PART I


ITEM l.  BUSINESS

GENERAL

    Pennsylvania Enterprises, Inc. (the  "Company")  is a holding company which,
through  its  subsidiaries,  is  engaged  in  both  regulated  and  nonregulated
activities.  The Company's regulated  activities  are conducted by its principal
subsidiary, PG Energy Inc.  ("PG  Energy"),  a  regulated public utility, and PG
Energy's wholly-owned subsidiary,  Honesdale  Gas  Company ("Honesdale"), also a
regulated public utility which was acquired  on  February 14, 1997.  Together PG
Energy and  Honesdale  distribute  natural  gas  to  a  thirteen-county  area in
northeastern Pennsylvania,  a  territory  that  includes  130 municipalities, in
addition to the cities of Scranton,  Wilkes-Barre and Williamsport.  In 1997, PG
Energy  and  Honesdale  collectively  accounted  for  approximately  84%  of the
Company's operating revenues.  Until  February  16, 1996, when its water utility
operations were sold, PG Energy  was  also  engaged in the distribution of water
(See "-Sale of Water Utility Operations.")  

    The  Company,  through  its  other  subsidiaries,  PG  Energy  Services Inc.
("Energy Services"), formerly known as  Pennsylvania Energy Resources, Inc., PEI
Power Corporation ("Power Corp") which  was  formed in October, 1997, Theta Land
Corporation ("Theta")  and  Keystone  Pipeline  Services,  Inc.  ("Keystone"), a
wholly-owned subsidiary of Energy Services which was acquired effective December
4, 1995, is engaged in  various  nonregulated  activities, including the sale of
natural gas, propane and electricity  and other energy-related services, as well
as the construction, maintenance and  rehabilitation of natural gas distribution
pipelines and  the  sale  of  property  for  residential,  commercial  and other
development.  Additionally, commencing in mid-1998, the Company expects to begin
generating and  selling  electricity  and  steam  produced  by  the cogeneration
facility which Power  Corp  acquired  in  November,  1997.    Prior to 1996, the
Company's nonregulated subsidiaries did not  constitute a significant portion of
either its assets or operations.   However,  it  is anticipated that in 1998 the
revenues  of  these  subsidiaries  will  account  for  25-30%  of  the Company's
operating revenues and 20-25% of its capital expenditures.

    Both PG Energy, incorporated in Pennsylvania  in 1867 as Dunmore Gas & Water
Company,  and   Honesdale   (collectively   referred   to   as   the  "Regulated
Subsidiaries") are regulated by the  Pennsylvania Public Utility Commission (the
"PPUC").  As of December 31,  1997,  PG Energy provided service to approximately
147,000 natural gas customers  and  Honesdale  provided service to approximately
3,300 customers.  

    The Company and its  subsidiaries  employed  approximately 815 persons as of
December 31, 1997.

Restructuring of Natural Gas Industry

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


                                         -1-
<PAGE>

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

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

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

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

    In December, 1996, legislation  was  enacted  in Pennsylvania which provides
all customers of electric utilities in  the  state  with the right to choose the
generator of their electricity.    This  customer  choice,  which is intended to
increase competition and to lower costs for electricity, is being phased in over
a three-year period ending  on  January  1,  2001.   Under this legislation, the
electric utilities in Pennsylvania  are  required to unbundle generation charges


                                         -2-
<PAGE>

from the other charges included  in  their currently bundled rates and customers
can contract with qualified suppliers  of  their choosing, including the utility
currently serving them, to purchase electric  energy at nonregulated rates.  The
electric utilities will continue to  utilize their transmission and distribution
networks to distribute electricity to  their customers regardless of supplier, a
function which will remain subject to rate regulation by the PPUC.

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

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

Expansion of Nonregulated Activities

    The Company intends  to  continue  its  focus  to  position its nonregulated
subsidiaries as leading  suppliers  of  energy  and  energy-related products and
services.  The Regulated Subsidiaries  will  actively  market the use of natural
gas and  will  continue  to  aggressively  add  customers  to their distribution
systems.  Additionally, the Company  plans  to  further expand the activities of
Energy Services.   Energy  Services,  in  alliance  with  CNG Energy Services, a
subsidiary of Consolidated Natural Gas Company,  markets a broad array of energy
and energy-related products and  services  under  the  name PG Energy PowerPlus.
Presently, PG Energy PowerPlus offers the sale of natural gas and electricity to
residential, commercial and industrial users, as  well as the sale of propane on
both a retail and wholesale level, in central and northeastern Pennsylvania; and


                                         -3-
<PAGE>

the inspection, maintenance and  servicing  of  residential and small commercial
gas-fired equipment.  Also,  Energy  Services,  through its subsidiary Keystone,
provides specialized  pipeline  distribution  services  for utilities, including
keyhole vacuum excavation, camera inspection and bridge pipeline rehabilitation,
as well as the conventional installation  of  mains and services for the natural
gas, water  and  sewer  industries.    In  addition,  the  Company,  through its
subsidiary  Theta,  is  presently   marketing  Company-owned  land  parcels  for
residential and commercial development under  the guidance of the Watershed Land
Use  Plan  developed  by  the  independent  PG  Energy  Land  Use  Committee  in
association with the Company.  Theta is also developing plans to conduct timber,
sand and gravel operations on the Company's land and to increase the value being
realized from  the  Company's  extensive  land  holdings  through  a more active
management of those resources.   Commencing  in  mid-1998, Power Corp expects to
begin generating and selling  electricity  and  steam provided by a cogeneration
facility it acquired in  November,  1997.    The  facility, located in Archbald,
Pennsylvania, initially will  be  fueled  by  a  combination  of natural gas and
methane  recovered  from  a  nearby  landfill.    The  output  produced  by this
25-megawatt facility is intended to be marketed by PG Energy PowerPlus.

Sale of Water Utility Operations

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

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

GAS BUSINESS

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















                                         -4-
<PAGE>

    Number  and  Type  of  Customers.    At  December  31,  1997,  the Regulated
Subsidiaries had approximately  150,300  natural  gas  customers, from which the
Company derived total natural gas revenues  of  $190.5 million during 1997.  The
following chart shows a breakdown of  the types of customers and the percentages
of gas revenues generated by each type of customer in 1997:
[CAPTION]
            Type of Customer             % of Customers         % of Revenues
       [S]                                  [C]                    [C]
       Residential                           90.8%                  66.4%   
       Commercial                             9.0                   24.3*  
       Industrial                             0.2                    7.8*   
       Other Users                              -                    1.5     
          Total                             100.0%                 100.0%    

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

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

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

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

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

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

                                         -5-
<PAGE>

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

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

    During 1998, the  Regulated  Subsidiaries  expect to transport approximately
25,676,000 MCF of natural gas.

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

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

    FERC Order 636.  On April 8,  1992, FERC issued Order No. 636 ("Order 636"),
requiring interstate pipelines to  restructure  their services and operations in
order to  enhance  competition  and  maximize  the  benefits  of  wellhead price


                                         -6-
<PAGE>

decontrol.  The objectives of  Order  636  were  to be accomplished primarily by
unbundling the services provided by the interstate pipelines and by making those
services available to end users on the same terms as LDCs.

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

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

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

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

                                         -7-
<PAGE>

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

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

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

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

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

    Energy  Services  purchases  natural  gas  from  marketers,  producers,  and
integrated energy companies  at  variable  and  fixed  prices for various terms.
Transportation is arranged via the interstate pipeline electronic bulletin board
or contracting with suppliers for a city gate delivery.













                                         -8-
<PAGE>

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

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

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

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

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

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

  (c)  Storage gas is delivered via Transco.








                                         -9-
<PAGE>

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

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

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

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

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

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

    The Company believes that  the  Regulated  Subsidiaries have sufficient firm
pipeline transportation and storage  entitlements  to  meet the demands of their
existing customers and to supply new customers.

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






                                        -10-
<PAGE>

    Capital Expenditures.   Capital  expenditures  totaled  $34.3 million during
1997, including $30.2 million  for  the  construction  of utility plant, and are
estimated to be $47.6 million during  1998, consisting of $36.3 million relative
to utility plant and $11.3  million  with  respect to the Company's nonregulated
activities, including $8.1 million to convert the cogeneration facility acquired
by Power Corp in November, 1997,  to  burn  both natural and methane gas and, in
connection therewith, to construct a  methane  gas recovery facility at a nearby
landfill.

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

    In addition to  those  regulations  promulgated  by  the PPUC, the Regulated
Subsidiaries must also comply with federal, state and local regulations relating
generally to  the  discharge  of  materials  into  the  environment or otherwise
relating to the protection of the environment.  Compliance with such regulations
has not had  any  material  effect  upon  the  capital expenditures, earnings or
competitive position of the Regulated  Subsidiaries'  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 the Regulated Subsidiaries through rates.

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




                                        -11-
<PAGE>

    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.

    The  gas  distribution  and   transportation  activities  of  the  Regulated
Subsidiaries are not subject to the Natural Gas Act, as amended.

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

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

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

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

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




                                        -12-
<PAGE>

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

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

WATER BUSINESS

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

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

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

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















                                        -13-
<PAGE>
[CAPTION]
EXECUTIVE OFFICERS OF THE COMPANY
                                                           Positions and
                                      Officer            Offices with the
           Name               Age      Since                  Company           
[S]                            [C]      [C]       [C]                        
Kenneth L. Pollock             77       1987      Chairman  of   the   Board  of
                                                  Directors
                                                  
Thomas F. Karam                39       1995      President and  Chief Executive
                                                  Officer
                                                  
Vincent A. Bonaddio            48       1995      Vice President, Operations and
                                                  Engineering Services
                                                  
Harry E. Dowling               48       1984      Vice    President,    Customer
                                                  Services
                                                  
John F. Kell, Jr.              60       1978      Vice    President,   Financial
                                                  Services
                                                  
Thomas J. Ward                 47       1988      Vice President, Administrative
                                                  Services, and Secretary
                                                  
Richard N. Marshall            40       1993      Treasurer     and    Assistant
                                                  Secretary
                                                  
Thomas J. Koval                45       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 1998 Annual
Meeting and until his successor has  been  duly elected.  Each of these Officers
holds the same position with PG Energy.    Other than with respect to Mr. Karam,
who has  an  employment  agreement  with  the  Company  as  President  and Chief
Executive Officer for  a  five-year  period  ending  September  1, 2001, and Mr.
Pollock, who has an employment  agreement  with  the  Company as Chairman of the
Board of Directors for a three-year period  ending June 26, 1999, subject to his
re-election  by  the  Company's  shareholders,  there  are  no  arrangements  or
understandings between any officer and any other person pursuant to which he was
selected as an officer.


















                                        -14-
<PAGE>

ITEM 2.  PROPERTIES

    Gas.  The gas systems of the Regulated Subsidiaries consist of approximately
2,400 miles of distribution  lines,  eleven  city  gate  and 80 major regulating
stations and  miscellaneous  related  and  additional  property.   The Regulated
Subsidiaries believe that their gas utility properties are adequately maintained
and in good operating condition in all material respects. 

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

    Land.  As of February 25, 1998,  PG Energy owned approximately  45,000 acres
of undeveloped land and Theta  owned  approximately 1,000 acres of land, certain
of  which  is  being   prepared   for   development,  situated  in  northeastern
Pennsylvania.  

    Cogeneration Facility.  Power Corp  owns a 25-megawatt cogeneration facility
located in Lackawanna County, Pennsylvania  which it acquired in November, 1997.
This facility, which  is  currently  being  converted  to  burn both methane and
natural gas, is expected to  be  operational  in  mid-1998.   Power Corp is also
presently constructing a methane  recovery  facility  at a nearby landfill which
will supply the methane gas that will be burned at its cogeneration facility.

