<PAGE>
 
                           THE PROVIDENCE GAS COMPANY

                                    FORM 10-Q

                           SECURITIES AND EXCHANGE COMMISSION

                               Washington, D. C. 20549


      (Mark One)

      {X}   QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF
                  THE SECURITIES EXCHANGE ACT OF 1934

      For quarterly period ended          December 31, 1998
                                -------------------------------------

                                    OR

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

      For the transition period from ________________ to _________________

      Commission file number                     0-1160
                             ---------------------------------------------

                          THE PROVIDENCE GAS COMPANY
      --------------------------------------------------------------------
            (Exact name of registrant as specified in its charter)

               Rhode Island                        05- 0203650
      --------------------------------------------------------------------
      (State or other jurisdiction of            (I.R.S. Employer
      incorporation or organization)             Identification No.)

             100 Weybosset Street, Providence, Rhode Island 02903
      --------------------------------------------------------------------
                   (Address of principal executive offices)
                                  (Zip Code)

                                 401-272-5040
     ---------------------------------------------------------------------
               Registrant's telephone number, including area code

        (Former name, former address and former fiscal year, if changed
                              since last report)

        Indicate by checkmark 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 ___.
          ---        

      APPLICABLE ONLY TO CORPORATE ISSUERS:

      Common Stock, $1.00 par value; 1,243,598 shares outstanding at
      --------------------------------------------------------------
      February  12, 1999.
      -------------------
<PAGE>
 
                           THE PROVIDENCE GAS COMPANY

                                   FORM 10-Q

                               DECEMBER 31, 1998


<TABLE> 
<CAPTION> 
                                                                       PAGE
    <S>                                                                <C>  
    PART I:      FINANCIAL INFORMATION                           
                                                                 
    Item 1       Financial Statements                            
                                                                 
                 Consolidated Statements of Income for the       
                 three and twelve months ended                   
                 December 31, 1998 and 1997                             I-1
                                                                 
                 Consolidated Balance Sheets as of               
                 December 31, 1998, December 31, 1997            
                 and September 30, 1998                                 I-2
                                                                 
                 Consolidated Statements of Cash Flows for the   
                 three months ended December 31, 1998 and 1997          I-3
                                                                 
                 Consolidated Statements of Capitalization as of 
                 December 31, 1998, December 31, 1997            
                 and September 30, 1998                                 I-4
                                                                 
                 Notes to Consolidated Financial Statements             I-5
                                                                 
    Item 2       Management's Discussion and Analysis of         
                 Financial Condition and Results of Operations          I-10
                                                                 
    PART II:     OTHER INFORMATION                               
                                                                 
    Item 6       Exhibits and Reports on Form 8-K                       II-1
                                                                 
                 Signature                                              II-2
</TABLE> 
<PAGE>
 
PART I.  FINANCIAL INFORMATION
-------  ---------------------
ITEM I.  FINANCIAL STATEMENTS
-------  --------------------
 
                          THE PROVIDENCE GAS COMPANY
                          --------------------------
                       CONSOLIDATED STATEMENTS OF INCOME
                       ---------------------------------
                       FOR THE PERIODS ENDED DECEMBER 31
                       ---------------------------------
                                  (Unaudited)
                                   ---------

<TABLE>   
<CAPTION>
                                                THREE MONTHS         TWELVE MONTHS
                                             ------------------    ------------------
                                               1998       1997       1998       1997
                                             ------------------    ------------------
                                               (thousands, except per share amounts)
<S>                                          <C>        <C>        <C>        <C>
 Operating revenues                          $ 51,877   $ 59,200   $176,703   $208,200
 Cost of gas sold                              25,628     32,333     84,943    114,017
                                             --------   --------   --------   --------
 
  Operating margin                             26,249     26,867     91,760     94,183
                                             --------   --------   --------   --------
 
 Operating expenses:
  Operation and maintenance                    11,612     11,318     46,107     47,449
  Depreciation and amortization                 4,094      3,454     14,123     12,840
  Taxes:
   State gross earnings                         1,556      1,756      5,163      6,009
   Local property and other                     1,890      1,879      7,740      7,623
   Federal income                               1,836      2,246      3,932      4,433
                                             --------   --------   --------   --------
 
 Total operating expenses                      20,988     20,653     77,065     78,354
                                             --------   --------   --------   --------
 
 Operating income                               5,261      6,214     14,695     15,829
 
 Other, net                                       167        157        594        456
                                             --------   --------   --------   --------
 
 Income before interest expense                 5,428      6,371     15,289     16,285
                                             --------   --------   --------   --------
 
 Interest expense:
  Long-term debt                                1,546      1,490      6,418      6,012
  Other                                           301        526      1,140      1,786
  Interest capitalized                            (76)       (82)      (248)      (263)
                                             --------   --------   --------   --------
                                                1,771      1,934      7,310      7,535
                                             --------   --------   --------   --------
 
 Net income                                     3,657      4,437      7,979      8,750
 
 Dividends on preferred stock                    (104)      (139)      (452)      (591)
                                             --------   --------   --------   --------
 
 Net income applicable to
 common stock                                $  3,553   $  4,298   $  7,527   $  8,159
                                             ========   ========   ========   ========
 Net income per
 common share - basic                        $   2.86   $   3.46   $   6.05   $   6.56
                                             ========   ========   ========   ========
 Net income per
 common share - diluted                      $   2.86   $   3.46   $   6.05   $   6.56
                                             ========   ========   ========   ========
 Weighted average number of
 shares outstanding:
  Basic                                       1,243.6    1,243.6    1,243.6    1,243.6
                                             ========   ========   ========   ========
  Diluted                                     1,243.6    1,243.6    1,243.6    1,243.6
                                             ========   ========   ========   ========
</TABLE>

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

                                   I-1
<PAGE>
 
                           THE PROVIDENCE GAS COMPANY
                           --------------------------
                          CONSOLIDATED BALANCE SHEETS
                          ---------------------------
                                  (thousands)

