SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549


                                    FORM 10-K

              ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

For the fiscal year ended December 31, 1998       Commission file number 0-7812


                         PENNSYLVANIA ENTERPRISES, INC.
             (Exact name of registrant as specified in its charter)


        Pennsylvania                                    23-1920170
(State or other jurisdiction of               (IRS Employer Identification No.)
  incorporation or organization)

          One PEI Center
    Wilkes-Barre, Pennsylvania                          18711-0601
(Address of principal executive offices)                 (Zip Code)

Registrant's telephone number, including area code:  (570) 829-8843

Securities registered pursuant to Section 12(b) of the Act:  NONE

Securities registered pursuant to Section 12(g) of the Act:

                           COMMON STOCK, NO PAR VALUE
                                (Title of Class)


Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the  preceding 12 months (or for such  shorter  period that the  registrant  was
required  to file  such  reports),  and  (2) has  been  subject  to such  filing
requirements for the past 90 days. Yes x No __

Indicate by check mark if disclosure of delinquent  filers  pursuant to Item 405
of Regulation  S-K is not contained  herein,  and will not be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ x ]

The  aggregate  market  value of the voting stock held by  nonaffiliates  of the
registrant amounted to $201,586,303 as of February 24, 1999. For the purposes of
the foregoing calculation,  all directors and/or officers have been deemed to be
affiliates,  but the  registrant  disclaims  that any of such  directors  and/or
officers is an affiliate.

The  number of shares of Common  Stock,  no par  value,  outstanding  as of
February 24, 1999: 10,667,483 shares

                       DOCUMENTS INCORPORATED BY REFERENCE

List hereunder the following documents if incorporated by reference and the Part
of the Form 10-K into which the document is incorporated:

Part  III - Items  10(a),  11,  12 and 13 -  Portions  of the  Definitive  Proxy
Statement for the Annual Meeting of Shareowners to be held on May 5, 1999.
<PAGE>
                                TABLE OF CONTENTS

                                                                          PAGE

PART I

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

     Item 2.     PROPERTIES.............................................    14

     Item 3.     LEGAL PROCEEDINGS......................................    14

     Item 4.     SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....    14

PART II

     Item 5.     MARKET FOR THE REGISTRANT'S COMMON EQUITY AND
                      RELATED STOCKHOLDER MATTERS.......................    15

     Item 6.     SELECTED FINANCIAL DATA................................    16

     Item 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS...............    19

     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.

<PAGE>

                                     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 the cities of Scranton,
Wilkes-Barre  and  Williamsport.  In 1998, PG Energy and Honesdale  collectively
accounted for  approximately  77% 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"),  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.  These activities include the sale of natural
gas, propane,  electricity and other energy-related  products and services;  the
construction,  maintenance and rehabilitation of utility  facilities,  primarily
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 (a trademark of Energy  Services),  principally in northeastern
and central Pennsylvania.  Power Corp, an exempt wholesale generator (within the
meaning of the Public Utility  Holding  Company Act of 1935, as amended),  began
generating  and  selling   electricity  in  July,   1998,   upon  completion  of
modifications to its  cogeneration  facility that enable it to burn both natural
gas  and  methane.  In  1998,  the  revenues  of the  nonregulated  subsidiaries
accounted for approximately 23% of the Company's  operating  revenues and 37% 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, 1998, PG Energy provided  service to  approximately
148,900 natural gas customers and Honesdale  provided  service to  approximately
3,300 customers.

       The Company and its subsidiaries employed approximately 825 persons as of
December 31, 1998.

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 occurring in the electric industry,
which competes with the natural gas industry for many of the same energy uses.


<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 600 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  54%  of PG  Energy's  total  gas
deliveries  in 1998,  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 its customers  effective  November 1, 1997.
During 1998 approximately 1,150 of Honesdale's customers received transportation
service and purchased 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  148,900  customers.
However,  the actual timing of such filing may be influenced by the terms of the
legislation,  as  discussed  below,  which the Company  and PG Energy  currently
believe that Pennsylvania may enact in 1999 requiring that all customers of LDCs
have the  right,  within the next one to two  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 1999.  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  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 the
transition  costs  it  would  incur  in  offering  choice  to all its  customers
(including  those involving  information  systems and customer  education) 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 on positioning 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  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, primarily 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,
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 and the  installation  of fiber optic cable. 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.  In July,  1998, Power Corp
began generating and selling electricity provided by a cogeneration  facility it
acquired in November,  1997.  This  25-megawatt  facility,  located in Archbald,
Pennsylvania,  is fueled by a combination  of natural gas and methane  recovered
from a nearby landfill. 

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).

OPERATING SEGMENTS

       The Company has three principal operating segments:

o          Regulated  Energy  Products and Services,  principally  the purchase,
           distribution and sale,  subject to regulation of the PPUC, of natural
           gas  in  thirteen  counties  in  northeastern   Pennsylvania  by  the
           Regulated Subsidiaries ("Energy Products and Services - Regulated")
o          Nonregulated  Energy  Products and Services,  principally the sale of
           natural gas, propane,  electricity and other energy-related  products
           and services by Energy Services,  principally in a twenty-six  county
           area in  northeastern  and  central  Pennsylvania  and by Power  Corp
           ("Energy Products and Services - Nonregulated")
o          Pipeline  Construction  and Services,  principally the  construction,
           maintenance and rehabilitation of utility  facilities  throughout the
           eastern  United  States  by  Keystone  ("Pipeline   Construction  and
           Services").

       Financial information relative to the Company's operating segments can be
found in Note 13 of the Notes to Consolidated  Financial Statements in Item 8 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.


<PAGE>


       Number  and Type of  Customers.  At  December  31,  1998,  the  Regulated
Subsidiaries  had  approximately  152,200 natural gas customers,  from which the
Company  derived total natural gas revenues of $158.7  million  during 1998. The
following  chart shows a breakdown of the types of customers and the percentages
of gas revenues generated by each type of customer in 1998:

Type of Customer            % of Customers             % of Revenues

Residential                        90.8%                   66.7%
Commercial                          8.9                    24.1*
Industrial                          0.2                     7.7*
Other Users                         0.1                     1.5
    Total                         100.0%                  100.0%

*  Includes the 2.6% of total gas revenues derived from interruptible customers.

       During 1998, the Regulated  Subsidiaries  delivered an estimated total of
45,969,700  MCF of  natural  gas to their  customers,  of which  45% was sold at
normal tariff rates,  54%  represented  gas transported for customers and 1% 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 1998 a total of 5,461,250 MCF of natural
gas was sold to interruptible  customers, of which 5,210,078 MCF was transported
for such customers,  which together  represented 12% of the total  deliveries of
natural gas to the Regulated Subsidiaries' customers during 1998.

       PG Energy's  largest  natural gas customer  accounted for less than 1% of
its operating revenues in 1998.

       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  approximately  3,300 customers  effective  November 1, 1997.  During
1998,  approximately  1,150 of  Honesdale's  customers  received  transportation
service and purchased 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.


       Set forth  below is a summary  of the gas  transported  by the  Regulated
Subsidiaries and the number of customers using transportation  service from 1996
to 1998:

                                   Volume of Gas Transported (MCF)
                             --------------------------------------------------
             Number of        Interstate       Pennsylvania
  Year       Customers           Gas                Gas               Total
-------     ------------     -------------     -------------     --------------

   1998       1,736 (a)       24,669,000                   -         24,669,000
   1997       1,244 (a)       22,584,000              99,000         22,683,000
   1996         503           15,959,000           4,459,000         20,418,000

  (a)    Includes  1,148  and  729  residential  and  commercial   customers  of
         Honesdale   receiving   transportation   service   in  1998  and  1997,
         respectively.

       During 1999, the Regulated Subsidiaries expect to transport approximately
28,000,000 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 and its elimination in 1998.

       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 $1.7 million in 1998,  $2.4 million in 1997 and
$1.8 million in 1996. These revenues  reflected the sale of 582,000 MCF, 651,000
MCF and  491,000  MCF in 1998,  1997 and  1996,  respectively.  It is  presently
anticipated that approximately 600,000 MCF will be sold under the Alternate Fuel
Rate in 1999.  The change in volumes sold under the Alternate Fuel Rate reflects
the  switching  by  certain   customers   between  alternate  fuel  service  and
transportation  service as a result of periodic  changes in the relative cost of
natural gas and alternate fuels.

       FERC  Order 636.  On April 8, 1992,  FERC  issued  Order No. 636  ("Order
636"),   requiring  interstate  pipelines  to  restructure  their  services  and
operations in order to enhance competition and maximize the benefits of wellhead
price decontrol.  The objectives of Order 636 were to be accomplished  primarily
by unbundling the services  provided by the  interstate  pipelines and by making
those services available to end users on the same terms as LDCs.
       
Pursuant to Order 636, the  interstate  pipelines  have been required to:
(1) unbundle  transportation service from sales service; (2) allocate sufficient
storage capacity, together with firm transportation, to replicate previous sales
services;  (3)  provide a no-notice  transportation  service;  (4) provide  open
access storage service;  (5) reallocate  upstream pipeline capacity and upstream
storage for the benefit of downstream  interstate  pipeline  suppliers;  and (6)
implement  a  straight  fixed-variable  rate  design  to  replace  all  modified
fixed-variable  rate  designs.  The  interstate  pipelines  have been  granted a
blanket  sales   certificate  to  make  unbundled  sales  in  competition   with
non-pipeline  merchants and are being  permitted  recovery of all reasonable and
prudent  transition  costs  incurred  in order to comply  with Order  636.  Such
transition  costs  include:  (1) the cost of  renegotiating  existing gas supply
contracts with producers ("Gas Supply Realignment  Costs");  (2) recovery of gas
costs included in the interstate pipelines' purchased gas adjustment accounts at
the time they adopted  market-based pricing for gas sales ("Account 191 Costs");
(3)  unrecovered  costs of  assets  that  cannot be  assigned  to  customers  of
unbundled  services  ("Stranded  Costs");  and (4)  costs of new  facilities  to
physically  implement  Order  636  ("New  Facility  Costs").  Additionally,  the
interstate  pipelines  have been allowed  pre-granted  abandonment  of sales and
transportation  services to customers upon  expiration of applicable  contracts,
subject to customers' rights of first refusal.

       On  October  15,  1993,  the PPUC  adopted an annual  purchased  gas cost
("PGC") order (the "PGC Order")  regarding the recovery of Order 636  transition
costs.  The PGC Order stated that  Account 191 and New Facility  Costs (the "Gas
Transition  Costs") are  subject to recovery  through the annual PGC rate filing
made with the PPUC by 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,  1998,  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 billed pursuant to Order
636 through the billing of a surcharge to its customers  effective September 12,
1994. As December 31, 1998,  $10.6 million of such Non-Gas  Transition Costs had
been billed to PG Energy and recovered  from its  customers.  PG Energy does not
presently anticipate that it will be billed for any additional amount of Non-Gas
Transition Costs by its interstate pipelines.

       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 varying periods of more or less than one
year, but frequently for the following  heating season (i.e.,  November  through
March).  Depending upon their terms,  these contracts may or may not 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 28% of the Regulated  Subsidiaries'
total purchases of natural gas in 1998. Three other suppliers accounted for 23%,
20% and 10%,  respectively,  of the Regulated  Subsidiaries'  total purchases of
natural  gas in 1998.  No other  suppliers  accounted  for more  than 10% of the
Regulated Subsidiaries' purchases during 1998.


<PAGE>


     The purchases of natural gas by the Regulated  Subsidiaries during 1998 and
1997 and by PG Energy during 1996 are summarized below:

                                   Volume                          Average
      Year                     Purchased (MCF)                   Cost per MCF*
-----------------             ------------------                 ------------

      1998                        22,763,000                       $3.86
      1997                        26,540,000                       $3.78
      1996                        27,955,000                       $3.83

* At the entry points on the distribution systems of the Regulated Subsidiaries.

       During 1999, the Regulated  Subsidiaries expect to purchase approximately
27,500,000 MCF of natural gas under seasonal or other  contracts of more or less
than one year at a currently projected average cost of $3.63 per MCF.

       The Regulated  Subsidiaries  presently have adequate  supplies of natural
gas to meet the demands of existing  customers  through  October,  1999, 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,  1999,  and to serve new  customers (of which  approximately  2,500 are
expected to be added in 1999).

       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 (i.e. at the entry point
on the LDC's system).

       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:


<PAGE>


                                            Daily            Percentage of Total
                     Expiration         Transportation          Transportation
   Pipeline           Date (a)          Entitlement (MCF)         Entitlement
-------------    -----------------     -------------------   ------------------

Transco          Various through 2015       74,100 (b)                61.2%
Tennessee        1999 and 2000              35,983 (c)                29.7
Columbia         2004                       11,016                     9.1
                                       -------------------   ------------------
                                           121,099                   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 3,416 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:

                                                                   Maximum
                       Expiration          Total Storage       Daily Withdrawal
Pipeline/Party          Date (a)             (MCF) (b)        From Storage (MCF)
--------------  ----------------------   ----------------     ------------------

Transco           Various through 2013       6,200,000              86,884
Tennessee         November 1, 2000           3,700,000              25,310 (d)
Columbia          October 31, 2004           1,100,000              16,036
NYSEG (c)         March 31, 2002               290,000              28,093
                                         ----------------     -----------------
                                            11,290,000             156,323
                                         ================     =================

   (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.