ITEM 3.  LEGAL PROCEEDINGS

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

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

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























                                        -15-
<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 February 25, 1998, there were
approximately 6,400 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,
1997 and 1996.  The prices  shown  represent the high and low transaction prices
for the respective quarters without retail mark-up, mark-down or commission.
[CAPTION]

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

              1997
          [S]                          [C]        [C]             [C]
          First quarter                $24.063    $21.375         $    .290
          Second quarter                27.750     21.250              .300
          Third quarter                 30.500     25.250              .300
          Fourth quarter                32.750     24.250              .300
            Total                                                 $   1.190

              1996

          First quarter                $20.000    $18.313         $    .275
          Second quarter                21.313     18.813              .275
          Third quarter                 21.438     19.875              .275
          Fourth quarter                22.938     20.500              .275
            Total                                                 $   1.100

    (1)  After restatement for  the  two-for-one  split  of the Company's common
         stock effective March 20, 1997,  as  more  fully discussed in Note 4 of
         the Notes to Consolidated Financial  Statements  in Item 8 of this Form
         10-K.

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
















                                        -16-
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA

    Selected consolidated financial data  for  the  Company and its subsidiaries
for each of the five years in  the  period ended December 31, 1997, is set forth
below.  This data should be  read in conjunction with the Consolidated Financial
Statements contained in Item 8 of this Form 10-K:
<TABLE>
<CAPTION>
                                           Year Ended December 31,               
                               1997       1996       1995       1994       1993  
                         (Thousands of Dollars, Except Per Share Amounts and Ratios)
<S>                          <C>        <C>        <C>        <C>        <C>
OPERATING REVENUES:
  Regulated                  $190,533   $160,594   $152,756   $167,992   $153,325
  Nonregulated -  
    Gas sales and services     26,004     13,028      8,094      8,838      6,216
    Pipeline construction 
      and services             11,210     10,733        826         44         38
    Other                         299        125        259        223        194
      Total operating 
        revenues              228,046    184,480    161,935    177,097    159,773

OPERATING EXPENSES:
  Cost of gas                 134,502     98,475     90,478    105,832     91,252
  Operation and maintenance    43,385     42,930     29,551     28,569     26,899
  Depreciation                  9,464      7,833      7,018      6,671      6,389
  Income taxes                  7,374      5,800      3,955      4,541      5,159
  Taxes other than income
    taxes                      11,766     11,182      9,982     10,852     10,110
      Total operating
        expenses              206,491    166,220    140,984    156,465    139,809

OPERATING INCOME               21,555     18,260     20,951     20,632     19,964

OTHER INCOME (DEDUCTIONS),
  NET                           1,221      1,726        355        111       (540)

INTEREST CHARGES (1)           (9,634)   (10,192)   (15,422)   (13,791)   (12,886)

INCOME FROM CONTINUING
  OPERATIONS                   13,142      9,794      5,884      6,952      6,538

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

INCOME BEFORE SUBSIDIARY'S
  PREFERRED STOCK
  DIVIDENDS AND 
  EXTRAORDINARY LOSS           13,142      9,431      2,050     17,456     14,447

SUBSIDIARY'S PREFERRED
  STOCK DIVIDENDS (1)           1,312      1,730      2,763      4,639      6,462

INCOME (LOSS) BEFORE
  EXTRAORDINARY LOSS           11,830      7,701       (713)    12,817      7,985

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

NET INCOME (LOSS)            $ 11,830   $  6,584   $   (713)  $ 12,817   $  7,985

                    
See page 19 for an explanation of footnotes.
</TABLE>
                                        -17-
<PAGE>
<TABLE>
<CAPTION>
                                           Year Ended December 31,               
                               1997       1996       1995       1994       1993  
                         (Thousands of Dollars, Except Per Share Amounts and Ratios)
<S>                          <C>       <C>        <C>        <C>         <C>
COMMON STOCK INFORMATION:
 Weighted average number
  of shares outstanding in
  thousands (3)                 9,661     10,222     11,459     10,913      8,790
 Basic and diluted earnings
  (loss) per share of
  common stock: (3)
    Continuing operations (1)$   1.22   $    .79   $    .27   $    .21   $    .01
    Discontinued operations         -       (.04)      (.33)       .96        .90
    Net income (loss) before
      discount (premium) on
      repurchase/redemption
      of subsidiary's
      preferred stock and
      extraordinary loss         1.22        .75       (.06)      1.17        .91
    Discount (premium) on
      repurchase/redemption
      of subsidiary's
      preferred stock             .08       (.13)         -       (.09)         -
    Extraordinary loss              -       (.11)         -          -          -
    Earnings (loss) per 
      share of common stock  $   1.30   $    .51   $   (.06)  $   1.08   $    .91

 Cash dividends per share
   of common stock           $   1.19   $   1.10   $   1.10   $   1.10   $   1.10

CAPITALIZATION AT END
  OF PERIOD:
 Amounts -
  Common shareholders'
   investment                $122,105   $117,651   $162,739   $172,012   $165,775
  Preferred stock of
    PG Energy -
   Not subject to mandatory
    redemption, net            15,864     18,851     33,615     33,615     33,615
   Subject to mandatory
    redemption                    640        739      1,680      1,760     31,840
  Long-term debt              127,000     75,000    106,706    220,705    155,388
    Total capitalization     $265,609   $212,241   $304,740   $428,092   $386,618

 Ratios -
  Common shareholders'
   investment                   46.0%      55.4%      53.4%      40.2%      42.9%
  Preferred stock of
    PG Energy -
   Not subject to mandatory
    redemption, net              6.0        8.9       11.0        7.8        8.7
   Subject to mandatory
    redemption                   0.2        0.4        0.6        0.4        8.2
  Long-term debt                47.8       35.3       35.0       51.6       40.2 
    Total                      100.0%     100.0%     100.0%     100.0%     100.0%


</TABLE>
                    
See page 19 for an explanation of footnotes.

                                        -18-
<PAGE>
<TABLE>
<CAPTION>
<S>                          <C>        <C>        <C>        <C>        <C>
UTILITY PLANT AT END OF
  PERIOD:
 Total utility plant         $351,106   $319,205   $295,895   $284,080   $269,819
 Accumulated depreciation      88,129     79,783     76,882     74,408     70,954
    Net utility plant        $262,977   $239,422   $219,013   $209,672   $198,865

TOTAL ASSETS AT END OF
  PERIOD:
 Continuing operations       $388,830   $366,810   $319,968   $321,236   $318,057
 Discontinued operations,
   net (4)                          -          -    204,250    203,196    193,002
    Total                    $388,830   $366,810   $524,218   $524,432   $511,059

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

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

(3)  Reflects a two-for-one stock split  of the Company's common stock effective
     March 20,  1997,  as  more  fully  discussed  in  Note  4  of  the Notes to
     Consolidated Financial Statements in Item 8 of this Form 10-K.

(4)  Net of  (i)  liabilities  assumed  by  Pennsylvania-American (ii) estimated
     liability for income taxes on  sale  of discontinued operations, (iii) with
     respect to the year ended  December  31,  1995, the anticipated income from
     the discontinued  operations  during  the  phase-out  period  for financial
     statement purposes of April 1,  1995,  through  February 15, 1996, and (iv)
     with  respect  to  the  years  1994  and  1993,  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.



















                                        -19-
<PAGE>

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

RESTRUCTURING OF NATURAL GAS INDUSTRY

    The Company's principal operating subsidiary,  PG Energy Inc. ("PG Energy"),
and PG Energy's  wholly-owned  subsidiary,  Honesdale  Gas Company ("Honesdale")
(collectively referred to as the "Regulated Subsidiaries"), are regulated public
utilities engaged in the sale  and  distribution  of natural gas which accounted
for approximately 84% of the Company's  operating revenues in 1997.  The natural
gas industry, which  historically  has  included producers, interstate pipelines
and  local   distribution   companies   ("LDCs"),   is   undergoing  significant
restructuring.  The  industry  is  rapidly  progressing  from a highly regulated
environment to one  in  which  there  is  competition,  customer choice and only
partial regulation.  The same change is  also beginning to occur in the electric
industry which competes with  the  natural  gas  industry  for  many of the same
energy uses.

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

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

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

    Although the regulations promulgated by the  PPUC only require LDCs to offer
transportation service to individual  customers  having an annual consumption of
at least 5,000 thousand cubic feet ("MCF") of natural gas and groups of not more
than ten customers having a combined consumption of at least 5,000 MCF per year,
the PPUC has allowed certain  LDCs  to  make transportation service available to
other customers, regardless of  their  consumption.    One of these companies is
Honesdale which, with the  approval  of  the PPUC, began offering transportation

                                        -20-
<PAGE>

service to all of its some  3,300  customers  effective November 1, 1997.  As of
February 1, 1998, approximately  1,250  of  Honesdale's customers had elected to
receive transportation service and to  purchase  their natural gas supplies from
PG Energy Services Inc. ("Energy Services"), a subsidiary of the Company and the
only marketer currently selling gas to customers served by Honesdale.  PG Energy
is also planning to  file  tariffs  with  the  PPUC  in  the near future seeking
approval  to  make  transportation  service  available  to  all  of  its 147,000
customers.  Moreover,  as  noted  below,  the  Company  and  PG Energy currently
believe that Pennsylvania  may  enact  legislation  in  1998  requiring that all
customers of LDCs have  the  right,  within  the  next several years, to receive
transportation service and to choose the supplier of their natural gas.

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

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

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

                                        -21-
<PAGE>

parties would have any  material  adverse  impact  on  its earnings or financial
condition despite the increased competition to  which PG Energy would be subject
regarding the sale of natural gas to its customers.

EXPANSION OF NONREGULATED ACTIVITIES

    The Company intends  to  continue  its  focus  to  position its nonregulated
subsidiaries as leading  suppliers  of  energy  and  energy-related products and
services.  The Regulated Subsidiaries  will  actively  market the use of natural
gas and  will  continue  to  aggressively  add  customers  to their distribution
system.  Additionally, the  Company  plans  to  further expand the activities of
Energy Services, a nonregulated  affiliate  of  PG  Energy.  Energy Services, in
alliance with CNG Energy Services, markets  a  broad array of energy and energy-
related products and services under the name PG Energy PowerPlus.  Presently, PG
Energy PowerPlus offers the marketing and sale of natural gas and electricity to
residential, commercial and industrial users, as  well as the sale of propane on
both a retail and wholesale level, in central and northeastern Pennsylvania; and
the inspection, maintenance and  servicing  of  residential and small commercial
gas-fired equipment.  Also,  Energy  Services,  through its subsidiary, Keystone
Pipeline Services, Inc. ("Keystone"), provides specialized pipeline distribution
services for utilities, including  keyhole  vacuum excavation, camera inspection
and bridge pipeline rehabilitation, as  well as the conventional installation of
mains and  services  for  the  natural  gas,  water  and  sewer  industries.  In
addition, the Company, through its  subsidiary Theta Land Corporation ("Theta"),
is presently marketing Company-owned land parcels for residential and commercial
development under the guidance of the  Watershed  Land Use Plan developed by the
independent PG Energy Land Use Committee in association with the Company.  Theta
is also developing plans to  conduct  timber,  sand and gravel operations on the
Company's land and  to  increase  the  value  being  realized from the Company's
extensive land holdings through  a  more  active  management of those resources.
Commencing in mid-1998, PEI  Power  Corporation  ("Power Corp"), a subsidiary of
the Company formed in  October,  1997,  expects  to begin generating and selling
electricity and  steam  produced  by  a  cogeneration  facility  it  acquired in
November, 1997.  The  facility  initially  will  be  fueled  by a combination of
natural gas and methane recovered from  a  nearby landfill.  The output produced
by this 25-megawatt facility is intended to be marketed by PG Energy PowerPlus.