<TABLE>
<CAPTION>
 
                                                             (Unaudited)
                                                             ----------
 
                                                   December 31,    December 31,      September 30,
                                                      1998            1997               1998
                                                   ----------------------------------------------
<S>                                                <C>             <C>              <C> 
ASSETS
------
Gas plant, at original cost                        $321,119         $295,994        $   313,549
  Less - Accumulated depreciation and                                        
    plant acquisition adjustments                   121,969          111,631            119,916
                                                   --------         --------        -----------
                                                    199,150          184,363            193,633
                                                   --------         --------        -----------
Current assets:                                                              
  Cash and temporary cash investments                   887            3,674                798
  Accounts receivable, less allowance of                                     
    $2,404 at 12/31/98, $1,924 at 12/31/97                                   
    and $2,137 at 9/30/98                            21,507           38,549              9,938
  Unbilled revenues                                   9,649           10,809              1,610
  Inventories, at average cost -                                             
    Liquefied natural gas, propane and                                       
     underground storage                                 11                -                 11
    Materials and supplies                              951            1,077              1,166
  Prepaid and refundable taxes                        2,319            1,962              4,417
  Prepayments                                         1,610              604              1,663
                                                   --------         --------        -----------
                                                     36,934           56,675             19,603
                                                   --------         --------        -----------
Deferred charges and other assets                    15,517           12,484             15,378
                                                   --------         --------        -----------
                                                                             
    Total assets                                   $251,601         $253,522        $   228,614
                                                   ========         ========        ===========
 CAPITALIZATION AND LIABILITIES                                              
-------------------------------
                                                                             
 Capitalization (see accompanying                                            
   statement)                                      $164,923         $158,090        $   164,462
                                                   --------         --------        -----------
 Current liabilities:                                                        
   Notes payable                                     14,300           32,310              9,720
   Current portion of long-term debt                  3,155            3,654              3,050
   Accounts payable                                  22,358           12,546              7,332
   Accrued taxes                                      3,421            4,889              2,537
   Accrued vacation                                   1,594            1,545              1,597
   Customer deposits                                  2,977            3,406              2,998
   Other                                              4,193            4,273              4,769
                                                   --------         --------        -----------
                                                     51,998           62,623             32,003
                                                   --------         --------        -----------
 Deferred credits and reserves:                                              
   Accumulated deferred Federal income                                       
     taxes                                           21,876           20,823             21,351
   Unamortized investment tax credits                 2,158            2,315              2,197
   Other                                             10,646            9,671              8,601
                                                   --------         --------        -----------
                                                     34,680           32,809             32,149
                                                   --------         --------        -----------
 Commitments and contingencies                            -                -                  -
                                                   --------         --------        -----------
                                                                             
 Total capitalization and liabilities              $251,601         $253,522        $   228,614
                                                   ========         ========        ===========
                                                            
</TABLE>
 The accompanying notes are an integral part of these consolidated financial
 statements.

                                      I-2
<PAGE>
 
                          THE PROVIDENCE GAS COMPANY
                          --------------------------
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                     -------------------------------------

                    FOR THE THREE MONTHS ENDED DECEMBER 31
                    --------------------------------------
                                  (Unaudited)
                                  -----------

<TABLE>
<CAPTION>
                                                        1998       1997
                                                      ------------------
                                                          (thousands)

<S>                                                   <C>        <C>
Cash provided by (used for)-
Operating Activities:
  Net income                                          $  3,657   $ 4,437
  Items not requiring cash:
    Depreciation and amortization                        4,001     3,486
    Change as a result of regulatory actions                 -     1,500
    Deferred Federal income taxes                          525       225
    Amortization of investment tax credits                 (39)      (39)
    Changes in assets and liabilities
     which provided (used) cash:
      Accounts receivable                              (11,569)   (7,428)
      Unbilled revenues                                 (8,039)   (8,151)
      Deferred gas costs                                     -       151
      Inventories                                          215        89
      Prepaid and refundable taxes                       2,098     1,331
      Prepayments                                           53       362
      Accounts payable                                  14,326     1,932
      Accrued taxes                                        884     2,360
      Accrued vacation, customer deposits
       and other                                          (600)     (503)
      Deferred charges and other                           844       230
                                                      --------   -------
  Net cash provided by (used for)
    operating activities                                 6,356       (18)
                                                      --------   -------
 
Investing Activities:
  Expenditures for property, plant and
    equipment, net                                      (7,753)   (5,713)
                                                      --------   -------
 
Financing Activities:
  Payments on long-term debt                            (1,796)   (1,940)
  Increase in notes payable                              4,580    11,900
  Cash dividends on preferred stock                       (104)     (139)
  Cash dividends on common stock                        (1,194)   (1,194)
                                                      --------   -------
  Net cash provided by financing activities              1,486     8,627
                                                      --------   -------
 
Increase in cash and temporary cash investments             89     2,896
Cash and temporary cash investments at
  beginning of period                                      798       778
                                                      --------   -------
Cash and temporary cash investments at
  end of period                                       $    887   $ 3,674
                                                      ========   =======
 
Supplemental disclosures of cash flow information:
 Cash paid during the period-
   Interest (net of amount capitalized)               $  1,964   $ 1,710
   Income taxes (net of refunds)                      $      4   $     -
 Schedule of non-cash investing activities:
   Capital lease obligations for equipment            $    115   $     -
</TABLE>

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

                                  I-3
<PAGE>
 
                          THE PROVIDENCE GAS COMPANY
                          --------------------------
                   CONSOLIDATED STATEMENTS OF CAPITALIZATION
                   -----------------------------------------
                                  (thousands)

                                                   

<TABLE>
<CAPTION>
                                                   (Unaudited)
                                                   -----------

