revenues, from 30.5% during 1993  to  29.1% during 1994 because of the
relatively greater increase in operating revenues.

    Operating Income.    As  a  result  of  the  above,  total  operating income
increased by $589,000 (3.0%) from  $19.9  million  for 1993 to $20.5 million for
1994.    However,  as  a  percentage  of  operating  revenues,  operating income
decreased from 13.0% in 1993  to  12.2%  in  1994  primarily  as a result of the
increase in the cost of gas as a percentage of operating revenues.

    Other Income (Deductions), Net.    Other  income (deductions), net increased
$730,000 from a deduction of  $472,000  in  1993  to income of $258,000 in 1994,
primarily as a result of a $409,000  gain ($268,000 net of related income taxes)
on the sale of  PGE's  interest  in  an  oil  and  gas joint venture, a $254,000
increase ($145,000 net of related income taxes) in gains on the sale of land and
other property and a $239,000  decrease  in  the net interest expense associated
with the unexpended portion of  the  proceeds  from the issuance of certain debt
held in a construction fund.

    Interest Charges.  Interest charges  increased by $905,000 (7.0%) from $12.9
million for 1993 to $13.8 million for  1994, primarily as a result of borrowings
under the Company's Term Loan  Agreement, see "-Liquidity and Capital Resources-
Long-Term Debt and Capital Stock Financings."    None of the interest expense on
borrowings under the Company's Term  Loan  Agreement or its 10.125% Senior Notes
due 1999 was allocated to the discontinued operations.

    Income  from  Continuing  Operations.    Income  from  continuing operations
increased $414,000 (6.3%) from $6.5 million  for  1993 to $7.0 million for 1994.
This increase was the  result  of  the  matters discussed above, principally the
increase in  operating  margin  resulting  from  the  higher  level  of sales to
residential and commercial heating customers,  the effect of which was partially
offset by increases in other operating expenses and interest charges.

    Subsidiary's  Preferred  Stock  Dividends.    Dividends  on  preferred stock
decreased $1.8 million (28.2%) from  $6.5  million  for 1993 to $4.6 million for
1994, primarily as a result of  the  redemption  by PGE on December 23, 1993, of
100,000 shares ($10.0 million), and  on  May  31, 1994, of 150,000 shares ($15.0
million), of its 9.50% Cumulative Preferred Stock, $100 par value.  No dividends
on preferred stock have been allocated to the discontinued operations.

    Net Income.  Net income increased $4.8 million (60.5%) from $8.0 million for
1993 to $12.8 million for 1994.   The increased earnings in 1994 were the result
of a $2.6  million  increase  in  income  from  discontinued  operations and the
matters discussed above relating  to  the continuing operations, principally the
increase in operating margin resulting primarily  from the higher level of sales
to residential  and  commercial  heating  customers,  increases  in other income
(deductions), net and the decrease in preferred stock dividends.  The effects of
these factors were partially offset by the increase in other operating expenses.





                                        -25-
<PAGE>

    Before the $534,000 premium  paid  on  the  redemption  of 150,000 shares of
PGE's 9.50% Cumulative Preferred Stock on May 31, 1994, and the $446,000 premium
paid on the redemption  of  150,000  shares  of PGE's 8.90% Cumulative Preferred
Stock on December 16, 1994,  the  earnings  per  share of common stock increased
$.53 (29.1%) from $1.82 per share for  1993  to  $2.35 per share for 1994.  This
improvement was the result  of  the  60.5%  increase  in net income and occurred
despite a 24.2% increase in  the  weighted  average number of shares outstanding
during 1994 primarily as a result  of the Company's offering of 1,250,000 shares
of common stock in October, 1993.  While premiums on the redemption of preferred
stock are charged to retained earnings and  are not a determinant of net income,
the premiums associated with any redemptions occurring subsequent to January 20,
1994, must be taken into account in calculating the earnings per share of common
stock.  As a consequence, the  premiums  on the redemption of the 150,000 shares
of PGE's 9.50% Cumulative Preferred Stock  and the 150,000 shares of PGE's 8.90%
Cumulative Preferred Stock acted to reduce  PGE's earnings per share for 1994 by
$.18 per share, resulting in earnings of $2.17 per share of common stock for the
year, an increase of $.35 per share (19.2%) over the earnings of $1.82 per share
for the year ended December 31, 1993.

RATE MATTERS

    Annual Gas Cost Adjustment.  Pursuant  to the provisions of the Pennsylvania
Public Utility Code (the "Code")  which  require  that the tariffs of larger gas
distribution companies, such as PGE, be  adjusted  on an annual basis to reflect
changes in their purchased gas  costs,  the  PPUC, by Order adopted November 10,
1994, authorized PGE to decrease  the  gas  costs  contained in its tariffs from
$3.74 to $3.68 per thousand cubic feet  effective December 1, 1994.  This change
in gas rates  on  account  of  purchased  gas  costs  was  designed to produce a
decrease in annual  revenue  of  $1.8  million.    In  accordance  with the same
provisions of the Code, by Order  adopted  May 11, 1995, the PPUC authorized PGE
to decrease the gas costs  contained  in  its  gas tariffs to $2.42 per thousand
cubic feet effective  May  15,  1995,  in  order  to refund overcollections from
customers caused by lower than  anticipated  purchased gas costs and the receipt
of supplier refunds  during  1995.    This  change  in  gas  rates on account of
purchased gas costs  was  designed  to  produce  a  decrease  in revenue of $8.2
million from its effective  date  through  December  1,  1995.  Additionally, by
Order adopted November 9, 1995, the PPUC authorized PGE to increase its gas cost
rate to $2.75 per thousand cubic  feet  effective December 1, 1995.  This change
in gas rates on account of  purchased  gas  costs  is designed to produce a $9.6
million increase in annual revenue.    The  changes  in  gas rates on account of
purchased gas costs have no effect  on  the Company's earnings since the changes
in revenue are offset by corresponding changes in the cost of gas.

    Quarterly Gas Cost  Adjustment.    Effective  September  14,  1995, the PPUC
adopted regulations that  provide  for  the  quarterly  adjustment of the annual
purchased gas cost rate  of  larger  gas  distribution companies, including PGE.
Such adjustments are allowed when the  actual  purchased gas costs vary from the
estimated 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  will  still  be  required to file an annual
purchased gas cost rate with such  regulations.    As  of March 1, 1996, no such
quarterly gas cost adjustments had been made to PGE's tariffs.

    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

                                        -26-
<PAGE>

Transition Costs") are subject to  recovery  through the annual PGC rate filings
made with the PPUC by  PGE  and  other  larger local gas distribution companies.
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 local distribution companies 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,  $858,000  was  recovered by PGE over a
twelve-month period ended January 31, 1995, through an increase in its PGC rate,
$252,000 are being recovered by PGE  in  its  annual  PGC rate that the PPUC has
approved effective December 1, 1995, and  the recovery of the remaining $217,000
will be sought by PGE in its PGC rate that is 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 $9.6 million of Non-Gas
Transition Costs will  be  billed  to  PGE,  generally  over  a four-year period
extending through the fourth quarter  of  1997,  of  which $6.1 million had been
billed to PGE and  $4.4  million  had  been  recovered  from its customers as of
December 31, 1995.  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.

    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  approximately  $413.5  million,
consisting of $266.4 million in  cash  and  the  assumption of $147.1 million of
PGE's liabilities, including $141.1  million  of  its long-term debt, subject to
certain adjustments. 

    The Company and PGE are using  the  $209.1 million of cash proceeds from the
sale, after the payment  of  an  estimated  $56.7  million  of federal and state
income taxes, to  retire  debt,  to  repurchase  stock  and  for working capital
purposes.  In this regard, PGE repaid  its  $50.0 million term loan due 1996 and
all of its outstanding bank borrowings  on February 16, 1996.  Additionally, the
Company and PGE temporarily  invested  $152.0  million  of the proceeds from the
sale pending the use  of  such  funds  for  (i)  the repurchase of approximately
2,000,000 shares of the Company's common  stock in April, 1996, for an estimated
aggregate  consideration  of  approximately   $77.7  million  including  related


                                        -27-
<PAGE>

expenses, (ii) the  defeasance  of  the  $30.0  million  principal amount of the
Company's 10.125% Senior Notes on June  17,  1996,  at a total estimated cost of
$31.5 million, (iii) the repurchase of  an  estimated 225,000 shares of PGE's 9%
cumulative  preferred  stock  in   April,   1996,  for  an  estimated  aggregate
consideration of $25.0 million  including  related expenses, (iv) the repurchase
of an estimated  80,000  shares  of  PGE's  4.10%  cumulative preferred stock in
April, 1996, for an estimated  aggregate consideration of $4.2 million including
related expenses and  (v)  for  other  working  capital  purposes.   Because the
repurchases of the Company's  common  stock  and  PGE's  9% and 4.10% cumulative
preferred stock will involve voluntary  sales  by  the holders of the respective
securities, the number and cost of  the  shares actually purchased may vary from
that estimated depending on market conditions at the time of the repurchases. 