DISCONTINUED OPERATIONS

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

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





                                        -22-
<PAGE>

STOCK SPLIT

    On February 19, 1997, the Board of  Directors of the Company declared a two-
for-one split of the Company's  Common  Stock  effective March 20, 1997, as more
fully discussed in Note 5  of  the  accompanying Notes to Consolidated Financial
Statements.  All per share data included  in  this Item 7 for the years 1996 and
1995 has been restated to reflect this two-for-one split.

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, 1997, 1996 and 1995:
<TABLE>
<CAPTION>
                                                Percentage of Operating Revenues
                                                    Year Ended December 31,     
                                                 1997         1996         1995 

<S>                                              <C>          <C>          <C>
OPERATING REVENUES:
  Regulated..................................     83.6%        87.1%        94.3%
  Nonregulated -
    Gas sales and services...................     11.4          7.0          5.0
    Pipeline construction and services.......      4.9          5.8          0.5
    Other....................................      0.1          0.1          0.2
      Total operating revenues...............    100.0        100.0        100.0

OPERATING EXPENSES:
  Cost of gas................................     59.0         53.4         55.9
  Operation and maintenance..................     19.0         23.3         18.3
  Depreciation...............................      4.2          4.2          4.3
  Income taxes...............................      3.2          3.1          2.4
  Taxes other than income taxes..............      5.2          6.1          6.2
    Total operating expenses.................     90.6         90.1         87.1

OPERATING INCOME.............................      9.4          9.9         12.9  

OTHER INCOME, NET............................      0.6          0.9          0.2

INTEREST CHARGES (1).........................     (4.2)        (5.5)        (9.5)

INCOME FROM CONTINUING OPERATIONS............      5.8          5.3          3.6

LOSS WITH RESPECT TO DISCONTINUED
  OPERATIONS.................................        -         (0.2)        (2.3)

INCOME BEFORE SUBSIDIARY'S PREFERRED
  STOCK DIVIDENDS............................      5.8          5.1          1.3

SUBSIDIARY'S PREFERRED STOCK DIVIDENDS.......     (0.6)        (0.9)        (1.7)

INCOME (LOSS) BEFORE EXTRAORDINARY LOSS......      5.2          4.2         (0.4)

EXTRAORDINARY LOSS (NET OF TAX BENEFIT
  OF $575,000)...............................        -         (0.6)           -

NET INCOME (LOSS)............................      5.2%         3.6%        (0.4)%
                    
(1)  None of  the  Company's  interest  expense  and  none  of  the subsidiary's
     preferred stock dividends was allocated to the discontinued operations.
</TABLE>
                                        -23-
<PAGE>

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

    Operating Revenues.  Operating revenues increased $43.6 million (23.6%) from
$184.5 million for 1996 to $228.0  million  for  1997,  largely as a result of a
$29.9 million (18.6%)  increase  in  regulated  operating  revenues  and a $13.0
million (99.6%)  increase  in  nonregulated  gas  sales  and  services by Energy
Services.

    The $29.9 million  (18.6%)  increase  in  regulated  operating revenues from
$160.6 million for 1996 to $190.5  million  for 1997 was primarily the result of
higher levels in PG Energy's gas cost  rate  and the effect of the rate increase
granted PG Energy by the PPUC  which  became  effective on January 15, 1997 (see
"Rate Matters").  The effect of the increases in rates was partially offset by a
749,000 cubic feet (2.9%) decrease in  deliveries to PG Energy's residential and
commercial heating customers.  There was a decrease of 130 (2.0%) heating degree
days from 6,627 (105.3%  of  normal)  during  1996  to  6,497 (103.3% of normal)
during 1997.  Operating  revenues  of  Honesdale  totaling $3.0 million from its
February 14, 1997, acquisition date  through December 31, 1997, also contributed
to the increased regulated operating revenues.

    The $13.0 million (99.6%)  increase  in  nonregulated gas sales and services
from $13.0 million for 1996 to  $26.0  million for 1997 was primarily the result
of a 5.5 million cubic feet (307.5%)  increase in sales of natural gas by Energy
Services during the period.

    Operating Expenses.  Operating  expenses,  including depreciation and income
taxes, increased $40.3 million (24.2%)  from  $166.2  million for 1996 to $206.5
million for 1997.    As  a  percentage  of  operating  revenues, total operating
expenses increased from 90.1% during  1996  to  90.6%  during 1997, largely as a
result of an increase in the cost of gas.

    Cost of gas increased $36.0 million  (36.6%)  from $98.5 million for 1996 to
$134.5 million for 1997, primarily because  of  higher levels in PG Energy's gas
cost rate (see "-Rate  Matters"),  and  the  aforementioned increase in sales by
Energy Services.  Also  contributing  to  the  increase  was $2.0 million of gas
costs related to Honesdale from its  February 14, 1997, acquisition date through
December 31, 1997.  

    Other than the cost of gas and income taxes, operating expenses increased by
$2.7 million (4.3%) from $61.9 million for 1996 to $64.6 million for 1997.  This
increase was  partially  attributable  to  a  $1.6  million  (20.8%) increase in
depreciation expense, primarily as a result of additions to utility plant.  Also
contributing to the higher operating expenses  was a $584,000 (5.2%) increase in
taxes other than income taxes  resulting  from  a higher level of gross receipts
tax because of the increased sales by  PG Energy and the sales by Honesdale from
its acquisition date.    Operation  and  maintenance  expense increased $455,000
(1.1%) largely as a result of  $678,000  of expenses relative to Honesdale since
its acquisition date, as well as  increased payroll and other costs attributable
to the expansion of the Company's nonregulated activities.

    Income taxes increased $1.6  million  (27.1%)  from  $5.8 million in 1996 to
$7.4 million in 1997 due to an  increase in income before income taxes (for this
purpose, operating income net of interest charges).






                                        -24-
<PAGE>

    Operating Income.  As a result  of  the above, operating income increased by
$3.3 million (18.1%) from  $18.3  million  for  1996  to $21.6 million for 1997.
However, as a percentage of total operating revenues, operating income decreased
for such periods from 9.9% in 1996 to  9.4%  in 1997, largely as a result of the
proportionately higher ratio of cost of gas to operating revenues.

    Other Income, Net.  Other  income,  net decreased $505,000 (29.3%) from $1.7
million for 1996 to $1.2 million  for 1997, largely because 1996 included income
from the temporary investment of certain  proceeds  from the sale of PG Energy's
regulated water utility operations in February, 1996.

    Interest Charges.   Interest  charges  decreased  $558,000 (5.5%) from $10.2
million  for  1996  to  $9.6  million  for  1997.    This  decrease  was largely
attributable to the the  Company's  defeasance  of  its  10.125% Senior Notes on
September 30, 1996.

    Income  From  Continuing  Operations.    Income  from  continuing operations
increased $3.3 million (34.2%) from $9.8  million  for 1996 to $13.1 million for
1997.  This increase  was  largely  the  result  of the matters discussed above,
principally the increase in operating revenues and decrease in interest charges,
the effects of which were  partially  offset by increased operating expenses and
the lower level of other income, net.

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

    Income (Loss) Before  Extraordinary  Loss.    The  increase in income before
extraordinary loss of $4.1 million (53.6%)  from  $7.7 million for 1996 to $11.8
million for  1997  was  largely  the  result  of  the  increase  in  income from
continuing operations and the reduced dividends on preferred stock, as discussed
above, and the absence of any loss with respect to discontinued operations.

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

    Net Income (Loss).  The increase in  net income of $5.2 million (79.7%) from
$6.6 million for 1996 to $11.8  million  for  1997  was the result of the higher
income  from  continuing  operations,  the  reduced  dividends  on  subsidiary's
preferred stock and the extraordinary loss  in 1996, as discussed above, as well
as the absence of any loss with  respect to discontinued operations.  These same
factors, along with premiums of $.13 per share during 1996 and discounts of $.08
per share during 1997 on  the  repurchase  of preferred stock, accounted for the
increase in basic and diluted earnings  per  share  of common stock of $.79 from
$.51 per share for 1996 to $1.30  per  share for 1997.  Also contributing to the

                                        -25-
<PAGE>

increase in basic and diluted earnings  per  share  of common stock was the 5.5%
reduction in the weighted average  number  of  shares outstanding as a result of
the repurchase of  shares,  largely  during  the  second  quarter  of 1996, with
proceeds from the sale  of  PG  Energy's  water  utility operations in February,
1996.

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

    Operating Revenues.  Operating revenues increased $22.5 million (13.9%) from
$161.9 million for 1995 to $184.5 million  for 1996 largely as a result of $10.7
million of operating revenues relative to the pipeline construction and services
activities of Keystone, which was acquired in December, 1995, and a $4.9 million
increase in operating revenues relative  to  nonregulated gas sales and services
by Energy Services.  Also contributing to the increase in operating revenues was
a higher level of revenues  attributable  to  PG Energy's gas sales and services
which increased by $7.8 million, primarily  as  a  result of a 1.5 billion cubic
feet (6.8%) increase in sales  to  residential and commercial heating customers.
There was a 598 (9.9%)  increase  in  heating  degree  days from 6,029 (95.8% of
normal) during 1995 to 6,627 (105.3% of normal) during 1996.  The effects of the
increased sales to heating customers were partially offset by lower levels in PG
Energy's gas cost rate.  See "-Rate Matters."

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

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

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

    Income taxes increased  $1.8  million  from  $4.0  million  in  1995 to $5.8
million in 1996 due  to  an  increase  in  income  before income taxes (for this
purpose, operating income net of interest charges).  

    Operating Income.  As a result  of  the above, operating income decreased by
$2.7 million (12.9%) from $21.0 million  for  1995 to $18.3 million for 1996 and
decreased as a percentage  of  total  operating  revenues  for such periods from
12.9% in 1995  to  9.4%  in  1996,  primarily  because  of  the  higher level of
operating expenses.

                                        -26-
<PAGE>

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

    Interest Charges.  Interest charges  decreased  by $5.2 million (33.9%) from
$15.4 million for 1995 to  $10.2  million  for  1996.  This decrease was largely
attributable to the lower level of  indebtedness resulting from the repayment of
PG Energy's $50.0  million  term  loan  and  all  of  its  then outstanding bank
borrowings on February 16, 1996,  with  proceeds  from the sale of its regulated
water utility operations  on  such  date  and  the  Company's  defeasance of its
10.125% Senior Notes on September 30, 1996.