   (d)     Includes 2,279 MCF that may be delivered to Honesdale under the terms
           of the storage contract with Tennessee.

       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:

            Firm Pipeline        Withdrawals
           Transportation       From Storage                        Percentage
Pipeline        (MCF)              (MCF)           Total (MCF)       of Total
---------  --------------     ---------------    --------------     ------------

Transco       74,100 (a)             114,977 (c)        189,077           68.2%
Tennessee     35,983 (b)              25,310 (d)         61,293           22.1
Columbia      11,016                  16,036             27,052            9.7
           --------------    ----------------    --------------     ------------
             121,099                 156,323            277,422          100.0%
           ==============    ================    ==============     ============

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

   (b)     Includes up to 3,416 MCF that may be transported by Honesdale  during
           the period November through January.

   (c)     Includes  28,093  MCF that may be  delivered  under  the terms of the
           storage  contract  with NYSEG and the  abandonment  of Transco's  LGA
           storage service.

   (d)     Includes 2,279 MCF that may be delivered to Honesdale under the terms
           of the storage contract with Tennessee.


<PAGE>


      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 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 1998,  the average daily
capacity so released  was 32,674 MCF, and the maximum  capacity  released on any
one day in 1998 was  41,473  MCF.  Through  December  31,  1998,  the  Regulated
Subsidiaries had not, however,  released any storage capacity on the open market
via the pipeline electronic bulletin boards.

       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 354,000 MCF, of which
257,000 MCF would be required for customers to whom the  Regulated  Subsidiaries
provide  retail sales service and 97,000 MCF would be required for customers for
whom the Regulated  Subsidiaries  provide  transportation  service through their
distribution systems. The Regulated Subsidiaries' historic maximum daily sendout
is  313,446  MCF,  which   occurred  on  January  17,  1997,   when  service  to
interruptible  customers and select  industrial  users was  curtailed.  The mean
temperature in its gas service area on that day was 5 degrees Fahrenheit.

       Capital  Expenditures.  Capital expenditures totaled $44.8 million during
1998,  including $28.2 million for the  construction of utility plant,  $8.7 for
the conversion of Power Corp's cogeneration facility and the construction of the
related  methane  recovery  facility and $4.8 million for the  development of an
industrial  site  adjacent  to  Power  Corp's  cogeneration  facility.   Capital
expenditures are estimated to be $22.5 million during 1999,  consisting of $18.4
million relative to utility plant and $4.1 million with respect to the Company's
nonregulated activities.

       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.  PG  Energy  paid  $175,000  to the party  performing  the
remediation in settlement of a claim for PG Energy's  share of such  remediation
costs.  Although  the  conclusion  by the EPA  that it  anticipates  no  further
remedial  action  with  respect  to  the  sites  at  which  PG  Energy  operated
manufactured gas plants does not constitute a legal prohibition  against further
regulatory  action  under CERCLA or other  applicable  federal or state law, the
Company  does not  believe  that  additional  costs,  if any,  related  to these
manufactured  gas plant sites would be  material  to its  financial  position or
results of  operations  since  environmental  remediation  costs  generally  are
recoverable through rates over a period of time.

       The  Company 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.

       Power Corp is an exempt wholesale generator pursuant to Section 32 of the
PUHCA,  and both Power Corp and Energy  Services  are licensed  power  marketers
pursuant to Section 205 of the Federal  Power Act and rules and  regulations  of
the FERC.

       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.

       By Order  adopted  October 16,  1998,  the PPUC  approved an overall 4.1%
increase  in PG  Energy's  base  rates,  designed  to  produce  $7.4  million of
additional annual revenue, effective October 17, 1998.

       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.


<PAGE>


         In accordance  with these  procedures  PG Energy has been  permitted to
make the following  changes since January 1, 1996, to the gas costs contained in
its tariff rates:

                                        Change in                Calculated
         Effective                    Rate Per MCF           Increase (Decrease)
                                 -------------------------
           Date                    From           To          In Annual Revenue
----------------------------     ----------    -----------   ------------------

December 1, 1998                   $4.25         $4.53           $   7,100,000
September 1, 1998                   4.18          4.25               1,900,000
June 1, 1998                        3.95          4.18               5,800,000
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

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

       FERC  Order  636,  among  other  matters,  requires  that  the  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 refunding  approximately  $11,000 of decreased 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 $7.5 million during the period January 1 through February 15, 1996.


<PAGE>


       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  $815,000  during  the  period  January 1 through
February 15, 1996.

EXECUTIVE OFFICERS OF THE COMPANY

                                                          Positions and
                                  Officer                Offices with the
     Name                 Age      Since                     Company
-------------------     ------    ---------    -------------------------------

Thomas F. Karam           40       1995         President and Chief Executive
                                                 Officer

Vincent A. Bonaddio       49       1995         Vice President, Operations and
                                                 Engineering Services

Harry E. Dowling          49       1984         Vice President, Customer
                                                 Services

John F. Kell, Jr.         61       1978         Vice President, Financial
                                                 Services

Donna M. Abdalla          39       1998         Corporate Secretary

Richard N. Marshall       41       1993         Treasurer and Assistant
                                                 Secretary

Thomas J. Koval           46       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 1999  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 seven-year period ending September 1, 2003, there are no
arrangements or understandings between any officer and any other person pursuant
to which he was selected as an officer.


<PAGE>


ITEM 2.       PROPERTIES

       Gas.  The  gas  systems  of  the   Regulated   Subsidiaries   consist  of
approximately  2,439 miles of distribution  lines, eleven city gate and 81 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 from PG
Energy to U.S. Bank Trust, National Association, as Trustee.

       Land. As of February 24, 1999, PG Energy owned approximately 44,000 acres
of undeveloped  land,  while Theta owned  approximately  1,000 acres of land and
Power Corp.  owned  approximately  150 acres of land,  certain of which is being
prepared   for   development.   All  such  land  is  situated  in   northeastern
Pennsylvania, primarily Luzerne and Lackawanna Counties.

       Cogeneration  Facility.   Power  Corp  owns  a  25-megawatt  cogeneration
facility  located  in  Lackawanna  County,  Pennsylvania  which it  acquired  in
November,  1997. This facility,  which became  operational in July,  1998, burns
both methane and natural gas. Power Corp also owns a methane  recovery  facility
at a nearby  landfill  which  supplies  methane  gas burned at its  cogeneration
facility.

       Other than the aforementioned facilities owned by Power Corp, neither the
Nonregulated  Energy  Products and Services  operating  segment nor the Pipeline
Construction and Services segment has materially important physical properties.

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 1998,  there were no matters  submitted to a
vote of security  holders of the registrant  through the solicitation of proxies
or otherwise.


<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  24,  1999,  there were
approximately 8,300 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,
1998 and 1997. The prices shown  represent the high and low  transaction  prices
for the respective quarters without retail mark-up, mark-down or commission.

                                          Price Range                  Cash
                                 -------------------------------
                                     High              Low           Dividends
                                 -------------     -------------   -------------
           1998

First quarter                    $  26.563         $   23.125      $        .30
Second quarter                      29.000             22.813               .30
Third quarter                       27.688             21.125               .30
Fourth quarter                      25.938             21.688               .30
   Total                                                           $       1.20

           1997

First quarter (1)                $  24.063         $   21.375      $        .29
Second quarter                      27.750             21.250               .30
Third quarter                       30.500             25.250               .30
Fourth quarter                      32.750             24.250               .30
   Total                                                           $       1.19

      (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.


<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, 1998,  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,
                                        ---------------------------------------------------------------
                                           1998          1997*       1996*        1995*       1994*
                                        ----------    -----------  ----------   ----------  -----------
                                         (Thousands of Dollars, Except Per Share Amounts and Ratios)
<S>     <C>    <C>    <C>    <C>    <C>    <C>
OPERATING REVENUES:
    Energy products and services -
       Regulated .....................   $ 158,724    $ 190,533    $ 160,594    $ 152,756    $ 167,992
       Nonregulated ..................      36,393       26,303       13,153        8,353        9,061
    Pipeline construction and services      12,215       11,210       10,733          826           44
          Total operating revenues ...     207,332      228,046      184,480      161,935      177,097

OPERATING EXPENSES:
    Cost of gas and other energy .....     117,689      134,622       98,475       90,478      105,832
    Operation and maintenance ........      45,623       43,265       42,930       29,551       28,569
    Depreciation .....................      10,446        9,464        7,833        7,018        6,671
    Income taxes .....................       3,947        7,374        5,800        3,955        4,541
    Taxes other than income taxes ....      11,428       11,766       11,182        9,982       10,852
       Total operating expenses ......     189,133      206,491      166,220      140,984      156,465

OPERATING INCOME .....................      18,199       21,555       18,260       20,951       20,632

OTHER INCOME, NET ....................       1,661        1,221        1,726          355          111

INTEREST CHARGES (1) .................     (11,159)      (9,634)     (10,192)     (15,422)     (13,791)

INCOME FROM CONTINUING
    OPERATIONS .......................       8,701       13,142        9,794        5,884        6,952

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

INCOME BEFORE SUBSIDIARY'S
    PREFERRED STOCK
    DIVIDENDS AND
    EXTRAORDINARY LOSS ...............       8,701       13,142        9,431        2,050       17,456

SUBSIDIARY'S PREFERRED
    STOCK DIVIDENDS (1) ..............       1,191        1,312        1,730        2,763        4,639

INCOME (LOSS) BEFORE
    EXTRAORDINARY LOSS ...............       7,510       11,830        7,701         (713)      12,817

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

NET INCOME (LOSS) ....................   $   7,510    $  11,830    $   6,584    $    (713)   $  12,817
</TABLE>

See page 18 for an explanation of footnotes.

*Reclassified to conform with 1998 consolidated financial statement
 presentation.
<TABLE>
<CAPTION>
<PAGE>

                                                               Year Ended December 31,
                                               1998            1997          1996            1995            1994
                                             -------          ------        -------        --------        -------
                                                   (Thousands of Dollars, Except Per Share Amounts and Ratios)
<S>     <C>    <C>    <C>    <C>    <C>    <C>
COMMON STOCK INFORMATION:
   Weighted average number of shares
     outstanding in thousands (3) ....         9,997           9,661         10,222          11,459          10,913
   Basic and diluted earnings
     (loss) per share of
     common stock: (3)
       Continuing operations (1) .....     $     .75      $     1.22      $     .79        $    .27        $    .21
       Discontinued operations .......          --              --             (.04)           (.33)            .96
       Net income (loss) before
          discount (premium) on
          repurchase/redemption of
          subsidiary's preferred stock
          and extraordinary loss .....           .75            1.22            .75            (.06)           1.17
       Discount (premium) on
         repurchase/redemption of
         subsidiary's preferred stock           (.10)            .08           (.13)        --                 (.09)
       Extraordinary loss ............          --              --             (.11)        --                 --
       Earnings (loss) per share of
         common stock ................      $    .65      $     1.30     $      .51        $   (.06)        $  1.08

   Cash dividends per share of
     common stock ....................      $   1.20      $     1.19     $     1.10        $   1.10         $  1.10

CAPITALIZATION AT END
    OF PERIOD:
   Amounts -
     Common shareholders' investment .      $132,326      $  122,105     $  117,651       $ 162,739         $172,012
     Preferred stock of
       PG Energy -
      Not subject to mandatory
        redemption, net ..............         4,831          15,864         18,851          33,615          33,615
      Subject to mandatory redemption            240             640            739           1,680           1,760
     Long-term debt ..................        98,000         127,000         75,000         106,706         220,705
        Total capitalization .........  $    235,397    $    265,609   $    212,241     $   304,740    $    428,092

   Ratios -
     Common shareholders' investment .         56.2%           46.0%          55.4%            53.4%          40.2%
     Preferred stock of PG Energy -
      Not subject to mandatory
        redemption, net ..............          2.1             6.0            8.9             11.0             7.8
      Subject to mandatory redemption           0.1             0.2            0.4              0.6             0.4
     Long-term debt ..................         41.6            47.8           35.3             35.0            51.6
        Total ........................        100.0%          100.0%         100.0%           100.0%          100.0%
</TABLE>



See page 18 for an explanation of footnotes.


