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 1-3490


                                 PG ENERGY INC.
             (Exact name of registrant as specified in its charter)


          Pennsylvania                                    24-0717235
(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:

                                 TITLE OF CLASS

                         PREFERRED STOCK, $100 PAR VALUE


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 as of February 24, 1999: None

All Common Stock of the registrant is held by its parent  company,  Pennsylvania
Enterprises, Inc.

The  number of shares of Common  Stock,  no par  value,  outstanding  as of
February 24, 1999: 3,494,418 shares

Documents incorporated by reference:  NONE

REGISTRANT MEETS THE CONDITIONS SET FORTH IN GENERAL  INSTRUCTIONS I (1) (a) AND
(b) OF FORM 10-K AND IS THEREFORE  FILING THIS FORM WITH THE REDUCED  DISCLOSURE
FORMAT.

<PAGE>
                                TABLE OF CONTENTS

                                                                           PAGE

PART I

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

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

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

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

PART II

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

     Item 6.     SELECTED FINANCIAL DATA................................    *

     Item 7.     MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS...............    14

     Item 8.     FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............    24

     Item 9.     CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON
                      ACCOUNTING AND FINANCIAL DISCLOSURE................    48

PART III

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

     Item 11.    EXECUTIVE COMPENSATION...................................   *

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

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

PART IV

     Item 14.    EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS
                      ON FORM 8-K.........................................  49**

                 SIGNATURES...............................................  53

*    These items have been omitted from this Form 10-K as  Registrant  meets the
     conditions set forth in General  Instructions I(1) (a) and (b) of Form 10-K
     and is therefore filing this form with the reduced disclosure format.

**   The "Index to Exhibits" is located on page 54.

<PAGE>
                                     PART I


ITEM l.       BUSINESS

GENERAL

       PG Energy Inc. (PG Energy) is a subsidiary of  Pennsylvania  Enterprises,
Inc. ("PEI").  PG Energy,  incorporated in Pennsylvania in 1867 as Dunmore Gas &
Water Company,  is engaged in the  distribution  of natural gas. On February 14,
1997, PG Energy acquired all of the  outstanding  capital stock of Honesdale Gas
Company  ("Honesdale"),  a  regulated  public  utility  engaged in  distributing
natural gas to portions of Wayne and Pike  Counties,  in an area  adjacent to PG
Energy's  service  territory.  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").  Both PG Energy and  Honesdale  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.

       PG Energy and Honesdale employed approximately 565 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.

       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 PG Energy  Services Inc.
("Energy Services"), a nonregulated affiliate of PG Energy 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 PG  Energy  currently  believes  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.

       PG Energy believes 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.

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 PEI and PG Energy to retire debt, to
repurchase  stock,  for  construction   expenditures  and  for  working  capital
purposes. (See "Management's  Discussion and Analysis of Financial Condition and
Results of  Operations-Liquidity  and Capital  Resources-Sale  of Water  Utility
Operations" in Item 7 of this Form 10-K).

GAS BUSINESS

       PG Energy  and  Honesdale  (collectively  referred  to as the  "Company")
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 Company's  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 Company had
approximately 152,200 natural gas customers, from which it 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 Company  delivered an estimated  total of 45,969,700 MCF
of natural gas to its  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 Company sells 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 Company's 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 Company 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 Company and
the number of customers using transportation service from 1996 to 1998:
<TABLE>
<CAPTION>

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

<S>                 <C>                <C>                                       <C>       
   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
</TABLE>

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

       During 1999, the Company  expects to transport  approximately  28,000,000
MCF of natural gas.

       The rates charged by the Company 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 Company 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 of December 31, 1998,  $10.6 million of such Non-Gas  Transition  Costs
were 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 Company  purchases  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 Company's total purchases of
natural  gas in 1998.  Three other  suppliers  accounted  for 23%,  20% and 10%,
respectively,  of the Company's total purchases of natural gas in 1998. No other
suppliers accounted for more than 10% of the Company's purchases during 1998.

       The  purchases of natural gas by the Company  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 Company's distribution systems.

       During 1999, the Company expects 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 Company  presently  has adequate  supplies of natural gas to meet the
demands of existing  customers  through October,  1999, and the Company believes
that it 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).

       Pipeline  Transportation and Storage Entitlements.  Pursuant to the terms
of Order 636,  the  Company  has  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>

<TABLE>
<CAPTION>

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

<S>                                   <C>                           <C>                          <C>  
Transco               Various through 2015                          74,100 (b)                   61.2%
Tennessee             1999 and 2000                                 35,983 (c)                   29.7
Columbia              2004                                          11,016                        9.1
                                                         -------------------------     --------------------------
                                                                   121,099                      100.0%
                                                         =========================     ==========================
</TABLE>

   (a)     Agreements  are   automatically   extended  from   month-to-month  or
           year-to-year  after their expiration  unless notice of termination is
           given  by  one  of  the  parties  and  the  Company  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.


<PAGE>


       The  Company  has also  contracted  with its former  interstate  pipeline
suppliers  and the New York State  Electric  and Gas Company  ("NYSEG")  for the
following volumes of gas storage and storage withdrawals:
<TABLE>
<CAPTION>

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

<S>                                        <C>                    <C>                            <C>   
Transco                    Various through 2013                   6,200,000                      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
                                                            ===================     ============================
</TABLE>

   (a)     Agreements  are   automatically   extended  from   month-to-month  or
           year-to-year  after their expiration  unless notice of termination is
           given  by  one  of  the  parties  and  the  Company  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 its present pipeline  transportation  and storage  entitlements,
the Company is entitled to a maximum daily delivery of the following  quantities
of gas:
<TABLE>
<CAPTION>

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

<S>                         <C>                    <C>                      <C>                   <C>  
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%
                       ===================     ===================    ==================     ================
</TABLE>

     (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 Company 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 Company had not,
however,  released  any storage  capacity  on the open  market via the  pipeline
electronic bulletin boards.

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

       Peak Day Requirements. The Company plans for peak day demand on the basis
of a daily mean  temperature of 0 degrees  Fahrenheit.  Requirements  for such a
design peak day, assuming the curtailment of service to interruptible customers,
are  currently  estimated  to be  354,000  MCF,  of which  257,000  MCF would be
required for  customers to whom the Company  provides  retail sales  service and
97,000  MCF  would be  required  for  customers  for whom the  Company  provides
transportation  service through its distribution systems. The Company's 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 $28.2 million during
1998, and are estimated to be $18.4 million during 1999.

       Regulation.  The  natural  gas  utility  operations  of the  Company  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 Company
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 Company's gas business.  Although it cannot  predict the future impact of
these  regulations,  the Company  believes that any additional  expenditures and
costs made necessary by them would be fully recoverable 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's gas  distribution  and  transportation  activities  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.