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

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

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

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

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

                                        -27-
<PAGE>

RATE MATTERS

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

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

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

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

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

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








                                        -28-
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

Sale of Water Utility Operations

    On February 16, 1996,  PG  Energy  sold  its  regulated water operations and
certain related assets to  Pennsylvania-American  for $414.3 million, consisting
of $262.1 million in cash and  the  assumption  of $152.2 million of PG Energy's
liabilities, including $141.0 million of its long-term debt.  The Company and PG
Energy used the $205.4 million  of  cash  proceeds  from  the sale, net of $56.7
million of income taxes, to  retire  debt, to repurchase stock, for construction
expenditures and for other working capital  purposes.  In this regard, PG Energy
repaid its $50.0 million term loan due 1996 and all of its then outstanding bank
borrowings on February  16,  1996,  and  the  Company  and PG Energy temporarily
invested the  balance  of  the  proceeds.    A  portion  of  these proceeds were
subsequently used by the Company  to  repurchase  2,025,928 shares of its common
stock during 1996 for  an  aggregate  consideration  of  $39.8 million, of which
1,781,204 shares were acquired  in  April  pursuant  to  a self tender offer and
241,874 shares were acquired from time  to time through open market transactions
and an oddlot buyback program.    Also  during  1996 and using proceeds from the
sale, PG Energy repurchased 134,359 shares  of its 9% cumulative preferred stock
for an aggregate consideration of $14.5  million  and 20,330 shares of its 4.10%
cumulative preferred  stock  for  an  aggregate  consideration  of $1.0 million,
largely pursuant to self tender  offers  conducted during March and April, 1996,
and  utilized  approximately  $31.4  million  for  its  working  capital  needs.
Additionally, on June 17, 1996, PG  Energy repurchased 9,408 shares of its 5.75%
cumulative preferred stock  (including  800  shares  redeemed in accordance with
annual sinking fund provisions) for an aggregate consideration of $838,000.  

Liquidity

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

    Additionally, as  the  Company's  nonregulated  activities expand, increased
capital will  be  required  for  those  activities,  especially  to  convert the
cogeneration facility  Power  Corp  acquired  in  November,  1997,  to burn both
natural and methane gas and, in connection therewith, to construct a methane gas
recovery facility at a nearby  landfill.    It is currently anticipated that the
expenditures for the expansion of  the Company's nonregulated activities will be
funded by a combination of capital  provided by the Company, bank borrowings and
other debt financing.

    The cash flow from PG Energy'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 PG Energy to use bank borrowings to
fund such expenditures, pending  the  periodic  issuance  of stock and long-term
debt.  Bank borrowings are also  used  by  PG Energy for the seasonal funding of
its gas purchases and increases in customer accounts receivable.

    In order to temporarily  finance  construction  expenditures and to meet its
seasonal borrowing requirements, PG Energy has  made arrangements for a total of
$68.5 million of unsecured revolving  bank  credit, which is deemed adequate for
its immediate needs.  Specifically, PG  Energy currently has seven bank lines of
credit with an aggregate borrowing  capacity  of $68.5 million which provide for

                                        -29-
<PAGE>

borrowings at interest  rates  generally  less  than  prime  and which mature at
various times during 1998  and  1999  and  which  PG  Energy intends to renew or
replace as they expire.  As of February 25, 1998, PG Energy had $15.5 million of
borrowings outstanding under these bank lines of credit.  

    The Company believes that the  Regulated  Subsidiaries will be able to raise
in a timely manner  such  funds  as  are  required for their future construction
expenditures, refinancings and  other  working  capital requirements.  Likewise,
the Company believes that its  nonregulated  subsidiaries  will be able to raise
such funds as are required for  their needs, including that required relative to
Power Corp's cogeneration facility and related methane gas recovery facility.

Long-Term Debt and Capital Stock Financings

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

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

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

    Under the terms of its  Customer  Stock Purchase Plan (the "Customer Plan"),
which then provided the  residential  customers  of  PG  Energy with a method of
purchasing newly-issued shares of the  Company's  common  stock at a 5% discount
from the market price,  176,462  shares  ($2.4  million) of the Company's common
stock were issued in 1995.    Effective  May  9, 1995, the Company suspended the
Customer Plan because of the  significant  reduction in its capital requirements
resulting from the sale of PG Energy's water utility operations to Pennsylvania-
American and because of the proceeds received from such sale.  However, based on
its currently-anticipated funding requirements and  in order to help maintain an
appropriate  capital  structure,  the   Company  reinstated  the  Customer  Plan
effective February 4, 1998.    Upon  such  reinstatement,  the Customer Plan was
amended to provide the residential  customers of all the Company's subsidiaries,
including PG Energy, with  a  method  of  purchasing  newly-issued shares of the
Company's common stock at a 5% discount from the market price.

    The Company also obtains funds  from  the  sale  of common stock through its
Dividend Reinvestment and Stock Purchase Plan (the "DRP"), its 1992 Stock Option
Plan and its  Employees'  Savings  Plan.    Effective  May  9, 1995, the Company
suspended the  supplemental  cash  investment  feature  of  the  DRP  and the 5%
discount from the market price  on  the  reinvestment of dividends under the DRP
because of the significant reduction  in its capital requirements resulting from
the sale of PG  Energy's  water  utility operations to Pennsylvania-American and


                                        -30-
<PAGE>

because of  the  proceeds  received  from  such  sale.    The  supplemental cash
investment  feature   was,   however,   reinstated   effective   June  1,  1996.
Additionally, from  June  14,  1996,  through  December  31,  1996,  the Company
temporarily suspended  the  sale  of  newly-issued  stock  to  both  the DRP and
Employees' Savings Plan as a result of the proceeds received from the sale of PG
Energy's water utility operations, and during that period the two plans obtained
shares of Company common stock  for  participants through open market purchases.
Effective January 1, 1997,  the  Company  resumed  selling newly-issued stock to
both the DRP and Employees'  Savings  Plan.    On  January 30, 1998, the DRP was
amended to  reinstate  the  provision  whereby  the  Company's  shareholders may
reinvest cash  dividends  and  make  supplemental  cash  investments to purchase
newly-issued shares of the  Company's  common  stock  at  a 5% discount from the
market price.

    Under the DRP, 68,678 shares  ($1.7  million), 17,664 shares ($340,000), and
232,610 shares ($3.3 million) of common  stock were issued during 1997, 1996 and
1995, respectively.   Under  the  Company's  Employees'  Savings Plan (a section
401(k) plan) which  became  effective  January  1,  1992,  the Company issued an
additional 30,436 shares ($750,000)  in  1997,  10,198 shares ($195,000) in 1996
and 38,936 shares ($628,000) in  1995.    Additionally, under the Company's 1992
Stock Option Plan 3,600  shares  ($54,000),  37,400  shares ($561,000) and 9,600
shares ($144,000) were issued in 1997, 1996 and 1995, respectively.

Capital Expenditures and Related Financings

    Capital expenditures  totaled  $34.3  million  during  1997, including $30.2
million of expenditures for the construction  of utility plant.  During 1996 and
1995, respectively, expenditures for  the  construction of utility plant totaled
$29.2  million  and  $21.1  million.    Such  expenditures  were  financed  with
internally-generated funds and bank borrowings, pending the periodic issuance of
stock and long-term debt.

    The Company estimates that its capital expenditures will total $47.6 million
during 1998, consisting of  $36.3  million  relative  to utility plant and $11.3
million with respect to  the  Company's  nonregulated activities, including $8.1
million to convert the cogeneration facility acquired by Power Corp in November,
1997, to burn both  natural  and  methane  gas  and, in connection therewith, to
construct a  methane  gas  recovery  facility  at  a  nearby  landfill.  Capital
expenditures are currently expected to range  from $40-43 million in each of the
years 1999 and 2000, of which  approximately $37.0 million per year will involve
utility  plant  and  the  balance  will  relate  to  the  Company's nonregulated
activities.  It is anticipated  that  such capital expenditures will be financed
with internally  generated  funds  and  bank  borrowings,  and  by  the periodic
issuance of stock and long-term debt.

Current Maturities of Long-Term Debt and Preferred Stock

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

    On September 30, 1996,  the  Company  defeased the $28.7 million outstanding
principal amount of its 10.125%  Senior  Notes,  due  June 15, 1999 (the "Senior
Notes").  Specifically, on that  date,  the Company deposited $29.9 million with
the trustee for the Senior Notes,  which was used, together with interest earned
on  the  funds  so  deposited,  to  pay  the  Company's  interest  and principal
obligations through June 15,  1997,  the  date  on  which  the Senior Notes were
scheduled to be redeemed.  The deposit  of  such funds acted to discharge all of

                                        -31-
<PAGE>

the Company's obligations  with  respect  to  the  Senior  Notes.   Of the $29.9
million required to defease the Senior Notes, $17.2 million was obtained through
the liquidation of the  Company's  temporary  cash investments and $12.7 million
was obtained through the repayment of loans that had been made by the Company to
PG Energy.

Year 2000

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

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

Forward-Looking Statements

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

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The consolidated financial statements  of  the  Company and its subsidiaries
and the reports of  independent  accountants  thereon  are presented on pages 33
through 61 of this Form 10-K.  All  basic and diluted per share data included in
this Item 8 for the years 1996  and  1995  has been restated to reflect the two-
for-one split of the Company's  Common  Stock  effective March 20, 1997, as more
fully discussed in Note  4  of  the  Notes  to Consolidated Financial Statements
contained herein.
















                                        -32-
<PAGE>


                       REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Shareholders
of Pennsylvania Enterprises, Inc.

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing under Item  14  (a)(1)  and  (2)  on  page  64  present fairly, in all
material respects, the financial position of Pennsylvania Enterprises, Inc., and
its subsidiaries at December 31, 1997,  and  the results of their operations and
their cash flows  for  the  year  ended  December  31,  1997, in conformity with
generally accepted accounting principles.    These  financial statements are the
responsibility of the Company's management;  our responsibility is to express an
opinion on these financial statements  based  on  our  audits.  We conducted our
audits of  these  statements  in  accordance  with  generally  accepted auditing
standards which require that we plan  and perform the audit to obtain reasonable
assurance  about  whether  the   financial   statements  are  free  of  material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the  amounts  and  disclosures  in   the  financial  statements,  assessing  the
accounting principles used  and  significant  estimates  made by management, and
evaluating the overall financial  statement  presentation.   We believe that our
audits provide  a  reasonable  basis  for  the  opinion  expressed  above.   The
consolidated financial  statements  of  Pennsylvania  Enterprises,  Inc. and its
subsidiaries for the two  years  in  the  period  ended  December 31, 1996, were
audited by other independent accountants  whose  report dated February 19, 1997,
expressed an unqualified opinion on those statements.