    With the repayment of its term loan  and all its bank borrowings on February
16, 1996, and  the  availability  of  the  cash  proceeds  from  the sale of its
regulated water operations that  have  been temporarily invested, PGE terminated
its $60.0 million bank credit agreement  and  one additional bank line of credit
under which $3.0 million was available  for  borrowing by PGE.  PGE has retained
and currently has four bank lines of credit with an aggregate borrowing capacity
of $17.5 million (See "-Liquidity"), which  is deemed adequate for its immediate
needs.  However, PGE plans  to  arrange  additional  bank lines of credit as the
proceeds from the sale of its water utility operations are fully utilized and as
it requires further borrowing capacity.

Liquidity

    The  primary  capital  needs  of  the  Company  are  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.

    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.

    In order to so finance  construction  expenditures  and to meet its seasonal
borrowing requirements, PGE has made  arrangements  for a total of $17.5 million
of unsecured revolving bank credit and plans to arrange additional bank lines of
credit  as  its  needs  require  (See  "-Sale  of  Water  Utility  Operations").
Specifically, PGE currently has  four  bank  lines  of  credit with an aggregate
borrowing capacity of $17.5  million  which  provide  for borrowings at interest
rates generally less than prime.   Borrowings outstanding under these bank lines
of credit are due and  payable  at  various  dates  during 1996, the earliest of
which is March 31, 1996.  As of March 1, 1996, PGE had no 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.





                                        -28-
<PAGE>

Long-Term Debt and Capital Stock Financings

    Both the Company and 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, exclusive of interim
bank borrowings and indebtedness  that  was  assumed by Pennsylvania-American in
connection with its purchase of  PGE's  water utility operations, consummated by
the Company and PGE since the beginning of 1994.

    On May 31, 1994, the  Company  borrowed  $20.0  million pursuant to the Term
Loan Agreement, which matures on May  31,  1999.  Borrowings under the Term Loan
Agreement  bear  interest  at  LIBOR  ("London  Interbank  Offered  Rates") plus
one-half of one percent (5.875% as of  March  1, 1996).  Under the provisions of
the Term Loan Agreement, the  Company  can  choose interest rate periods of one,
two, three or six months.  The  Company  utilized the proceeds from such loan to
purchase $20.0 million of PGE common stock.   PGE used a portion of the proceeds
it so received to redeem $15.0  million  of its 9.50% Cumulative Preferred Stock
and to fund  the  $534,375  premium  in  connection  with  such redemption.  The
remaining $4.5 million of proceeds were  used  by  PGE to repay a portion of its
bank borrowings and for working capital purposes.

    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, 88,231
shares ($2.4 million) and 59,537  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.

    Through the Company's  Dividend  Reinvestment  and  Stock Purchase Plan (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, 116,505 shares ($3.3 million),  62,271 shares ($1.8 million) and 15,988
shares ($465,000) of  common  stock  were  issued  during  1995,  1994 and 1993,
respectively.  The Company uses the proceeds from the DRP to purchase PGE common
stock.    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.

    Under the Company's Employees'  Savings  Plan  (a section 401(k) plan) which
became effective January 1, 1992, the Company issued an additional 19,468 shares
($628,000)  in  1995,  18,100  shares  ($540,000)  in  1994  and  16,478  shares
($481,000) in 1993.



                                        -29-
<PAGE>

    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.

    On December 7, 1995, PERI borrowed $2.0 million pursuant to a five-year term
loan agreement, which matures November 30, 2000.  Borrowings under the agreement
bear interest at a fixed rate of 6.54%.   PERI used the proceeds it so received,
along with  an  equity  investment  from  the  Company,  to  acquire  all of the
outstanding stock of Keystone Pipeline  Services,  Inc. (formerly known as Ford,
Bacon & Davis  Sealants,  Inc.)  from  Ford,  Bacon  &  Davis Companies, Inc., a
wholly-owned subsidiary of Deutsche Babcock  Technologies, Inc.  Under the terms
of the agreement, PERI  is  required  to  make principal repayments of $200,000,
$300,000, $400,000, $500,000 and  $600,000  during  the  years 1996, 1997, 1998,
1999 and 2000, respectively.

Construction Expenditures and Related Financings

    Expenditures for the construction  of  utility  plant totaled $21.1 million,
$19.6 million and $15.1  million  in  1995,  1994  and 1993, respectively.  Such
expenditures were financed with  internally-generated funds and bank borrowings,
pending the periodic issuance of stock and long-term debt.

    The Company currently estimates  that  PGE's capital expenditures will total
$28.9 million, $24.8 million and $25.3 million, respectively, for 1996, 1997 and
1998.  It is anticipated that such expenditures will be financed with internally
generated funds and bank borrowings, pending  the periodic issuance of stock and
long-term debt.

Current Maturities of Long-Term Debt and Preferred Stock

    As of December 31, 1995, $115.8 million of PGE's long-term debt, $200,000 of
PERI's long-term debt and $80,000  of  PGE's  preferred stock was required to be
repaid within twelve months.  The entire $115.8 million of PGE's long-term debt,
which consisted of borrowings of  $60.0  million under its revolving bank credit
agreement, $5.8 million under three  additional  bank  lines of credit and $50.0
under its term  loan,  had  been  repaid  by  February  16, 1996, primarily with
proceeds from the sale of  PGE's  water  utility  operations (See "Sale of Water
Utility Operations").

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.

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
28 through 55 of this Form 10-K.



                                        -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, 1995 and 1994,
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,  1995.      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,  1995 and 1994, and the
results of their operations and their cash  flows for each of the three years in
the period  ended  December  31,  1995  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,
1995 (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 23, 1996





                                        -31-
<PAGE>
<TABLE>
<CAPTION>
                  PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                         CONSOLIDATED STATEMENTS OF INCOME

                                                      Year Ended December 31,     
                                                   1995*       1994*       1993*  
                                                       (Thousands of Dollars)
<S>                                              <C>         <C>         <C>
OPERATING REVENUES                               $ 152,756   $ 167,992   $ 153,325
  Cost of gas                                       84,372      98,653      86,557
OPERATING MARGIN                                    68,384      69,339      66,768

OTHER OPERATING EXPENSES:
  Operation                                         22,438      22,652      21,797
  Maintenance                                        4,967       4,436       3,695
  Depreciation                                       6,971       6,667       6,388
  Income taxes                                       3,556       4,290       4,935
  Taxes other than income taxes                      9,918      10,807      10,055
      Total other operating expenses                47,850      48,852      46,870

OPERATING INCOME                                    20,534      20,487      19,898

OTHER INCOME (DEDUCTIONS), NET (Note 4)                763         258        (472)

INCOME BEFORE INTEREST CHARGES                      21,297      20,745      19,426

INTEREST CHARGES:
  Interest on long-term debt                        13,663      12,591      11,636
  Other interest                                     1,844       1,223       1,299
  Allowance for borrowed funds used
    during construction                                (94)        (21)        (47)
      Total interest charges                        15,413      13,793      12,888

INCOME FROM CONTINUING OPERATIONS                    5,884       6,952       6,538

DISCONTINUED OPERATIONS (Note 2):
  Income from discontinued operations                2,127      10,504       7,909
  Estimated loss on disposal of discontinued
    operations, net of anticipated income
    during the phase-out period of $7,409,000
    (net of related income taxes of $4,800,000)     (5,961)          -           -
  Income (loss) with respect to discontinued 
    operations                                      (3,834)     10,504       7,909

INCOME BEFORE SUBSIDIARY'S
  PREFERRED STOCK DIVIDENDS                          2,050      17,456      14,447

SUBSIDIARY'S PREFERRED STOCK DIVIDENDS               2,763       4,639       6,462

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

COMMON STOCK:
  Earnings (loss) per share of common stock:
    Continuing operations                        $     .55   $     .43   $     .02
    Discontinued operations                           (.67)       1.92        1.80
    Net income (loss) before premium on
      redemption of subsidiary's preferred stock      (.12)       2.35        1.82
    Premium on redemption of subsidiary's
      preferred stock                                    -        (.18)          -
    Earnings (loss) per share of common stock    $    (.12)  $    2.17   $    1.82

  Weighted average number of shares outstanding  5,729,436   5,456,568   4,394,953

*  See Note 2 regarding discontinued operations and restatement of consolidated
   financial statements.