<PAGE>
<TABLE>
<CAPTION>


                                           Year Ended December 31,
                             ------------------------------------------------------
                               1998         1997      1996       1995       1994
                             ---------    --------  --------   --------   ---------
                            (Thousands of Dollars, Except Per Share Amounts and Ratios)
<S>     <C>    <C>    <C>    <C>    <C>    <C>
UTILITY PLANT AT END OF
    PERIOD:
   Total utility plant ....   $376,685   $351,106   $319,205   $295,895   $284,080
   Accumulated depreciation     95,735     88,129     79,783     76,882     74,408
       Net utility plant ..   $280,950   $262,977   $239,422   $219,013   $209,672

TOTAL ASSETS AT END OF
    PERIOD:
   Continuing operations ..   $426,202   $388,830   $366,810   $319,968   $321,236
   Discontinued operations,
     net (4) ..............       --         --         --      204,250    203,196
      Total ...............   $426,202   $388,830   $366,810   $524,218   $524,432

</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 the
        February 15, 1996, date of disposition of the  discontinued  operations.
        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.


<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  collectively  accounted for approximately 77% of the Company's  operating
revenues in 1998.  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  occurring 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 600 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  54%  of PG  Energy's  total  gas
deliveries  in 1998,  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 its customers  effective  November 1, 1997.
During   1998,   approximately   1,150   of   Honesdale's   customers   received
transportation  service and purchased  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  148,900  customers.
However,  the actual timing of such filing may be influenced by the terms of the
legislation,  as  discussed  below,  which the Company  and PG Energy  currently
believe that Pennsylvania may enact in 1999 requiring that all customers of LDCs
have the  right,  within the next one to two  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 1999.  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  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 the
transition  costs  it  would  incur  in  offering  choice  to all its  customers
(including  those involving  information  systems and customer  education) 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.


<PAGE>


EXPANSION OF NONREGULATED ACTIVITIES

       The Company intends to continue its focus on positioning 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 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  and the  installation  of fiber  optic  cable.  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.  In
July,  1998, PEI Power  Corporation  ("Power Corp"), a subsidiary of the Company
formed in October,  1997, began generating and selling electricity produced by a
cogeneration  facility it acquired in November,  1997. This 25-megawatt facility
is fueled by a combination  of natural gas and methane  recovered  from a nearby
landfill.

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"  and  the  following   sections  of
Management's  Discussion  and Analysis  generally  relate only to the  Company's
continuing  operations.  For additional  information  regarding the discontinued
operations,  see  Note 2 of the  accompanying  Notes to  Consolidated  Financial
Statements.

STOCK SPLIT

       On February  19, 1997,  the Board of Directors of the Company  declared a
two-for-one  split of the Company's  Common Stock  effective  March 20, 1997, as
more  fully  discussed  in  Note 4 of the  accompanying  Notes  to  Consolidated
Financial  Statements.  All per share data  included in this Item 7 for the year
1996 has been restated to reflect this two-for-one split.


<PAGE>


RESULTS OF CONTINUING OPERATIONS

       The following table expresses certain items in the Company's consolidated
statements  of income  as  percentages  of  operating  revenues  for each of the
calendar years ended December 31, 1998, 1997 and 1996:

                                          Percentage of Operating Revenues
                                          --------------------------------
                                              Year Ended December 31,
                                          --------------------------------
                                             1998      1997       1996
                                          ---------  ---------   --------

OPERATING REVENUES:
    Energy products and services -
       Regulated ......................      76.6%     83.6%     87.1%
       Nonregulated ...................      17.5      11.5       7.1
    Pipeline construction and services        5.9       4.9       5.8
        Total operating revenues ......     100.0     100.0     100.0

OPERATING EXPENSES:
    Cost of gas and other energy ......      56.8      59.0      53.4
    Operation and maintenance .........      22.0      19.0      23.3
    Depreciation ......................       5.0       4.2       4.2
    Income taxes ......................       1.9       3.2       3.1
    Taxes other than income taxes .....       5.5       5.2       6.1
        Total operating expenses ......      91.2      90.6      90.1

OPERATING INCOME ......................       8.8       9.4       9.9

OTHER INCOME, NET .....................       0.8       0.6       0.9

INTEREST CHARGES ......................      (5.4)     (4.2)     (5.5)    (1)

INCOME FROM CONTINUING OPERATIONS .....       4.2       5.8       5.3

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

INCOME BEFORE SUBSIDIARY'S PREFERRED
    STOCK DIVIDENDS ...................       4.2       5.8       5.1

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

INCOME (LOSS) BEFORE EXTRAORDINARY LOSS       3.6       5.2       4.2

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

NET INCOME (LOSS) .....................       3.6%      5.2%      3.6%


(1)   None of the  Company's  interest  expense  and  none  of the  subsidiary's
      preferred stock dividends was allocated to the discontinued operations.

<PAGE>


o Year Ended December 31, 1998, Compared With Year Ended December 31, 1997

       Operating  Revenues.  Operating  revenues  decreased $20.7 million (9.1%)
from $228.0 million for 1997 to $207.3 million for 1998 largely as a result of a
$31.8  million  (16.7%)  decrease in operating  revenues from  Regulated  Energy
Products and Services,  namely,  the sale and transportation of natural gas. The
impact of this decrease was partially offset by a $10.1 million (38.4%) increase
in revenues from Nonregulated Energy Products and Services, largely comprised of
a $7.7 million  (29.8%)  increase in gas sales and services by Energy  Services,
$1.2 million attributable to the generation and sale of electric energy by Power
Corp, which began  generating and selling  electricity in July, 1998, and a $1.0
million  (9.0%)  increase  in  operating   revenues  relative  to  the  Pipeline
Construction and Service activities of Keystone.

       Operating  revenues from Regulated Energy Products and Services decreased
$31.8 million  (16.7%) from $190.5  million for 1997 to $158.7 million for 1998,
primarily as a result of a 3.9 billion  cubic feet  (17.0%)  decrease in natural
gas sales by PG Energy to its residential and commercial heating customers. This
reduction in sales was  attributable to warmer than normal  temperatures  during
1998 and colder than normal temperatures during 1997, as well as lower levels in
PG Energy's gas cost rate (see "-Rate  Matters").  The number of heating  degree
days  decreased by 1,202  (18.5%) from 6,498  (103.3% of normal)  during 1997 to
5,296 (84.2% of normal) during 1998.

       The $8.9 million (34.2%)  increase in Energy  Services'  nonregulated gas
sales and services,  from $26.0 million for 1997 to $34.9 million for 1998,  was
primarily  the result of a 3.4 million  cubic feet (45.2%)  increase in sales of
natural gas by Energy Services during the year.

       Operating Expenses. Operating expenses, including depreciation and income
taxes,  decreased  $17.4 million  (8.4%) from $206.5  million for 1997 to $189.1
million  for 1998.  As a  percentage  of  operating  revenues,  total  operating
expenses increased from 90.6% during 1997 to 91.2% during 1998.

       The cost of gas and other energy  decreased  $16.9  million  (12.6%) from
$134.6  million  for 1997 to $117.7  million for 1998  primarily  because of the
aforementioned  decrease in sales by PG Energy to its residential and commercial
heating  customers  and lower  levels in PG  Energy's  gas cost rate (see "-Rate
Matters").  The effects of these decreases were partially offset by the increase
in Energy  Services' gas sales described above and the sales of Power Corp since
it began operating in July, 1998.

       Other than the cost of gas and other energy and income  taxes,  operating
expenses  increased by $3.0 million  (4.7%) from $64.5 million for 1997 to $67.5
million for 1998.  This  increase  was largely  attributable  to a $2.4  million
(5.5%) increase in operation and maintenance  expense,  primarily as a result of
increased payroll and other costs associated with the expansion of the Company's
nonregulated  activities and increased  amortization of computer  software.  The
effects of these increases were partially offset by the reversal of $1.9 million
of previously expensed other postretirement benefit costs relative to the period
January 1, 1993, through January 15, 1997, recovery of which was approved by the
PPUC over a fifteen year period beginning November 1, 1998. Also contributing to
the higher  operating  expenses was a $982,000  (10.4%) increase in depreciation
expense,  primarily  because of additions to utility plant. The effects of these
increases were  partially  offset by a $338,000  (2.9%)  decrease in taxes other
than income taxes  resulting from a lower level of gross receipts tax because of
the decreased sales by PG Energy and Honesdale.

       Income taxes  decreased $3.4 million (46.5%) from $7.4 million in 1997 to
$3.9 million in 1998 due to a decrease in income  before  income taxes (for this
purpose, operating income net of interest charges).

       Operating Income. Operating income decreased by $3.4 million (15.6%) from
$21.6  million for 1997 to $18.2  million for 1998 and decreased as a percentage
of total  operating  revenues for such periods from 9.4% in 1997 to 8.8% in 1998
primarily because of the lower level of operating revenues from Regulated Energy
Products and Services.
<PAGE>

       Operating income  attributable to the Company's three operating segments:
Regulated Energy Products and Services,  principally the purchase,  distribution
and sale of natural gas by the  Regulated  Subsidiaries  ("Energy  Products  and
Services - Regulated");  Nonregulated Energy Products and Services,  principally
the sale of natural gas, propane,  electricity and other energy-related products
and services by Energy Services and Power Corp ("Energy  Products and Services -
Nonregulated");   and  Pipeline  Construction  and  Services,   principally  the
construction,  maintenance and  rehabilitation of utility facilities by Keystone
("Pipeline  Construction  and Services"),  for the years ended December 31, 1998
and 1997, was as follows:

                                           Year Ended December 31,
                                     ----------------------------------
                                                             Increase
                                       1998        1997     (Decrease)

Energy Products and Services -
   Regulated .....................   $ 18,028    $ 21,963    $ (3,935)
   Nonregulated ..................        190        (373)        563
Pipeline Construction and Services        231          95         136
Intercompany eliminations and
  corporate expenses .............       (250)       (130)       (120)
   Total .........................   $ 18,199    $ 21,555    $ (3,356)

       The  decrease in  operating  income from  Regulated  Energy  Products and
Services  is  primarily  related to the  aforementioned  decrease in sales to PG
Energy's residential and commercial heating customers. The increase in operating
income from Nonregulated Energy Products and Services is primarily the result of
the increased sales by Energy Services.

       Other Income, Net. Other income, net increased $440,000 (36.0%) from $1.2
million  for 1997 to $1.7  million  for 1998  largely as a result of the sale of
certain nonutility property during 1998.

       Interest Charges. Interest charges increased by $1.5 million (15.8%) from
$9.6  million for 1997 to $11.2  million  for 1998.  This  increase  was largely
attributable to a higher level of long-term debt outstanding in 1998.

       Income From  Continuing  Operations.  Income from  continuing  operations
decreased  $4.4 million  (33.8%) from $13.1 million for 1997 to $8.7 million for
1998.  This  decrease  was largely the result of the  matters  discussed  above,
principally  the  decrease  in  operating  income and the  increase  in interest
charges.

       Subsidiary's  Preferred  Stock  Dividends.  Dividends on preferred  stock
decreased  $121,000  (9.2%) from $1.3 million for 1997 to $1.2 million for 1998,
primarily  as a  result  of the  repurchase  by PG  Energy  in  1998  of all its
remaining 9% cumulative preferred stock as of December 1, 1998.

       Net Income  (Loss).  The decrease in net income of $4.3  million  (36.5%)
from  $11.8  million  for 1997 to $7.5  million  for 1998 was the  result of the
reduced  operating  income and increased  interest  charges as discussed  above.
These  same  factors,  along with  premiums  of $.10 per share  during  1998 and
discounts of $.08 per share during 1997 on the  repurchase  of preferred  stock,
accounted  for the  decrease in basic and diluted  earnings  per share of common
stock of $.65 from  $1.30  per  share for 1997 to $.65 per share for 1998.  Also
contributing  to the decrease in basic and diluted  earnings per share of common
stock was a 3.5% increase in the weighted  average number of shares  outstanding
as a result  of the  issuance  of  shares  during  1998 in  connection  with the
Company's Dividend Reinvestment and Stock Purchase Plan, Customer Stock Purchase
Plan,  1992 Stock Option Plan and  Employees'  Savings Plan.  (See Liquidity and
Capital Resources - Long-Term Debt and Capital Stock Financings).

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 operating  revenues from Regulated  Energy
Products and Services and a $13.1 million  (100.0%)  increase from  Nonregulated
Energy Products and Services.

       The $29.9 million (18.6%)  increase in operating  revenues from Regulated
Energy  Products and Services 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 129 (1.9%)  heating  degree days from 6,627 (105.3% of normal)
during  1996 to 6,498  (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  $13.1  million   (100.0%)   increase  in  operating   revenues  from
Nonregulated  Energy  Products and Services from $13.2 million for 1996 to $26.3
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 and other energy.

       The cost of gas and other energy  increased  $36.1  million  (36.7%) from
$98.5 million for 1996 to $134.6 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 other energy and income  taxes,  operating
expenses  increased by $2.6 million  (4.1%) from $61.9 million for 1996 to $64.5
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  $335,000 (0.8%) 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).

       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 and  other  energy  to  operating
revenues.

       Operating  income from Regulated  Energy Products and Services  increased
$5.2 million (31.4%),  primarily as a result of aforementioned increase in sales
to PG Energy's  residential and commercial heating  customers.  Operating income
from   Nonregulated   Energy  Products  and  Services   decreased  $1.3  million
principally as a result of the increased  expenses  relative to the expansion of
Energy Services' activities.