PRICE WATERHOUSE LLP


Philadelphia, Pennsylvania
February 18, 1998
























                                        -33-
<PAGE>


                       REPORT OF INDEPENDENT ACCOUNTANTS



To Pennsylvania Enterprises, Inc.:

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

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

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

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






                                                    ARTHUR ANDERSEN LLP


New York, N.Y.
February 19, 1997





                                        -34-
<PAGE>

                  PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                         CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
                                                      Year Ended December 31,      
                                                    1997        1996        1995   
                                                       (Thousands of Dollars)
<S>                                              <C>         <C>         <C>
OPERATING REVENUES:
  Regulated                                      $  190,533  $  160,594  $  152,756
  Nonregulated -
    Gas sales and services                           26,004      13,028       8,094
    Pipeline construction and services               11,210      10,733         826
    Other                                               299         125         259
      Total operating revenues                      228,046     184,480     161,935

OPERATING EXPENSES:
  Cost of gas                                       134,502      98,475      90,478
  Operation and maintenance                          43,385      42,930      29,551
  Depreciation                                        9,464       7,833       7,018
  Income taxes                                        7,374       5,800       3,955
  Taxes other than income taxes                      11,766      11,182       9,982
    Total operating expenses                        206,491     166,220     140,984

OPERATING INCOME                                     21,555      18,260      20,951

OTHER INCOME, NET                                     1,221       1,726         355

INCOME BEFORE INTEREST CHARGES                       22,776      19,986      21,306

INTEREST CHARGES:
  Interest on long-term debt                          9,055       9,609      13,672
  Other interest                                        810         760       1,844
  Allowance for borrowed funds used
    during construction                                (231)       (177)        (94)
      Total interest charges                          9,634      10,192      15,422

INCOME FROM CONTINUING OPERATIONS                    13,142       9,794       5,884
 
LOSS WITH RESPECT TO DISCONTINUED
  OPERATIONS (Note 2)                                     -        (363)     (3,834)

INCOME BEFORE SUBSIDIARY'S PREFERRED
  STOCK DIVIDENDS                                    13,142       9,431       2,050

SUBSIDIARY'S PREFERRED STOCK DIVIDENDS                1,312       1,730       2,763

INCOME (LOSS) BEFORE EXTRAORDINARY LOSS              11,830       7,701        (713)

EXTRAORDINARY LOSS (NET OF TAX BENEFIT
  OF $575,000) (Note 6)                                   -      (1,117)          -

NET INCOME (LOSS)                                $   11,830  $    6,584  $     (713)

COMMON STOCK: (Notes 1 and 4)
  Basic and diluted earnings (loss) per share
    of common stock:
    Continuing operations                        $     1.22  $      .79  $      .27
    Discontinued operations                               -        (.04)       (.33)
    Net income (loss) before discount (premium)
      on repurchase/redemption of subsidiary's
      preferred stock and extraordinary loss           1.22         .75        (.06)
    Discount (premium) on repurchase/redemption
      of subsidiary's preferred stock                   .08        (.13)          -
    Extraordinary loss                                    -        (.11)          -
    Earnings (loss) per share of common stock    $     1.30  $      .51  $     (.06)

  Weighted average number of shares outstanding   9,661,056  10,222,002  11,458,872



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



</TABLE>

                                        -35-
<PAGE>

                PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

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

OTHER PROPERTY AND INVESTMENTS:
  Nonutility property and equipment                       16,335        12,502
  Accumulated depreciation                                (4,875)       (4,674)
  Other                                                    2,171         1,720
                                                          13,631         9,548

CURRENT ASSETS:
  Cash and cash equivalents                                2,202         1,126
  Accounts receivable -
    Customers                                             28,681        22,464
    Others                                                   850           565
    Reserve for uncollectible accounts                    (1,340)       (1,233)
  Unbilled revenues                                       12,108        12,966
  Materials and supplies, at average cost                  3,110         2,865
  Gas held by suppliers, at average cost                  21,933        20,265
  Natural gas transition costs collectible                   134         2,525
  Deferred cost of gas and supplier refunds, net           6,182        19,316
  Prepaid expenses and other                               1,686         1,438
                                                          75,546        82,297

DEFERRED CHARGES:
  Regulatory assets -
    Deferred taxes collectible                            30,592        29,771
    Other                                                  4,415         4,274
  Unamortized debt expense                                 1,361         1,498
  Other                                                      308             -
                                                          36,676        35,543












TOTAL ASSETS                                            $388,830      $366,810



The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
                                        -36-
<PAGE>

                   PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                             CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                              December 31,    
                                                          1997          1996 
                                                         (Thousands of Dollars)
<S>                                                     <C>           <C>
CAPITALIZATION AND LIABILITIES

CAPITALIZATION (see accompanying statements):
  Common shareholders' investment                       $122,105      $117,651
  Preferred stock of PG Energy -
    Not subject to mandatory redemption, net              15,864        18,851
    Subject to mandatory redemption                          640           739
  Long-term debt                                         127,000        75,000
                                                         265,609       212,241

CURRENT LIABILITIES:
  Current portion of long-term debt                       24,776        38,721
  Preferred stock subject to repurchase or mandatory
    redemption                                                80           115
  Notes payable                                            2,170        10,000
  Accounts payable                                        18,448        19,945
  Accrued general business and realty taxes                2,953         2,350
  Accrued income taxes                                     4,618        14,525
  Accrued interest                                         1,783         1,243
  Accrued natural gas transition costs                     1,087         2,095
  Other                                                    1,722         3,904
                                                          57,637        92,898

DEFERRED CREDITS:
  Deferred income taxes                                   52,511        49,270
  Unamortized investment tax credits                       4,596         4,767
  Operating reserves                                       2,825         3,086
  Other                                                    5,652         4,548
                                                          65,584        61,671







COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)









TOTAL CAPITALIZATION AND LIABILITIES                    $388,830      $366,810



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 CASH FLOWS

                                                        Year Ended December 31,   
                                                     1997       1996       1995   
                                                        (Thousands of Dollars)
<S>                                                 <C>        <C>        <C>
CASH FLOW FROM OPERATING ACTIVITIES:
  Income from continuing operations, net of
    subsidiary's preferred stock dividends          $ 11,830   $  8,064   $  3,121
  Effects of noncash charges to income -
    Depreciation                                       9,519      7,896      7,018
    Deferred income taxes, net                         2,210      2,104       (251)
    Provisions for self insurance                        898      1,042      2,652
    Extraordinary loss, net of tax benefit                 -     (1,117)         -
    Other, net                                         1,338      2,335      5,572
  Changes in working capital, exclusive of cash 
   and current portion of long-term debt -
    Receivables and accrued utility revenues          (4,847)    (3,350)      (219)
    Gas held by suppliers                             (1,668)    (5,125)     4,885
    Accounts payable                                  (2,532)     2,057        321
    Deferred cost of gas and supplier refunds, net    14,397    (18,493)     5,715
    Other current assets and liabilities, net          1,997      2,235     (6,509)
  Other operating items, net                            (986)    (5,458)     2,628
      Net cash provided by (used for) continuing
        operations                                    32,156     (7,810)    24,933
  Net cash provided by (used for) discontinued
    operations                                       (13,655)   (45,173)     3,764
      Net cash provided by (used for) operating
        activities                                    18,501    (52,983)    28,697

CASH FLOW FROM INVESTING ACTIVITIES:
  Additions to utility plant                         (30,971)   (29,312)   (20,615)
  Proceeds from the sale of discontinued operations        -    261,752          -
  Acquisition of nonregulated business                     -          -     (3,169)
  Acquisition of regulated business                   (2,019)         -          -
  Other, net                                          (2,915)    (1,803)    (4,934) 
      Net cash provided by (used for) investing
        activities                                   (35,905)   230,637    (28,718) 

CASH FLOW FROM FINANCING ACTIVITIES:
  Issuance of common stock                             2,491      1,291      4,045
  Repurchase of common stock                               -    (40,452)         -
  Repurchase/redemption of preferred stock
    of PG Energy                                      (3,121)   (15,670)       (80) 
  Dividends on common stock                          (11,501)   (11,174)   (12,605)
  Issuance of long-term debt                          26,000          -     52,000
  Repayment of long-term debt                              -    (81,906)   (53,535)
  Net increase (decrease) in bank borrowings           4,053    (27,903)    10,500
  Other, net                                             558     (1,343)        (5) 
      Net cash provided by (used for) financing
        activities                                    18,480   (177,157)       320 

NET INCREASE IN CASH AND CASH EQUIVALENTS              1,076        497        299
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR         1,126        629        330 
CASH AND CASH EQUIVALENTS AT END OF YEAR            $  2,202   $  1,126   $    629

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the year for:
    Interest (net of amount capitalized)            $  8,337   $ 10,423   $ 27,951
    Income taxes                                    $ 15,728   $ 46,605   $  8,748

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
                                        -38-
<PAGE>
<TABLE>
<CAPTION>
                     PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF CAPITALIZATION

                                                          December 31,        
                                                   1997                1996     
                                                    (Thousands of Dollars)
<S>                                              <C>                 <C>
COMMON SHAREHOLDERS' INVESTMENT:
  Common stock, no par value
    (stated value $5 per share) 
    Authorized - 30,000,000 shares
    Outstanding - 9,744,272 shares and
      9,607,972 shares, respectively             $  48,721           $  48,040
  Additional paid-in capital                        23,089              20,391  
  Retained earnings                                 50,295              49,220  
     Total common shareholders' investment         122,105   46.0%     117,651   55.4%

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

    Total preferred stock not subject to
        mandatory redemption, net                   15,864    6.0%      18,851    8.9%

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

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

LONG-TERM DEBT:
  First mortgage bonds                              55,000              55,000  
  Notes                                             96,776              58,721 
  Less current maturities and sinking
    fund requirements                              (24,776)            (38,721)
     Total long-term debt                          127,000   47.8%      75,000   35.3%

TOTAL CAPITALIZATION                             $ 265,609  100.0%   $ 212,241  100.0%









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


                                        -39-
<PAGE>
<TABLE>
<CAPTION>
                  PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

            CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' INVESTMENT

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


                                          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, 1994    $55,539 $    2,515 $   45,493 $ 68,465 $172,012

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

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

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

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

Net income for 1997                   -          -          -   11,830   11,830
Issuance of common stock            681          -      2,698        -    3,379
Discount on repurchase of
  preferred stock of PG Energy        -          -          -      746      746
Cash dividends on common stock 
  ($1.19 per share)                   -          -          -  (11,501) (11,501)

Balance at December 31, 1997    $48,721 $        - $   23,089 $ 50,295 $122,105















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


                                        -40-
<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 which, through  its  subsidiaries,  is engaged in both regulated
and nonregulated activities.   The  Company's regulated activities are conducted
by its principal subsidiary, PG  Energy  Inc.  ("PG Energy"), a regulated public
utility,  and  PG  Energy's   wholly-owned  subsidiary,  Honesdale  Gas  Company
("Honesdale"), also a regulated  public  utility  which was acquired on February
14, 1997.    Together  PG  Energy  and  Honesdale  distribute  natural  gas to a
thirteen-county area in northeastern Pennsylvania, a territory that includes the
cities of Scranton, Wilkes-Barre and Williamsport.  

    The  Company,  through  its  other  subsidiaries,  PG  Energy  Services Inc.
("Energy Services"), formerly known as  Pennsylvania Energy Resources, Inc., PEI
Power Corporation ("Power Corp") which  was  formed in October, 1997, Theta Land
Corporation ("Theta"),  and  Keystone  Pipeline  Services,  Inc. ("Keystone"), a
wholly-owned subsidiary of Energy  Services,  is engaged in various nonregulated
activities, including  the  marketing  and  sale  of  natural  gas,  propane and
electricity and other  energy-related  services,  as  well  as the construction,
maintenance and rehabilitation  of  natural  gas  distribution pipelines and the
sale of property for  residential,  commercial  and  other  development.  In the
fourth quarter of 1997,  Energy  Services  began marketing electricity and other
products and services, under the  name  PG  Energy  PowerPlus, in 26 counties in
northeastern and central Pennsylvania  pursuant  to  a retail marketing alliance
agreement with CNG Energy  Services,  a  subsidiary  of Consolidated Natural Gas
Company.  Power Corp is expected to begin generating and selling electricity and
steam, which will be  marketed  by  PG  Energy  PowerPlus,  in mid-1998 upon the
completion of modifications to its cogeneration  facility that will enable it to
burn both natural and methane gas.

    Principles of Consolidation.   The consolidated financial statements include
the accounts of the  Company  and  its  subsidiaries, PG Energy, Energy Services
(including  Keystone),  Power  Corp  and  Theta.    The  consolidated  financial
statements also include the accounts  of  Honesdale beginning February 14, 1997,
the date  Honesdale  was  acquired  by  PG  Energy.    All material intercompany
accounts have been eliminated in consolidation.

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

    Use of Accounting Estimates.    The  preparation  of financial statements in
conformity with generally accepted  accounting principles requires management to
make estimates and assumptions that  affect  the  reported amounts of assets and
liabilities and disclosure of contingent  assets  and liabilities at the date of
the financial statements  and  the  reported  amounts  of  revenues and expenses


                                        -41-
<PAGE>

during the reporting period.  These estimates involve judgments with respect to,
among other things, various future  economic factors and regulatory matters (see
"Management's Discussion and  Analysis  of  Financial  Conditions and Results of
Operations - Restructuring of Natural Gas Industry" in Item 7 of this Form 10-K)
which are difficult  to  predict  and  are  beyond  the  control of the Company.
Therefore, actual amounts could differ from these estimates.