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



                                        -32-
<PAGE>
<TABLE>
<CAPTION>
                PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS


                                                              December 31,    
                                                          1995*         1994* 
                                                        (Thousands of Dollars)
ASSETS
<S>                                                     <C>           <C>
UTILITY PLANT:
  At original cost, less acquisition
    adjustments of $386,000                             $295,895      $284,080
  Accumulated depreciation                               (76,882)      (74,408)
                                                         219,013       209,672

OTHER PROPERTY AND INVESTMENTS                             7,142         3,481

CURRENT ASSETS:
  Cash                                                       629           330
  Restricted cash - common stock subscribed (Note 5)           -         2,532
  Accounts receivable -
    Customers                                             21,066        16,883
    Others                                                   815         1,474
    Reserve for uncollectible accounts                      (788)         (937)
  Accrued utility revenues                                10,319         9,004
  Materials and supplies, at average cost                  2,876         2,797
  Gas held by suppliers, at average cost                  15,140        20,025
  Natural gas transition costs collectible                 4,612         4,708
  Deferred cost of gas and supplier refunds, net               -         3,767
  Prepaid expenses and other                               3,486         1,483
                                                          58,155        62,066


DEFERRED CHARGES:
  Regulatory assets
    Deferred taxes collectible                            30,015        31,696
    Natural gas transition costs collectible                 497         4,099
    Other                                                  2,516         3,131
  Unamortized debt expense                                 2,630         3,539
  Other                                                        -         3,552
                                                          35,658        46,017



NET ASSETS OF DISCONTINUED OPERATIONS                    204,250       203,196





TOTAL ASSETS                                            $524,218      $524,432


*  See Note 2 regarding discontinued operations and restatement of consolidated
   financial statements.

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
                                        -33-
<PAGE>
<TABLE>
<CAPTION>
                   PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                             CONSOLIDATED BALANCE SHEETS


                                                              December 31,    
                                                         1995*         1994*  
                                                        (Thousands of Dollars)
<S>                                                     <C>           <C>
CAPITALIZATION AND LIABILITIES

CAPITALIZATION (see accompanying statements):
  Common shareholders' investment (Notes 5 and 8)       $162,739      $172,012
  Preferred stock of PGE (Note 6) -
    Not subject to mandatory redemption, net              33,615        33,615
    Subject to mandatory redemption                        1,680         1,760
  Long-term debt (Note 7)                                106,706       220,705
                                                         304,740       428,092


CURRENT LIABILITIES:
  Current portion of long-term debt and
    preferred stock subject to mandatory
    redemption (Notes 6, 7 and 9)                        116,081         3,290
  Notes payable (Note 9)                                  10,180             -
  Accounts payable                                        18,531        17,781
  Deferred cost of gas and supplier refunds, net             434             -
  Accrued general business and realty taxes                1,493         3,315
  Accrued income taxes                                       526         3,136
  Accrued interest                                         2,307         2,850
  Accrued natural gas transition costs (Note 3)            2,278         2,356
  Other                                                    3,534         2,398
                                                         155,364        35,126


DEFERRED CREDITS:
  Deferred income taxes                                   48,835        46,600
  Accrued natural gas transition costs (Note 3)            1,144         3,250
  Unamortized investment tax credits                       4,938         5,110
  Operating reserves                                       3,709         2,383
  Other                                                    5,488         3,871
                                                          64,114        61,214




COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)





TOTAL CAPITALIZATION AND LIABILITIES                    $524,218      $524,432


*  See Note 2 regarding discontinued operations and restatement of consolidated
   financial statements.

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
                                        -34-
<PAGE>
<TABLE>
<CAPTION>
                   PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF CASH FLOWS

                                                        Year Ended December 31,   
                                                     1995*      1994*      1993*  
                                                        (Thousands of Dollars)
<S>                                                 <C>        <C>        <C>
CASH FLOW FROM OPERATING ACTIVITIES:
  Income from continuing operations, net of
    subsidiary's preferred stock dividends          $  3,121   $  2,313   $     76
  Effects of noncash charges to income -
    Depreciation                                       7,018      6,693      6,413
    Deferred income taxes, net                          (251)       752     (2,472)
    Provisions for self insurance                      2,652      1,030      1,510
    Other, net                                         5,572      3,074      2,418
  Changes in working capital, exclusive of cash 
   and current portion of long-term debt -
    Receivables and accrued utility revenues            (219)     1,435     (2,099)
    Gas held by suppliers                              4,885      6,625     (5,038)
    Accounts payable                                     321     (4,375)    (1,233)
    Deferred cost of gas and supplier refunds, net     5,715      5,784    (13,307)
    Other current assets and liabilities, net         (6,509)      (763)     1,187
  Other operating items, net                           2,628     (6,588)    (4,014)
      Net cash provided (used) by continuing
        operations                                    24,933     15,980    (16,559)
  Net cash provided (used) by discontinued
    operations                                         3,764        552       (837)
      Net cash provided (used) by operating
        activities                                    28,697     16,532    (17,396)

CASH FLOW FROM INVESTING ACTIVITIES:
  Additions to utility plant                         (20,615)   (16,960)   (14,011)
  Investment in non-regulated business                (3,169)         -          -
  Other, net                                          (4,934)     1,098        201
      Net cash used for investing activities         (28,718)   (15,862)   (13,810)

CASH FLOW FROM FINANCING ACTIVITIES:
  Issuance of common stock                             4,045      3,887     32,807
  Common stock subscribed, net (Note 5)                    -      2,515          -
  Redemption of preferred stock of PGE                   (80)   (30,080)   (10,080)
  Dividends on common stock                          (12,605)   (12,002)    (9,805)
  Issuance of long-term debt                          52,000     50,000     19,000
  Repayment of long-term debt                        (53,535)   (31,055)   (30,678)
  Net increase in bank borrowings                     10,500     15,370     32,247
  Other, net                                              (5)    (1,724)      (599)
      Net cash provided (used) for financing
        activities                                       320     (3,089)    32,892

NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                            299     (2,419)     1,686
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR           330      2,749      1,063
CASH AND CASH EQUIVALENTS AT END OF YEAR            $    629   $    330   $  2,749

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the year for:
    Interest (net of amount capitalized)            $ 27,951   $ 24,622   $ 23,992
    Income taxes                                    $  8,748   $  7,460   $  6,931



                                        -35-
<PAGE>

*  See Note 2 regarding discontinued operations and restatement of consolidated
   financial statements.

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






















































                                        -36-
<PAGE>
<TABLE>
<CAPTION>
                     PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF CAPITALIZATION

                                                          December 31,        
                                                   1995*               1994*  
                                                    (Thousands of Dollars)
<S>                                              <C>                 <C>
COMMON SHAREHOLDERS' INVESTMENT (Notes 5 and 8):
  Common stock, no par value
    (stated value $10 per share) 
    Authorized - 15,000,000 shares
    Outstanding - 5,784,319 shares and
      5,553,915 shares, respectively             $  57,843           $  55,539
  Common stock subscribed                                -               2,515
  Additional paid-in capital                        49,749              45,493
  Retained earnings                                 55,147              68,465
     Total common shareholders' investment         162,739    53.4%    172,012   40.2%

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,
        100,000 shares issued                       10,000              10,000
      9% cumulative preferred,
        250,000 shares outstanding, net of
        issuance costs                              23,615              23,615
    Total preferred stock not subject to
        mandatory redemption, net                   33,615    11.0%     33,615    7.8%
    Subject to mandatory redemption -
      5.75% cumulative preferred, 17,600 and 
        18,400 shares outstanding, respectively      1,760               1,840  
      Less current redemption requirements             (80)                (80) 

    Total preferred stock subject to
        mandatory redemption                         1,680     0.6%      1,760    0.4%

LONG-TERM DEBT (Note 7):
  First mortgage bonds                              55,000             108,535
  Notes                                            167,707             115,380
  Less current maturities and sinking
    fund requirements                             (116,001)             (3,210)
     Total long-term debt                          106,706    35.0%    220,705   51.6%

TOTAL CAPITALIZATION                             $ 304,740   100.0%  $ 428,092  100.0%










*  See Note 2 regarding discontinued operations and restatement of consolidated
   financial statements.