                                           December 31,      December 31,     September 30,
                                             1998                1997             1998
                                           ----------------------------------------------
<S>                                        <C>               <C>              <C> 
Common stockholder's investment:
Common stock, $1 par
    Authorized - 2,500 shares
    Outstanding - 1,244 as of 12/31/98,
                  12/31/97 and 9/30/98       $  1,244         $  1,244         $  1,244
  Amount paid in excess of par                 37,478           37,546           37,590
  Retained earnings                            45,166           42,415           42,807
                                             --------         --------         --------
Total common equity                            83,888           81,205           81,641
                                             --------         --------         --------
                                                                            
Cumulative preferred stock:                                                 
  Redeemable 8.70% Series, $100 par                                         
  Authorized - 80 shares                                                    
  Outstanding - 48 shares as of                                             
    12/31/98 and 9/30/98, and                   4,800            6,400            4,800
                                             --------         --------         --------
    64 shares as of 12/31/97                                                
                                                                            
Long-term debt:                                                             
  First Mortgage Bonds                         75,728           69,600           77,328
  Other long-term debt                          2,479            2,988            2,573
  Capital leases                                1,183            1,551            1,170
                                             --------         --------         --------
                                                                            
Total long-term debt                           79,390           74,139           81,071
                                                                            
Less current portion                            3,155            3,654            3,050
                                             --------         --------         --------
                                                                            
Long-term debt, net                            76,235           70,485           78,021
                                             --------         --------         --------
                                                                            
Total capitalization                         $164,923         $158,090         $164,462
                                             ========         ========         ========
</TABLE>

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

                                      I-4
<PAGE>
 
                           THE PROVIDENCE GAS COMPANY

                   Notes to Consolidated Financial Statements


Accounting Policies
-------------------

   It is the Registrant's opinion that the financial information contained in
this report reflects all normal, recurring adjustments necessary to a fair
statement of the results for the periods reported; however, such results are not
necessarily indicative of results to be expected for the year, due to the
seasonal nature of the Registrant's operations.  Certain information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted in this Form 10-Q pursuant to the rules and regulations of the
Securities and Exchange Commission.  However, the disclosures herein when read
with the annual report for 1998 filed on Form 10-K are adequate to make the
information presented not misleading.

Rates and Regulation
--------------------

   The Registrant is subject to the regulatory jurisdiction of the Rhode Island
Public Utilities Commission (RIPUC) with respect to rates and charges, standards
of service, accounting and other matters.  In August 1997, the RIPUC approved
the Price Stabilization Plan Settlement Agreement (the Plan or Energize RI)
among the Registrant, the Rhode Island Division of Public Utilities and Carriers
(the Division), The Energy Council of Rhode Island (TEC-RI), and the George
Wiley Center.  Effective October 1, 1997 through September 30, 2000, Energize RI
provides firm customers with a price decrease of approximately four percent in
addition to a three-year price freeze.  Under Energize RI, the Gas Charge Clause
(GCC) mechanism has been suspended for the entire term. Energize RI also
requires the Registrant to make significant capital investments to improve its
distribution system. Capital investments required by Energize RI are estimated
to total approximately $26 million over the three-year term. In addition,
Energize RI requires the Registrant to fund the Low-Income Assistance Program at
an annual level of $1 million, the Demand Side Management Program at an annual
level of $.5 million and the Low-Income Weatherization Program at an annual
level of $.2 million.  Energize RI also continues the process of unbundling by
requiring the Registrant to provide unbundled service offerings for up to 10
percent per year of firm deliveries.

   As part of Energize RI, the Registrant will amortize approximately $4.0
million of environmental costs previously charged to the accumulated
depreciation reserve.  These costs and all environmental costs incurred during
the term of the Plan will be amortized over a 10-year period.  Also, in
connection with the Plan, the Registrant wrote-off approximately $1.5 million of
previously deferred gas costs in October 1997.

   Under Energize RI, the Registrant may earn up to 10.9 percent annually on its
average common equity of up to $81.0 million, $86.2 million and $92.0 million in
fiscal 1998, 1999, and 2000, respectively. In addition, the Registrant may not
earn less than a seven percent return on average common equity.  In the event
that the Registrant earns in excess of 10.9 percent or less than seven percent,
the Registrant will defer revenues or costs through a deferred revenue account
over the term of the Plan.  Any balance in the deferred revenue account at the
end of the Plan will be refunded to or recovered from customers in a manner
determined by all parties to the Plan and approved by the RIPUC.

   As part of Energize RI, the Registrant is permitted to file with the Division
for the recovery of the impact of exogenous changes (Changes) which may occur
during the three-year term of the Plan.  Changes are defined as "...significant
increases or decreases in the Registrant's costs or revenues which are beyond
the Registrant's reasonable control."  Any disputes regarding either the nature
or quantification of the Changes are to be resolved by the RIPUC.  The impact of
any Changes will be debited or credited to a regulatory asset or liability
account throughout the term of Energize RI and will be recovered or refunded at
the expiration of the Plan through a method to be determined.

                                      I-5
<PAGE>
 
   In fiscal 1998, the Registrant did not earn its allowed rate of return
primarily as a result of the extremely warm weather and the loss of non-firm
margin.  The Registrant believes the causes of these two events were beyond its
control and thus considers them as Changes.  In fiscal 1999, the Registrant
intends to file with the Division for recovery of a portion of these losses.
These factors continue to adversely affect the Registrant in fiscal 1999. Under
the Plan's design, which assumed normal weather, the Registrant should have had
earnings in year one of the Plan in excess of 10.9 percent. The earnings in
excess of 10.9 percent were to be deferred in the deferred revenue account to
fund capital investments and other Plan commitments in the remaining two years
of the Plan. Absent favorable recovery for the Changes and/or other factors such
as colder than normal weather, the Registrant's ability to earn a 10.9 percent
return on average common equity during the remainder of Energize RI is
substantially impaired.