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

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

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

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

    Revenues and Cost of Gas.  The Regulated Subsidiaries bill 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.  Energy Services also bills  its  customers  on a monthly basis at its
contractual rates.

    The Regulated Subsidiaries generally pass on to their customers increases or
decreases in  gas  costs  from  those  reflected  in  its  tariff  charges.   In
accordance with this  procedure,  the  Regulated  Subsidiaries defer any current
under or over-recoveries of  gas  costs  and  collect  or refund such amounts in
subsequent periods.  The Regulated Subsidiaries had underrecoveries of gas costs
totaling $17.0 million, $29.6 million and $10.4 million as of December 31, 1997,
1996 and 1995, respectively.  Energy Services records its gas costs as incurred.

    Deferred Charges (Regulatory Assets).   The Regulated Subsidiaries generally
account for and report  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



                                        -42-
<PAGE>

recorded because of the  regulatory  rate  practices  of the PPUC, the following
deferred charges are included as  "Other"  regulatory  assets as of December 31,
1997 and 1996:
[CAPTION]
                                                   1997              1996 
                                                   (Thousands of Dollars)
    [S]                                          [C]               [C]
    Computer software costs                      $ 1,945           $ 1,293
    Early retirement plan charges                    618               664
    Low income usage reduction program               432               492
    Rate case expense                                356               588
    Extraordinary charges due to flooding            348               426
    Customer assistance program                      181               219
    Other postretirement benefits                    174                 -
    Corrosion control costs                           46               194
    Other                                            315               398

      Total                                      $ 4,415           $ 4,274

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

    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, 1997 and 1996, are shown below:
[CAPTION]
                                                   1997              1996 
                                                   (Thousands of Dollars)
    [S]                                          [C]               [C]
    Utility plant basis differences              $55,497           $53,132      
    FERC Order 636 transition costs                 (394)              181
    Postretirement benefits                         (700)             (726)
    Take-or-pay costs, net                             -              (467)
    Operating reserves                            (1,181)           (1,406)
    Other                                           (711)           (1,444)

        Net deferred income tax liability        $52,511           $49,270















                                        -43-
<PAGE>

    The provision for income taxes relative to continuing operations consists of
the following components:
[CAPTION]
                                                  1997       1996       1995  
                                                    (Thousands of Dollars)
    [S]                                          [C]        [C]        [C]
    Included in operating expenses:
      Currently payable -
        Federal                                  $ 3,894    $ 2,513    $ 3,129
        State                                      1,359      1,519      1,284
          Total currently payable                  5,253      4,032      4,413
      Deferred, net -
        Federal                                    2,186      2,059        198
        State                                        107       (119)      (463)
          Total deferred, net                      2,293      1,940       (265)
      Amortization of investment tax credits        (172)      (172)      (193)
          Total included in operating expenses     7,374      5,800      3,955

    Included in other income, net:
      Currently payable -
        Federal                                       34        806        126
        State                                         12        (19)        44
          Total currently payable                     46        787        170
      Deferred, net -
        Federal                                       (6)         -          -
        State                                          -          -          -
          Total deferred, net                         (6)         -          -
          Total included in other income, net         40        787        170

          Total provision for income taxes       $ 7,414    $ 6,587    $ 4,125

    The total provision for income taxes relative to continuing operations shown
in the accompanying consolidated  statements  of  income differs from the amount
which would be computed by  applying  the  statutory  federal income tax rate to
income before income taxes.   The  following  table summarizes the major reasons
for this difference:
[CAPTION]
                                                   1997       1996       1995 
                                                    (Thousands of Dollars)
    [S]                                          [C]        [C]        [C]
    Income before income taxes                   $20,556    $16,381    $10,009
    Tax expense at statutory federal
      income tax rate                            $ 7,195    $ 5,733    $ 3,503
    Increases (reductions) in taxes
      resulting from -
        State income taxes, net of
          federal income tax benefit                 961        898        562  
        Amortization of investment tax 
          credits                                   (172)      (172)      (193)
        Other, net                                  (570)       128        253

      Total provision for income taxes           $ 7,414    $ 6,587    $ 4,125









                                        -44-
<PAGE>

    Earnings Per Share.  The  Company  adopted  the provisions of FASB Statement
128, "Earnings per Share" in  December,  1997.    The following tables present a
reconciliation of the  calculations  of  basic  and  diluted  earnings per share
("EPS") from  continuing  operations  for  the  each  of  the  three years ended
December 31, 1997, 1996 and 1995, respectively, follows:
[CAPTION]
                                            Income        Shares      Earnings
                 1997                     (Numerator)  (Denominator)  Per Share
                                                (In Thousands)
[S]                                       [C]                 [C]     [C]
Income from continuing operations
  before subsidiary's preferred stock
  dividends                               $    13,142          
Less subsidiary's preferred stock
  dividends                                     1,312  
Basic EPS on income from continuing
  operations available to common
  shareholders                                 11,830          9,661  $     1.22
Effect of dilutive stock options                    -             75           -
Diluted EPS on income from continuing
  operations available to common
  shareholders after assumed issuance
  of stock options                        $    11,830          9,736  $     1.22
[CAPTION]
                                            Income        Shares      Earnings
                 1996                     (Numerator)  (Denominator)  Per Share
                                                (In Thousands)
[S]                                       [C]                 [C]     [C] 
Income from continuing operations
  before subsidiary's preferred stock
  dividends and extraordinary loss        $     9,794
Less subsidiary's preferred stock
  dividends                                     1,730
Basic EPS on income from continuing
  operations available to common
  shareholders                                  8,064         10,222  $      .79
Effect of dilutive stock options                    -             21           -
Diluted EPS on income from continuing
  operations available to common
  shareholders after assumed issuance
  of stock options                        $     8,064         10,243  $      .79
[CAPTION]
                                            Income        Shares      Earnings
                 1995                     (Numerator)  (Denominator)  Per Share
                                                (In Thousands)
[S]                                       [C]                [C]      [C]
Income from continuing operations
  before subsidiary's preferred stock
  dividends                               $     5,884
Less subsidiary's preferred stock
  dividends                                     2,763
Basic EPS on income from continuing
  operations available to common 
  shareholders                                  3,121         11,459  $      .27
Effect of dilutive stock options                    -              5           -
Diluted EPS on income from continuing
  operations available to common
  shareholders after assumed issuance
  of stock options                        $     3,121         11,464  $      .27



                                        -45-
<PAGE>

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

    Disclosures about Segments of  an  Enterprise  and  Related Information.  In
June, 1997, FASB Statement 131, "Disclosures about Segments of an Enterprise and
Related Information" was issued.   The  provisions  of this statement, which are
effective  for  fiscal  years  beginning  after  December  15,  1997,  establish
standards for reporting information about operating segments in annual financial
statements and selected segment information  in interim financial reports issued
to shareholders.  The Company expects  to adopt the reporting provisions of FASB
Statement 131 in 1998.

(2)  DISCONTINUED OPERATIONS

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

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

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








                                        -46-
<PAGE>

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

Income from discontinued operations                           $  2,127

                 Net Cash Provided by Discontinued Operations*
                           (Thousands of Dollars)
[CAPTION]
[S]                                                           [C]
Income from discontinued operations                           $  2,127
Noncash charges (credits) to income:
    Depreciation                                                 1,946
    Deferred treatment plant costs, net                            145
    Deferred income taxes                                          447
Changes in working capital, exclusive
  of long-term debt                                              1,648
Additions to utility plant                                      (2,276)
Net increase (decrease) in long-term debt                        1,010
Other, net                                                      (1,283)

Net cash provided by discontinued operations                  $  3,764

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

(3)  RATE MATTERS

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

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






                                        -47-
<PAGE>

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

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

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

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

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

    By Order of the PPUC entered August 26, 1994, PG Energy began recovering the
Non-Gas Transition Costs that it estimates it will ultimately be billed pursuant
to FERC Order 636 through the billing  of a surcharge to its customers effective
September 12, 1994.  It  is  currently  estimated  that $10.7 million of Non-Gas
Transition Costs will be billed to  PG  Energy, generally over a six-year period
extending through January 1, 1999, of  which  $9.6 million had been billed to PG
Energy and $9.5 million had been recovered from its customers as of December 31,
1997.  In addition, during 1997 $1.1 million of take-or-pay costs refunded to PG
Energy by its  suppliers  were  applied  as  a  reduction  of  the total Non-Gas
Transition Costs recoverable from customers.    The remaining balance of Non-Gas
Transition Costs, which is presently estimated to be $134,000, is expected to be
recovered by PG Energy from its customers during 1998.





                                        -48-
<PAGE>

(4)  COMMON STOCK

    Common Stock Split.  On  February  19,  1997, the Board of Directors adopted
resolutions to amend the  Company's  Restated  Articles  of Incorporation to (i)
increase the number of authorized  shares  of  its  common stock from 15 million
shares to 30 million shares and (ii) reduce the stated value of such shares from
$10.00 per share  to  $5.00  per  share  upon  the  filing  of  a Certificate of
Amendment with the Secretary of  the  State  of  Pennsylvania on March 20, 1997.
Such actions had no effect on  the  Company's capital accounts.  On February 19,
1997, the Board of  Directors  also  declared  a  two-for-one stock split of the
Company's Common Stock effective March 20, 1997.  The number of shares of common
stock reflected in these consolidated  financial statements and the earnings per
share of common stock presented for  the  years 1996 and 1995 have been restated
to give retroactive effect to this stock split.

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

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

    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  at  a  5%  discount from the market price.
Under the  DRP,  68,678  shares  ($1.7  million),  17,664  shares ($340,000) and
233,010 shares ($3.3 million) of common  stock were issued during 1997, 1996 and
1995, respectively.  

    Employees' Savings Plan.   Under  the  Company's  Employees' Savings Plan (a
section 401(k) plan) which became effective  January 1, 1992, the Company issued
an additional 30,436 shares ($750,000) in 1997, 10,198 shares ($195,000) in 1996
and 38,936 shares ($628,000) in 1995.

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

    In  October,  1995,   FASB   Statement   123,  "Accounting  For  Stock-Based
Compensation," was issued.   The  Company  adopted  the disclosure provisions of
FASB Statement 123 in 1996,  but  opted  to remain under the expense recognition

                                        -49-
<PAGE>

provisions of Accounting Principles Board  (APB) Opinion No. 25, "Accounting for
Stock Issued to  Employees,"  in  accounting  for  stock  option and stock award
plans.  No options were granted under the 1992 Stock Option Plan in 1997 and for
the years  ended  December  31,  1996  and  1995,  no  compensation  expense was
recognized for options granted  under  the  Plan.   Had compensation expense for
stock options granted under the Plan been  determined based on fair value at the
grant dates consistent  with  the  method  required  by  FASB Statement 123, the
Company's net income and earnings per  share  for  the year 1996 would have been
reduced to the pro forma amounts shown below:
[CAPTION]
                                                       1996    
         [S]                                       [C]
         Net income:
           As reported                             $6.6 million
           Pro forma                               $5.9 million
         
         Earnings per common share:
           As reported                             $    .51
           Pro forma                               $    .44
         
    A summary of the stock option activity during each of the three years in the
period ended December 31, 1997, pursuant to  the terms of the Plan, all of which
were Nonqualified Stock Options, is set forth below:
[CAPTION]
                                              Number of           Weighted
                                           shares subject     average exercise
                                              to option            price      
[S]                                               [C]         [C]
Outstanding at December 31, 1994                   89,200     $          15.00
Exercised during 1995                              (9,600)               15.00

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

Outstanding at December 31, 1996                  382,200                19.79
Exercised during 1997                              (3,600)               15.00

Outstanding at December 31, 1997                  378,600                19.83

Options exercisable at December 31, 1997          198,600     $          19.00
Options available for future grant at
  December 31, 1997                                   800

    There were no options granted under the  Plan in 1997.  The weighted average
fair value of options granted in 1996  of  $3.66 was estimated as of the date of
grant using the Black-Scholes stock option pricing model, based on the following
weighted  average  assumptions:    quarterly  dividend  yield  of  1.25%, annual
expected return of 5.3%, annual  standard  deviation (volatility) of 20.5%, risk
free interest rate of 6.91%, and expected term of 7 years.