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
                                        -37-
<PAGE>
<TABLE>
<CAPTION>
                  PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' INVESTMENT

               FOR THE YEARS ENDED DECEMBER 31, 1995, 1994 AND 1993


                                          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, 1992    $41,315 $        - $   23,023 $ 70,806 $135,144

Net income for 1993                   -          -          -    7,985    7,985
Issuance of common stock         12,825          -     19,982        -   32,807
Premium on redemption of
  preferred stock of PGE              -          -          -     (356)    (356)
Cash dividends on common stock 
  ($2.20 per share)                   -          -          -   (9,805)  (9,805)

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
  (Note 5)                            -      2,515          -        -    2,515
Premium on redemption of
  preferred stock of PGE              -          -          -     (980)    (980)
Cash dividends on common stock 
  ($2.20 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
  (Note 5)                            -     (2,515)         -        -   (2,515)
Cash dividends on common stock
  ($2.20 per share)                   -          -          -  (12,605) (12,605)

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















The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
                                        -38-
<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.  The Company, through its remaining subsidiaries, Pennsylvania
Energy Resources, Inc. ("PERI"),  Pennsylvania  Energy Marketing Company ("PEM")
and Theta Land Corporation, is also engaged in various non-regulated activities,
including  energy-related  services   and   the  construction,  maintenance  and
rehabilitation of  natural  gas  distribution  pipelines,  which  have  not been
significant to the operations of the Company as a whole.

    Principles of Consolidation.   The consolidated financial statements include
the accounts of the Company and its subsidiaries, PGE, PERI, PEM and Theta.  The
consolidated financial statements also include the accounts of Keystone Pipeline
Services, Inc. ("Keystone"), a wholly-owned subsidiary of PERI, from 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 or
regulatory agencies such as the PPUC.

    The operations of PERI, including Keystone from its date of acquisition, PEM
and Theta, which  are  summarized  in  Note  4  to  these consolidated financial
statements, were not significant to the operations of the Company as a whole and
are  reflected  in  the  consolidated  financial  statements  in  "Other  Income
(deductions), net."

    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  which  are difficult to
predict and are beyond the  control  of  the Company.  Therefore, actual amounts
could differ from these estimates.

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




                                        -39-
<PAGE>

    The allowance for funds used during construction ("AFUDC") is defined as the
net cost  during  the  period  of  construction  of  borrowed  funds  used and a
reasonable rate upon other funds  when  so  used.   Such allowance is charged to
utility plant and reported as a  reduction  of interest expense (with respect to
the cost of  borrowed  funds)  in  the  accompanying  consolidated statements of
income.  AFUDC varies according to changes  in the level of construction work in
progress and in the sources and costs of capital.  The weighted average rate for
such allowance was approximately 8% in 1995, 7% in 1994 and 8% in 1993.

    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 2.75% in
1995, 2.77% in 1994 and 2.81% in 1993, 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.

    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,  and  natural  gas  transition costs
collectible, the following deferred  charges  are included as "Other" regulatory
assets:
[CAPTION]
                                                   1995              1994 
    [S]                                          [C]               [C]
    Early retirement plan charges                $   710           $   756
    Low income usage reduction program               429               441
    Computer software costs                          415             1,006
    Corrosion control costs                          341               489
    Customer assistance program                      109                 5
    Other                                            512               434

      Total                                      $ 2,516           $ 3,131

    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.


                                        -40-
<PAGE>

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

    Income Taxes.  The Company  provides  for  deferred taxes in accordance with
the provisions of FASB  Statement  109.    The  components  of the Company's net
deferred income tax liability relative  to  continuing operations as of December
31, 1995 and 1994, are shown below:
[CAPTION]
                                                   1995              1994 
                                                   (Thousands of Dollars)
    [S]                                          [C]               [C]
    Utility plant basis differences              $51,822           $49,638
    FERC Order 636 transition costs                  700             1,371
    Alternative minimum tax                       (1,947)           (2,213)
    Operating reserves                            (1,300)           (1,020)
    Other                                           (440)           (1,176)

        Net deferred income tax liability        $48,835           $46,600

    The provision for income taxes relative to continuing operations consists of
the following components:
[CAPTION]
                                                  1995       1994       1993  
                                                    (Thousands of Dollars)
    [S]                                          [C]        [C]        [C]
    Included in operating expenses:
      Currently payable -
        Federal                                  $ 2,845    $ 1,654    $ 4,535
        State                                      1,169      1,128      2,021
          Total currently payable                  4,014      2,782      6,556
      Deferred, net -
        Federal                                      198      1,785       (515)
        State                                       (463)      (105)      (934)
          Total deferred, net                       (265)     1,680     (1,449)
      Amortization of investment tax credits        (193)      (172)      (172)
          Total included in operating expenses     3,556      4,290      4,935

    Included in other income, net:
      Currently payable -
        Federal                                      410        345         93
        State                                        159        170         35
          Total currently payable                    569        515        128
      Deferred, net -
        Federal                                        -         10          7
        State                                          -         12          6
          Total deferred, net                          -         22         13
          Total included in other income, net        569        537        141

          Total provision for income taxes       $ 4,125    $ 4,827    $ 5,076








                                        -41-
<PAGE>

    The components of deferred  income  taxes relative to continuing operations,
which are  recorded  consistent  with  the  treatment  allowed  by  the PPUC for
ratemaking purposes, are as follows:
[CAPTION]
                                                  1995       1994       1993  
                                                    (Thousands of Dollars)
    [S]                                          [C]        [C]        [C]
    Excess of tax depreciation over
      depreciation for accounting purposes       $ 1,587    $ 1,197    $ 1,023
    FERC Order 636 transition costs                 (670)     1,371          -
    Take-or-pay costs, net                          (281)      (652)    (1,126)
    Other, net                                      (901)      (214)    (1,333)

        Total deferred taxes, net                $  (265)   $ 1,702    $(1,436)

    Included in:
      Operating expenses                         $  (265)   $ 1,680    $(1,449)
      Other income, net                                -         22         13

        Total deferred taxes, net                $  (265)   $ 1,702    $(1,436)

    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]
                                                   1995       1994       1993 
                                                    (Thousands of Dollars)
    [S]                                          [C]        [C]        [C]
    Income before income taxes                   $10,009    $11,828    $11,687
    Tax expense at statutory federal
      income tax rate                            $ 3,503    $ 4,140    $ 4,090
    Increases (reductions) in taxes
      resulting from -
        State income taxes, net of
          federal income tax benefit                 562        942        924
        Amortization of investment tax 
          credits                                   (193)      (172)      (172)
        Other, net                                   253        (83)       234

      Total provision for income taxes           $ 4,125    $ 4,827    $ 5,076

    Long Lived Assets.  In March  1995,  FASB Statement 121, "Accounting for the
Impairment of Long-Lived Assets", was issued.  The provisions of this statement,
which are effective for fiscal years beginning after September 15, 1995, require
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  is  not  expected  to have any
significant impact on  the  Company  or  PGE  since  the  carrying amount of all
assets, including regulatory assets, is considered recoverable.





                                        -42-
<PAGE>

(2)  DISCONTINUED OPERATIONS

    On April 26, 1995, the  Company  and  PGE signed a definitive agreement (the
"Agreement")  with  American   Water   Works   Company,  Inc.  ("American")  and
Pennsylvania-American Water  Company  ("Pennsylvania-American"),  a wholly-owned
subsidiary of  American,  providing  for  the  sale  to Pennsylvania-American of
substantially all of the assets,  properties  and  rights of PGE's water utility
operations.

    Under the terms of  the  Agreement, Pennsylvania-American paid approximately
$413.5 million consisting of $266.4 million in cash and the assumption of $147.1
million of PGE's liabilities, including $141.1 million of its long-term debt, to
PGE on the February 16, 1996, closing  date  for the transaction.  This price is
subject to certain post-closing adjustments.  PGE continued to operate the water
utility business until the closing date.

    The sale price reflects a $6.5  million  premium  over the book value of the
assets sold.  However,  after  transaction  costs  and  the  net effect of other
items, principally  the  write-off  of  certain  deferred  regulatory assets and
deferred credits and  the  impact  of  pension  and other postretirement benefit
expenses relative to the early  retirement  plan  (see  Note  10 of the Notes to
Consolidated Financial Statements), the sale  resulted in an estimated after tax
loss of $6.0 million,  net  of  the  expected  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  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 $56.7 million.

    The net cash proceeds from the  sale of approximately $209.1 million, net of
the estimated $56.7 million  payable  for  income  taxes,  are being used by the
Company and PGE to retire debt, to  repurchase stock and for working capital for
their continuing operations.  With  the  sale of PGE's water utility operations,
the principal assets  of  the  Company  and  PGE  consist  of  PGE's gas utility
operations and approximately 46,000 acres of land.

    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  have  been allocated 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
has been allocated to the discontinued operations.