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

       Tax  Surcharge  Adjustments.  Regulations  of the  PPUC  provide  for the
Company  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.

       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.

<PAGE>
ITEM 2.       PROPERTIES

       Gas. The Company's gas systems  consist of  approximately  2,439 miles of
distribution  lines,  eleven  city  gate and 81 major  regulating  stations  and
miscellaneous related and additional property. The Company believes that its 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 First Trust of New York, National Association, as Trustee.

     Land. As of February 24, 1999, PG Energy owned  approximately  44,000 acres
of undeveloped land situated in
northeastern Pennsylvania.

ITEM 3.       LEGAL PROCEEDINGS

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

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 Registrant's common stock is owned entirely by PEI and is not traded.

       PG Energy did not pay any cash dividends on common stock during the years
ended December 31, 1998 and 1997.

       Information  relating to  restrictions  on the payment of dividends by PG
Energy is set forth in Note 7 of the Notes to Consolidated  Financial Statements
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

       PG Energy Inc. ("PG Energy"),  a subsidiary of Pennsylvania  Enterprises,
Inc. ("PEI"),  and PG Energy's  wholly-owned  subsidiary,  Honesdale Gas Company
("Honesdale") (collectively referred to as ("the Company"), are regulated public
utilities  engaged in the sale and  distribution of natural gas. 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 nonregulated  affiliate 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 PG Energy currently believes
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.

       PG Energy believes 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.

DISCONTINUED OPERATIONS

       Pursuant to an Asset Purchase  Agreement dated April 26, 1995, as amended
(the  "Agreement"),  among PEI, PG Energy,  American Water Works  Company,  Inc.
("American") and Pennsylvania-American Water Company  ("Pennsylvania-American"),
a wholly-owned  subsidiary of American, PEI 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.
<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 ................     100.0%    100.0%    100.0%
    Cost of gas ...................      54.2      58.2      55.0
                                     --------   -------   -------
OPERATING MARGIN ..................      45.8      41.8      45.0
                                     --------   -------   -------
OPERATING EXPENSES:
    Operation .....................      15.7      12.9      15.6
    Maintenance ...................       3.0       2.7       3.4
    Depreciation ..................       6.1       4.7       4.7
    Income taxes ..................       2.7       3.9       4.0
    Taxes other than income taxes .       7.0       6.1       6.9
                                     --------   -------   -------
        Total operating expenses ..      34.5      30.3      34.6
                                     --------   -------   -------
OPERATING INCOME ..................      11.3      11.5      10.4

OTHER INCOME, NET .................       0.4       0.1       0.1

INTEREST CHARGES ..................      (6.6)     (5.2)     (4.6)
                                     --------   -------   -------
INCOME FROM CONTINUING OPERATIONS .       5.1       6.4       5.9

LOSS WITH RESPECT TO DISCONTINUED
    OPERATIONS ....................       --        --       (0.2)
                                     -------    -------   -------
NET INCOME ........................       5.1       6.4       5.7

DIVIDENDS ON PREFERRED STOCK ......      (0.7)     (0.7)     (1.1)  (1)
                                     --------   -------   -------
EARNINGS APPLICABLE TO COMMON STOCK       4.4%      5.7%      4.6%
                                     ========   =======   =======

(1)  None  of  the  dividends  on  preferred  stock  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 $31.6 million (16.6%)
from $190.6 million for 1997 to $159.0  million for 1998,  primarily as a result
of a 3.9  billion  cubic  feet  (17.0%)  decrease  in sales by PG  Energy to its
residential  and  commercial  heating  customers.  This  reduction  in sales was
attributable to the 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.

       Cost of Gas. The cost of gas decreased  $24.7 million (22.3%) from $110.9
million  for  1997  to  $86.2  million  for  1998,   primarily  because  of  the
aforementioned  decrease  in the volume of natural  gas sold by PG Energy to its
residential and commercial heating customers and lower levels in PG Energy's gas
cost rate (see "-Rate Matters").

       Operating Margin. The operating margin decreased $6.9 million (8.6%) from
$79.7  million in 1997 to $72.8  million in 1998,  primarily  as a result of the
decrease in sales as a result of the warmer weather in 1998 as noted above. As a
percentage of operating  revenues,  the margin  increased  from 41.8% in 1997 to
45.8% in 1998 due to the proportionately lower cost of gas during the period.

       Other Operating Expenses. Other operating expenses decreased $2.9 million
(5.1%) from $57.7 million for 1997 to $54.8 million for 1998.  This decrease was
primarily  attributable to a $3.1 million (42.1%)  decrease in income taxes from
$7.3  million  for 1997 to $4.2  million  for 1998 due to a  decrease  in income
before  income  taxes  (for  this  purpose,  operating  income  net of  interest
charges).  Also  contributing to this decrease was the effect of 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, a
$364,000 (7.0%)  decrease in maintenance  expense and a $483,000 (4.1%) decrease
in taxes other than income taxes  resulting from a lower level of gross receipts
tax  related to the  decrease  in sales.  The  effects of these  decreases  were
partially  offset by increased  amortization  of computer  software  costs and a
$641,000  (7.1%)  increase in  depreciation  expense as a result of additions to
utility plant. As a percentage of operating  revenues,  other operating expenses
increased from 30.3% during 1997 to 34.5% during 1998,  primarily because of the
lower level of operating revenues.

       Operating Income. As a result of the above, operating income decreased by
$3.9 million  (17.9%) from $22.0 million for 1997 to $18.0 million for 1998, and
decreased  as a  percentage  of total  operating  revenues for such periods from
11.5% to 11.3%.

     Other Income,  Net. Other income,  net increased $551,000 from $100,000 for
1997 to  $651,000  for 1998,  largely  because  of a gain on the sale of land in
June, 1998.

       Interest  Charges.  Interest  charges  increased by $558,000  (5.6%) from
$10.0  million for 1997 to $10.5  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  $3.9 million  (32.5%) from $12.1 million for 1997 to $8.2 million for
1998.  This  decrease  was largely the result of the  matters  discussed  above,
principally  the  decrease  in  operating  margin and the  increase  in interest
charges.

       Dividends on Preferred  Stock.  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 December 1998 of all its remaining
9% cumulative preferred stock as of December 1, 1998.

       Earnings  Applicable to Common Stock. The decrease in earnings applicable
to common  stock of $3.8  million  (35.4%)  from $10.8  million for 1997 to $7.0
million for 1998 was  primarily the result of the reduced  operating  margin and
increased  interest  charges  discussed  above.  These same factors,  along with
premiums of $.30 per share  during 1998 and  discounts  of $.23 per share during
1997 on the  repurchase  of  preferred  stock,  accounted  for the  decrease  in
earnings  per share of common  stock of $1.75  from  $3.49 per share for 1997 to
$1.74 per share for 1998.  Also  contributing  to the  decrease in earnings  per
share of common stock was the 3.5%  increase in the weighted  average  number of
shares  outstanding  as a result of the  issuance of shares  during  1998.  (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 $30.0 million (18.7%)
from $160.6 million for 1996 to $190.6  million for 1997,  primarily as a 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 operating revenues.