                                        -50-
<PAGE>

    The following  table  summarizes  information  regarding  the  stock options
outstanding at December 31, 1997, pursuant to the terms of the Plan:
[CAPTION]
             Options outstanding                       Options exercisable   
     At                            Remaining              At
December 31,         Exercise     contractual        December 31,   Exercise
    1997              price          life                1997         price  
     [S]           [C]             [C]                    [C]      [C]
      38,600       $      15.00    5.27 Years              38,600  $    15.00
     100,000              19.50    8.29 Years             100,000       19.50
     240,000              20.75    8.67 Years              60,000       20.75
     378,600                                              198,600

    Stock Incentive Plan.  On May  14, 1997, the Company's shareholders approved
the Pennsylvania Enterprises, Inc. Stock  Incentive Plan (the "Incentive Plan").
Under the terms  of  the  Plan,  a  total  of  460,000  shares of authorized but
unissued shares of  the  Company's  common  stock  have  been  reserved and made
available for  distribution  to  eligible  employees,  officers,  and directors.
Awards under the Incentive Plan may  take  the form of stock options, restricted
stock, and  other  awards  where  the  value  of  the  award  is  based upon the
performance of the Company's stock.  During 1997, nonqualified Stock Options for
the purchase of 42,000  shares  of  stock  were  issued  to certain officers and
directors.  The options  were  granted  subject  to the achievement of specified
financial and operational goals for  the  Company during 1997.  However, because
certain of these goals  were  not  met,  these  options  will not vest or become
exercisable and have not been included  in  either the stock option tables above
or the diluted earnings per share calculations included in Note 1 of these Notes
to Consolidated Financial Statements.

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

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

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

                                        -51-
<PAGE>

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

(5)  PREFERRED STOCK

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

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

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

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











                                        -52-
<PAGE>

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

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

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

(6)  LONG-TERM DEBT

    Long-term debt consisted of  the  following  components at December 31, 1997
and 1996:
<TABLE>
<CAPTION>
                                                          1997          1996  
                                                        (Thousands of Dollars)
  <S>                                                   <C>           <C>
  Indebtedness of the Company:
    Term loan, due 1999                                 $ 20,000      $ 20,000
    Less current maturities                                    -             -
      Total long-term debt of the Company                 20,000        20,000    

  Indebtedness of PG Energy:
    First mortgage bonds -
       8.375% Series, due 2002                            30,000        30,000    
       9.23 % Series, due 1999                            10,000        10,000    
       9.34 % Series, due 2019                            15,000        15,000    
                                                          55,000        55,000    
    Notes -
      6.92% Senior Notes, due 2004                        25,000             -
      Term loan, due 2002                                 25,000             -    
      Bank borrowings, at weighted average interest
        rates of 6.11% and 6.18%, respectively (Note 8)   25,776        38,721    
                                                          75,776        38,721    
    Less current maturities and sinking
      fund requirements                                  (24,776)      (38,721)   
      Total long-term debt of PG Energy                  106,000        55,000    

  Indebtedness of Power Corp:
    Bank borrowings, at weighted average interest
      rate of 7.50%                                        1,000             -    
    Less current maturities                                    -             -    
      Total long-term debt of Power Corp                   1,000             -    
      Total consolidated long-term debt                 $127,000      $ 75,000    
</TABLE>
    Term Loan Agreements.   Borrowings  under  the  Company's $20.0 million term
loan dated May 31, 1994, which matures  on May 31, 1999, bear interest at London
Interbank Offered Rates ("LIBOR") plus one-half of one percent.  Under the terms
of the loan, the Company can choose  interest rate periods of one, two, three or
six months.  




                                        -53-
<PAGE>

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

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

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

    Maturities and Sinking Fund  Requirements.    As  of  December 31, 1997, the
aggregate annual maturities and sinking  fund requirements of long-term debt for
each of the next five years ending December 31, were:
[CAPTION]
                           Year              Amount   
                           [S]            [C]
                           1998           $ 24,776,000 (a)
                           1999           $ 32,000,000 (b)
                           2000           $          -
                           2001           $          -
                           2002           $ 55,000,000 (c)

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

    (b) Includes the $20.0 million of  borrowings outstanding as of December 31,
        1997, under the Company's Term Loan  Agreement  due May 31, 1999, and PG
        Energy's 9.23% Series First  Mortgage  Bonds  in the principal amount of
        $10.0 million due September 1, 1999.

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

(7)  DIVIDEND RESTRICTIONS

    There are no dividend  restrictions  in  the  Company's Restated Articles of
Incorporation.  However, the preferred  stock provisions of PG Energy's Restated
Articles of Incorporation and certain of  the agreements under which the Company
and  PG  Energy  have  issued   long-term  debt  provide  for  certain  dividend
restrictions.  As of December 31,  1997, $5,416,000 of the consolidated retained
earnings of the Company were restricted against the payment of cash dividends on
common stock under the most restrictive of these covenants.



                                        -54-
<PAGE>

(8)  BANK NOTES PAYABLE

    The Company,  through  certain  of  its  subsidiaries,  primarily PG Energy,
currently has arrangements  for  nine  revolving  bank  lines  of credit with an
aggregate borrowing capacity of  $70.5  million  which provide for borrowings at
interest rates generally  less  than  prime  and  which  mature at various times
during 1998 and 1999.

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

    Information relating to the  Company's  bank  lines of credit and borrowings
under those lines of credit is set forth below:
<TABLE>
<CAPTION>
                                                         As of December 31,      
                                                     1997       1996       1995  
                                                         (Thousands of Dollars)
     <S>                                           <C>        <C>        <C>
     Borrowings under lines of credit
       Short-term                                  $  2,170   $ 10,000   $ 10,000
       Long-term                                     26,776     38,721     65,801
                                                   $ 28,946   $ 48,721   $ 75,801

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

     Total lines of credit
       Prime rate                                  $  1,000   $      -   $      -
       Less than prime rate                          69,500     65,500     80,500
                                                   $ 70,500   $ 65,500   $ 80,500

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

    Pension  Benefits.     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  and Honesdale.  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.  







                                        -55-
<PAGE>

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

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

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

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






                                        -56-
<PAGE>

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

    Prepaid (accrued) pension cost at year-end             $    821    $   (507)   
</TABLE>
    The assumptions used in determining pension obligations were:
[CAPTION]
                                                 1997       1996       1995 
         [S]                                    [C]        [C]        [C]
         Discount rate                          7.00 %     7.75 %     7.00 %
         Expected long-term rate of return
           on plan assets                       9.00 %     9.00 %     9.00 %
         Projected increase in future
           compensation levels                  5.00 %     5.00 %     5.00 %

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

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






                                        -57-
<PAGE>

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

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

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

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

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

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

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

                                        -58-
<PAGE>

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

    It was also assumed that the per capita cost of covered health care benefits
would increase at an annual rate of 8% in 1998 and that this rate would decrease
gradually to 5-1/2% for the year 2003  and remain at that level thereafter.  The
health care cost trend rate assumption  had  a significant effect on the amounts
accrued.  To illustrate, increasing the assumed health care cost trend rate by 1
percentage point in each  year  would  increase  the transition obligation as of
January 1, 1998, by approximately $493,000  and the aggregate of the service and
interest cost components of the  net  cost of postretirement benefits other than
pensions for the year 1997 by approximately $58,000.

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

(10)  CAPITAL EXPENDITURES

    The Company estimates the cost of  its 1998 capital expenditure program will
be $47.6 million,  consisting  of  $36.3  million  relative  to the construction
program of the Regulated  Subsidiaries  and  $11.3  million  with respect to the
Company's  nonregulated  activities,  including  $8.1  million  to  convert  the
cogeneration facility acquired by  Power  Corp  in  November, 1997, to burn both
natural and methane gas and, in connection therewith, to construct a methane gas
recovery  facility  at  a  nearby  landfill.     It  is  anticipated  that  such
expenditures  will  be  financed  with   internally  generated  funds  and  bank
borrowings and by the periodic issuance of stock and long-term debt.

(11)  COMMITMENTS AND CONTINGENCIES

    Environmental Matters.   PG  Energy,  like  many gas distribution companies,
once utilized manufactured gas plants  in  connection with providing gas service
to its customers.  None of  these  plants  has been in operation since 1972, and
several of the plant sites are no  longer  owned  by PG Energy.  Pursuant to the
Comprehensive Environmental Response,  Compensation  and  Liability  Act of 1980
("CERCLA"),  PG  Energy  filed  notices  with  the  United  States Environmental
Protection Agency (the "EPA") with respect  to  the former plant sites.  None of
the sites is or was formerly on  the proposed or final National Priorities List.
The EPA has conducted site inspections  and made preliminary assessments of each
site  and  has  concluded   that   no   further   remedial  action  is  planned.
Notwithstanding this determination by the EPA,  some of the sites may ultimately

                                        -59-
<PAGE>

require remediation.  One site that was owned by PG Energy from 1951 to 1967 and
at which it operated a manufactured gas  plant  from 1951 to 1954 was subject to
remediation in 1996.  The remediation  at  this site, which was performed by the
party from whom PG Energy  acquired  the  site  in 1951, required the removal of
materials from  two  former  gas  holders.    The  cost  of  such remediation is
purported to have been approximately $525,000, of which the party performing the
remediation is seeking to recover a material portion from PG Energy.  PG Energy,
however,  believes  that  any  liability  it  may  have  with  respect  to  such
remediation would be considerably less than  the  amount that the other party is
seeking.  While the final resolution of  the matter is uncertain, PG Energy does
not believe that it will have  any  material impact on its financial position or
results of operations.  Although the  conclusion  by the EPA that it anticipates
no further remedial action with respect to the sites at which PG Energy operated
manufactured gas plants does not  constitute a legal prohibition against further
regulatory action under CERCLA  or  other  applicable  federal or state law, the
Company does  not  believe  that  additional  costs,  if  any,  related to these
manufactured gas plant sites  would  be  material  to  its financial position or
results  of  operations  since  environmental  remediation  costs  generally are
recoverable through rates over a period of time.