Gas Supply
----------
 
   As part of the Price Stabilization Plan Settlement Agreement described above
in "Rates and Regulations", the Registrant entered into a full requirements gas
    ---------------------                                                      
supply contract with Duke Energy Trading and Marketing, L.L.C. (DETM) for a term
of three years.  Under the contract, DETM guarantees to meet the Registrant's
supply requirements; however, the Registrant must purchase all of its gas supply
exclusively from DETM.  In addition the Registrant transferred responsibility
for its pipeline capacity resources, storage contracts, and Liquefied Natural
Gas (LNG) capacity to DETM.  As a result, the Registrant's gas inventories of
approximately $18 million at September 30, 1997 were sold at book value to DETM
on October 1, 1997.

   As well as providing supply for firm customers at a fixed price, DETM will
provide gas at market prices to cover the Registrant's non-firm sales customers'
needs and to make up the supply imbalances of transportation customers.  DETM
will also provide various other services to the Registrant's transportation
service customers including enhanced balancing, standby and the storage and
peaking services available under the Registrant's approved Firm Transportation
(FT-2) storage service effective December 1, 1997.  DETM will receive the supply
related revenues from these services in exchange for providing the supply
management inherent in these services.

   Included in the DETM contract are a number of other important features.  The
Registrant has retained the right to continue to make portfolio changes to
reduce supply costs.  To the extent the Registrant makes such changes, the
Registrant must keep DETM whole for the value lost over the remainder of the
contract period.  This relieves the Registrant of the need to perform certain
upstream supply management functions which will make it possible for the
Registrant to take on the additional supply management workload required by the
further unbundling of firm sales customers without major staffing additions.

     The Registrant has entered into an agreement to amend its existing service
contract with Algonquin LNG, Inc. (ALNG), a subsidiary of Duke Energy. ALNG is
the owner and operator of a LNG tank located in Providence, Rhode Island. The
Registrant relies upon this service to provide gas supply into its distribution
system. The agreement, subject to regulatory approvals, is expected to begin on
November 1, 1999. Under the terms of the agreement, ALNG will replace and expand
the vaporization capability at the tank and make other necessary improvements to
modernize the tank and ensure its reliable operation in the future. The
Registrant will receive enhanced gas supply capability and will no longer be
responsible for compressing boil-off from the LNG tank before delivering that
form of gas supply into its distribution system. The Registrant will receive
$2.6 million from ALNG as reimbursement for costs associated with the project
including labor, engineering and legal expenses that will result as part of this
arrangement.

                                      I-6
<PAGE>
 
Environmental Matters
---------------------
 
     Federal, state and local laws and regulations establishing standards and
requirements for the protection of the environment have increased in number and
in scope within recent years.  The Registrant cannot predict the future impact
of such standards and requirements, which are subject to change and can take
effect retroactively.  The Registrant continues to monitor the status of these
laws and regulations.  Such monitoring involves the review of past activities
and current operations, and may include expending funds to investigate or clean
up certain sites.  To the best of its knowledge, subject to the following, the
Registrant believes it is in substantial compliance with such laws and
regulations.

     At December 31, 1998, the Registrant was aware of five sites at which
future costs may be incurred.

     The Registrant has been designated as a potentially responsible party (PRP)
under the Comprehensive Environmental Response Compensation and Liability Act of
1980 at two sites in Plympton, Massachusetts on which waste material is alleged
to have been deposited by disposal contractors employed in the past either
directly or indirectly by the Registrant and other PRPs.  With respect to one of
the Plympton sites, the Registrant has joined with other PRPs in entering into
an Administrative Consent Order with the Massachusetts Department of
Environmental Protection.  The costs to be borne by the Registrant, in
connection with both Plympton sites, are not anticipated to be material to the
financial condition of the Registrant.

    During 1995, the Registrant began a study at its primary gas distribution
facility located in Providence, Rhode Island.  This site formerly contained a
manufactured gas plant operated by the Registrant. As of December 31, 1998,
approximately $2.2 million had been spent primarily on studies at this site.  In
accordance with state laws, such a study is monitored by the Rhode Island
Department of Environmental Management (DEM).  The purpose of this study was to
determine the extent of environmental contamination at the site.  The Registrant
has completed the study which indicated that remediation will be required for
two-thirds of the property.  The remediation is expected to begin in April 1999
and will continue for a duration of three to six months.  During the remediation
process, the remaining one-third of the property will also be investigated and
remediated if necessary.

   At December 31, 1998, the Registrant compiled a preliminary range of costs,
based on removal and off-site disposal of contaminated soil, ranging from $3.4
million to in excess of $5.0 million.  However, because of the uncertainties
associated with environmental assessment and remediation activities, the future
cost of remediation could be higher than the range noted.  Based on the
proposals for remediation work, the Registrant has accrued $3.4 million at
December 31, 1998, for anticipated future remediation costs at this site.

   Tests conducted following the discovery of an abandoned underground oil
storage tank at the Registrant's Westerly, Rhode Island operations center in
1996 confirmed the existence of contaminants at this site. As a result, the
Registrant completed a site characterization test. Based on the findings of that
test, the Registrant concluded that remediation would be required. As of
December 31, 1998, the Registrant has extracted the underground oil storage tank
and has removed some localized contamination. The costs associated with the site
characterization test and partial removal of soil contaminants were shared
equally with the former owner of the property. The Registrant is currently
engaged in preliminary negotiations to sell the property back to the previous
owner, who would continue to remediate the site. In addition, in 1997,
contamination from scrapped meters and regulators was discovered at this site.
The Registrant reported this to the DEM and the Rhode Island Department of
Health and has completed the necessary remediation. Costs incurred by the
Registrant to remediate this site were approximately $.1 million.

                                      I-7
<PAGE>
 
   In November 1998, the Registrant received a letter of responsibility from DEM
relating to possible contamination on previously-owned property on Allens Avenue
in Providence.  The current operator of the property has been similarly
notified. The current operator conducted tests that support a finding that the
Registrant may be partially responsible for some of the contamination.
Additional investigation is underway to determine the extent of the problem and
the Registrant's responsibility.