       Cost of Gas. The cost of gas increased  $22.6 million  (25.6%) from $88.3
million for 1996 to $110.9 million for 1997,  primarily because of higher levels
in PG Energy's gas cost rate (see "-Rate  Matters").  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.

       Operating  Margin.  The operating  margin  increased $7.4 million (10.2%)
from $72.3  million in 1996 to $79.7 million in 1997,  primarily  because of the
aforementioned  rate increase granted to PG Energy and $1.0 million of operating
margin  of  Honesdale  since its  February  14,  1997,  acquisition  date.  As a
percentage of operating  revenues,  the margin  decreased  from 45.0% in 1996 to
41.8% in 1997, largely as a result of the  proportionately  higher ratio of cost
of gas to operating revenues.

       Other   Operating   Expenses.   Other   operating   expenses,   including
depreciation and income taxes,  increased $2.1 million (3.8%) from $55.6 million
for 1996 to $57.7 million for 1997. As a percentage of operating revenues, total
operating  expenses  decreased  from 34.6%  during  1996 to 30.3%  during  1997,
largely  as a  result  of the  proportionately  greater  increase  in  operating
revenues. The increase in other operating expenses was primarily the result of a
$1.4 million (18.1%) increase in depreciation  expense attributable to additions
to utility plant and a $629,000 (5.7%) 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.

       Income taxes increased $957,000 (15.0%) from $6.4 million in 1996 to $7.3
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
$5.2 million  (31.4%) from $16.7 million for 1996 to $22.0 million for 1997, and
increased  as a percentage  of total  operating  revenues  from 10.4% in 1996 to
11.5% in 1997.

       Other Income,  Net.  Other income,  net  decreased  $43,000  (30.1%) from
$143,000 for 1996 to $100,000 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  increased $2.6 million (35.5%) from
$7.3  million for 1996 to $10.0  million  for 1997.  This  increase  was largely
attributable to bank  borrowings to finance  construction  expenditures  and for
other working capital needs and the reduction in PG Energy's interest expense in
1996  resulting from the repayment of its $50.0 million term loan and all of its
then  outstanding  bank  borrowings on February 16, 1996, with proceeds from the
sale of its regulated water utility operations on such date.

       Income From  Continuing  Operations.  Income from  continuing  operations
increased  $2.6 million  (27.3%) from $9.5 million for 1996 to $12.1 million for
1997.  This  increase  was largely the result of the  matters  discussed  above,
principally  the  increase  in  operating  margin,  the  effects  of which  were
partially offset by increased operating expenses and interest charges.

       Net Income  (Loss).  The increase in net income of $3.0  million  (32.3%)
from  $9.2  million  for 1996 to $12.1  million  for 1997 was the  result of the
higher income from continuing operations, as discussed above, and the absence of
any loss with respect to discontinued operations.

       Dividends on Preferred  Stock.  Dividends  on preferred  stock  decreased
$418,000 (24.2%) from $1.7 million for 1996 to $1.3 million 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.

       Earnings  Applicable to common Stock. The increase in earnings applicable
to common  stock of $3.4  million  (45.5%)  from $7.4  million for 1996 to $10.8
million for 1997,  as well as the increase in earnings per share of common stock
of $1.80  from  $1.69  per share for 1996  (after a $.37 per  share  charge  for
premiums  on the  repurchase  of  preferred  stock)  to $3.49 per share for 1997
(including a $.23 per share discount on the repurchase of preferred  stock) were
the result of the higher  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.  The increase in earnings applicable to
common stock also  reflected a 8.0% decrease in the weighted  average  number of
shares  outstanding  as a result of the repurchase by PG Energy of shares of its
common stock on February 16, 1996,  with proceeds from the sale of its regulated
water utility operations.

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. PEI 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  repurchased
2,297,297 shares of its common stock from PEI for an aggregate  consideration of
$85.0  million,  repaid its $50.0 million term loan due 1996 and all of its then
outstanding  bank  borrowings  on  February  16,  1996,  and PEI  and PG  Energy
temporarily  invested the balance of the proceeds.  A portion of these  proceeds
were  subsequently  used by PG Energy (i) on March 8,  1996,  to repay the $30.0
million principal amount of its 10.125% promissory note (the "10.125% Promissory
Note") which was issued to PEI as a common  stock  dividend on February 16, 1996
(proceeds from the repayment of the 10.125% Promissory Note were used by PEI for
the  defeasance of PEI's 10.125% Senior Notes on September 30, 1996) and (ii) to
repurchase 134,359 shares of its 9% cumulative  preferred stock for an aggregate
consideration  of $14.5  million  and  20,330  shares  of its  4.10%  cumulative
preferred stock for an aggregate consideration of $1.0 million, largely pursuant
to self tender offers conducted during March and April, 1996.  Additionally,  on
June 17,  1996,  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
its  construction  program and the  seasonal  funding of its gas  purchases  and
increases in its customer accounts receivable. The Company's revenues are highly
seasonal and weather-sensitive,  with approximately 75% of its revenues normally
being  realized in the first and fourth  quarters of the calendar  year when the
temperatures in its service area are the coldest.

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

       In order to temporarily finance construction expenditures and to meet its
seasonal borrowing  requirements,  the Company has made arrangements for a total
of $67.0 million of unsecured  revolving bank credit,  which is deemed  adequate
for its immediate needs. Specifically,  PG Energy currently has seven bank lines
of credit with an aggregate  borrowing  capacity of $64.0  million which provide
for borrowings at interest  rates  generally less than prime and which mature at
various times during 1999 and 2000.  Honesdale has a $3.0 million revolving bank
line of credit which  provides for  borrowing at a fixed rate of 6.75% and which
matures in November,  1999. The Company  intends to renew or replace these lines
of credit as they expire. As of February 24, 1999, the Company had $32.6 million
of borrowings  outstanding under these bank lines of credit. In addition,  as of
February 24, 1999, PG Energy had  approximately  $9.6 million  outstanding under
its borrowing  arrangement with PEI, its parent company. Such interim borrowings
by PG Energy from PEI will be repaid with  proceeds  from bank  borrowings by PG
Energy.

       The  Company  believes  that it will be able to raise in a timely  manner
such  funds  as  are   required  for  its  future   construction   expenditures,
refinancings and other working capital requirements.


<PAGE>


Long-Term Debt and Capital Stock Financings

       The Company  periodically  engages 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.