                                        -43-
<PAGE>

    Selected  financial  information  for  the  discontinued  operations  as  of
December 31, 1995 and 1994, and for  the years ended December 31, 1995, 1994 and
1993 is set forth below:
[CAPTION]
                    Net Assets of Discontinued Operations

                                                     As of December 31,     
                                                    1995            1994    
                                                   (Thousands of Dollars)
[S]                                             [C]             [C]
Net utility plant                               $    368,742    $    359,399
Current assets (primarily accounts
  receivable and accrued revenues)                    12,756          12,141
Deferred charges and other assets                     25,752          31,103
Total assets being acquired by
  Pennsylvania-American                              407,250         402,643
Liabilities being assumed by
  Pennsylvania-American
    Long-term debt                                   141,097         141,420
    Other                                              5,983          13,168
                                                     147,080         154,588
Net assets being acquired by
  Pennsylvania-American                              260,170         248,055
Estimated liability for income taxes on
  sale of discontinued operations                    (56,710)        (55,542)
Estimated net income of discontinued operations
  during the remainder of the phase-out period           790               -
Other net assets of discontinued operations
 (written off as of March 31, 1995)                        -          10,683

Total net assets of discontinued operations     $    204,250    $    203,196
[CAPTION]
                      Income From Discontinued Operations

                                                  Years ended December 31,    
                                                1995*       1994        1993  
                                                   (Thousands of Dollars)
[S]                                           [C]         [C]         [C]
Operating revenues                            $ 15,640    $ 66,731    $ 53,363
Operating expenses, excluding income taxes
    Depreciation                                 1,946       7,672       5,911
    Other operating expenses                     6,929      29,005      27,140
                                                 8,875      36,677      33,051
Operating income before income taxes             6,765      30,054      20,312
    Income taxes                                 1,403       6,850       2,948
Operating income                                 5,362      23,204      17,364
    Other income                                     9          49          71
    Allocated interest charges                  (3,244)    (12,749)     (9,526)

Income from discontinued operations           $  2,127    $ 10,504    $  7,909

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





                                        -44-
<PAGE>
[CAPTION]
             Net Cash Provided (Used) by Discontinued Operations

                                                  Years ended December 31,    
                                                1995*       1994        1993  
                                                   (Thousands of Dollars)
[S]                                           [C]         [C]         [C]
Income from discontinued operations           $  2,127    $ 10,504    $  7,909
Noncash charges (credits) to income:
    Depreciation                                 1,946       7,672       5,911
    Deferred treatment plant costs, net            145         581      (3,560)
    Deferred income taxes                          447       5,146       4,170
    Deferred water utility billings                  -      (5,574)       (582)
  Changes in working capital, exclusive
    of long-term debt                            1,648         353      (2,041)
  Additions to utility plant                    (2,276)    (20,980)    (32,515)
  Utilization of restricted funds                    -       9,753      15,868
  Net increase (decrease) in long-term
     debt                                        1,010      (6,834)      1,640
  Other, net                                    (1,283)        (69)      2,363
Net cash provided (used) for discontinued
  operations                                  $  3,764    $    552    $   (837)

*   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

    Annual Gas Cost Adjustment.  Pursuant  to the provisions of the Pennsylvania
Public  Utility  Code,  which  require  that  the  tariffs  of  gas distribution
companies, 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
PPUC ordered PGE to make the following changes during 1995, 1994 and 1993 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, 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)
       December 1, 1993           2.79    3.74              28,800,000

    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.

    Quarterly Gas Cost  Adjustment.    Effective  September  14,  1995, the PPUC
adopted regulations that  provide  for  the  quarterly  adjustment of the annual
purchased gas cost rate  of  larger  gas  distribution companies, including PGE.
Such adjustments are allowed when the  actual  purchased gas costs vary from the
estimated 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  will  still  be  required to file an annual
purchased gas cost rate.    As  of  March  1,  1996,  no such quarterly gas cost
adjustments had been made to PGE's tariffs.

                                        -45-
<PAGE>

    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 filing.
PGE was billed a total of $1.3 million of Gas Transition Costs by its interstate
pipelines.  Of this amount,  $858,000  was  recovered by PGE over a twelve-month
period ended January 31, 1995, through an increase in its PGC rate, $252,000 are
being recovered by PGE in its  annual  PGC rate that the PPUC approved effective
December 1, 1995, and the recovery  of  the remaining $217,000 will be sought by
PGE in its PGC rate that is effective December 1, 1996.

    The PGC Order also indicated that  while Gas Supply Realignment and Stranded
Costs (the "Non-Gas Transition Costs")  are  not  natural gas costs eligible for
recovery under the PGC rate  filing  mechanism,  such  costs are subject to full
recovery by local distribution companies through the filing of a tariff pursuant
to either the existing  surcharge  or  base  rate provisions of the Pennsylvania
Public Utility 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 FERC Order  636  through  the  billing  of a surcharge to its
customers effective September 12,  1994.    It  is currently estimated that $9.6
million of Non-Gas Transition  Costs  will  be  billed  to PGE, generally over a
four-year period extending through  the  fourth  quarter  of 1997, of which $6.1
million had been billed to  PGE  and  $4.4  million  had been recovered from its
customers as of December  31,  1995.    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.
































                                        -46-
<PAGE>

(4)  OTHER INCOME (DEDUCTIONS), NET

    Other income (deductions), net was comprised of the following elements: 
[CAPTION]
                                                1995       1994       1993  
                                                   (Thousands of Dollars)
    [S]                                        [C]        [C]        [C]
    Earnings of non-regulated subsidiaries     $   651    $   395    $   316
    Write-off of expired advances relating
      to income taxes, net of related
      income taxes                                 227          -          -
    Net interest income (expense) with respect
      to proceeds from the issuance of debt
      held in a construction fund                   30        (91)      (330)
    Gain on sale of investment in joint
      venture, net of related income taxes           -        268          -
    Gain on sale of land and other property,
      net of related income taxes                    -        165         20
    Holding company expenses, net of related
      income tax benefits                         (189)      (209)      (203)
    Premium on retirement/defeasance of debt       (11)       (40)       (81)
    Amortization of preferred stock issuance
      costs, net of related income tax benefits     (1)      (227)      (126)
    Other                                           56         (3)       (68)
      Total                                    $   763    $   258    $  (472)

    Summary financial data for non-regulated
      subsidiaries:

      Revenues                                 $ 8,479    $ 9,127    $ 6,574
      Expenses                                   7,828      8,732      6,258
      Net income                               $   651    $   395    $   316

      Total assets (including, $66,000,
        $294,000 and $817,000, respectively,
        eliminated in consolidation)           $ 5,272    $ 1,753    $ 2,534

(5)  COMMON STOCK

    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, 88,231 shares ($2.4 million) and 59,537 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.

    On January 3, 1995, the Company issued 45,360 shares of its common stock for
an aggregate consideration of  $1.2  million  with  respect to payments received
pursuant to the Customer  Plan  during  the December, 1994, subscription period.
The payments  so  received  during  December  are  reflected  under the captions
"Restricted cash - Common stock subscribed" and "Common shareholders' investment
- Common stock  subscribed"  in  these  consolidated  financial statements as of
December 31, 1994.



                                        -47-
<PAGE>

    Dividend Reinvestment  and  Stock  Purchase  Plan.    Through  the Company's
Dividend Reinvestment and Stock Purchase Plan  ("DRP"), holders of shares of the
Company's common stock may reinvest  cash dividends and/or make cash investments
in the common  stock  of  the  Company.    Under  the  DRP, 116,505 shares ($3.3
million), 62,271 shares ($1.8  million)  and  15,988 shares ($465,000) of common
stock were issued during 1995, 1994  and 1993, 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  capital  requirements  resulting  from the sale of
PGE's water utility operations to Pennsylvania-American.
 
    On January 3, 1995, the Company issued 51,565 shares of its common stock for
an aggregate consideration of $1.3 million with respect to cash investments made
pursuant to the DRP during  the  fourth  quarter  of 1994.  The investments made
during the fourth quarter are  reflected  under  the captions "Restricted cash -
common stock subscribed"  and  "Common  shareholders'  investment - Common stock
subscribed" in these consolidated financial statements as of December 31, 1994.

    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 19,468 shares ($628,000) in 1995, 18,100 shares ($540,000) in 1994
and 16,478 shares ($481,000) in 1993.

    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  200,000 shares of authorized but unissued common
stock were reserved and made  available  for distribution to eligible employees.
Stock options awarded under the  Plan  may  be either Incentive Stock Options or
Non-qualified Stock Options.  On  April  7, 1993, Non-qualified Stock Options to
purchase 45,000 shares of common stock  were  issued to eligible employees at an
exercise price of $30 per share  (the  fair  market value of the common stock on
such date).   These  options,  which  expire  on  April  6,  2003,  could not be
exercised prior to April 7, 1994.  As  of December 31, 1995, the options for 400
such shares had expired, 4,800  had  been  exercised and 39,800 options remained
outstanding.  In addition, as  of  such  date,  155,400 shares of authorized but
unissued common stock were reserved for distribution to eligible employees under
the terms of the Plan, including 400 shares for which previously granted options
had expired.

    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 $100 per share  of  common  stock  (equivalent to $50 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.

                                        -48-
<PAGE>

    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
$100 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 $100 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  $.005  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.