       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  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
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.

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.

       By Order  adopted  October 16,  1998,  the PPUC  approved an overall 4.1%
increase  in PG  Energy's  base  rates,  designed  to  produce  $7.4  million of
additional annual revenue, effective October 17, 1998.

       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, 1996, to the gas costs  contained in its
tariff rates:

                                        Change in                Calculated
         Effective                    Rate Per MCF           Increase (Decrease)
                                 -------------------------
           Date                    From           To          In Annual Revenue
----------------------------     ----------    -----------  --------------------

December 1, 1998                   $4.25         $4.53           $   7,100,000
September 1, 1998                   4.18          4.25               1,900,000
June 1, 1998                        3.95          4.18               5,800,000
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

       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.

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  continue  to
expand,  further capital will be required for those activities.  It is currently
anticipated  that such  expenditures  will be funded by a combination of capital
provided by the Company, bank borrowings and other debt financing.

       The cash flow from 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.


<PAGE>


       In order to temporarily finance construction expenditures and to meet its
seasonal borrowing requirements,  PG Energy has made arrangements for a total of
$64.0 million of unsecured  revolving bank credit,  which is deemed adequate for
its immediate needs.  Specifically,  PG Energy currently has seven bank lines of
credit which provide for borrowings at interest rates  generally less than prime
and  which  mature at  various  times  during  1999 and 2000 and which PG Energy
intends to renew or replace as they expire.  As of February 24, 1999,  PG Energy
had $31.0 million of borrowings outstanding under these bank lines of credit.

       In order to finance the  conversion  of its  cogeneration  facility,  the
construction  of  a  methane  recovery   facility  and  initial  phases  of  the
development of an industrial site adjacent to its cogeneration  facility,  Power
Corp has  borrowed  $10.0  million  pursuant  to two bank  lines of credit as of
February 24, 1999. These bank lines of credit provide for borrowings at interest
rates less than prime and which mature during 1999 and 2000.  Power Corp intends
to renew or replace these lines of credit as they expire.

       The Company believes that its Regulated  Subsidiaries and Power Corp 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 other nonregulated  subsidiaries will be
able to raise such funds as are required for their needs.

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 1997,  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  (5.440%  as of  February  24,  1999).  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.

       The Company  also  obtains  external  funds from the sale of common stock
through its Dividend  Reinvestment  and Stock  Purchase Plan, its Customer Stock
Purchase  Plan,  its 1992 Stock  Option Plan and its  Employees'  Savings  Plan.
During 1998 the Company realized $15.3 million from the issuance of common stock
under these plans.

Capital Expenditures and Related Financings

       Capital  expenditures  totaled $44.8 million during 1998, including $28.2
million of expenditures for the construction of utility plant,  $8.7 million for
the conversion of Power Corp's cogeneration facility and the construction of the
related methane  recovery  facility,  and $4.8 million for the development of an
industrial site adjacent to Power Corp's cogeneration facility.  During 1997 and
1996,  respectively,  capital  expenditures  totaled  $34.3  million  and  $32.0
million.  Such  expenditures were financed with  internally-generated  funds and
bank borrowings.

       The  Company  estimates  that its capital  expenditures  will total $22.5
million during 1999,  consisting of $18.4 million  relative to utility plant and
$4.1 million  with respect to the  Company's  nonregulated  activities.  Capital
expenditures are currently  expected to range from $20-25 million in each of the
years 2000 and 2001, of which  approximately $18.0 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

       As of December 31, 1998,  $81.3 million of long-term debt was required to
be repaid within  twelve  months.  The $81.3 million of long-term  debt includes
$20.0 million  outstanding  under the Company's Term Loan Agreement which is due
on May 31,  1999,  $51.3  million  outstanding  under PG Energy's  bank lines of
credit  which is due at  various  times  during  1999,  and $10.0  million of PG
Energy's 9.23% series first mortgage bonds which are due September 1, 1999.

       PG Energy and the Company are each intending to finance their  respective
current  maturities of long-term debt with  internally  generated funds and bank
borrowings pending the periodic issuance of long-term debt and capital stock.

Year 2000 Readiness Disclosure

       The Company has  performed an inventory  and  assessment  of its computer
systems  and  applications,  as well as devices  with  embedded  technology,  to
identify  year 2000 issues and to develop a plan for  addressing  those  issues.
This plan,  which was  initiated in 1996,  is scheduled to be completed by March
31, 1999, for all  applications and devices that could have a material effect on
the  Company's  operations,  and by June 30,  1999,  with  respect  to all other
issues.  The plan involves the  replacement  of certain  systems with  purchased
software,  the renovation of other systems, and the purchase of certain hardware
and other devices. The Company is utilizing both internal resources and contract
personnel to implement the plan, which is currently on schedule.

       It is estimated that the total cost of the Company's plan to address year
2000 issues will be approximately  $2.0-2.5 million. This amount, which had been
largely  expended as of December  31, 1998,  includes  costs for the purchase of
hardware and software, external contractors and internal resources. The internal
resources,  which are estimated to account for approximately $1.0 million of the
total  cost,  involved  the  redeployment  of  existing  personnel  and  did not
represent an incremental cost. In view of the estimated cost and the substantial
progress  that  has been  made to  date,  management  does  not  anticipate  the
expenditures necessary to carry out the plan to address year 2000 issues will be
material relative to the Company's financial position or results of operations.

       As key  elements  of its plan to address  year 2000  issues,  the Company
replaced its financial and human resource systems with purchased  software.  The
installation of these new systems, along with modifications currently being made
to the  Company's  customer  information  system and  upgrading of its operating
system software,  will resolve the primary year 2000 issues.  The  modifications
and  testing  of the  customer  information  system  and  the  upgrading  of the
Company's operating system software are now anticipated to be completed by March
31, 1999.


<PAGE>


       The Company's plan to address year 2000 issues  includes an assessment of
its critical suppliers and vendors, and also its largest customers, to determine
their status relative to year 2000 compliance.  The Company is in the process of
surveying  approximately  200 such suppliers,  vendors and customers and to date
has not identified any situations  that would appear to pose a significant  risk
to the Company.  The Company  intends to continue  monitoring the progress being
made by its  suppliers,  vendors  and  largest  customers  relative to year 2000
compliance and will promptly make any changes in its contingency planning as the
occasion warrants.

       The Company is subject to potential  disruptions  in its  operations as a
result of year 2000  related  failures of its  critical  suppliers  and vendors.
Although there is presently no basis for suggesting  such situation would occur,
management  believes the worst case  scenario in such regard  might  involve the
temporary disruption in the gas service of certain of its customers.  To provide
for this and other  possible  contingencies  related  to year 2000  issues,  the
Company is currently  evaluating  its existing  emergency and disaster  recovery
plans. These plans will be modified,  as deemed appropriate,  based, among other
considerations,  on the Company's  assessment of the year 2000 compliance of its
critical  suppliers and vendors.  These plans,  as so modified,  will attempt to
mitigate, to the extent reasonably possible, the effect of any year 2000 related
failures by a third party. However, the Company is dependent on its suppliers of
natural  gas,  interstate  gas  pipelines  and  utility  and   telecommunication
companies,  over which it has no control, to serve its customers. Any disruption
in service by one of these key suppliers  could,  depending  upon its nature and
extent, have a material adverse effect on the Company's operations.

Market Risk Disclosures

       The Company's  primary market risk exposures  relate to market prices for
natural gas and changes in long-term interest rates.

       While neither the Company nor any of its subsidiaries  utilize derivative
commodity  instruments  for  trading  purposes,  PG  Energy,  Honesdale,  Energy
Services  and Power Corp each  purchase  natural gas for periods of more or less
than one year which, depending upon the terms of such contracts,  may or may not
provide  for an  adjustment  each  month in the cost of gas  purchased  pursuant
thereto,  based on the then current  market prices for natural gas.  Pursuant to
regulations  of the PPUC,  both PG Energy and Honesdale are permitted to recover
prudently  incurred gas costs from their customers.  Accordingly,  the commodity
price  risks  associated  with  those  companies  is  limited.  Energy  Services
generally structures its sales commitments to customers in a manner that permits
it to adjust the prices  charged to the  customers for any change in the cost of
the gas which it  purchases  for those  customers.  In  addition  to the methane
produced at a nearby  landfill,  Power Corp has  commitments for the purchase of
natural gas that are subject to market price risk but those  commitments are not
material relative to the Company's financial position or results of operations.

       The Company  utilizes  long-term  debt as a primary source of its capital
and,  therefore,  is exposed to changes in interest rates. At December 31, 1998,
the  Company  had  fixed-rate  long-term  debt  aggregating  $83.0  million.  In
addition,  the  Company  had $96.3  million of  variable  rate  long-term  debt,
including  long-term  borrowings  under its bank lines of credit,  for which the
interest rates are generally set, at the Company's  option,  for periods of one,
two or three months.  If market  interest  rates were to average 50 basis points
(0.50%) more in 1999 than in 1998, it is estimated  that the Company's  interest
expense  would  increase  by  approximately   $350,000.  This  amount  has  been
calculated by considering the impact of the  hypothetical  interest rates on the
Company's  variable-rate debt and also the fixed-rate debt that matures in 1999.
In the event of a significant  change in interest  rates,  which would primarily
affect PG Energy,  the Company  would take such action,  including the filing of
rate increase requests with the PPUC as it considers necessary,  to mitigate the
impact of the  change.  The  Company has not  historically  employed  derivative
financial instruments,  except for the use, in one instance, of an interest rate
cap.

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,   such   statements   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.  The  Company
cautions  that  assumptions,  projections,  expectations,  intentions or beliefs
about  future  events  may  and  often  do  vary  from  actual  results  and the
differences  between  assumptions,  projections,   expectations,  intentions  or
beliefs  and  actual  results  can be  material.  Accordingly,  there  can be no
assurance that actual results will not differ materially from those expressed or
implied by the forward-looking statements. The following are some of the factors
that could cause actual  achievements and events to differ materially from those
expressed  or  implied  in  such  forward-looking   statements:  the  nature  of
Pennsylvania  legislation  restructuring the natural gas industry; the impact of
year 2000  disruption;  industrial,  commercial  and  residential  growth in the
service  territories of the Company and its subsidiaries;  the weather and other
natural  phenomena;  the timing and  extent of changes in  commodity  prices and
interest rates; changes in environmental and other laws and regulations to which
the Company and its  subsidiaries  are subject or other  external  factors  over
which the Company  has no control;  growth in  opportunities  for the  Company's
nonregulated  activities;  and general  economic  conditions  and  uncertainties
relating  to such  growth  during the  periods  covered  by the  forward-looking
statements.  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 year 1996 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.


<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,  1998 and 1997,  and the  results  of their
operations  and their cash  flows for each of the two years in the period  ended
December 31, 1998, 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 year ended December 31, 1996 were audited by other
independent  accountants  whose  report dated  February  19, 1997,  expressed an
unqualified opinion on those statements.


PricewaterhouseCoopers LLP


Philadelphia, Pennsylvania
February 17, 1999


<PAGE>



                                      REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To Pennsylvania Enterprises, Inc.:

We have  audited  the  consolidated  statements  of  income  and  cash  flows of
Pennsylvania  Enterprises,  Inc. (a Pennsylvania  corporation)  and subsidiaries
(the "Company") for the year ended December 31, 1996. 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 audit.