       PG Energy also obtains  external  funds from the sale of its common stock
to PEI in connection  with PEI's Dividend  Reinvestment  and Stock Purchase Plan
(the "DRP") and its Customer Stock Purchase Plan (the "Customer  Plan").  During
1998 PG Energy realized $6.2 million from the issuance of common stock to PEI in
connection  with these  plans.  PG Energy did not issue any shares of its common
stock to PEI in connection with the DRP or the Customer Plan during 1997 because
of the  reduction  in its  capital  requirements  resulting  from the sale of PG
Energy's water utility  operations to  Pennsylvania-American  and because of the
proceeds received from such sale.

Capital Expenditures and Related Financings

       Capital  expenditures for the construction of utility plant totaled $28.2
million,   $30.2  million  and  $29.2  million  during  1998,   1997  and  1996,
respectively.  Such expenditures were financed with  internally-generated  funds
and bank borrowings.

       The  Company  estimates  that its capital  expenditures  will total $18.4
million  during 1999,  and will  approximate  $18.0 million in each of the years
2000 and 2001. It is anticipated that such capital expenditures will be financed
with  internally  generated  funds  and  bank  borrowings,  and by the  periodic
issuance of stock and long-term debt.

Current Maturities of Long-Term Debt and Preferred Stock

       As of December 31, 1998, $68.2 million of PG Energy's  long-term debt was
required to be repaid within twelve months.  The $68.2 million of long-term debt
includes $51.3 million  outstanding under PG Energy's bank lines of credit which
is due at various times during 1999,  $10.0 million of PG Energy's  9.23% series
first  mortgage  bonds  which are due  September  1, 1999,  and $6.9  million of
borrowings from PEI which are due December 31, 1999.

       PG Energy  intends to finance its current  maturities  of long-term  debt
with  internally  generated  funds  and  bank  borrowings,  and by 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  that 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.

       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.


<PAGE>


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 the Company does not utilize derivative  commodity  instruments for
trading purposes,  it does 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, the Company is permitted to recover prudently  incurred
gas costs from its customers.  Accordingly, the associated commodity price risks
are limited.

       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  $80.0  million.  In
addition,  the  Company  had $83.2  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   $300,000.  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,  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  disruptions;  industrial,  commercial and  residential  growth in the
service territories of the Company; 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 is subject or
other  external  factors  over which the  Company  has no  control;  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 the reports of
independent  accountants  thereon are  presented  on pages 25 through 47 of this
Form 10-K.


<PAGE>



                        REPORT OF INDEPENDENT ACCOUNTANTS



To the Board of Directors and Shareholders
of PG Energy Inc.

In our  opinion,  the  consolidated  financial  statements  listed  in the index
appearing  under  Item 14  (a)(1)  and (2) on page  49  present  fairly,  in all
material respects,  the financial position of PG Energy Inc., and its subsidiary
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 financial  statements of PG Energy Inc. 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 PG Energy Inc.:

We have audited the  statements  of income and cash flows of PG Energy Inc. ("PG
Energy"),  formerly known as Pennsylvania  Gas and Water Company (a Pennsylvania
corporation and wholly-owned subsidiary of Pennsylvania  Enterprises,  Inc.) for
the  year  ended  December  31,  1996.   These  financial   statements  are  the
responsibility of PG Energy'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 financial  statements  referred to above present fairly, in
all material  respects,  the results of  operations  and cash flows of PG Energy
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>
                  PG ENERGY INC. AND SUBSIDIARY

                 CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>

                                                        Year Ended December 31,
                                                -------------------------------------------
                                                    1998            1997          1996
                                                -------------   -------------- ------------
                                                            (Thousands of Dollars)

<S>                                             <C>            <C>            <C>        
OPERATING REVENUES ..........................   $   158,951    $   190,567    $   160,594
     Cost of gas ............................        86,164        110,905         88,291
                                                -----------    -----------    -----------
OPERATING MARGIN ............................        72,787         79,662         72,303
                                                -----------    -----------    ----------- 

OTHER OPERATING EXPENSES:
     Operation ..............................        24,884         24,534         25,070
     Maintenance ............................         4,837          5,201          5,513
     Depreciation ...........................         9,627          8,986          7,612
     Income taxes ...........................         4,237          7,321          6,364
     Taxes other than income taxes ..........        11,174         11,657         11,028
                                                 -----------    ----------    -----------
         Total other operating expenses .....        54,759         57,699         55,587
                                                -----------    -----------    -----------

OPERATING INCOME ............................        18,028         21,963         16,716

OTHER INCOME, NET ...........................           651            100            143
                                                 -----------    ----------    -----------

INCOME BEFORE INTEREST CHARGES ..............        18,679         22,063         16,859
                                                -----------    -----------    -----------  

INTEREST CHARGES:
    Interest on long-term debt ..............        10,204          9,481          6,862
    Other interest ..........................           398            700            658
    Allowance for borrowed funds used
     during construction ....................           (94)          (231)          (177)
                                                -----------    ------------   -----------
       Total interest charges ...............        10,508          9,950          7,343
                                                -----------    -----------    -----------

INCOME FROM CONTINUING OPERATIONS ...........         8,171         12,113          9,516

LOSS WITH RESPECT TO DISCONTINUED OPERATIONS
     (Note 2) ...............................          --             --             (363)
                                                -----------    ----------     -----------

NET INCOME ..................................         8,171         12,113         9,153

DIVIDENDS ON PREFERRED STOCK ................         1,191          1,312         1,730
                                                -----------    -----------    -----------

EARNINGS APPLICABLE TO COMMON STOCK .........   $     6,980    $    10,801    $     7,423
                                                ===========    ===========    ===========

EARNINGS PER SHARE OF COMMON STOCK:
     Continuing operations ..................   $      2.04    $      3.26   $       2.16
     Discontinued operations ................          --             --            (0.10)
                                                -----------    -----------    -----------
     Income before discount (premium) on
     repurchase of preferred stock ..........         2.04            3.26           2.06
     Discount (premium) on repurchase
     of preferred stock .....................        (0.30)           0.23          (0.37)
                                               -----------    ------------    -----------
     Earnings per share of common stock .....  $      1.74    $       3.49    $      1.69
                                               ===========    ============    ===========

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING    3,429,597       3,314,155      3,601,072
                                               ===========    ============    ===========


</TABLE>



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



<PAGE>


                          PG ENERGY INC. AND SUBSIDIARY

                           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 ...................       3,981        4,459
                                                     ---------    ---------

CURRENT ASSETS:
    Cash and cash equivalents ....................         768          304
    Accounts receivable -
       Customers .................................      18,475       23,551
       Affiliates, net ...........................        --             63
       Others ....................................         269          280
       Reserve for uncollectible accounts ........      (1,080)      (1,168)
    Accrued utility revenues .....................      11,472       11,680
    Materials and supplies, at average cost ......       2,758        2,716
    Gas held by suppliers, at average cost .......      22,320       21,933
    Deferred cost of gas and supplier refunds, net       6,058        6,182
    Prepaid income taxes .........................       1,560         --
    Prepaid expenses and other ...................       2,582        1,767
                                                      --------     --------
                                                        65,182       67,308
                                                      --------     --------