     In prior rate cases filed with the RIPUC, the Registrant requested that
environmental investigation and remediation costs be recovered by inclusion in
its depreciation factors consistent with the rate recovery treatment for all
types of cost of removal.  Due to the magnitude of the Registrant's
environmental investigation and remediation expenditures, the Registrant sought
current recovery for these amounts.  As a result, in accordance with the Price
Stabilization Plan Settlement Agreement described in Rates and Regulations,
                                                     --------------------- 
effective October 1, 1997, all environmental investigation and remediation costs
incurred through September 30, 1997, as well as all costs incurred during the
three-year term of the Plan, will be amortized over a ten-year period.
Additionally, it is the Registrant's practice to consult with the RIPUC on a
periodic basis when, in management's opinion, significant amounts might be
expended for environmental-related costs. As of December 31, 1998, the
Registrant has charged environmental assessment and remediation costs of $2.7
million and an estimated $3.4 million in future costs to the accumulated
depreciation reserve and has amortized $.6 million of these costs.

     Management has begun discussions with other parties who may assist the
Registrant in paying any future costs at the above sites. Management believes
that its program for managing environmental issues, combined with rate recovery
and financial contributions from others, will likely avoid any material adverse
effect on its results of operations or its financial condition as a result of
the ultimate resolution of the above sites.
 

New Accounting Pronouncements
-----------------------------

   In June 1997, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 131, "Disclosures about
Segments of an Enterprise and Related Information". SFAS No. 131, which is
effective for the Registrant's fiscal year ending September 30, 1999, requires
that a public business enterprise report financial and descriptive information
about its reportable operating segments.  This statement requires additional
disclosure only and will not affect the financial position or results of
operations of the Registrant.

  In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities".  This Statement establishes accounting and
reporting standards requiring that every derivative instrument (including
certain derivative instruments embedded in other contracts) be recorded on the
balance sheet as either an asset or liability measured at its fair value.  SFAS
No. 133 requires that changes in the derivative's fair value be recognized
currently in earnings unless specific hedge accounting criteria are met.
Special accounting for qualifying hedges allows a derivative's gains and losses
to offset related results on the hedged item in the income statement, and
requires that a company must formally document, designate and assess the
effectiveness of transactions that receive hedge accounting.

   SFAS No. 133 is effective for the Registrant's fiscal year ending September
30, 2000.  A company may also implement the Statement as of the beginning of any
fiscal quarter after issuance (that is, fiscal quarters beginning June 16, 1998
and thereafter).  SFAS No. 133 cannot be applied retroactively.  SFAS No. 133
must be applied to (a) derivative instruments and (b) certain derivative
instruments embedded in hybrid contracts that were issued, acquired or
substantively modified after December 31, 1997 (and, at a company's election,
before January 1, 1998).

                                      I-8
<PAGE>
 
   The Registrant has not yet quantified the impact of adopting SFAS No. 133 on
its consolidated financial statements and has not determined the timing of or
method of adoption of SFAS No. 133.

   In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) 98-1, "Accounting for the Costs of Computer Software
Developed or Obtained for Internal Use."  It applies to all nongovernmental
entities and is effective for the Registrant's financial statements for the
fiscal year ending September 30, 2000.  The provisions of this SOP should be
applied to internal-use software costs incurred in fiscal years subsequent to
December 15, 1998 for all projects, including those projects in progress upon
initial application of the SOP.

   The SOP establishes accounting standards for the determination of capital or
expense treatment of expenditures for computer software developed or obtained
for internal use based upon the stage of development.  The SOP defines the three
stages as (1) Preliminary Project, (2) Application Development and (3) Post-
Implementation/Operation.  As a general rule, the Preliminary Project and Post-
Implementation/Operation phase expenditures are expensed and Application
Development expenditures are capitalized.

   The Registrant will adopt the SOP upon the effective date and assess its
impact at that time.

                                      I-9
<PAGE>
 
ITEM 2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
         -----------------------------------------------------------
            AND RESULTS OF OPERATIONS
            -------------------------
 
         The Providence Gas Company (the Registrant) and its subsidiary and
     their representatives may from time to time make written or oral
     statements, including statements contained in the Registrant's filings with
     the Securities and Exchange Commission (SEC), which constitute or contain
     "forward-looking" statements as that term is defined in the Private
     Securities Litigation Reform Act of 1995 or by the SEC in its rules,
     regulations, and releases. All statements other than statements of
     historical facts included in this Form 10-Q regarding the Registrant's
     financial position, strategic initiatives and industry developments are
     forward-looking statements.  Where, in any forward-looking statement, the
     Registrant, or its management, expresses an expectation or belief as to
     future results, such expectation or belief is expressed in good faith and
     believed to have a reasonable basis, but there can be no assurance that the
     statement of expectation or belief will result or be achieved or
     accomplished. Factors which could cause actual results to differ materially
     from those anticipated include but are not limited to: general economic,
     financial and business conditions; changes in government regulations or
     regulatory policies; competition in the energy services sector; regional
     weather conditions; the availability and cost of natural gas; development
     and operating costs; the availability and terms of capital; the business
     abilities and judgment of personnel; the ability of the Registrant and its
     suppliers and customers to modify or redesign their computer systems to
     work properly in the Year 2000; the Registrant's ability to grow its
     business through customer growth; unanticipated environmental liabilities;
     the costs and effects of unanticipated legal proceedings; the impacts of
     unusual items resulting from ongoing evaluations of business strategies and
     asset valuations; and changes in business strategy.
 