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

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

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



                                                        ARTHUR ANDERSEN LLP


New York, N.Y.
February 19, 1997


<PAGE>


                 PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                        CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>

                                                                         Year Ended December 31,
                                                               -------------------------------------------
                                                               -------------------------------------------
                                                                  1998           1997*          1996*
                                                              -------------- -------------- --------------
                                                              --------------------------------------------
                                                                         (Thousands of Dollars)
<S>     <C>    <C>    <C>    <C>    <C>    <C>
OPERATING REVENUES:
     Energy Products and Services -
        Regulated ..........................................   $    158,724    $    190,533    $    160,594
        Nonregulated .......................................         36,393          26,303          13,153
     Pipeline construction and services ....................         12,215          11,210          10,733
                                                               ------------    ------------    ------------
           Total operating revenues ........................        207,332         228,046         184,480
                                                               ------------    ------------    ------------

OPERATING EXPENSES:
    Cost of gas and other energy ...........................        117,689         134,622          98,475
    Operation and maintenance ..............................         45,623          43,265          42,930
    Depreciation ...........................................         10,446           9,464           7,833
    Income taxes ...........................................          3,947           7,374           5,800
    Taxes other than income taxes ..........................         11,428          11,766          11,182
                                                               ------------    ------------    ------------
       Total operating expenses ............................        189,133         206,491         166,220
                                                               ------------    ------------    ------------

OPERATING INCOME ...........................................         18,199          21,555          18,260

OTHER INCOME, NET ..........................................          1,661           1,221           1,726
                                                               ------------    ------------    ------------

INCOME BEFORE INTEREST CHARGES .............................         19,860          22,776          19,986
                                                               ------------    ------------    ------------

INTEREST CHARGES:
    Interest on long-term debt .............................         10,681           9,055           9,609
    Other interest .........................................            572             810             760
    Allowance for borrowed funds used during construction ..            (94)           (231)           (177)
                                                               ------------    ------------    ------------
           Total interest charges ..........................         11,159           9,634          10,192
                                                               ------------    ------------    ------------

INCOME FROM CONTINUING OPERATIONS ..........................          8,701          13,142           9,794
LOSS WITH RESPECT TO DISCONTINUED OPERATIONS (Note 2) ......           --              --              (363)
                                                               ------------    ------------    ------------
INCOME BEFORE SUBSIDIARY'S PREFERRED STOCK DIVIDENDS .......          8,701          13,142           9,431
SUBSIDIARY'S PREFERRED STOCK DIVIDENDS .....................          1,191           1,312           1,730
                                                               ------------    ------------    ------------
INCOME BEFORE EXTRAORDINARY LOSS ...........................          7,510          11,830           7,701
EXTRAORDINARY LOSS (NET OF TAX BENEFIT OF $575,000) (Note 6)           --              --            (1,117)
                                                               ------------    ------------    ------------
NET INCOME .................................................   $      7,510    $     11,830    $      6,584
                                                               ============    ============    ============

COMMON STOCK:  (Notes 1 and 4)
     Basic and diluted earnings per share of common stock:
         Continuing operations .............................   $       0.75    $       1.22    $       0.79
         Discontinued operations ...........................           --              --             (0.04)
         Discount (premium) on repurchase/redemption
            of subsidiary's preferred stock ................          (0.10)           0.08           (0.13)
         Extraordinary loss ................................           --              --             (0.11)
                                                               ------------    ------------    ------------
         Earnings per share of common stock ................   $       0.65    $       1.30    $       0.51
                                                               ============    ============    ============

    WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING
         Basic .............................................      9,996,586       9,661,056      10,222,002
                                                               ============    ============    ============
         Diluted ...........................................     10,076,273       9,735,809      10,242,686
                                                               ============    ============    ============
</TABLE>
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.

* Reclassified to conform with 1998 consolidated financial statement
  presentation.

                 PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                                            December 31,
                                                     ------------------------
                                                        1998          1997
                                                     ----------   -----------
                                                      (Thousands of Dollars)
ASSETS

UTILITY PLANT:
    At original cost .............................   $ 376,685    $ 351,106
    Accumulated depreciation .....................     (95,735)     (88,129)
                                                       -------      -------
                                                       280,950      262,977
                                                       -------      -------

OTHER PROPERTY AND INVESTMENTS:
    Nonutility property and equipment ............      31,816       16,335
    Accumulated depreciation .....................      (5,460)      (4,875)
    Other ........................................       2,296        2,171
                                                        ------       ------
                                                        28,652       13,631
                                                        ------       ------

CURRENT ASSETS:
    Cash and cash equivalents ....................         807        2,202
    Restricted cash - common stock subscribed ....         452         --
    Accounts receivable -
       Customers .................................      26,259       28,681
       Others ....................................         811          850
       Reserve for uncollectible accounts ........      (1,465)      (1,340)
    Unbilled revenues ............................      12,247       12,108
    Materials and supplies, at average cost ......       3,053        3,110
    Gas held by suppliers, at average cost .......      22,676       21,933
    Deferred cost of gas and supplier refunds, net       6,058        6,316
    Prepaid income taxes .........................       2,090         --
    Prepaid expenses and other ...................       2,713        1,686
                                                        ------       ------
                                                        75,701       75,546
                                                        ------       ------

DEFERRED CHARGES:
    Regulatory assets -
       Deferred taxes collectible ................      31,097       30,592
       Other .....................................       8,598        4,415
    Unamortized debt expense .....................       1,014        1,361
    Other ........................................         190          308
                                                        ------       ------
                                                        40,899       36,676
                                                        ------       ------

TOTAL ASSETS .....................................   $ 426,202    $ 388,830
                                                     =========    =========
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.
<PAGE>

                 PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                           CONSOLIDATED BALANCE SHEETS

                                                            December 31,
                                                        ---------------------
                                                           1998       1997
                                                        ---------   ---------
                                                        (Thousands of Dollars)
CAPITALIZATION AND LIABILITIES

CAPITALIZATION (see accompanying statements):
    Common shareholders' investment ..................   $132,326   $122,105
    Preferred stock of PG Energy -
      Not subject to mandatory redemption, net .......      4,831     15,864
      Subject to mandatory redemption ................        240        640
    Long-term debt ...................................     98,000    127,000
                                                          -------    -------
                                                          235,397    265,609
                                                          -------    -------
CURRENT LIABILITIES:
    Current portion of long-term debt ................     81,348     24,776
    Preferred stock subject to repurchase or mandatory
      redemption .....................................       --           80
    Notes payable ....................................      6,200      2,170
    Accounts payable .................................     22,370     18,448
    Accrued general business and realty taxes ........      1,764      2,953
    Accrued income taxes .............................       --        4,618
    Accrued interest .................................      1,811      1,783
    Accrued natural gas transition costs .............       --        1,087
    Other ............................................      1,924      1,722
                                                          -------     ------
                                                          115,417     57,637
                                                          -------     ------
DEFERRED CREDITS:
    Deferred income taxes ............................     60,923     52,511
    Unamortized investment tax credits ...............      4,424      4,596
    Operating reserves ...............................      2,836      2,825
    Other ............................................      7,205      5,652
                                                           ------     ------
                                                           75,388     65,584
                                                           ======     ======




COMMITMENTS AND CONTINGENCIES (Notes 10 and 11)




TOTAL CAPITALIZATION AND LIABILITIES .................   $426,202   $388,830
                                                         ========   ========
The  accompanying  notes  are an  integral  part of the  consolidated  financial
statements.


<PAGE>


            PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                        Year Ended December 31,
                                                                  ------------------------------------
                                                                      1998        1997        1996
                                                                  ----------  ----------   -----------
                                                                          (Thousands of Dollars)
<S>     <C>    <C>    <C>    <C>    <C>    <C>
CASH FLOW FROM OPERATING ACTIVITIES:
     Income from continuing operations, net of
        subsidiary's preferred stock dividends .................   $   7,510    $  11,830    $   8,064
     Gain on sales of nonutility property ......................      (2,784)        (701)        --
     Effects of noncash charges to income -
        Depreciation ...........................................      10,536        9,519        7,896
        Deferred income taxes, net .............................       3,252        2,210        2,104
        Provisions for self insurance ..........................       1,184          898        1,042
        Extraordinary loss, net of tax benefit .................        --           --         (1,117)
        Other, net .............................................         496        2,039        2,335
    Changes in working capital, exclusive of cash
       and current portion of long-term debt -
         Receivables and accrued utility revenues ..............       2,447       (4,847)      (3,350)
         Gas held by suppliers .................................        (743)      (1,668)      (5,125)
         Accounts payable ......................................       2,476       (2,532)       2,057
         Deferred cost of gas and supplier refunds, net ........        (829)      14,397      (18,493)
         Other current assets and liabilities, net .............      (8,637)       1,997        2,235
    Other operating items, net .................................       1,037         (986)      (5,458)
                                                                   ---------    ---------    ---------
           Net cash provided by (used for) continuing operations      15,945       32,156       (7,810)
    Net cash used for discontinued operations ..................        --        (13,655)     (45,173)
                                                                   ---------    ---------    ---------
            Net cash provided by (used for) operating activities      15,945       18,501      (52,983)
                                                                   ---------    ---------    ---------

CASH FLOW FROM INVESTING ACTIVITIES:
     Additions to utility plant ................................     (29,003)     (30,971)     (29,312)
     Additions to nonutility property ..........................     (16,041)      (3,560)      (1,991)
     Proceeds from the sale of discontinued operations .........        --           --        261,752
     Proceeds from the sales of nonutility property ............       3,460          746         --
     Acquisition of regulated business .........................        --         (2,019)        --
     Other, net ................................................           3         (101)         188
                                                                   ---------    ---------    ---------
           Net cash provided by (used for) investing activities      (41,581)    (35,905)      230,637
                                                                   ---------    ---------    ---------

CASH FLOW FROM FINANCING ACTIVITIES:
     Issuance of common stock ..................................      15,301        2,491        1,291
     Common stock subscribed ...................................         452         --           --
     Repurchase of common stock ................................        --           --        (40,452)
     Repurchase/redemption of preferred stock of PG Energy .....     (12,124)      (3,121)     (15,670)
     Dividends on common stock .................................     (12,020)     (11,501)     (11,174)
     Issuance of long-term debt ................................        --         26,000         --
     Repayment of long-term debt ...............................        --           --        (81,906)
     Net increase (decrease) in bank borrowings ................      33,048        4,053      (27,903)
     Other, net ................................................        (416)         558       (1,343)
                                                                   ---------    ---------    ---------
           Net cash provided by (used for) financing activities       24,241       18,480     (177,157)
                                                                   ---------    ---------    ---------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...........      (1,395)       1,076          497
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................       2,202        1,126          629
                                                                   ---------    ---------    ---------
CASH AND CASH EQUIVALENTS AT END OF YEAR .......................   $     807    $   2,202    $   1,126
                                                                   =========    =========    =========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
     Cash paid during the year for:
          Interest (net of amount capitalized) .................   $  10,588    $   8,337    $  10,423
                                                                   =========    =========    =========
          Income taxes .........................................   $   2,713    $  15,728    $  46,605
                                                                   =========    =========    =========
</TABLE>


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



<PAGE>



                 PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                    CONSOLIDATED STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>

                                                                        December 31,
                                                               -----------------------------
                                                                  1998               1997
                                                               ------------        ---------
                                                                   (Thousands of Dollars)
<S>     <C>    <C>    <C>    <C>    <C>    <C>
COMMON SHAREHOLDERS' INVESTMENT:
    Common stock, no par value
       (stated value $5 per share)
       Authorized - 30,000,000 shares
       Outstanding - 10,407,933 shares and
          9,744,272 shares, respectively ....................   $  52,040         $  48,721
    Additional paid-in capital ..............................      35,523            23,089
    Retained earnings .......................................      44,763            50,295
                                                                  -------          --------
       Total common shareholders' investment ................     132,326  56.2%    122,105      46.0%
                                                                  -------          --------
PREFERRED  STOCK of PG  Energy,  par value $100 per
    share  Authorized  - 997,500 shares:
       Not subject to mandatory redemption, net -
          4.10% cumulative preferred,
             48,310 and 49,110 shares outstanding,
             respectively ...................................       4,831             4,911
          9% cumulative preferred, 115,641 shares outstanding
             at December 31, 1997, net of issuance costs ....        --              10,953
                                                                   ------            ------
       Total preferred stock not subject to
           mandatory redemption, net ........................       4,831  2.1%      15,864      6.0%
                                                                   ------            ------
       Subject to mandatory redemption -
          5.75% cumulative preferred, 2,396 and
             7,200 shares outstanding, respectively .........         240               720
          Less current redemption requirements ..............        --                 (80)
                                                                 --------            ------
       Total preferred stock subject to mandatory redemption          240  0.1%         640      0.2%
                                                                  -------            ------
LONG-TERM DEBT:
    First mortgage bonds ....................................      55,000            55,000
    Notes ...................................................     124,348            96,776
    Less current maturities and sinking fund requirements ...     (81,348)          (24,776)
       Total long-term debt .................................      98,000  41.6%    127,000     47.8%
                                                                --------- ------   --------    ------
TOTAL CAPITALIZATION ........................................   $ 235,397 100.0%   $265,609    100.0%
                                                                ========= ======   ========    ======

</TABLE>


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


<PAGE>



                 PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

           CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDERS' INVESTMENT

              FOR THE YEARS ENDED DECEMBER 31, 1996, 1997 AND 1998

<TABLE>
<CAPTION>
                                                Common      Additional
                                  Common         Stock       Paid-in     Retained
                                   Stock       Subscribed    Capital     Earnings      Total
                                  ---------    ---------   ---------    ---------    ----------
                                                 (Thousands of Dollars)

<S>                 <C> <C>       <C>          <C>         <C>          <C>          <C>      
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

Net income for 1998 ...........       7,510        7,510
Issuance of common stock ......       3,319          452      11,982         --         15,753
Premium on repurchase of
   preferred stock of PG Energy        --           --          --         (1,022)      (1,022)
Cash dividends on common stock
   ($1.20 per share) ..........        --           --          --        (12,020)     (12,020)
                                   -------  -   --------    --------     --------    ---------
Balance at December 31, 1998 ..   $  52,040     $    452    $ 35,071     $ 44,763    $ 132,326
                                  =========     ========    ========     ========    =========
</TABLE>

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


<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.  In 1998,  PG Energy  and
Honesdale   collectively  accounted  for  approximately  77%  of  the  Company's
operating revenues.