DEFERRED CHARGES:
    Regulatory assets -
       Deferred taxes collectible ................      31,097       30,592
       Other .....................................       8,598        4,415
    Unamortized debt expense .....................         964        1,164
    Other ........................................          25          225
                                                      --------      -------
                                                        40,684       36,396
                                                      --------      -------





TOTAL ASSETS .....................................   $ 390,797    $ 371,140
                                                     =========    =========

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


<PAGE>


                          PG ENERGY INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

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

CAPITALIZATION (see accompanying statements):
    Common shareholder's investment ..................   $126,638   $107,425
    Preferred stock of PG Energy -
       Not subject to mandatory redemption, net ......      4,831     15,864
       Subject to mandatory redemption ...............        240        640
    Long-term debt -
       Parent ........................................       --       23,500
       Other .........................................     95,000    106,000
                                                         --------    -------
                                                          226,709    253,429
                                                         --------    -------
CURRENT LIABILITIES:
    Current portion of long-term debt -
       Parent ........................................      6,900       --
       Other .........................................     61,348     24,776
    Preferred stock subject to repurchase or mandatory
       redemption ....................................       --           80
    Notes payable ....................................      1,200      2,170
    Accounts payable -
       Suppliers .....................................     15,659     14,515
       Parent ........................................        674        199
       Affiliates, net ...............................          3       --
    Accrued general business and realty taxes ........      1,464      2,797
    Accrued income taxes .............................       --        4,946
    Accrued interest .................................      1,807      1,844
    Accrued natural gas transition costs .............       --        1,087
    Other ............................................      1,149      1,188
                                                         --------    -------
                                                           90,204     53,602
                                                         --------    -------
DEFERRED CREDITS:
    Deferred income taxes ............................     60,211     52,207
    Unamortized investment tax credits ...............      4,424      4,596
    Operating reserves ...............................      2,836      2,825
    Other ............................................      6,413      4,481
                                                         --------   --------
                                                           73,884     64,109
                                                         --------   --------


TOTAL CAPITALIZATION AND LIABILITIES .................   $390,797   $371,140
                                                         ========   ========

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


<PAGE>
                          PG ENERGY INC. AND SUBSIDIARY

                      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:
      Net income                                                               $ 8,171      $ 12,113       $ 9,516
      Gain on sale of other property                                              (917)            -             -
      Effects of noncash charges to income -
          Depreciation                                                           9,703         9,034         7,675
          Deferred income taxes, net                                             2,894         1,863         1,940
          Provisions for self insurance                                          1,050           711         1,042
          Other, net                                                               395         1,902         1,390
      Changes in  working  capital,  exclusive  of cash and  current  portion of
           long-term debt and preferred stock -
               Receivables and accrued utility revenues                          5,270        (5,220)           46
               Gas held by suppliers                                              (387)       (1,668)       (5,125)
               Accounts payable                                                  1,069        (4,425)          215
               Deferred cost of gas and supplier refunds, net                     (829)       14,397       (18,493)
               Other current assets and liabilities, net                        (8,910)        1,526         2,958
      Other operating items, net                                                2,255         (1,809)       (5,644)
                                                                                ------        -------       -------
                Net cash provided by (used for) continuing operations           19,764        28,424        (4,480)
      Net cash used for discontinued operations, principally for the payment
           of income taxes                                                          -        (13,655)      (45,173)
                                                                               -------       -------       --------
               Net cash provided by (used for) operating activities            19,764        14,769        (49,653)
                                                                               -------       -------       --------

CASH FLOW FROM INVESTING ACTIVITIES:
      Additions to utility plant                                               (29,003)      (30,971)      (29,312)
      Proceeds from the sale of other property                                     985             -             -
      Proceeds from the sale of discontinued operations                              -             -       261,752
      Acquisition of regulated business                                              -        (2,019)            -
      Other, net                                                                  225           557          1,078
                                                                               -------        ------       -------
               Net cash provided by (used for) investing activities            (27,793)      (32,433)      233,518
                                                                               --------      --------      -------

CASH FLOW FROM FINANCING ACTIVITIES:
      Issuance of long-term debt                                                     -        25,000        49,900
      Repurchase of preferred stock                                            (12,124)       (3,121)      (15,670)
      Dividends on preferred and common stock                                   (1,191)       (1,312)      (35,498)
      Issuance of common stock                                                   6,171             -           339
      Repurchase of common stock                                                     -             -       (85,008)
      Repayment of long-term debt (Note 3)                                      (9,100)       (7,900)      (68,500)
      Net increase (decrease) in bank borrowings                                25,155         4,053       (27,723)
      Other, net                                                                  (418)         558         (1,343)
                                                                                ------       -------      ---------
               Net cash provided by (used for) financing activities              8,493        17,278       (183,503)
                                                                                ------       -------      ---------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                               464          (386)          362
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                     304           690           328
                                                                                ------        ------       -------
CASH AND CASH EQUIVALENTS AT END OF YEAR                                        $  768        $  304       $   690
                                                                                ======        ======       =======

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
    Cash paid during the year for:
         Interest (net of amount capitalized)                                $ 10,127       $  9,395       $ 7,139
                                                                             =========      ========       =======
         Income taxes                                                        $  1,757       $ 15,548       $46,483
                                                                             =========      ========       =======
</TABLE>

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


<PAGE>
<TABLE>
<CAPTION>



                                                  PG ENERGY INC. AND SUBSIDIARY

                                            CONSOLIDATED STATEMENTS OF CAPITALIZATION

                                                                                              December 31,
                                                                                 ----------------------------------------
                                                                                      1998                     1997
                                                                                 ---------------          ---------------
                                                                                         (Thousands of Dollars)
<S>     <C>    <C>    <C>    <C>    <C>    <C>
COMMON SHAREHOLDER'S INVESTMENT:
    Common stock, no par value
       (stated value $10 per share)
       Authorized - 15,000,000 shares
       Outstanding - 3,494,418 shares and
          3,314,155 shares, respectively                                         $      34,944            $     33,142
    Additional paid-in capital                                                          44,546                  32,677
    Retained earnings                                                                   47,148                  41,606
                                                                                  ------------            ------------
       Total common shareholder's investment                                           126,638      55.9%      107,425       42.4%
                                                                                  ------------            ------------
PREFERRED STOCK, 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                                              4,831       2.1%       15,864        6.3%
           mandatory redemption, net                                              ------------             -----------