(6)  PREFERRED STOCK

Preferred Stock of PGE Subject to Mandatory Redemption

    On December 23, 1993, PGE redeemed  100,000  shares of its 9.50% 1988 series
cumulative preferred stock  at  a  price  of  $103.5625  per share (plus accrued
dividends to the redemption date), which included a voluntary redemption premium
of $3.5625 per share ($356,250 in the aggregate).  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.  Eight
hundred such shares were acquired  and  cancelled  by  PGE  in each of the three
years in the period ended December 31,  1995, for an aggregate purchase price in
each year of $80,000.

    As of December 31,  1995,  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 1996 through 2000.




                                        -49-
<PAGE>

    At PGE's option,  the  5.75%  cumulative  preferred  stock  may currently be
redeemed at a price of $102.00 per share ($1,795,200 in the aggregate).

Preferred Stock of PGE Not Subject to Mandatory Redemption

    On August 18, 1992, PGE issued 250,000 shares of its 9% cumulative preferred
stock, par value $100  per  share,  for  aggregate net proceeds of approximately
$23.6 million.  The 9% cumulative preferred stock is not redeemable by 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.

    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 $10,550,000.

Dividend Information

    The dividends on the preferred stock  of  PGE  in each of the three years in
the period ended December 31, 1995, were as follows:
[CAPTION]
         Series                        1995         1994         1993 
                                           (Thousands of Dollars)
          [S]                         [C]          [C]          [C]
          4.10%                       $  410       $  410       $  410
          5.75%                          103          108          113
          8.90%                            -        1,280        1,335
          9.00%                        2,250        2,250        2,250
          9.50% 1988 series                -          591        2,354

           Total                      $2,763       $4,639       $6,462

    Dividends on all series  of  PGE's  preferred  stock  are cumulative, and if
dividends in an amount equivalent to four full quarterly dividends on all shares
of preferred stock then outstanding are  in default and until all such dividends
have been paid, the holders  of  the  preferred  stock, voting separately as one
class, shall be entitled to elect a  majority  of the Board of Directors of PGE.
Additionally, PGE may not declare dividends on its common stock if any dividends
on shares of preferred stock then outstanding are in default.


















                                        -50-
<PAGE>

(7)  LONG-TERM DEBT

    Long-term debt consisted of  the  following  components at December 31, 1995
and 1994:
[CAPTION]
                                                          1995          1994  
                                                        (Thousands of Dollars)
  [S]                                                   [C]           [C]
  Indebtedness of the Company:
    10.125% senior notes, due 1999, net of
      unamortized discount                              $ 29,906      $ 29,880
    Term loan, due 1999                                   20,000        20,000
      Total long-term debt of the Company                 49,906        49,880

  Indebtedness of PGE:
    First mortgage bonds -
       8    % Series, due 1997                                 -         3,535
       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
       9.57 % Series, due 1996                                 -        50,000
                                                          55,000       108,535
    Notes -
      Term loan, due 1996                                 50,000             -
      Bank borrowings, at weighted average interest
        rates of 6.62% and 5.28%, respectively (Note 9)   65,801        65,500
                                                         115,801        65,500
    Less current maturities and sinking
      fund requirements                                 (115,801)       (3,210)
      Total long-term debt of PGE                         55,000       170,825

  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                 $106,706      $220,705

    Term Loan Agreements.  On May  31,  1994, the Company borrowed $20.0 million
pursuant to a five-year term  loan  agreement (the "Term Loan Agreement"), which
loan matures on May 31,  1999.    Borrowings  under the Term Loan Agreement bear
interest at  LIBOR  ("London  Interbank  Offered  Rates")  plus  one-half of one
percent (5.875% as  of  March  1,  1996).    Under  the  terms  of the Term Loan
Agreement, the Company can choose  interest  rate  periods of one, two, three or
six months.  The Company utilized the  proceeds from such loan to purchase $20.0
million of PGE common stock.  PGE used  a portion of the proceeds it so received
to redeem $15.0 million of its 9.50%  cumulative preferred stock and to fund the
$534,375 premium in connection with such redemption.  The remaining $4.5 million
of proceeds were used by PGE to  repay  a portion of its bank borrowings and for
working capital purposes.

    On October 12, 1995,  PGE  borrowed  $50.0  million  pursuant to a term loan
agreement, which matures on November  1,  1996.    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.

    On December 7, 1995, PERI borrowed $2.0 million pursuant to a five-year term
loan agreement, which loan  matures  November  30,  2000.   Borrowings under the
agreement bear interest at a fixed rate of  6.54%.  PERI used the proceeds it so
received along with an equity investment from  the Company to acquire all of the
outstanding stock of Keystone Pipeline  Services,  Inc. (formerly known as Ford,

                                        -51-
<PAGE>

Bacon & Davis  Sealants,  Inc.)  from  Ford,  Bacon  &  Davis Companies, Inc., a
wholly-owned subsidiary of Deutsche Babcock  Technologies, Inc.  Under the terms
of the term loan agreement,  PERI  is  required  to make principal repayments of
$200,000, $300,000, $400,000, $500,000 and $600,000 during the years 1996, 1997,
1998, 1999 and 2000, respectively.






















































                                        -52-
<PAGE>

    Maturities and Sinking Fund  Requirements.    As  of  December 31, 1995, 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]
                           1996           $116,001,000 (a)
                           1997           $    300,000
                           1998           $    400,000
                           1999           $ 60,500,000 (b)
                           2000           $    600,000

    (a) Includes $65.8 million of PGE bank borrowings outstanding as of December
        31, 1995, and PGE's term loan  in the principal amount of $50.0 million.
        Such amounts were repaid on  February  16,  1996, with proceeds from the
        sale of PGE's water operations to Pennsylvania-American.

    (b) Includes the $20.0 million of  borrowings outstanding as of December 31,
        1995, under the Company's  Term  Loan  Agreement  due  May 31, 1999, the
        Company's 10.125% Senior Notes in  the principal amount of $30.0 million
        due June 15, 1999, and  PGE's  9.23%  Series First Mortgage Bonds in the
        principal amount of $10.0 million due September 1, 1999.

(8)  DIVIDEND RESTRICTIONS

    There are no dividend restrictions in the Restated Articles of Incorporation
of the Company.    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, 1995, $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 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 also 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 four additional
bank lines of credit with an aggregate borrowing capacity of $17.5 million which
provide for borrowings at interest rates  generally less than prime.  Borrowings
outstanding under two of these bank lines of credit with borrowing capacities of
$2.5 million and  $5.0  million  mature  on  May  31,  1996,  and June 30, 1996,
respectively.  Borrowings outstanding under  the  other two bank lines of credit
with borrowing capacities of $3.0 million  and  $7.0 million mature on March 31,
1996, and May  31,  1996,  respectively.    As  of  March  1,  1996,  PGE had no
borrowings  outstanding   under   these   additional   bank   lines  of  credit.
Additionally, PGE had one other bank  line  of credit outstanding as of December
31, 1995, with  a  borrowing  capacity  of  $3.0  million,  which was terminated
following the sale of PGE's water  operations.   The commitment fees paid by PGE
with respect to its revolving  bank  credit  agreements totaled $26,000 in 1995,
$97,000 in 1994 and $113,000 in 1993.

    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, 1995.

                                        -53-
<PAGE>

    Information relating to  PGE's  bank  lines  of  credit and borrowings under
those lines of credit is set forth below:
[CAPTION]
                                                    As of December 31,        
                                              1995         1994         1993  
                                                  (Thousands of Dollars)
      [S]                                   [C]          [C]          [C]
      Borrowings under lines of credit
        Short-term                          $ 10,000     $      -     $  2,000
        Long-term                             65,801       65,500       47,000
                                            $ 75,801     $ 65,500     $ 49,000

      Unused lines of credit
        Short-term                          $      -     $      -     $  5,000
        Long-term                              4,699        2,000       13,000
                                            $  4,699     $  2,000     $ 18,000

      Total lines of credit
        Prime rate                          $      -     $      -     $  2,000 
        Other than prime rate                 80,500       67,500       65,000
                                            $ 80,500     $ 67,500     $ 67,000

      Short-term bank borrowings (a)
        Maximum amount outstanding          $ 10,000     $  5,692     $  5,666 
        Daily average amount outstanding    $  2,581     $    441     $    637
        Weighted daily average interest 
          rate                                6.513%       3.984%       4.046%
        Weighted average interest rate at
          year-end                            6.334%           -        4.208%
        Range of interest rates               6.290-       3.700-       3.750-
                                              6.660%       6.000%       6.000%

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

(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  will  be
transferred to  the  American  pension  plan.    In  February,  1996,  PGE began
terminating additional employees as a result of the sale of its water operations
and the transfer  of  fewer  employees  to Pennsylvania-American than originally
expected.  As a result  of  these  actions,  the Company recognized 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