       The Company,  through its other  subsidiaries,  PG Energy  Services  Inc.
("Energy  Services"),  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.  These activities include the sale of natural
gas, propane,  electricity and other energy-related  products and services;  the
construction,  maintenance and rehabilitation of utility  facilities,  primarily
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,  principally in northeastern and central  Pennsylvania.  Power
Corp, an exempt wholesale  electricity  generator,  began generating and selling
electricity in July,  1998, upon completion of modifications to its cogeneration
facility that 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
information  of  the  Regulated  Subsidiaries  that  is  incorporated  in  these
consolidated financial statements has been prepared in accordance with generally
accepted accounting principles, including the provisions of Financial Accounting
Standards  Board ("FASB")  Statement 71,  "Accounting for the Effects of Certain
Types  of  Regulation,"  which  give  recognition  to the  rate  and  accounting
practices of regulatory agencies such as the PPUC.

       Use of Accounting  Estimates.  The preparation of financial statements in
conformity with generally accepted accounting  principles requires management to
make estimates and  assumptions  that affect the reported  amounts of assets and
liabilities  and disclosure of contingent  assets and liabilities at the date of
the  financial  statements  and the  reported  amounts of revenues  and expenses
during the reporting period.  These estimates involve judgments with respect to,
among other things, various future economic factors


<PAGE>


and regulatory matters (see  "Management's  Discussion and Analysis of Financial
Condition 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 both 1998 and 1997 and 9% in 1996.

       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 2.65% in 1998, 2.81% in 1997 and 2.60% in 1996.

       When depreciable  utility 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  utility
property,  other  than in the case of  significant  involuntary  conversions  or
extraordinary retirements.

       Nonutility  Property and Equipment and Depreciation.  Nonutility property
and  equipment is recorded at cost,  including  applicable  construction  period
interest.  When nonutility property and equipment is sold or retired,  the asset
and applicable  accumulated  depreciation are eliminated from the accounts and a
gain or loss is reflected in other income, net.

       The  units-of-production  method is used to depreciate  both Power Corp's
cogeneration  facility  and its methane  recovery  facility.  The  straight-line
method is used for all other nonutility property and equipment.

       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 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 $15.3 million, $17.0 million and $29.6 million as of December 31, 1998,
1997 and 1996, respectively. Energy Services records its gas costs as incurred.


<PAGE>


       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
recorded  because of the  regulatory  rate  practices of the PPUC, the following
deferred  charges are included as "Other"  regulatory  assets as of December 31,
1998 and 1997:

                                                    1998               1997
                                                ------------       -----------
                                                      (Thousands of Dollars)

Other postretirement benefits                   $       2,887       $     174
Computer software costs                                 2,007           1,945
Early retirement plan charges                           1,961             618
Rate case expense                                         554             356
Low income usage reduction program                        470             432
Extraordinary charges due to flooding                     262             348
Other                                                     457             542
                                                -------------       ---------
    Total                                       $       8,598       $   4,415
                                                =============       =========
       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, 1998 and 1997, are shown below:

                                                 1998                 1997
                                             ---------------     ---------------
                                                   (Thousands of Dollars)

Utility plant basis differences              $      58,922       $      55,497
Pension benefits                                       766                 341
Deferred charges                                       629                 602
Postretirement benefits                             (1,230)              (700)
Operating reserves                                    (969)            (1,181)
FERC Order 636 transition costs                          -               (394)
Other                                                2,805             (1,654)
                                             -------------       ------------
    Net deferred income tax liability        $      60,923       $     52,511
                                             =============       ============

<PAGE>


       The provision for income taxes relative to continuing operations consists
of the following components:

                                                 1998       1997        1996
                                               --------  ----------  ----------
                                                    (Thousands of Dollars)

Included in operating expenses:
   Currently payable -
      Federal ..............................   $   359    $ 3,894    $ 2,513
      State ................................       139      1,359      1,519
                                               -------    -------    -------
        Total currently payable ............       498      5,253      4,032
                                               -------    -------    -------
   Deferred, net -
      Federal ..............................     3,011      2,186      2,059
      State ................................       610        107       (119)
                                               -------    -------     ------ 
        Total deferred, net ................     3,621      2,293      1,940
                                               -------    -------     ------  
   Amortization of investment tax credits ..      (172)      (172)      (172)
                                               -------    -------     ------
        Total included in operating expenses     3,947      7,374      5,800
                                               -------    -------     ------
Included in other income, net:
   Currently payable -
      Federal ..............................       634         34        806
      State ................................       227         12        (19)
                                               -------     ------     ------
        Total currently payable ............       861         46        787
                                               -------     ------     ------
   Deferred, net -
      Federal ..............................      (280)        (6)      --
      State ................................       (89)      --         --
                                               -------     ------     ------
        Total deferred, net ................      (369)        (6)      --
                                               -------     ------     ------
        Total included in other income, net        492         40        787
                                               -------     ------     ------
        Total provision for income taxes ...   $ 4,439    $ 7,414    $ 6,587
                                               =======    =======     ======
       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:
<TABLE>
<CAPTION>

                                                     1998        1997       1996
                                                       (Thousands of Dollars)

<S>                                                <C>         <C>         <C>     
Income before income taxes .....................   $ 13,140    $ 20,556    $ 16,381
                                                   ========    ========    ========
Tax expense at statutory federal income tax rate   $  4,599    $  7,195    $  5,733
Increases (reductions) in taxes resulting from -
   State income taxes, net of federal income
     tax benefit ...............................        577         961         898
   Amortization of investment tax credits ......       (172)       (172)       (172)
   Other, net ..................................       (565)       (570)        128
                                                  ---------    --------    --------
Total provision for income taxes ...............   $  4,439    $  7,414    $  6,587
                                                  =========    ========    ========
</TABLE>


<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, 1998, 1997 and 1996, respectively, follows:
<TABLE>
<CAPTION>

                                                    Income        Shares       Earnings
                             1998                 (Numerator)  (Denominator)   Per Share
------------------------------------------------- ----------   ------------- ----------------
                                                        (In Thousands)

<S>     <C>    <C>    <C>    <C>    <C>    <C>
Income from continuing operations
   before subsidiary's preferred stock dividends  $    8,701
Less subsidiary's preferred stock dividends            1,191
Basic EPS on income from continuing operations    ----------
   available to common shareholders                    7,510          9,997     $        .75
Effect of dilutive stock options                           -             79               -
                                                  ----------     ----------     ------------
Diluted EPS on income from continuing operations
   available to common shareholders after assumed
   issuance of stock options                      $    7,510         10,076     $        .75
                                                  ==========     ==========     ============
                                                   Income        Shares        Earnings
                             1997                (Numerator)  (Denominator)    Per Share
------------------------------------------------- ---------   -------------- --------------
                                                         (In Thousands)

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
                                                  =========      ==========     ==========
                                                      Income        Shares     Earnings
                             1996                  (Numerator)   (Denominator) Per Share
-------------------------------------------------  ------------- ------------ -----------
                                                         (In Thousands)

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
                                                   ===========      =========  ==========
     
</TABLE>

<PAGE>


       Reporting  Comprehensive  Income.  Effective January 1, 1998, the Company
adopted the provisions of FASB Statement 130 "Reporting  Comprehensive  Income."
However,  because there were no items comprising other comprehensive income, the
adoption of FASB 130 has no effect on the Company's financial statements for the
periods ended December 31, 1998.

       Accounting for Derivative  Instruments  and Hedging  Activities.  In June
1998,  FASB Statement 133,  "Accounting  for Derivative  Instruments and Hedging
Activities" was issued.  The provisions of this  statement,  which are effective
for fiscal  quarters  beginning  after June 15, 1999,  establish  accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments embedded in other contracts,  and for hedging activities.  While the
Company generally has not used derivative  instruments,  it expects to adopt, to
the extent necessary,  the provisions of FASB Statement 133 in the third quarter
of 1999. The impact of such adoption on the Company's future financial condition
and results of  operations  will depend upon a number of factors,  including the
extent to which the Company may use derivative instruments,  and the designation
and effectiveness of such derivative hedging market risk.

(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." 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.

(3)      RATE MATTERS

       Rate Increases.  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.

       By Order  adopted  October 16,  1998,  the PPUC  approved an overall 4.1%
increase  in PG  Energy's  base  rates,  designed  to  produce  $7.4  million of
additional annual revenue, effective October 17, 1998.

       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.
<PAGE>

       In accordance with these  procedures PG Energy has been permitted to make
the following  changes since January 1, 1996, to the gas costs  contained in its
tariff rates:

                                        Change in                Calculated
         Effective                    Rate Per MCF           Increase (Decrease)
                                 -------------------------
           Date                    From           To          In Annual Revenue
----------------------------     ----------    -----------    -----------------

December 1, 1998                   $4.25         $4.53           $   7,100,000
September 1, 1998                   4.18          4.25               1,900,000
June 1, 1998                        3.95          4.18               5,800,000
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

       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.

(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 year 1996 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 - Restricted Cash - Common Stock Subscribed.
The Company  reinstated its Customer  Stock Purchase Plan (the "Customer  Plan")
effective February 4, 1998. The Customer Plan provides the residential customers
of all the  Company's  subsidiaries  with a method  of  purchasing  newly-issued
shares of the Company's  common stock at a 5% discount from the market price. On
January 1, 1999,  the Company  issued  19,177  shares of its common stock for an
aggregate  consideration of $446,000 with respect to payments  received pursuant
to the Customer  Plan during the  subscription  period ended  December 31, 1998.
Such payments are reflected under the captions  "Restricted  cash - common stock
subscribed"  and  "Common   shareholders'   investment"  in  these  consolidated
financial  statements  as of December 31, 1998.  Under the terms of the Customer
Plan,  81,134 shares of the Company's common stock were issued during 1998 for a
total consideration of $2.0 million.

       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, 544,496 shares ($12.5 million), 68,678 shares ($1.7 million) and 17,664
shares  ($340,000)  of common  stock were  issued  during  1998,  1997 and 1996,
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 30,711 shares ($769,000) in 1998, 30,436 shares ($750,000) in 1997
and 10,198 shares ($195,000) in 1996.

       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.
<PAGE>

       In  October,  1995,  FASB  Statement  123,  "Accounting  For  Stock-Based
Compensation," was issued. The Company adopted the disclosure provisions of FASB
Statement  123 in 1996,  but  opted to  remain  under  the  expense  recognition
provisions of Accounting  Principles Board (APB) Opinion No. 25, "Accounting for
Stock  Issued to  Employees,"  in  accounting  for stock  option and stock award
plans.  No options were granted under the 1992 Stock Option Plan in 1998 or 1997
and for the year ended December 31, 1996, 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:

                                                   1996
                                             -------------------
Net income:
   As reported                                $6.6 million
   Pro forma                                  $5.9 million

Earnings per common share:
   As reported                                $    .51
   Pro forma                                  $    .44



<PAGE>


       A summary of the stock option  activity during each of the three years in
the period ended  December 31, 1998,  pursuant to the terms of the Plan,  all of
which were Nonqualified Stock Options, is set forth below:

                                               Number of             Weighted
                                            shares subject      average exercise
                                               to option              Price
                                            --------------       ---------------

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
Cancelled during 1998                              (30,000)                20.75
Exercised during 1998                               (7,000)                15.00
                                             -------------
Outstanding at December 31, 1998                   341,600                 19.85
                                             =============
Options exercisable at December 31, 1998           251,600      $          19.53
Options available for future grant at
    December 31, 1998                               30,800


       There  were no  options  granted  under  the  Plan in 1998 or  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.

       The following table  summarizes  information  regarding the stock options
outstanding at December 31, 1998, pursuant to the terms of the Plan:
<TABLE>
<CAPTION>

                     Options Outstanding                              Options Exercisable
---------------------------------------------------------------  --------------------------------
           At                                   Remaining            At
      December 31,           Exercise          contractual       December 31,         Exercise
          1998                 price              life              1998              price
------------------------- ---------------- --------------------   -------------- -----------------

<S>            <C>        <C>                   <C>                     <C>      <C>          
               24,600     $        15.00        4.27 Years              24,600   $       15.00
                7,000              15.00        4.16 Years               7,000           15.00
               50,000              19.50        0.93 Years              50,000           19.50
               50,000              19.50        7.29 Years              50,000           19.50
              150,000              20.75        7.67 Years              60,000           20.75
               60,000              20.75        2.93 Years              60,000           20.75
             --------                                                 --------
              341,600                                                  251,600
             ========                                                 ========
</TABLE>

       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 1998,  nonqualified Stock Options for
the  purchase  of 195,000  shares of stock were issued to certain  officers  and
directors.  130,000 options were granted subject to the achievement of specified
financial and  operational  goals for the Company  during 1998 and 1999.  60,000
options were granted  subject to the  achievement  of  specified  financial  and
operations  goals for the  Company  during  2001 and 2002.  5,000  options  were
cancelled during 1998. In addition, since certain of these goals were not met in
1998,  65,000 of 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.

       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.  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  1998,  1997
and 1996, PG Energy  repurchased 4,804, 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 $444,000 in 1998, $99,000 in 1997 and $838,000 in
1996.