     RESULTS OF OPERATIONS
 
         For the current quarter and twelve month period, the Registrant's
  operating revenues, operating margin and net income applicable to common stock
  have decreased over the comparable period presented, as shown in the table
  below:

  (000's)

<TABLE>
<CAPTION>
                                            Three Months                                          Twelve Months
                                          Ended December 31                                      Ended December 31
                                                                  Percent                                         Percent
                                1998        1997        Change     Change            1998         1997       Change     Change
                              -------     -------      --------   -------           --------    --------    -------     ------
<S>                           <C>         <C>          <C>        <C>               <C>         <C>         <C>         <C> 
 Operating                                                                     
 revenues                     $51,877     $59,200      $(7,323)    (12.4)           $176,703    $208,200    $(31,497)   (15.1)
                              =======     ========     ========   =======           ========    ========     =======    ======
                                                                                                                     
 Operating margin             $26,249     $26,867      $  (618)     (2.3)           $ 91,760    $ 94,183    $ (2,423)    (2.6)
                              =======     ========     ========   =======           ========    ========     =======    ======
 Net income                                                                                                          
 applicable to                                                                                                       
 common stock                 $ 3,553     $  4,298     $  (745)    (17.3)           $  7,527    $  8,159     $  (632)    (7.7)
                              =======     ========     ========   =======           ========    ========     =======    ======
 </TABLE>
 
                                     I-10
<PAGE>
 
Operating Margin
----------------

    Operating margin decreased approximately $.6 million on 2.3 percent compared
to the same quarter last year and approximately $2.4 million or 2.6 percent for
the twelve months ended December 31, 1998 versus the same period last year.

    During the latest quarter, the Registrant experienced weather that was 14
percent warmer than the same quarter last year. This warmer weather resulted in
decreased margin of approximately $2.5 million.  This decrease was partially
offset by the write-off of $1.5 million of previously deferred gas costs in the
first quarter of fiscal 1998 in connection with Energize RI.

    The Registrant experienced weather that was 15 percent warmer for the twelve
months ended December 31, 1998 versus the same period last year.  The warmer
temperatures resulted in decreased margin of approximately $7.4 million compared
to last year.  Offsetting the warmer than normal weather was $9.4 million of
margin generated under Energize RI which became effective October 1, 1997. This
additional margin includes $9.1 million associated with adjusting the Gas Charge
Clause (GCC) mechanism.

    Additionally, non-firm margin decreased $1.6 million when compared with the 
twelve months ended last year. Prior to Energize RI, the Registrant was allowed
to recover approximately $3.0 million in non-firm margin under the terms of the
Integrated Resource Plan (IRP), subject to the Registrant's ability to generate
sufficient gas cost savings for customers. As a result of Energize RI, the
Registrant retains the actual non-firm margin earned. Due to an unfavorable
pricing difference between natural gas and alternative fuels, the Registrant
experienced a decrease in non-firm sales and transportation margin.

    As part of Energize RI, the performance-based ratemaking mechanism
(Mechanism) under the IRP was teminated in September 1997.  During the previous
twelve month period the Registrant recorded $1.5 million in additional margin as
a result of this Mechanism.  Thus, a decrease in margin from the twelve months
ended this year to the same period last year occurred because this Mechanism was
no longer available.

Operating and Maintenance Expenses
----------------------------------

    Overall, operating and maintenance expenses increased approximately $.3
million or 2.6 percent from the same quarter last year and decreased
approximately $1.3 million or 2.8 percent for the twelve months ended December
31, 1998 when compared to the same twelve month period last year.

    The Registrant's operating and maintenance expense increase quarter over
quarter  is primarily attributable to normal recurring pay increases.

    The twelve month decrease is primarily attributable to a decrease in the bad
debt expense.  The decrease in bad debts was attributable to improved collection
experience and the implementation of new credit policies, as well as decreased
operating revenues from warmer than normal weather.  The Registrant's other
operating and maintenance expenses were essentially flat due to cost management.

    The Company continually reviews its operating expenses in order to keep
expenses as low as possible; however, expenses can vary from year to year.

Depreciation and Amortization Expenses
--------------------------------------

    Depreciation and amortization expense increased approximately $.6 million or
18.5 percent compared to the same quarter last year and approximately $1.3
million or 10.0 percent for the twelve months ended December 31, 1998 versus the
same period last year.  This increase was the result of increased capital
spending for Energize RI commitments including technology projects as well as
the amortization of previously deferred environmental costs. Effective October
1, 1997, ProvGas began amortizing environmental costs over a ten-year period in
accordance with Energize RI.

                                      I-11
<PAGE>
 
Taxes
-----

    Taxes for the current quarter versus last year decreased approximately $.6
million or 10.2 percent and decreased approximately $1.2 million or 6.8  percent
for the current twelve-month period versus last year. The decrease in taxes,
mainly State gross earnings and Federal income, was the result of lower
operating revenues and lower pretax earnings.

Other, net
----------

   Other, net remained flat in the current quarter versus the same quarter last
year and increased approximately $.1 million for the twelve months ended
December 31, 1998 versus the same period last year.  The majority of the
increase is attributable to interest income earned as a result of Federal income
tax refunds resulting from amending prior year tax returns.

Interest Expense
----------------

    Interest expense decreased $.2 million or 8.4 percent during the latest
quarter compared to the same quarter last year and decreased approximately $.2
million or 3.0 percent during the latest twelve months compared to the same
twelve months last year. The Registrant's short-term borrowings decreased as a
result of the Series S First Mortgage Bond issuance in April 1998.

FUTURE OUTLOOK

Regulatory

   Under Energize RI, the Registrant may earn up to 10.9 percent annually on its
average common equity of up to $81.0 million, $86.2 million, and $92.0 million
in fiscal 1998, 1999 and 2000, respectively.  In addition, the Registrant may
not earn less than a seven percent return on average common equity.  In the
event that the Registrant earns in excess of 10.9 percent or less than seven
percent, the Registrant will defer revenues or costs through a deferred revenue
account over the term of the Plan.  Any balance in the deferred revenue account
at the end of the Plan will be refunded to or recovered from customers in a
manner to be determined by all parties to the Plan and approved by the Rhode
Island Public Utilities Commission (RIPUC).