       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                                                                              108,248                  99,276
    Less current maturities and sinking fund requirements                             (68,248)                 (24,776)
                                                                                   ----------                 --------  
       Total long-term debt                                                            95,000      41.9%       129,500       51.1%
                                                                                   ----------                 --------
TOTAL CAPITALIZATION                                                               $  226,709     100.0%      $253,429     100.0%
                                                                                   ==========                 ========
</TABLE>

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


<PAGE>

<TABLE>
<CAPTION>


                                                  PG ENERGY INC. AND SUBSIDIARY

                                    CONSOLIDATED STATEMENTS OF COMMON SHAREHOLDER'S INVESTMENT

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

                                                                Additional
                                                Common           Paid-in           Retained
                                                 Stock           Capital           Earnings        Total
                                             --------------  -----------------  --------------- ---------------
                                                                 (Thousands of Dollars)

<S>                 <C> <C>                  <C>             <C>                <C>             <C>         
Balance at December 31, 1995                 $     56,025    $         94,463   $       57,868  $    208,356

Net income for 1996                                      -                 -             9,153         9,153
Issuance of common stock                               90                 249                -           339
Repurchase of common stock                        (22,973)           (62,035)                -      (85,008)
Premium on repurchase of                                                                         
   preferred stock                                      -                   -          (1,337)       (1,337)
Dividends on:
   Preferred stock                                      -                   -          (1,730)       (1,730)
   Common stock                                         -                   -         (33,768)      (33,768)
                                                      ---                 ---              ---          ---
Balance at December 31, 1996                       33,142              32,677           30,186        96,005

Net income for 1997                                     -                   -           12,113        12,113
Discount on redemption of
   preferred stock                                      -                   -              746           746
Dividends on:
   Preferred stock                                      -                   -          (1,312)       (1,312)
   Common stock                                         -                   -            (127)         (127)
                                                ---------           ---------       ----------   -----------
Balance at December 31, 1997                       33,142              32,677           41,606       107,425

Net income for 1998                                     -                   -            8,171         8,171
Issuance of common stock                            1,802               4,369                -         6,171
Capital contribution by parent                          -               7,500                -         7,500
Premium on redemption of
   preferred stock                                      -                   -          (1,022)       (1,022)
Dividends on:
   Preferred stock                                      -                   -          (1,191)       (1,191)
   Common stock                                         -                   -            (416)         (416)
                                             ------------          ----------      -----------  ------------
Balance at December 31, 1998                 $     34,944          $   44,546      $    47,148  $    126,638
                                             ============          ==========      ===========  ============

</TABLE>



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


<PAGE>


                          PG ENERGY INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)      SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       Nature of the Business.  PG Energy Inc.  ("PG  Energy"),  a  wholly-owned
subsidiary of  Pennsylvania  Enterprises,  Inc.  ("PEI"),  and its  wholly-owned
subsidiary, Honesdale Gas Company ("Honesdale"),  acquired on February 14, 1997,
are regulated public  utilities  subject to the jurisdiction of the Pennsylvania
Public  Utility  Commission  (the  "PPUC")  for  rate and  accounting  purposes.
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.

       Principles  of  Consolidation.   The  consolidated  financial  statements
include the accounts of PG Energy and  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 Company")
are subject to the  jurisdiction  of the PPUC for rate and accounting  purposes.
The  financial  information  of  the  Company  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 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  Company's  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.

       Revenues and Cost of Gas. The Company  bills  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.

       The Company  generally passes on to its customers  increases or decreases
in gas costs from those reflected in its tariff charges. In accordance with this
procedure,  the Company defers any current under or over-recoveries of gas costs
and  collects or refunds  such amounts in  subsequent  periods.  The Company 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.

       Deferred Charges (Regulatory  Assets). The Company generally accounts 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.


<PAGE>


       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
Operating reserves                                    (969)              (1,181)
Postretirement benefits                             (1,230)                (700)
FERC Order 636 transition costs                          -                 (394)
Other                                                2,093               (1,958)
                                             -------------         ------------
    Net deferred income tax liability        $      60,211         $     52,207
                                             =============         ============

       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 ..............................   $   960    $ 4,196    $ 3,235
      State ................................       187      1,357      1,361
                                               -------    -------    -------
        Total currently payable ............     1,147      5,553      4,596
   Deferred, net -
      Federal ..............................     2,831      1,844      2,059
      State ................................       431         96       (119)
        Total deferred, net ................     3,262      1,940      1,940
   Amortization of investment tax credits ..      (172)      (172)      (172)
        Total included in operating expenses     4,237      7,321      6,364

Included in other income, net:
   Currently payable -
      Federal ..............................       125         33        (59)
      State ................................        40         11        (19)
        Total currently payable ............       165         44        (78)
   Deferred, net -
      Federal ..............................      (280)      --         --
      State ................................       (89)      --         --
        Total deferred, net ................      (369)      --         --
        Total included in other income, net       (204)        44        (78)

        Total provision for income taxes ...   $ 4,033    $ 7,365    $ 6,286



<PAGE>


       The total  provision for income taxes  relative to continuing  operations
shown in the  accompanying  consolidated  statements of income  differs from the
amount which would be computed by applying the statutory federal income tax rate
to income before income taxes.  The following table summarizes the major reasons
for this difference:

<TABLE>
<CAPTION>
                                                   1998         1997          1996
                                                 ----------  ---------    ----------
                                                      (Thousands of Dollars)

<S>                                                <C>         <C>         <C>     
Income before income taxes .....................   $ 12,204    $ 19,478    $ 15,802

Tax expense at statutory federal income tax rate   $  4,271    $  6,817    $  5,531
Increases (reductions) in taxes resulting from -
   State income taxes, net of federal income
     tax benefit ...............................        370         952         795
   Amortization of investment tax credits ......       (172)       (172)       (172)
   Other, net ..................................       (436)       (232)        132

Total provision for income taxes ...............   $  4,033    $  7,365    $  6,286
</TABLE>

       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 PEI, PG Energy,  American Water Works  Company,  Inc.
("American") and Pennsylvania-American Water Company  ("Pennsylvania-American"),
a wholly-owned  subsidiary of American, PEI 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 PEI 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.


<PAGE>


       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
PEI'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.

       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.


<PAGE>


(4)      COMMON STOCK

       PEI reinstated  its Customer  Stock  Purchase Plan (the "Customer  Plan")
effective February 4, 1998. The Customer Plan provides the residential customers
of all of PEI's subsidiaries with a method of purchasing  newly-issued shares of
PEI's common stock at a 5% discount from the market price. The net proceeds from
the sale of any such shares of common  stock are used for the general  corporate
purposes of PEI or made  available to PEI's  subsidiaries,  including PG Energy,
for   construction   expenditures,   refinancings   and  other  working  capital
requirements.  During 1998, PG Energy realized $1.5 million from the issuance of
its common stock to PEI in connection with the Customer Plan.