(12) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

    The carrying amounts and estimated  fair  values of financial instruments at
December 31, 1997 and 1996, were as follows:
[CAPTION]
                                               1997                 1996        
                                        Carrying Estimated   Carrying Estimated
                                         Amount  Fair Value   Amount  Fair Value
                                                 (Thousands of Dollars)
[S]                                     [C]      [C]         [C]      [C]
Long-term debt (including current
  portion):
    Company                             $ 20,000 $   20,000  $ 20,000 $   20,000
    Regulated Subsidiaries               130,776    136,914    93,721     99,222
    Power Corp                             1,000      1,000         -          -
Preferred stock of PG Energy subject to
  mandatory redemption (including
  current portion)                           720        734       819        836






                                        -60-
<PAGE>

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

(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
[CAPTION]
                                                 QUARTER ENDED                  
                                March 31,  June 30,  September 30,  December 31,
                                  1997       1997        1997           1997    
                                (Thousands of Dollars, Except Per Share Amounts)
[S]                             [C]        [C]       [C]            [C]
Operating revenues              $  89,491  $ 41,864  $      24,209  $     72,482
Operating income (loss)            10,227     2,362           (291)        9,257
Income (loss) from continuing
  operations                        8,052       151         (2,367)        5,994
Net income (loss)                   8,052       151         (2,367)        5,994

Basic earnings (loss) per
  share of common stock (a):
 Continuing operations                .84       .02           (.24)          .62
 Net income (loss)                    .84       .10           (.24)          .62
Diluted earnings (loss) per
   share of common stock (a):
 Continuing operations                .83       .02           (.24)          .61
 Net income (loss)              $     .83  $    .10  $        (.24) $        .61

[CAPTION]
                                                 QUARTER ENDED                  
                                March 31,  June 30,  September 30,  December 31,
                                  1996       1996        1996           1996    
                                (Thousands of Dollars, Except Per Share Amounts)
[S]                             [C]        [C]       [C]            [C]
Operating revenues              $  74,087  $ 30,257  $      19,354  $     60,782
Operating income (loss)            10,443     1,611           (751)        6,957
Income (loss) from continuing
  operations                        7,337      (455)        (2,940)        4,122
Loss with respect to 
  discontinued operations            (365)      (21)             -            23
Extraordinary loss, net                 -         -         (1,117)            -
Net income (loss)                   6,972      (476)        (4,057)        4,145

Basic earnings (loss) per
  share of common stock (a):
 Continuing operations                .63      (.05)          (.30)          .43
 Net income (loss)                    .60      (.18)          (.42)          .43
Diluted earnings (loss) per
  share of common stock (a):
 Continuing operations                .63      (.05)          (.30)          .43
 Net income (loss)              $     .60  $   (.18) $        (.42) $        .43

    (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 activity related to  the  issuance and/or repurchase of shares of
        common stock at various dates during 1997 and 1996.

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

                                        -61-
<PAGE>

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

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


















































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

           Report of Independent Accountants on the Consolidated
             Financial Statements as of December 31, 1997 . . . . . . . .   33

           Report of Independent Accountants on the Consolidated
             Financial Statements as of December 31, 1996 . . . . . . . .   34

           Consolidated Statements of Income for each of the three years 
             in the period ended December 31, 1997. . . . . . . . . . . .   35

           Consolidated Balance Sheets as of December 31, 1997 and 1996 .   36

           Consolidated Statements of Cash Flows for each of the three 
             years in the period ended December 31, 1997. . . . . . . . .   38

           Consolidated Statements of Capitalization as of December 31, 
             1997 and 1996. . . . . . . . . . . . . . . . . . . . . . . .   39

           Consolidated Statements of Common Shareholders' Investment
             for each of the three years in the period ended December
             31, 1997 . . . . . . . . . . . . . . . . . . . . . . . . . .   40

           Notes to Consolidated Financial Statements . . . . . . . . . .   41

     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, 1997 . . . . . . . . . . . .   67

     3.  Exhibits
             See "Index to Exhibits" located  on  page  69  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>

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

(c)  Executive Compensation Plans and Arrangements

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

     Exhibit

     10-27  Form of Change in Control  Agreement between 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.

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

     10-29  Agreement, dated as of March  15,  1991, by and between the Company,
            PG Energy and Robert L. Jones   -- filed as Exhibit No. 10-38 to the
            Company's Annual Report on Form 10-K for 1990, File No. 0-7812.

     10-30  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.

     10-31  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.

     10-32  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.

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

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

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

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



</TABLE>
                                        -65-
<PAGE>


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

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

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

     10-40  First Amendment to the  Director Deferred Compensation Plan, amended
            and restated effective as of November 19, 1997 -- filed herewith.

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

     10-42  First Amendment  to  the  1995  Directors'  Stock Compensation Plan,
            amended and restated  effective  as  of  November  19, 1997 -- filed
            herewith.

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































                                        -66-
<PAGE>

SCHEDULE II


























































                                        -67-
<PAGE>

                                  SIGNATURES

    Pursuant to the  requirements  of  Section  13  or  15(d)  of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
[CAPTION]
                                              PENNSYLVANIA ENTERPRISES, INC.    

                                                       (Registrant)
[S]       [C]
Date:     March 5, 1998                 By:         /s/ Thomas F. Karam         
                                                        Thomas F. Karam
                                           President and Chief Executive Officer
                                             (Principal Executive Officer)

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

    Pursuant to the requirements of  the  Securities  Exchange Act of 1934, this
report has  been  signed  below  by  the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.
[CAPTION]
          Signature                         Capacity                   Date    
  [S]                              [C]
  /s/ Kenneth L. Pollock           Chairman of the Board of       March 5, 1998
      Kenneth L. Pollock            Directors

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

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

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

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

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

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

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

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

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

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

                                        -68-
<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,  PG  Energy,  American   Water  Works  Company,  Inc.,  and
            Pennsylvania-American Water Company --  filed  as  Exhibit 2-1 to PG
            Energy's Quarterly Report on Form  10-Q  for the quarter ended March
            31, 1995, File No. 1-3490.

(3) Articles of Incorporation and By-Laws:

 3-1        Restated Articles of  Incorporation  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 PG Energy)
            and First Trust  of  New  York,  National  Association, as Successor
            Trustee to Morgan Guaranty  Trust  Company  of  New York -- filed as
            Exhibit 2(c) to PG Energy's Bond Form S-7, Registration No. 2-55419.
                                                                                

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

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

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

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

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

 4-7        Fifteenth Supplemental Indenture, dated  as  of December 15, 1963 --
            filed as Exhibit 2(i) to PG Energy's Bond Form S-7, Registration No.
            2-55419.                                                            

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

                                        -69-
<PAGE>

Exhibit
Number                                                                          

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

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

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

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

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

 4-14       Twenty-second Supplemental Indenture, dated as of August 15, 1989 --
            filed as Exhibit 4-22 to  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  PG  Energy's Annual Report on Form 10-K
            for 1993, File No. 1-3490.                                          

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





                                        -70-
<PAGE>

Exhibit
Number                                                                          

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

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


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

(10) Material Contracts:

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

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

10-3        Service Agreement  for  storage  service  under  Rate Schedule SS-2,
            dated April 1, 1990, between PG Energy and Transcontinental Gas Pipe
            Line Corporation -- filed  as  Exhibit  10-8 to 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 PG Energy 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  PG  Energy 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  PG Energy 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  PG Energy and Transcontinental Gas
            Pipe Line Corporation -- filed as Exhibit 10-7 to PG Energy's Annual
            Report on Form 10-K for 1993, File No. 1-3490.                      

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

                                        -71-
<PAGE>

Exhibit
Number                                                                          

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

10-10       Service Agreement  for  transportation  service  under Rate Schedule
            FTPO, dated  July  10,  1997,  effective  November  1,  1997, by and
            between PG Energy and Transcontinental  Gas Pipe Line Corporation --
            filed as Exhibit 10-10 to PG Energy's Annual Report on Form 10-K for
            1997, File No. 1-3490.

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

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

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

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

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

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

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

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



                                        -72-
<PAGE>

Exhibit
Number                                                                          

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

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

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

10-22       Service  Agreement  for  storage  service,  dated  April  15,  1997,
            effective November 1, 1997, by  and  between  PG Energy and New York
            State Electric & Gas  Corporation  --  filed  as Exhibit 10-22 to PG
            Energy's Annual Report on Form 10-K for 1997, File No. 1-3490.

10-23       Service Agreement for transportation service under Rate Schedule FT,
            dated April 30, 1997, effective November  1, 1997, by and between PG
            Energy and CNG Transmission Corporation -- filed as Exhibit 10-23 to
            PG Energy's Annual Report on Form 10-K for 1997, File No. 1-3490.

10-24       Bond Purchase Agreement,  dated  September  1,  1989, relating to PG
            Energy's First  Mortgage  Bonds  9.23%  Series  due  1999  and First
            Mortgage Bonds 9.34% Series  due  2019 among Allstate Life Insurance
            Company, Allstate Life Insurance Company  of  New York and PG Energy
            -- filed as Exhibit 10-34 to the Company's Annual Report on Form 10-
            K for 1989, File No. 0-7812.                                        

10-25       Term Loan Agreement  dated  August  14,  1997,  among PG Energy, the
            Banks parties thereto  and  PNC  Bank,  National Association, in its
            capacity as Agent for  the  Banks  --  filed  as Exhibit 10-25 to PG
            Energy's Annual Report on Form 10-K for 1997, File No. 1-3490.

10-26       6.92% Senior Notes  Purchase  Agreement,  dated  September 30, 1997,
            between PG Energy and the Purchasers -- filed as Exhibit 10-26 to PG
            Energy's Annual Report on Form 10-K for 1997, File No. 1-3490.

10-27       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.                      

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




                                        -73-
<PAGE>

Exhibit
Number

10-29       Agreement, dated as of March  15,  1991, by and between the Company,
            PG Energy 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.     

10-30       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.

10-31       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.     

10-32       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.

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

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

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

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

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

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

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

10-40       First Amendment to the  Director Deferred Compensation Plan, amended
            and restated effective as of November 19, 1997 -- filed herewith.




                                        -74-
<PAGE>

Exhibit
Number

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

10-42       First Amendment  to  the  1995  Directors'  Stock Compensation Plan,
            amended and restated  effective  as  of  November  19, 1997 -- filed
            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  Accountants  relative  to December 31, 1997,
            Consolidated Financial Statements -- filed herewith.

23-2        Consent of Independent  Accountants  relative  to December 31, 1996,
            Consolidated Financial Statements - filed herewith.





































                                        -75-
<PAGE>

                                  TABLE OF CONTENTS

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

    Item  2.  PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . .  15

    Item  3.  LEGAL PROCEEDINGS  . . . . . . . . . . . . . . . . . . . . . .  15

    Item  4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  . . . . .  15


PART II

    Item  5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
                STOCKHOLDER MATTERS  . . . . . . . . . . . . . . . . . . . .  16

    Item  6.  SELECTED FINANCIAL DATA  . . . . . . . . . . . . . . . . . . .  17

    Item  7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                CONDITION AND RESULTS OF OPERATIONS  . . . . . . . . . . . .  20

    Item  8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  . . . . . . . . .  32

    Item  9.  CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                ACCOUNTING AND FINANCIAL DISCLOSURE  . . . . . . . . . . . .  62


PART III

    Item 10.  DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT . . . . . .  63

    Item 11.  EXECUTIVE COMPENSATION . . . . . . . . . . . . . . . . . . . .  63

    Item 12.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                OWNERS AND MANAGEMENT  . . . . . . . . . . . . . . . . . . .  63

    Item 13.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS . . . . . . . .  63


PART IV

    Item 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
                ON FORM 8-K  . . . . . . . . . . . . . . . . . . . . . . . .  64*

              SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . .  68






________________________
* The "Index to Exhibits" is located on page 69.


</TABLE>
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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, 1997

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

  Reserve for uncollectible accounts-

    Year ended December 31, 1997                      $    1,233   $ 2,202    $      4   $    2,099(a)   $ 1,340

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

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


Shown as operating reserves on the consolidated
  balance sheets:

    Insurance -

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

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

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



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

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



















</TABLE>




<PAGE>