                                        -54-
<PAGE>

its determination of the estimated loss  on  the disposal of PGE's water utility
operations.

























































                                        -55-
<PAGE>

    In December, 1995, as a result  of the agreement to transfer fewer employees
to Pennsylvania-American in  connection  with  the  sale  of PGE's water utility
operations than originally  expected,  the  Company  offered an Early Retirement
Plan ("ERP") to its employees who would be  59  years of age or older and have a
minimum of five years of service as  of  December  31, 1995.  Of the 63 eligible
employees, 50 elected to accept this  offer  and retire 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  $353,000,  $309,000  and  $244,000  in  1995,  1994 and 1993,
respectively.  The  following  items  were  the  components  of such net pension
costs:
[CAPTION]
                                                 1995        1994        1993  
                                                    (Thousands of Dollars)
    [S]                                        [C]         [C]         [C]
    Present value of benefits earned 
      during the year                          $    430    $    549    $    470
    Interest cost on projected benefit 
      obligations                                 1,459       1,400       1,321
    Return on plan assets                        (1,502)        535      (1,720)
    Net amortization and deferral                   (34)        (55)        (53)
    Deferral of investment (loss) gain                -      (2,120)        226
        Net pension cost                       $    353    $    309    $    244

    The funded status of the  plan  as  of  December  31,  1995 and 1994, was as
follows:
[CAPTION]
                                                             1995        1994  
                                                          (Thousands of Dollars)
    [S]                                                    [C]         [C]
    Actuarial present value of the projected
      benefit obligations:
        Accumulated benefit obligations
          Vested                                           $ 29,100    $ 21,592
          Nonvested                                              47          77
            Total                                            29,147      21,669
        Provision for future salary increases                 7,841       7,565
        Projected benefit obligations                        36,988      29,234
    Market value of plan assets, primarily 
      invested in equities and bonds                         34,000      30,457
    Plan assets in excess of (less than) projected
      benefit obligations                                    (2,988)      1,223
    Unrecognized net transition asset as of 
      January 1, 1986, being amortized over 20 years         (2,155)     (2,528)
    Unrecognized prior service costs                          1,507       2,150
    Unrecognized net (gain) loss                              2,155      (1,644)

    Accrued pension cost at year-end                       $ (1,481)   $   (799)


    The assumptions used in determining pension obligations were:
[CAPTION]
                                                 1995       1994       1993 
         [S]                                    [C]        [C]        [C]
         Discount rate                          7.00 %     8.75 %     8.00 %
         Expected long-term rate of return
           on plan assets                       9.00 %     9.00 %     9.00 %
         Projected increase in future
           compensation levels                  5.00 %     5.50 %     5.50 %

                                        -56-
<PAGE>

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  accumulated  benefit   obligation   relating  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  equal  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.  In  February, 1996, PGE began terminating
additional employees as a result  of  the  sale  of its water operations and the
transfer of fewer employees  to  Pennsylvania-American than originally expected.
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.

    As a result of 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  under  FASB  Statement 88 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
1995, 1994 and 1993:
[CAPTION]
                                                   1995       1994       1993  
                                                     (Thousands of Dollars)
    [S]                                          [C]        [C]        [C]
    Present value of benefits earned during
      the year                                   $    127   $    148   $    124
    Interest cost on accumulated benefit
      obligation                                      577        532        532
    Return on plan assets                             (69)        (4)         -
    Net amortization and deferral                     391        360        339

    Net cost of postretirement benefits other
      than pensions                                 1,026      1,036        995
    Less disbursements for benefits                  (555)      (543)      (540)

    Increase in liability for postretirement
      benefits other than pensions               $    471   $    493   $    455








                                        -57-
<PAGE>

    Reconciliations  of  the  accumulated  benefit  obligation  to  the  accrued
liability for postretirement benefits  other  than  pensions  as of December 31,
1995 and 1994, follow:
[CAPTION]
                                                        1995       1994  
                                                    (Thousands of Dollars)
    [S]                                               [C]        [C]
    Accumulated benefit obligation:
      Retirees                                        $  6,514   $  9,021
      Fully eligible active employees                      850      1,628
      Other active employees                             1,074      1,305
                                                         8,438     11,954
    Plan assets at fair value                                -        839
    Accumulated benefit obligation 
      in excess of plan assets                           8,438     11,115
    Unrecognized transition obligation
      being amortized over 20 years                     (5,438)   (11,108)
    Unrecognized net gain (loss)                          (703)       885

    Accrued liability for postretirement
      benefits other than pensions                    $  2,297   $    892

    The assumptions used in determining other postretirement benefit obligations
were:
[CAPTION]
                                                 1995       1994       1993 
         [S]                                    [C]        [C]        [C]
         Discount rate                          7.00 %     8.75 %     8.00 %
         Expected long-term rate of return
           on plan assets                       9.00 %     9.00 %     9.00 %
         Projected increase in future
           compensation levels                  5.00 %     5.50 %     5.50 %

    It was also assumed that the per capita cost of covered health care benefits
would increase at an annual rate of 9% in 1996 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, 1995, by approximately $394,000  and the aggregate of the service and
interest cost components of the  net  cost of postretirement benefits other than
pensions for the year 1995 by approximately $50,000.

    Since PGE has  not  sought  to  increase  its  base  gas rates, the $441,000
($258,000 net of related income taxes), $447,000 ($256,000 net of related income
taxes) and $407,000 ($232,000 net  of  related  income taxes) of additional cost
incurred in 1995, 1994 and 1993,  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.

Other Postemployment Benefits

    In  December,  1992,   FASB   Statement   112,  "Employers'  Accounting  for
Postemployment Benefits," was issued.   The provisions of this statement require
the recording of a  liability  for  postemployment  benefits (such as disability
benefits,  including  workers'   compensation,   salary   continuation  and  the
continuation of benefits such  as  health  care  and life insurance) provided to
former or inactive employees, their  beneficiaries  and covered dependents.  The
Company consistently recorded liabilities for  benefits  of this nature prior to
the effectiveness of FASB Statement  112, and included liabilities for employees

                                        -58-
<PAGE>

scheduled to be terminated in 1996 as  a  result of the sale of water operations
in its estimate of accrued costs relative  to such sale as of December 31, 1995.
The provisions  of  FASB  Statement  112,  which  the  Company adopted effective
January 1, 1994, did not  have  a  material  impact on its financial position or
results of operations.

(11)  CONSTRUCTION EXPENDITURES

    PGE estimates the  cost  of  its  1996  construction  program  will be $28.9
million.   It  is  anticipated  that  such  expenditures  will  be financed with
internally generated funds and bank borrowings, pending the periodic issuance of
stock and long-term debt.

(12)  COMMITMENTS AND CONTINGENCIES

Valve Maintenance

    On November 16, 1993, the PPUC staff issued an Emergency Order, subsequently
ratified by the PPUC (the  "Emergency  Order"),  requiring PGE to survey its gas
distribution system to verify  the  location  and  spacing  of  its gas shut off
valves, to add or repair valves  where  needed and to establish programs for the
periodic inspection and maintenance of  all  such valves and the verification of
all gas service line information.  On  March 31, 1995, the PPUC adopted an Order
approving a plan submitted by PGE  for  complying with the Emergency Order.  PGE
does not believe that  compliance  with  the  terms  of  such  Order will have a
material adverse effect on its financial position or results of operations.

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.















                                        -59-
<PAGE>

(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
<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              $ 68,237   $ 25,184  $      12,119  $     47,216
Operating income                   9,905      2,271            400         7,958
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              1.00       (.37)          (.72)          .65
 Discontinued operations            (.65)         -              -          (.02)
 Earnings (loss) per share of
   common stock (a)                  .35       (.37)          (.72)          .63

                                                 QUARTER ENDED                  
                                March 31,  June 30,  September 30,  December 31,
                                  1994       1994        1994           1994    
                                (Thousands of Dollars, Except Per Share Amounts)

Operating revenues              $  80,233  $ 26,568  $      14,356  $     46,835
Operating income                   10,884     2,192            515         6,784
Income (loss) from continuing
  operations                        6,469    (2,342)        (4,038)        2,112
Income from discontinued
  operations                        2,079     2,757          2,915         2,865
Net income (loss)                   8,548       415         (1,123)        4,977

Earnings (loss) per share
  of common stock:                                                          
 Continuing operations               1.20      (.43)          (.74)          .38
 Discontinued operations              .38       .51            .53           .52
 Net income (loss) before
   premium on redemption of
   subsidiary's preferred stock      1.58       .08           (.21)          .90
 Premium on redemption of
   subsidiary's preferred stock         -      (.10)             -          (.08)
 Earnings (loss) per share of
   common stock                      1.58      (.02)          (.21)          .82
</TABLE>
    (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 during the year.