       PG Energy also obtains  funds from the sale of its common stock to PEI in
connection with PEI's Dividend Reinvestment and Stock Purchase Plan (the "DRP").
Effective May 9, 1995, PEI suspended the cash investment  feature of the DRP and
the 5% discount from the market price on the reinvestment of dividends under the
DRP because of the significant  reduction in its capital requirements  resulting
from the sale of PG Energy's water utility  operations to  Pennsylvania-American
and because of the proceeds received from such sale. The cash investment feature
was, however,  reinstated  effective June 1, 1996.  Additionally,  from June 14,
1996,  through  December  31,  1996,  PEI  temporarily  suspended  the  sale  of
newly-issued stock to the DRP as a result of the proceeds received from the sale
of PG Energy's water utility operations, and during that period the DRP obtained
shares of PEI common  stock for  participants  through  open  market  purchases.
Effective January 1, 1997, PEI resumed selling newly-issued stock to the DRP.

       Although  PEI resumed  selling  newly-issued  stock to the DRP  effective
January 1, 1997,  PG Energy did not issue any shares of its common  stock to PEI
in  connection  with the DRP during 1997 because of the reduction in its capital
requirements  resulting from the sale of PG Energy's water utility operations to
Pennsylvania-American  and  because  of the  proceeds  received  from such sale.
Effective  January 30, 1998, PEI reinstated the 5% discount from market price on
the  reinvestment of dividends and the supplemental  cash investments  under the
DRP.  During  1998 and 1996,  PG Energy  realized  $4.7  million  and  $340,000,
respectively,  from the issuance of common stock to PEI in  connection  with the
DRP.

     On June 24,  1998,  PEI  converted  $7.5  million of the  outstanding  loan
balance from PG Energy to a contribution of capital.

       On February  16,  1996,  PG Energy  repurchased  2,297,297  shares of its
common stock from PEI for an aggregate  consideration  of $85.0 million,  with a
portion  of the  proceeds  from  the sale of its  water  utility  operations  to
Pennsylvania-American.

(5)      PREFERRED STOCK

       Preferred  Stock  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 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.

       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:

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

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
   Parent ...........................................       6,900       23,500
                                                          108,248       99,276

Less current maturities and sinking fund requirements     (68,248)     (24,776)

   Total long-term debt .............................   $  95,000    $ 129,500

       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.

       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.

       As of December  31, 1998 and 1997,  PG Energy had $6.9  million and $23.5
million, respectively, outstanding under its borrowing arrangement with PEI. The
outstanding  borrowings  by PG Energy from PEI will be repaid with proceeds from
bank borrowings by PG Energy.


<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                    $         68,248,000 (a)
2000                    $                  -
2001                    $                  -
2002                    $         55,000,000 (b)
2003                    $                  -

(a)         Represents  PG Energy's  9.23%  Series First  Mortgage  Bonds in the
            principal  amount of $10.0  million  due  September  1, 1999,  $51.3
            million of PG Energy's bank  borrowings  outstanding  as of December
            31, 1998, and $6.9 million of borrowings payable to PEI.

      (b)   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

       The  preferred  stock  provisions  of PG  Energy's  Restated  Articles of
Incorporation  and  certain of the  agreements  under which PG Energy has 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  currently has arrangements for seven revolving bank lines of
credit with an aggregate  borrowing  capacity of $66.0 million which provide for
borrowings  at  interest  rates  generally  less than prime and which  mature at
various times during 1999 and 2000.

       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.


<PAGE>


       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 ...............................   $ 1,200    $ 2,170    $10,000
    Long-term ................................    51,348     25,776     38,721
                                                 $52,548    $27,946    $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 .....................    66,000     68,500     65,500
                                                 $66,000    $69,500    $65,500

Short-term bank borrowings
    Maximum amount outstanding ...............   $ 2,295    $10,000    $10,000
    Daily average amount outstanding .........   $   941    $ 3,740    $ 1,392
    Weighted daily average interest rate .....     6.544%     6.343%     6.241%
    Weighted average interest rate at year-end     6.750%     6.536%     6.206%
    Range of interest rates ..................    6.025-     5.800-     5.875-
                                                   8.500%     8.500%     6.438%

(9)      POSTEMPLOYMENT BENEFITS

       Substantially  all  employees of the Company,  except those of Honesdale,
are covered by PEI's  trusteed,  noncontributory,  defined benefit pension plan.
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 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  $    39,000  $       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>

       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  programs
will be of $18.4  million.  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
         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)                                     $   156,348  $      166,313  $   130,776   $     136,914
Preferred stock 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  its  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 the Company.


<PAGE>


(13)     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                              $          65,015  $          25,143  $          15,223   $          53,570
Operating income (loss)                                     8,651              1,211               (468)              8,634
Income (loss) from continuing                    
   operations                                               5,477              (669)             (3,258)              5,430
Net income (loss)                                           5,477              (669)             (3,258)              5,430

Basic earnings (loss) per share of common stock:
  Continuing operations                                      1.65              (.20)               (.93)               1.52
  Discount (premium) on
     repurchase/redemption of
     preferred stock                                            -                 -                   -                (.30)
                                                -----------------    --------------    ----------------    ---------------- 
  Earnings (loss) per share of
     common stock                               $            1.65    $         (.20)   $           (.93)   $           1.22
                                                =================    ==============    ================    ================

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

Operating revenues                              $          79,939  $         33,229    $         16,276    $         61,123
Operating income (loss)                                    10,864             2,104                (484)              9,479
Income (loss) from continuing
   operations                                               8,421              (622)             (3,195)              6,197
Net income (loss)                                           8,421              (622)             (3,195)              6,197

Basic earnings (loss) per share of common stock:
  Continuing operations                                      2.54              (.19)               (.96)               1.87
  Discount (premium) on
     repurchase/redemption of
     preferred stock                                           -                .24                (.01)                  -
                                                ----------------  -----------------   -----------------    ----------------
  Earnings (loss) per share of
     common stock                               $           2.54  $             .05   $            (.97)   $           1.87
                                                ================  =================   =================    ================
</TABLE>

       Because of the seasonal nature of the Company 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 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 PG Energy and its subsidiary 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.............................................   25

                Report of Independent Accountants on the
                    Financial Statements as of December 31, 1996............................................   26

                Consolidated Statements of Income for each of the three years
                    in the period ended December 31, 1998...................................................   27

                Consolidated Balance Sheets as of December 31, 1998 and 1997................................   28

                Consolidated Statements of Cash Flows for each of the three
                    years in the period ended December 31, 1998.............................................   30

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

                Consolidated Statements of Common Shareholder's Investment
                    for each of the three years in the period ended December
                    31, 1998................................................................................   32

                Notes to Consolidated Financial Statements..................................................   33

      2.      Financial Statement Schedules
                  The following consolidated financial statement schedule for PG
              Energy  and its  subsidiary  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....................................................   52
</TABLE>

      3.      Exhibits
                  See  "Index to  Exhibits"  located on page 54 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 PEI and certain of
                its  Officers -- filed as Exhibit  10-34 to PG  Energy's  Annual
                Report on Form 10-K for 1989, File No. 1-3490.