       As of December 31, 1998,  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 2000  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 ($244,392 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. On December 1, 1998, PG Energy redeemed the remaining  115,641
outstanding  shares of its 9% cumulative  preferred stock at a price of $104 per
share,  which  included  a  voluntary  redemption  premium  of $4.00  per  share
($463,000 in the aggregate), plus accrued dividends.

       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.  During the year ended December 31, 1998,
PG Energy repurchased 800 shares of its 4.10% cumulative  preferred stock for an
aggregate  consideration  of  $53,000,   pursuant  to  unsolicited  offers  from
shareholders.  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 $5,096,705.
<PAGE>

       Dividend  Information.  The dividends on the preferred stock of PG Energy
in each of the three  years in the  period  ended  December  31,  1998,  were as
follows:

    Series                 1998                    1997               1996
---------------        ---------------        ---------------      -------------
                                          (Thousands of Dollars)

     4.10%             $        200           $          228       $        348
     5.75%                       36                       44                 72
     9.00%                      955                    1,040              1,310
                       ------------           --------------       ------------
      Total            $      1,191           $        1,312       $      1,730
                       ============           ==============       ============
       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.


<PAGE>


(6)      LONG-TERM DEBT

       Long-term debt consisted of the following components at December 31, 1998
and 1997:

<TABLE>
<CAPTION>
                                                             1998           1997
                                                           ----------   -----------
                                                             (Thousands of Dollars)
<S>     <C>    <C>    <C>    <C>    <C>    <C>
Indebtedness of the Company:
   Term loan, due 1999 .................................   $  20,000    $  20,000
   Less current maturities .............................     (20,000)        --
                                                           ---------    ---------
      Total long-term debt of the Company ..............        --         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       25,000
      Term loan, due 2002 ..............................      25,000       25,000
      Bank borrowings, at weighted average interest
         rates of 5.99% and 6.11%, respectively (Note 8)      51,348       25,776
                                                            --------      -------
                                                             101,348       75,776
                                                            --------      -------

   Less current maturities and sinking fund requirements     (61,348)     (24,776)
                                                            --------      -------
      Total long-term debt of PG Energy ................      95,000      106,000
                                                            --------      -------
Indebtedness of Power Corp:
   Bank borrowings, at weighted average interest
      rates of 7.12% and 7.50%, respectively (Note 8) ..       3,000        1,000
   Less current maturities .............................        --           --
                                                            --------      --------
      Total long-term debt of Power Corp ...............       3,000        1,000
                                                            --------      --------
      Total consolidated long-term debt ................    $ 98,000      $127,000
                                                            ========      ======== 
</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.

       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).
<PAGE>

       Maturities  and Sinking Fund  Requirements.  As of December 31, 1998, the
aggregate annual  maturities and sinking fund requirements of long-term debt for
each of the next five years ending December 31, were:

Year                             Amount

1999                    $         81,348,000 (a)
2000                    $          3,000,000 (b)
2001                    $                  -
2002                    $         55,000,000 (c)
2003                    $                  -

(a)         Represents  the  $20.0  million  of  borrowings  outstanding  as  of
            December 31, 1998,  under the Company's  Term Loan Agreement due May
            31,  1999,  PG Energy's  9.23% Series  First  Mortgage  Bonds in the
            principal  amount of $10.0 million due September 1, 1999,  and $51.3
            million of PG Energy's bank  borrowings  outstanding  as of December
            31, 1998.
(b)         Represents  the  $3.0  million  of  Power  Corp's  bank  borrowings
             outstanding as of December 31, 1998.

(c)         Represents  the  $25.0  million  of  borrowings  outstanding  as  of
            December 31, 1998,  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, 1998,  $5,416,000 of the consolidated retained
earnings of the Company were restricted against the payment of cash dividends on
common stock under the most restrictive of these covenants.

(8)      BANK NOTES PAYABLE

       The Company,  through certain of its  subsidiaries,  primarily PG Energy,
currently  has  arrangements  for nine  revolving  bank lines of credit  with an
aggregate  borrowing  capacity of $74.0 million which provide for  borrowings at
interest  rates  generally  less than prime and which  mature at  various  times
during 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 no  borrowings  due on  demand  or  within  one year  from  issuance
outstanding as of December 31, 1998.

       Information relating to the Company's bank lines of credit and borrowings
under those lines of credit is set forth below:
                                                        As of December 31,
                                                -------------------------------
                                                   1998       1997      1996
                                                       (Thousands of Dollars)
Borrowings under lines of credit
    Short-term ...............................   $ 6,200    $ 2,170    $10,000
    Long-term ................................    54,348     26,776     38,721
                                                 -------    -------    -------
                                                 $60,548    $28,946    $48,721
                                                 =======    =======    =======

Unused lines of credit
    Short-term ...............................   $ 1,800    $ 5,830    $  --
    Long-term ................................    11,652     35,724     16,779
                                                 -------    -------    -------
                                                 $13,452    $41,554    $16,779
                                                 =======    =======    =======

Total lines of credit
    Prime rate ...............................   $  --      $ 1,000    $  --
    Less than prime rate .....................    74,000     69,500     65,500
                                                 -------    -------    -------
                                                 $74,000    $70,500    $65,500
                                                 =======    =======    =======
Short-term bank borrowings
    Maximum amount outstanding ...............   $ 6,300    $10,000    $10,000
    Daily average amount outstanding .........   $ 2,510    $ 3,740    $ 1,392
    Weighted daily average interest rate .....     6.275%     6.343%     6.241%
    Weighted average interest rate at year-end     5.804%     6.536%     6.206%
    Range of interest rates ..................    5.577-     5.800-     5.875-
                                                   8.500%     8.500%     6.438%
<PAGE>

(9)      POSTEMPLOYMENT BENEFITS

       The Company has 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.

       In addition to pension benefits, the Company provides certain health care
and life  insurance  benefits  ("other  postretirement  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.

       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 addition, the PPUC Order adopted December 19, 1996,
specified that any excess or deficiency in other  postretirement  benefits costs
over the amount of such costs  included in rates be deferred  and  included in a
future rate filing. As of December 31, 1998, all other  postretirement  benefits
costs  relative  to 1998  and  prior  years,  including  $1.9  million  of other
postretirement  benefits  costs  incurred  during  the  period  January 1, 1993,
through January 15, 1997, are being recovered by PG Energy in its base gas rates
which the PPUC approved effective October 17, 1998.

       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  pension benefit  obligations and
the obligation to provide retiree health and life insurance benefits relating to
employees of PG Energy who accepted employment with  Pennsylvania-American  (the
"Transferred  Employees"),  as well as the obligation to provide  retiree health
care and life insurance  benefits to 45% of PG Energy's retired  employees as of
that  date.  In this  regard,  pension  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. In addition,  other postretirement benefits
plan  assets  in an  amount  proportional  to the  actuarial  present  value  of
accumulated  plan benefits  relative to the Transferred  Employees and 45% of PG
Energy's  retired  employees as of February 16, 1996, were transferred to trusts
established by Pennsylvania-American in 1997.

       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
would be at least 59  years  of age or  older as of March  31,  1998,  and had a
minimum  of five  years  of  service  as of  February  28,  1998.  A total of 27
employees elected to accept this offer and retire as of March 1, 1998, resulting
in the  recording,  as of March 1, 1998, of an additional  pension  liability of
$1.4  million and an  additional  other  postretirement  benefits  liability  of
$563,000.  These liabilities,  which reflect increased costs associated with the
1998 ERP,  were offset by assets  representing  the future rate recovery of such
liabilities  which was granted by the PPUC in  connection  with PG Energy's rate
increase that became effective October 17, 1998.

       The  assumptions  used in  determining  pension and other  postretirement
benefit obligations were:

                                           1998             1997           1996

Discount rate                              7.00%           7.00%          7.75%
Expected long-term rate of return
    on plan assets                         9.00%           9.00%          9.00%
Projected increase in future
    compensation levels                    5.00%           5.00%          5.00%



<PAGE>


       The  following  items  were  the  components  of net  pension  and  other
postretirement  benefits  costs,  relative to continuing  operations,  including
amounts capitalized:
<TABLE>
<CAPTION>

                                                                               Other
                                              Pension Costs              Postretirement Benefits
                                       1998       1997      1996        1998      1997       1996
                                                        (Thousands of Dollars)

<S>     <C>    <C>    <C>    <C>    <C>    <C>
Present value of benefits earned
   during the year ...............   $   845    $   622    $   799    $   261    $   282    $   253
Interest cost on projected benefit
   obligations ...................     2,965      2,697      2,731        593        673        506
Expected return on plan assets ...    (3,969)    (3,444)    (3,066)       (43)       (13)      --
Amortization of:
   Transition obligation (asset) .      (215)      (215)      (215)       314        314        314
   Prior service cost ............       268        133        136        450       --         --
   Actuarial (gain) loss .........      --          (40)      --         (162)      --         --
                                     -------    -------    -------    -------    -------    -------
       Net benefit cost ..........   $  (106)   $  (247)   $   385    $ 1,413    $ 1,256    $ 1,073
                                     =======    =======    =======    =======    =======    =======
</TABLE>

       The  following  table sets  forth the funded  status and change in funded
status for the pension and other postretirement benefits plans:

<TABLE>
<CAPTION>
                                                                                         Other
                                                                                     Postretirement
                                                             Pension Costs               Benefits
                                                         -------------------------------------------
                                                           1998        1997        1998        1997
                                                         -------------------------------------------
                                                                    (Thousands of Dollars)
<S>     <C>    <C>    <C>    <C>    <C>    <C>
Change in plan assets:
    Fair value of plan assets at beginning of year ..    $45,106      $39,00    $    580    $    169
    Actual return on plan assets ....................      4,123       7,321          (2)        (12)
    Employer contributions ..........................        977       1,080       1,167       1,092
    Participant contributions .......................       --          --            66          30
    Benefits paid ...................................     (2,641)     (2,295)       (663)       (699)
                                                         -------     -------    --------     -------
    Fair value of plan assets at end of year ........     47,565      45,106       1,148         580
                                                         -------     -------    --------     -------
Change in projected benefit obligation:
    Projected benefit obligation at beginning of year     42,384      35,567       9,712       6,944
    Service cost ....................................        845         622         261         283
    Interest cost ...................................      2,965       2,697         593         673
    Participant contributions .......................       --          --            66          30
    Plan amendments .................................      1,111       2,013       2,981        --
    Actuarial (gain) loss ...........................        293       3,780      (3,622)      2,481
    Benefits paid ...................................     (2,641)     (2,295)       (663)       (699)
                                                         -------     -------    --------      ------
    Projected benefit obligation at end of year .....     44,957      42,384       9,328       9,712
                                                         -------     -------    --------      ------
Funded status .......................................      2,608       2,722      (8,180)     (9,132)
Unrecognized net transition obligation (asset) ......     (1,508)     (1,724)      4,394       4,708
Unrecognized prior service cost .....................      4,981       4,138       2,532        --
Unrecognized net actuarial (gain) loss ..............     (4,177)     (4,315)     (2,025)      1,391
                                                         -------     -------    --------      ------
Prepaid (accrued) benefit cost at end of year .......    $ 1,904     $   821    $ (3,279)    $(3,033)
                                                         =======     =======    ========     =======
</TABLE>


<PAGE>


      It was also  assumed  that the per  capita  cost of  covered  health  care
benefits  would  increase at an annual rate of 7 1/2% in 1999 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 has a significant effect
on the amounts reported for health care plans. To illustrate,  assuming that the
health care cost trend rate changed by one percentage point each year would have
the following impact:

                                                One Percentage Point
                                              Increase           Decrease
                                                 (Thousands of Dollars)
Effect on total service and
   interest cost components                   $      36         $       34
Effect on other postretirement
   benefits obligation                              371                359


(10)     CAPITAL EXPENDITURES

       The Company  estimates the cost of its 1999 capital  expenditure  program
will be $22.5 million,  consisting of $18.4 million relative to the construction
programs of the  Regulated  Subsidiaries  and $4.1  million  with respect to the
Company's nonregulated activities. 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
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.  PG Energy  paid  $175,000 to the party
performing  the  remediation  in settlement of a claim for PG Energy's  share of
such remediation  costs.  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.