   As part of Energize RI, the Registrant is permitted to file with the RI
Division of Public Utilities and Carriers (Division) for the recovery of the
impact of exogenous changes (Changes) which may occur during the three-year term
of the Plan. Changes are defined as "...significant increases or decreases in
the Registrant's costs or revenues which are beyond the Registrant's reasonable
control."  Any disputes regarding either the nature or quantification of the
Changes are to be resolved by the RIPUC.  The impact of any Changes will be
debited or credited to a regulatory asset or liability account throughout the
term of Energize RI and will be recovered or refunded at the expiration of the
Plan through a method to be determined.

   In fiscal 1998, the Registrant did not earn its allowed rate of return
primarily as a result of the extremely warm weather and the loss of non-firm
margin.  The Registrant believes the causes of these two events were beyond its
control and thus considers them as Changes.  In fiscal 1999, the Registrant
intends to file with the Division for recovery of a portion of these losses.
These factors continue to adversely affect the Registrant in fiscal 1999. Under
the Plan's design, which assumed normal weather, the Registrant should have had
earnings in year one of the Plan in excess of 10.9 percent. The earnings in
excess of 10.9 percent were to be deferred in the deferred revenue account to
fund capital investments and other Plan commitments in the remaining two years
of the Plan. Absent favorable recovery for the Changes and/or other factors such
as colder than normal weather, the Registrant's ability to earn a 10.9 percent
return on average common equity during the remainder of Energize RI is
substantially impaired.

                                      I-12
<PAGE>
 
LIQUIDITY AND CAPITAL RESOURCES

       During the current year, the Registrant's cash flow from operating
activities increased approximately $6.4 million for the quarter ended December
31, 1998 compared to the same period last year.  This increase was primarily due
to a temporary increase in accounts payable for gas supply due to the timing of
payments made to Duke Energy Trading and Marketing, L.L.C. (DETM).  Offsetting
this increase was the prior year receipt of funds in the first quarter of fiscal
1998 in relation to the sale of the Registrant's working gas in storage to DETM.

   Capital expenditures for the quarter ended December 31, 1998 of $7.8 million
increased $2.1 million or 36 percent when compared to $5.7 million for the same
period last year.  This spending increase was due primarily to the Registrant's
continued efforts to move its information technology systems from a mainframe to
a client server environment.  Anticipated capital expenditures for the remainder
of Energize RI are expected to total approximately $51.3 million.

   During the current quarter, the Registrant's cash flow from financing
activities decreased $7.1 million due primarily to a temporary reduction in
short-term borrowings.  This reduction is due to the increase in cash flow from
operating activities as discussed above.  In September 1998, the Registrant
repurchased $6.4 million of Series M First Mortgage Bonds.  The Registrant
issued $15 million in Series T First Mortgage Bonds on February 8, 1999, the
proceeds of which were used to reduce borrowings under its lines of credit as
well as for general corporate purposes.  The Series T bonds are for a 30 year
term at an interest rate of 6.5 percent.  The Registrant estimates savings of
approximately $1.8 million over the life of the new debt.  The Registrant has
received an order from the Division which permits the amortization of the Series
M bond repurchase premium over the life of the Series T bonds.

YEAR 2000 UPDATE

     The Registrant's company-wide Year 2000 Project is proceeding on schedule.
The Project addresses the problem arising from the use in software programs and
computing infrastructure of two-digit years to define the applicable year,
rather than four-digit years, and from time-sensitive software that may
recognize a date using "00" as the last two digits of the year 1900, rather than
the year 2000.

Readiness

     The Registrant recognizes that the products and services that the
Registrant provides to its customers are essential, and senior management has
made Year 2000 readiness a top priority.  The Registrant's Year 2000 Project
Office is working with two international consulting firms to ensure the
continuity of mission critical business systems and processes before and beyond
the Year 2000.  The Registrant has organized the Project around the following
four major areas:

1.   Information Technology (IT) Systems

     The Registrant continues to implement its technology plan developed in 1992
which includes the migration from a mainframe centric to a client server centric
environment.  The migration includes the replacement of the Customer Information
System (CIS) which supports the business function of customer inquiry, service
orders and billing.  It also includes the replacement of its business
applications such as financial, human resources, and procurement with an
Enterprise Resource Planning (ERP) system.  These new business applications have
been represented to be Year 2000 ready by their respective vendors. This
migration is expected to be completed by June 30, 1999.

     The Registrant has completed an inventory and assessment of its remaining
IT systems and IT infrastructure.  All mission critical systems are expected to
be remediated, upgraded or replaced and tested by June 30, 1999.

     The Registrant has implemented procurement policies as part of its efforts
to ensure Year 2000 readiness.  These policies address any future changes to the
Registrant's IT systems environment and its future acquisitions of IT systems.

                                      I-13
<PAGE>
 
2.   Embedded Systems

     Embedded microprocessors are found in equipment deployed in the
Registrant's distribution and facility operations.  The distribution area
includes, but is not limited to, the monitoring, storage, measurement and
control of the flow of natural gas.  The facility area includes, but is not
limited to, back-up power supply, HVAC and security at the Registrant's offices.

     The Registrant has completed the assessment of its embedded components.
Many of the components associated with the Registrant's mission critical systems
have been identified as Year 2000 ready.  A remediation plan for mission
critical embedded systems has been completed and implementation of this plan is
underway.  Remediation and testing of mission critical embedded systems is
scheduled to be completed by June 30, 1999.  Remediation and testing of all
other embedded systems is planned to be completed by September 30, 1999.

3.   Upstream/Downstream

     The Registrant has developed a plan to identify its major suppliers and
customers and will evaluate their Year 2000 readiness through a combination of
correspondence, telephone interviews, and site visits.  The Registrant is
actively participating with the Rhode Island Y2K (Year 2000) Group which acts as
a communication forum for key customers as well as the other essential suppliers
of services such as telecommunications, water and electric.