      10-24     First Amendment to Form of Change in Control Agreement, dated as
                of May 24,  1995,  between  PEI and  certain of its  Officers --
                filed as Exhibit  10-29 to PEI'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 PEI, PG
                Energy and Robert L. Jones -- filed as Exhibit  No.  10-38 to PG
                Energy's Annual Report on Form 10-K for 1990, File No. 1-3490.

      10-26     Employment  Agreement  effective  September 1, 1995, between PEI
                and Dean T. Casaday -- filed as Exhibit 10-2 to PEI'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 PEI and Dean T. Casaday -- filed as Exhibit 10-17
                to PEI'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  PEI and Dean T.  Casaday --
                filed as Exhibit  10-37 to PEI'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 PEI's
                1993 definitive Proxy Statement, File No. 0-7812.

      10-30     Form of Stock  Option  Agreement,  dated  as of June  20,  1997,
                between PEI and certain of its Officers -- filed as Exhibit 10-1
                to PEI'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 PEI and certain of its  non-employee  directors -- filed
                as Exhibit 10-2 to PEI'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 PEI's
                1997 definitive Proxy Statement, File No. 0-7812.

      10-33     Employment  Agreement  dated as of August 28, 1996, by and among
                PEI,  PG Energy and Thomas F. Karam -- filed as Exhibit  10-2 to
                PEI'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  PEI,  PG Energy  and  Thomas F. Karam -- filed as Exhibit
                10-4 to PEI'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 PEI'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 PEI'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 PEI'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 PEI'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 PEI
                and certain of its  Officers  -- filed as Exhibit  10-1 to PEI'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 PEI
                and certain of its  non-employee  directors  -- filed as Exhibit
                10-2 to PEI'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 PEI and
                Thomas  F.  Karam -- filed as  Exhibit  10-3 to PEI'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 as Exhibit 10-42 to PEI's Annual Report
                on Form 10-K for 1998, File No. 0-7812.

(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.

                                                     PG ENERGY 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
                  PEI,  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,  as amended -- filed as
                  Exhibit 3-1 to PG Energy's  Annual  Report on
                  form 10-K for 1995, File No. 1-3490.

3-2               By-Laws of PG Energy, 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 PG Energy's
                  Annual Report on Form 10-K for 1989, File No. 1-3490.

4-15              Twenty-third  Supplemental Indenture,  dated as of August 15,
                  1989 -- filed as Exhibit 4-23 to PG Energy's
                  Annual Report on Form 10-K for 1989, File No. 1-3490.

4-16              Twenty-fourth  Supplemental  Indenture,  dated as of 
                  September  1, 1991 -- filed as  Exhibit  4-3 to PEI'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 4-1 to PG Energy's  Quarterly  Report
                  on Form 10-Q for the quarter ended  September  30, 1992,  File
                  No. 1-3490.

4-18              Twenty-sixth  Supplemental Indenture,  dated as of December 1,
                  1992 -- filed as Exhibit 4-20 to PG Energy's
                  Bond Form S-2, Registration No.33-54278.

4-19              Twenty-seventh  Supplemental  Indenture,  dated as of  
                  December  1,  1992 -- filed  as  Exhibit  4-19 to PG
                  Energy'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.

               
Exhibit
Number

(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  PEI'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 PG
                  Energy's Annual Report on Form 10-K for 1991, File No. 1-3490.

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  PEI'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 Pipe Line Corporation -- 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.

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.



Exhibit
Number

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  Company --
                  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  Company -- 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.

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 10-33 to PG Energy's  Annual
                  Report on Form 10-K for 1989, File No. 1-3490.
Exhibit
Number

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 PEI and certain
                  of its Officers -- filed as Exhibit  10-34 to
                  PG Energy's Annual Report on Form 10-K for 1989, File No.
                  1-3490.

10-24             First Amendment to Form of Change in Control Agreement,  dated
                  as of May 24, 1995, between PEI and certain of its Officers --
                  filed as Exhibit 10-29 to PEI'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
                  PEI,  PG Energy  and Robert L. Jones -- filed as
                  Exhibit 10-38 to PG Energy's Annual Report on Form 10-K for 
                  1990, File No. 1-3490.

10-26             Employment  Agreement effective September 1, 1995, between PEI
                  and  Dean T.  Casaday  --  filed  as  Exhibit  10-2  to  PEI'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 PEI and Dean T.  Casaday --
                  filed as Exhibit 10-17 to PEI'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 PEI and Dean T. Casaday
                  -- filed as Exhibit  10-37 to PEI'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
                  PEI's 1993 definitive Proxy Statement, File No. 0-7812.

10-30             Form of Stock  Option  Agreement,  dated as of June 20,  1997,
                  between  PEI and  certain of its  Officers -- filed as Exhibit
                  10-1 to PEI'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 PEI and certain of its non-employee directors -- filed
                  as Exhibit 10-2 to PEI'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
                  PEI's 1997 definitive Proxy Statement, File No. 0-7812.



Exhibit
Number

10-33             Employment Agreement dated as of August 28, 1996, by and among
                  PEI, PG Energy and Thomas F. Karam -- filed as Exhibit 10-2 to
                  PEI'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  PEI,  PG Energy and Thomas F. Karam -- filed as Exhibit
                  10-4 to PEI'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 PEI'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 PEI'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 PEI'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 PEI'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
                  PEI and certain of its  Officers  -- filed as Exhibit  10-1 to
                  PEI'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
                  PEI and  certain  of its  non-employee  directors  -- filed as
                  Exhibit  10-2 to PEI'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 PEI and
                  Thomas F.  Karam -- filed as Exhibit  10-3 to PEI'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 as  Exhibit  10-42 to PEI's  Annual
                  Report on Form 10-K for 1998, File No. 0-7812.

(21) Subsidiaries of the Registrant:

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

(27) Financial Data Schedule:

27-1              Financial Data Schedule -- filed herewith.


<PAGE>
<TABLE>
<CAPTION>
                                                  PG ENERGY INC. AND SUBSIDIARY
                                         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 .............................   $1,168   $1,947   $ --     $2,035(a)   $1,080

     Year ended December 31, 1997 .............................   $1,140   $2,112   $    4   $2,088(a)   $1,168

     Year ended December 31, 1996 .............................   $  781   $2,015   $ --     $1,656(a)   $1,140


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.