<PAGE>


(12)     DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

       The carrying  amounts and estimated fair values of financial  instruments
at December 31, 1998 and 1997, were as follows:
<TABLE>
<CAPTION>

                                                                    1998                         1997
                                                           Carrying     Estimated     Carrying      Estimated
                                                            Amount      Fair Value     Amount      Fair Value
                                                                 (Thousands of Dollars)
<S>     <C>    <C>    <C>    <C>    <C>    <C>
Long-term debt (including current portion):
      Company                                            $    20,000  $    20,000  $    20,000   $    20,000
      Regulated Subsidiaries                                 156,348      166,313      130,776       136,914
      Power Corp                                               3,000        3,000        1,000         1,000
Preferred stock of PG Energy subject to
    mandatory redemption (including
    current portion)                                             240          244          720           734
</TABLE>

       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)     OPERATING SEGMENTS

       During the fourth  quarter of 1998,  the Company  adopted  the  reporting
provisions of FASB Statement 131,  "Disclosures  about Segments of an Enterprise
and Related Information." The Company has three principal operating segments:

o        Regulated  Energy  Products  and  Services,   primarily  the  purchase,
         distribution   and  sale  of  natural  gas  in  thirteen   counties  in
         northeastern   Pennsylvania  by  the  Regulated  Subsidiaries  ("Energy
         Products and Services - Regulated")

<PAGE>


o        Nonregulated  Energy  Products and Services,  primarily the sale of
         natural gas,  propane,   electricity  and  other  energy-related
         products  and services by Energy  Services  generally in a twenty-six
         county area in northeastern  and central  Pennsylvania,  and by Power
         Corp.  ("Energy Products and Services - Nonregulated")

o        Pipeline   Construction  and  Services,   primarily  the  construction,
         maintenance and  rehabilitation  of utility  facilities  throughout the
         Eastern  United  States  by  Keystone   ("Pipeline   Construction   and
         Services").

       The accounting  policies of the segments are the same as those  described
in Note 1 to these consolidated financial statements.


<PAGE>





                                            1998          1997          1996
                                                 (Thousands of Dollars)

Operating revenues:
    Energy products and services -
       Regulated ......................   $ 158,951    $ 190,567    $ 160,594
       Nonregulated ...................      37,517       26,343       13,192
    Pipeline construction and services       12,215       11,210       10,733
    Intercompany eliminations .........      (1,351)         (74)         (39)
                                          ---------    ---------    ---------
        Total .........................   $ 207,332    $ 228,046    $ 184,480
                                          ---------    ---------    ---------
Operating income (loss):
    Energy products and services -
       Regulated ......................   $  18,028    $  21,963    $  16,716
       Nonregulated ...................         190         (373)         961
    Pipeline construction and services          231           95          180
    Intercompany eliminations and
       corporate expenses .............        (250)        (130)         403
                                          ---------    ---------    ---------
        Total .........................   $  18,199    $  21,555    $  18,260
                                          ---------    ---------    ---------

Depreciation expense:
    Energy products and services -
       Regulated ......................   $   9,627    $   8,986    $   7,612
       Nonregulated ...................         214           69           11
    Pipeline construction and services          605          409          210
                                          ---------    ---------    ---------
        Total .........................   $  10,446    $   9,464    $   7,833
                                          ---------    ---------    ---------
Income tax expense (benefit):
    Energy products and services -
       Regulated ......................   $   4,237    $   7,321    $   6,364
       Nonregulated ...................           2          456          544
    Pipeline construction and services           34          (40)          99
    Corporate and other ...............        (326)        (363)      (1,207)
                                          ---------    ---------    ---------
        Total .........................   $   3,947    $   7,374    $   5,800
                                          ---------    ---------    ---------
Capital expenditures:
    Energy products and services -
       Regulated ......................   $  28,189    $  30,225    $  29,231
       Nonregulated ...................      14,768          480          387
    Pipeline construction and services        1,368        2,635        1,347
    Corporate and other ...............         486          929          629
                                          ---------    ---------    ---------
        Total .........................   $  44,811    $  34,269    $  31,594
                                          ---------    ---------    ---------
Identifiable assets:
    Energy products and services -
       Regulated ......................   $ 390,797    $ 371,140    $ 354,579
       Nonregulated ...................      29,352       14,130        9,522
    Pipeline construction and services        8,125        7,096        5,306
    Intercompany eliminations and other      (2,072)      (3,536)      (2,597)
                                          ---------    ---------    ---------
        Total .........................   $ 426,202    $ 388,830    $ 366,810
                                          ---------    ---------    ---------


<PAGE>


(14)     QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                                                QUARTER ENDED
                                                ----------------------------------------------------------------------------
                                                     March 31,          June 30,         September 30,       December 31,
                                                        1998               1998              1998                1998
                                                             (Thousands of Dollars, Except Per Share Amounts)

<S>                                             <C>                <C>                <C>                 <C>              
Operating revenues                              $          76,889  $          35,871  $          26,900   $          67,672
Operating income (loss)                                     8,587              1,518               (259)              8,353
Income (loss) from continuing
   operations                                               5,539               (391)            (2,711)              5,073
Net income (loss)                                           5,539               (391)            (2,711)              5,073

Basic earnings (loss) per share of common stock:
  Continuing operations                                       .57               (.04)              (.27)                .49
  Net income (loss)                                           .57               (.04)              (.27)                .39
Diluted earnings (loss) per share of common stock:
  Continuing operations                                       .56               (.04)              (.27)                .49
  Net income (loss)                             $             .56  $            (.04) $            (.27)  $             .39

                                                                                QUARTER ENDED
                                                ----------------------------------------------------------------------------
                                                     March 31,          June 30,         September 30,       December 31,
                                                        1997               1997              1997                1997
                                                             (Thousands of Dollars, Except Per Share Amounts)

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
</TABLE>

      (a)   The total of the earnings per share for the quarters  does not equal
            the  earnings  per  share for the year,  as shown  elsewhere  in the
            consolidated  financial  statements and  supplementary  data of this
            report,  as a result of the 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.


<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.


<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.


<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.
<TABLE>
<CAPTION>
                                                                                    Page

<S>     <C>    <C>    <C>    <C>    <C>    <C>
                Report of Independent Accountants on the Consolidated Financial
                    Statements as of December 31, 1998 and 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, 1998..........................   35

                Consolidated Balance Sheets as of December 31, 1998 and 1997.......   36

                Consolidated Statements of Cash Flows for each of the three
                    years in the period ended December 31, 1998....................   38

                Consolidated Statements of Capitalization as of December 31,
                    1998 and 1997..................................................   39

                Consolidated Statements of Common Shareholders' Investment
                    for each of the three years in the period ended December
                    31, 1998.......................................................   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, 1998...........................   67
</TABLE>

      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.


<PAGE>


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

(b)   Reports on Form 8-K
           No reports on Form 8-K were filed during the last quarter of 1998.

(c)   Executive Compensation Plans and Arrangements

      The following listing includes the Company's executive  compensation plans
      and arrangements in effect as of December 31, 1998:

      Exhibit
      Number

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

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

      10-25     Agreement,  dated as of  March  15,  1991,  by and  between  the
                Company,  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.

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

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

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

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

      10-30     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.

      10-31     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.


<PAGE>


      Exhibit
      Number

      10-32     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.

      10-33     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.

      10-34     Amended  Employment  Agreement  dated as of May 6, 1998,  by and
                among the  Company,  PG Energy  and  Thomas F. Karam -- filed as
                Exhibit 10-4 to the Company's  Quarterly Report on Form 10-Q for
                the quarter ended June 30, 1998, File No. 0-7812.

      10-35     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.

      10-36     First  Amendment to the  Director  Deferred  Compensation  Plan,
                amended and restated  effective as of November 19, 1997 -- filed
                as Exhibit 10-40 to the Company's Annual Report on Form 10-K for
                1997, File No. 0-7812.

      10-37     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.

      10-38     First Amendment to the 1995 Directors' Stock  Compensation Plan,
                amended and restated  effective as of November 19, 1997 -- filed
                as Exhibit 10-42 to the Company's Annual Report on Form 10-K for
                1997, File No. 0-7812.

      10-39     Form of Stock Option Grant, dated as of May 6, 1998, 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 June 30, 1998, File No. 0-7812.

      10-40     Form of Stock Option Grant, dated as of May 6, 1998, 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 June 30, 1998, File No. 0-7812.

      10-41     Stock Option Grant, dated as of May 6, 1998, between the Company
                and Thomas F. Karam -- filed as  Exhibit  10-3 to the  Company's
                Quarterly  Report on Form 10-Q for the  quarter  ended  June 30,
                1998, File No. 0-7812.

      10-42     Director Retirement Plan, effective as of January 1, 1999
                -- filed herewith.

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

<PAGE>


                                                     SIGNATURES

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

                                               PENNSYLVANIA ENTERPRISES, INC. 
                                                       (Registrant)

Date:  March 1, 1999               By:           /s/ Thomas F. Karam          
                                                     Thomas F. Karam
                                           President and Chief Executive Officer
                                              (Principal Executive Officer)

Date: March 1, 1999                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.
<TABLE>
<CAPTION>

             Signature                                           Capacity                                  Date

<S>                                                                                                         <C>    
     /s/ Ronald W. Simms                            Chairman of the Board of Directors                March 1, 1999
        Ronald W. Simms                  

     /s/ William D. Davis                        Vice Chairman of the Board of Directors              March 1, 1999
        William D. Davis

     /s/ Thomas F. Karam                     Director, President and Chief Executive Officer          March 1, 1999
        Thomas F. Karam

     /s/ Robert J. Keating                                       Director                             March 1, 1999
        Robert J. Keating

     /s/ John D. McCarthy                                        Director                             March 1, 1999
        John D. McCarthy

     /s/ John D. McCarthy, Jr.                                   Director                             March 1, 1999
        John D. McCarthy, Jr.

     /s/ Kenneth M. Pollock                                      Director                             March 1, 1999
        Kenneth M. Pollock

     /s/ Richard A. Rose, Jr.                                    Director                             March 1, 1999
        Richard A. Rose, Jr.

     /s/ James A. Ross                                           Director                             March 1, 1999
        James A. Ross

</TABLE>

<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 20,
                  1999 -- filed herewith.

(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.


<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.

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.

<PAGE>


Exhibit
Number

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

(10) Material Contracts:

10-1              Service  Agreement  for  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.

10-2              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.

10-3              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.

10-4              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.

10-5              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.

10-6              Service Agreement for storage service under Rate Schedule GSS,
                  dated   October  1,  1993,   by  and  between  PG  Energy  and
                  Transcontinental  Gas Pipeline Corporation Company -- filed as
                  Exhibit  10-8 to PG  Energy's  Annual  Report on Form 10-K for
                  1993, File No. 1-3490.

10-7              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.

10-8              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.

10-9              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.



Exhibit
Number

10-10             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.

10-11             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.

10-12             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.

10-13             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.

10-14             Service Agreement (Service Package No. 171) for transportation
                  service under Rate Schedule FT-A,  dated September 1, 1993, by
                  and between PG Energy and  Tennessee  Gas Pipeline  Company --
                  filed as Exhibit 10-2 to PG Energy's  Quarterly Report on Form
                  10-Q  for the  quarter  ended  September  30,  1993,  File No.
                  1-3490.

10-15             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.

10-16             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.

10-17             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.

10-18             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.

10-19             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.


<PAGE>


Exhibit
Number

10-20             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.

10-21             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.

10-22             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.

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


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

10-25             Agreement,  dated as of March 15,  1991,  by and  between  the
                  Company,  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.


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

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

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

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

10-30             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.


<PAGE>

Exhibit
Number

10-31             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.

10-32             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.

10-33             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.

10-34             Amended  Employment  Agreement dated as of May 6, 1998, by and
                  among the  Company,  PG Energy and Thomas F. Karam -- filed as
                  Exhibit 10-4 to the  Company's  Quarterly  report on Form 10-Q
                  for the quarter ended June 30, 1998, File No. 0-7812.

10-35             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.

10-36             First Amendment to the Director  Deferred  Compensation  Plan,
                  amended and  restated  effective  as of  November  19, 1997 --
                  filed as Exhibit 10-40 to the Company's  Annual Report on Form
                  10-K for 1997, File No. 0-7812.

10-37             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.

10-38             First  Amendment  to the 1995  Directors'  Stock  Compensation
                  Plan,  amended and restated  effective as of November 19, 1997
                  -- filed as Exhibit  10-42 to the  Company's  Annual Report on
                  Form 10-K for 1997, File No. 0-7812.

10-39             Form of Stock Option Grant,  dated as of May 6, 1998,  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 June 30, 1998, File No. 0-7812.

10-40             Form of Stock Option Grant,  dated as of May 6, 1998,  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 June 30, 1998, File No. 0-7812.

10-41             Stock  Option  Grant,  dated as of May 6,  1998,  between  the
                  Company  and Thomas F.  Karam -- filed as Exhibit  10-3 to the
                  Company's  Quarterly Report on Form 10-Q for the quarter ended
                  June 30, 1998, File No. 0-7812.

10-42             Director Retirement Plan, effective as of January 1, 1999 --
                  filed herewith.


<PAGE>


(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,
                1998 and 1997,  Consolidated Financial Statements --
                filed herewith.

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

(27) Financial Data Schedule:

27-1            Financial Data Schedule -- filed herewith.



<PAGE>

<TABLE>
<CAPTION>






                                    PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
                                    SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                   FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1998

                                             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>    <C>
Deducted from the asset to which it applies:

   Reserve for uncollectible accounts-

     Year ended December 31, 1998 ..........   $1,340   $2,174   $ --     $2,049(a)   $1,465

     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


Shown as operating reserves on the consolidated balance sheets:

     Insurance -

     Year ended December 31, 1998...........   $2,825   $1,050   $ --     $1,039(b)   $2,836

     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
</TABLE>

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

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