     The Registrant has contacted its major suppliers critical to the delivery
of natural gas to its' system, including interstate pipelines, DETM, New England
Electric System and Bell Atlantic. All suppliers have indicated that they are
following a comprehensive program on a timely schedule designed to (1) inventory
and identify equipment and systems that are date sensitive; (2) assess, test,
remediate, and/or replace such equipment and/or systems; (3) maintain continuity
of service through preparation and implementation of an appropriate contingency
plan; and (4) assess the Y2K program and compatibility of important upstream
suppliers. While the Registrant cannot guarantee Y2K readiness of these and
other suppliers, information received from them indicates that they expect to
fulfill their obligations to the Registrant on and after January 1, 2000. The
Registrant's plan to address the assessment of third parties provides for
contacting all other critical suppliers by March 31, 1999. The assessment of all
other suppliers will continue throughout 1999. Any risk areas that surface as a
result of these assessments will be addressed in contingency planning.

4.   Contingency Planning

     The Registrant has contingency plans in place for response to certain
emergency operational situations.  The Registrant has begun conducting workshops
to develop actionable contingency plans which will address risks to its major
business processes due to the Year 2000 computer problem.  Such contingency
plans may include using manual procedures and arranging for alternative
suppliers.  The Registrant expects its Year 2000 contingency plans to be in
place by June 30, 1999, with continued refinement throughout 1999.

Year 2000 Costs

     The Registrant has developed a preliminary comprehensive budget for all
phases of its Year 2000 effort. The Registrant expects to capitalize Year 2000
costs incurred with a five-year amortization period consistent with the
regulatory treatment approved by the RIPUC under the Energize RI program.
Additionally, it is the Registrant's practice to consult with the RIPUC on a
periodic basis when, in management's opinion, significant amounts might be
expended for Year 2000 costs.


     As of December 31, 1998, the Registrant had deferred Year 2000 costs of
approximately $3.2 million which includes $.7 million for the assessment phase
of its Year 2000 effort. Remaining activities include project management and
consulting for the Year 2000 Project Office, contingency planning and testing of
the IT infrastructure and IT business systems. Costs for these activities,
together with previously deferred Year 2000 costs, are expected to range from $8
million to $11 million. These estimated costs include external contractors and
service providers, as well as the purchase of computer hardware and software.

     These estimates do not include Year 2000 costs which may be incurred by
joint ventures or partnerships for which the Registrant does not have primary
operating responsibility or costs of implementing the new CIS and ERP systems
pursuant to its ongoing technology plan. Additionally, the Registrant does not 
separately track the internal costs incurred for the Year 2000 project. Such 
costs are principally the related payroll costs for the information systems 
group. Substantially all of these costs are currently included in the rates 
being charged to the Registrant's customers under Energize RI, and therefore are
being expensed as they are incurred.

                                      I-14
<PAGE>
 
     These cost estimates and the dates on which the Registrant plans to
complete Year 2000 modification and testing processes and contingency planning
are based on management's current best estimates which were derived utilizing
numerous assumptions of future events, including the continued availability of
technological and certain other resources, the accuracy of third party
assurances and other factors.  There can be no guarantee that these estimates
will be achieved, and actual results may differ from those discussed above.

Risk Assessment

     No amount of preparation and testing can guarantee Year 2000 readiness.
However, the Registrant believes that it has taken and will take appropriate
preventative measures designed to minimize disruption before, during and after
January 1, 2000.

     The successful implementation of its CIS and ERP systems and the upgrade of
its Supervisory Control and Data Acquisition software applications prior to
January 1, 2000 are critical to enable the Registrant to avoid significant
business disruption in Year 2000.  In addition, a disruption in the extraction
or processing, transmission or storage of gas or its distribution due to Year
2000 problems experienced by the Registrant's gas suppliers could prevent those
suppliers from delivering a sufficient amount of gas to enable the Registrant to
serve certain customer segments.  Even if the flow of gas is not disrupted,
customers may not be able to receive gas if electrical service is disrupted.

     Because of the difficulty of assessing Year 2000 readiness of these
suppliers and others outside the control of the Registrant, the Registrant
considers potential disruptions by these third parties to present the
"reasonably likely worst case scenario." The Registrant's inability to serve its
customers could result in increased costs, loss of revenue and potential claims.

     The Rhode Island Public Utilities Commission has opened a generic docket to
investigate the readiness of regulated utilities for the millennium. Hearings
are scheduled for February 17 and 18, 1999. The Registrant has been requested to
present information regarding its Year 2000 readiness.

     This Year 2000 update contains "forward-looking statements" within the
meaning of the Private Securities Litigation Reform Act of 1995.  These 
forward-looking statements are subject to risks and uncertainties, and actual
results may differ materially from those described herein.

                                      I-15
<PAGE>
 
     THE PROVIDENCE GAS COMPANY
     --------------------------

     PART II.  OTHER INFORMATION
     ---------------------------
 
     Item 6 (a).  Exhibits
     -----------  --------
 
     10a.  Liquified Natural Gas Service Precedent Agreement dated December 11,
     1998 between Algonquin LNG, Inc. and the Registrant.
 
 
     Item 6 (b).  Reports on Form 8-K
     -----------  -------------------
 
     No reports on Form 8-K were filed during the quarter for which this report
     is filed.
 
                                      II-1
<PAGE>
 
                        THE PROVIDENCE GAS COMPANY
                        --------------------------
 
 
 
     It is the opinion of management that the financial information contained in
     this report reflects all adjustments necessary for a fair statement of
     results for the periods reported, but such results are not necessarily
     indicative of results to be expected for the year, due to the seasonal
     nature of the Registrant's gas operations. All accounting policies and
     practices have been applied in a manner consistent with prior periods.
 

 
 
                                   SIGNATURE
                                   ---------
 
     Pursuant to the requirements 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.
 
                         The Providence Gas Company
                         (Registrant)
 
 
 
                         BY:/s/  Gary S. Gillheeney
                            ------------------------------        
                            GARY S. GILLHEENEY
                            Senior Vice President,
                            Chief Financial Officer and
                            Teasurer
 
 
     Date:  February 12, 1999
          -------------------

                                      II-2