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




                                        -60-
<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, 1995 and 1994, were as follows:
[CAPTION]
                                               1995                 1994        
                                        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                             $ 49,906 $   50,300  $ 49,880 $   50,000
    PGE                                  170,801    175,431   174,035    177,027
    PERI                                   2,000      2,000         -          -
Preferred stock of PGE subject to
  mandatory redemption (including
  current portion)                         1,760      1,795     1,840      1,877

    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.

















                                        -61-
<PAGE>

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

    None.























































                                        -62-
<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.


























                                        -63-
<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 . . . . . . . . . . .   28

           Consolidated Statements of Income for each of the three years 
             in the period ended December 31, 1995. . . . . . . . . . . .   29

           Consolidated Balance Sheets as of December 31, 1995 and 1994 .   30

           Consolidated Statements of Cash Flows for each of the three 
             years in the period ended December 31, 1995. . . . . . . . .   32

           Consolidated Statements of Capitalization as of December 31, 
             1995 and 1994. . . . . . . . . . . . . . . . . . . . . . . .   33

           Consolidated Statements of Common Shareholders' Investment
             for each of the three years in the period ended December
             31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . .   34

           Notes to Consolidated Financial Statements . . . . . . . . . .   35

     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, 1995 . . . . . . . . . . . .   60

     3.  Exhibits
             See "Index to Exhibits" located  on  page  62  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.













                                        -64-
<PAGE>
<TABLE>
<CAPTION>
<S>      <C>       <C>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - continued
</TABLE>
(b)  Reports on Form 8-K
         No reports on Form 8-K were filed during the last quarter of 1995.

(c)  Executive Compensation Plans and Arrangements

     The following listing includes  the  Company's executive compensation plans
     and arrangements in effect as of December 31, 1995.

     Exhibit

     10-28  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.

     10-29  First Amendment to Form of Change  in Control Agreement, dated as of
            May 24, 1995, between  the  Company  and  certain of its Officers --
            filed herewith.

     10-30  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.

     10-31  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.

     10-32  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.

     10-33  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.

     10-34  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.

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















                                        -65-
<PAGE>

SCHEDULE II


























































                                        -66-
<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.

                                              PENNSYLVANIA ENTERPRISES, INC.    

                                                       (Registrant)

Date:     March 8, 1996                 By:         /s/ Dean T. Casaday         
                                                        Dean T. Casaday
                                           President and Chief Executive Officer
                                             (Principal Executive Officer)

Date:     March 8, 1996                 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 8, 1996
      Kenneth L. Pollock            Directors

  /s/ William D. Davis             Vice Chairman of the Board     March 8, 1996
      William D. Davis              of Directors

  /s/ Dean T. Casaday              Director, President and        March 8, 1996
      Dean T. Casaday               Chief Executive Officer

  /s/ Paul R. Freeman                     Director                March 8, 1996
      Paul R. Freeman

                                          Director                March 8, 1996
      Robert J. Keating

  /s/ John D. McCarthy                    Director                March 8, 1996
      John D. McCarthy

  /s/ John D. McCarthy, Jr.               Director                March 8, 1996
      John D. McCarthy, Jr.

                                          Director                March 8, 1996
      Kenneth M. Pollock

                                          Director                March 8, 1996
      Richard A. Rose, Jr.

  /s/ James A. Ross                       Director                March 8, 1996
      James A. Ross

  /s/ Ronald W. Simms                     Director                March 8, 1996
      Ronald W. Simms

                                        -67-
<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.                                                            



                                        -68-
<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, from
            PGE to First Trust of  New  York, National Association, as Successor
            Trustee to Morgan Guaranty  Trust  Company  of  New York -- 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.


                                        -69-
<PAGE>

Exhibit
Number                                                                          

 4-23       Indenture dated  as  of  June  15,  1992,  between  the  Company and
            Chemical Bank, as  Trustee,  with  respect  to the Company's 10.125%
            Senior Notes due June  15,  1999  --  filed  as  Exhibit 4-20 to the
            Company's Annual Report on Form 10-K for 1992, File No. 0-7812.

 4-24       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.               





                                        -70-
<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.                                          



                                        -71-
<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       7% Bond  Purchase  Agreement,  dated  November  1,  1994,  among the
            Luzerne County Industrial Development Authority, PGE and Wheat First
            Butcher Singer, as representative on behalf of itself and Legg Mason
            Wood Walker Incorporated -- filed  as  Exhibit 10-28 to PGE's Annual
            Report on Form 10-K for 1994, File No. 1-3490.

10-24       Amended  and  Restated  Project  Facilities  Agreement  dated  as of
            November 1, 1994,  between  PGE  and  the  Luzerne County Industrial
            Development Authority --  filed  as  Exhibit  10-29  to PGE's Annual
            Report on Form 10-K for 1994, File No. 1-3490.

10-25       Term Loan  Agreement,  dated  as  of  May  31,  1994,  by  and among
            Pennsylvania Enterprises, Inc. and the Banks parties thereto and PNC
            Bank, National Association, as Agent -- filed as Exhibit 10-1 to the
            Company's Quarterly Report on Form  10-Q for the quarter ended March
            31, 1994, File No. 0-7812.

10-26       Credit Agreement, dated as of April  19, 1993, by and among PGE, the
            Banks parties thereto  and  PNC  Bank,  Northeast  PA, as Agent, and
            CoreStates Bank, N.A. and NBD  Bank,  N.A.  as Co-Agents -- filed as
            Exhibit 10-1 to the Company's Quarterly  Report on Form 10-Q for the
            quarter ended March 31, 1993, File No. 0-7812.

10-27       First Amendment to Credit Agreement  and Notes, dated as of December
            16, 1994, by and among PGE,  the Banks parties thereto and PNC Bank,
            Northeast PA, as Agent, and CoreStates Bank, N.A. and NBD Bank, N.A.
            as Co-Agents -- filed  as  Exhibit  10-31  to PGE's Annual Report on
            Form 10-K for 1994, File No. 1-3490.




                                        -72-
<PAGE>

Exhibit
Number                                                                          

10-28       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.                      

10-29       First Amendment to Form of Change  in Control Agreement, dated as of
            May 24, 1995, between  the  Company  and  certain of its Officers --
            filed herewith.

10-30       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.               

10-31       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.

10-32       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.     

10-33       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.

10-34       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.                                   

(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.















                                        -73-
<PAGE>

                                  TABLE OF CONTENTS
<TABLE>
<CAPTION>

<S>       <C>
PART I                                                                       PAGE

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

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

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

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


PART II

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

    Item  6.  SELECTED FINANCIAL DATA  . . . . . . . . . . . . . . . . . . .  14

    Item  7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                CONDITION AND RESULTS OF OPERATIONS  . . . . . . . . . . . .  17

    Item  8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  . . . . . . . . .  27

    Item  9.  CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                ACCOUNTING AND FINANCIAL DISCLOSURE  . . . . . . . . . . . .  56


PART III

    Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . .  57

    Item 11.  EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . .  57

    Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                OWNERS AND MANAGEMENT  . . . . . . . . . . . . . . . . . . .  57

    Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . .  57


PART IV

    Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
                ON FORM 8-K  . . . . . . . . . . . . . . . . . . . . . . . .  58*

              SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . .  61






________________________
* The "Index to Exhibits" is located on page 62.
</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>
Date:     March 8, 1996                   By:                                     
                                                        Dean T. Casaday
                                             President and Chief Executive Officer
                                                 (Principal Executive Officer)

Date:     March 8, 1996                   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 8, 1996
      Kenneth L. Pollock            Directors

                                   Vice Chairman of the Board     March 8, 1996
      William D. Davis              of Directors

                                   Director, President and        March 8, 1996
      Dean T. Casaday               Chief Executive Officer

                                          Director                March 8, 1996
      Paul R. Freeman

                                          Director                March 8, 1996
      Robert J. Keating

                                          Director                March 8, 1996
      John D. McCarthy

                                          Director                March 8, 1996
      John D. McCarthy, Jr.

                                          Director                March 8, 1996
      Kenneth M. Pollock

                                          Director                March 8, 1996
      Richard A. Rose, Jr.

                                          Director                March 8, 1996
      James A. Ross

                                          Director                March 8, 1996
      Ronald W. Simms


<PAGE>
























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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, 1995

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

  Reserve for uncollectible accounts-

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

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

    Year ended December 31, 1993                      $    1,103   $ 1,106    $      -   $    1,392(a)   $   817


Shown as operating reserves on the consolidated
  balance sheets:

    Insurance -

        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

        Year ended December 31, 1993                  $    1,565   $ 1,823    $     75   $    1,600(b)   $ 1,863


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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