EMPLOYMENT AGREEMENT



     THIS EMPLOYMENT  AGREEMENT,  dated as of the 28th day of August,  1996, and
amended as of the 6th day of May, 1998, by and among  PENNSYLVANIA  ENTERPRISES,
INC. ("PEI"), PG ENERGY, INC. ("PGE") and Thomas F. Karam (the "Executive"),  an
individual residing at 331 Glenburn Road, Clarks Summit, Pennsylvania 18411.

                              W I T N E S S E T H:

     WHEREAS,  PEI and PGE each  desires to employ  Executive in the capacity of
its President and Chief Executive  Officer in connection with the conduct of its
business; and

     WHEREAS, PEI and PGE are offering Executive this Employment Agreement as an
inducement to remain in their employ; and

     WHEREAS,  Executive  desires  to accept  such  employment  on the terms and
conditions herein set
forth.

     NOW, THEREFORE, in consideration of the foregoing and the
mutual covenants contained herein, the parties hereto agree as follows:

     1. Employment.

     PEI and PGE each  hereby  employs  Executive  as its  President  and  Chief
Executive
Officer,  and  Executive  hereby  accepts  such  employment,  upon the terms and
conditions hereinafter set forth.

     2. Term.

     The term of employment of Executive under this Agreement (the "Term") shall
commence  on  September  1, 1996 and shall end on the date which is the  seventh
anniversary thereof unless terminated in accordance with Section 6 or 7 hereof.

     3. Office and Duties.

     During the Term, Executive shall serve as the President and Chief Executive
Officer of PEI and PGE and shall  report to the Boards of  Directors of PEI (the
"PEI Board") and PGE (the "PGE Board").  Executive  shall perform such duties as
are customary for the President and Chief Executive Officer of a company engaged
in natural gas distribution and energy-related services in the United States and
consistent  with  such  position  and  status,  and  such  other  executive  and
administrative  duties consistent therewith as may from time to time be assigned
to him by the PEI Board and the PGE  Board.  During  the Term,  Executive  shall
devote his full  business  time and best efforts to the business of PEI and PGE;
provided,  however,  that Executive may engage in other activities to the extent
that such  other  activities  do not  inhibit or  prohibit  the  performance  of
Executive's  duties under this  Agreement,  or conflict in any material way with
the business of PEI, PGE or any of their respective affiliates.

     4. Compensation.

     As compensation for the services to be rendered hereunder by Executive, PEI
and PGE collectively agree to pay to Executive,

     (a) an  aggregate  salary  payable in cash in  accordance  with PGE's usual
payroll  practices of $212,880 for the first year of the Term,  $225,000 for the
second year of the Term until April 30,  1998,  and $275,000 for the period from
May 1, 1998 to April 30, 1999. Thereafter the Compensation  Committee of the PEI
Board shall conduct  periodic  salary and  performance  reviews for Executive in
accordance with PEI's usual practices and, based upon such reviews,  Executive's
annual salary may be increased above but may not be decreased below $275,000 per
annum.

     (b) a grant of options  under  PEI's 1992 Stock  Option  Plan (the  "Option
Plan") to purchase  75,000  shares of PEI's common stock,  no par value,  stated
value $10.00 per share  ("Common  Stock") to be made on September1,  1996.  Such
options  shall become  exercisable,  subject to  acceleration  in the event of a
"Change of Control" of PEI (as defined in the Option Plan) pursuant to the terms
of the Option Plan, as follows:  options to purchase  15,000 shares shall become
exercisable on September 1,1997, options to purchase an additional 15,000 shares
shall become exercisable on September 1, 1998, options to purchase an additional
15,000 shares shall become exercisable on September 1, 1999, options to purchase
an additional  15,000 shares shall become  exercisable  on September 1, 2000 and
options to purchase an  additional  15,000  shares shall become  exercisable  on
September  1,  2001.  Such  options  shall be  exercisable  for the three  years
following the  termination of  Executive's  employment for any reason except for
termination  by PEI  pursuant to Section  7(a) hereof for "Cause" (as defined in
Section 7(a) hereof) or termination by Executive pursuant to Section 7(d) hereof
without "Good Reason" (as defined in Section 7(c) hereof).

     (c) a grant of options  under PEI's Stock  Incentive  Plan (the  "Incentive
Plan") to purchase  60,000  shares of PEI's common stock,  no par value,  stated
value $10.00 per share ("Common  Stock") to be made on May 6, 1998. Such options
shall become  exercisable,  subject to acceleration in the event of a "Change of
Control" of PEI (as defined in the Incentive  Plan) pursuant to the terms of the
Incentive  Plan,  as follows:  options to purchase  30,000  shares  shall become
exercisable on May 1, 2002, and options to purchase an additional  30,000 shares
shall become  exercisable  on May 1, 2003.  The  exercisability  of such options
shall  be  subject  to the  achievement  by the  Company  of any  financial  and
operational  goals  specified  by the  Compensation  Committee  of the  Board of
Directors of the Company  except in the event of a Change of Control (as defined
in  the  Incentive  Plan),  in  which  case  such  options  shall  become  fully
exercisable. Such options shall be exercisable for the three years following the
termination of Executive's  employment for any reason except for  termination by
PEI  pursuant to Section  7(a)  hereof for  "Cause" (as defined in Section  7(a)
hereof) or  termination  by Executive  pursuant to Section  7(d) hereof  without
"Good Reason" (as defined in Section 7(c) hereof.

     5. Benefits.

     (a) Executive  shall be entitled  during the Term to  participate in (i)all
employee  benefit  plans and programs as are  currently  available  and as shall
become  available  from  time to time to  other  employees  of PEI  and/or  PGE,
including,   without   limitation,   any   health,   accident,   disability   or
hospitalization  insurance  and (ii) all  executive  plans and  programs in each
case, to the extent that his position,  tenure,  compensation,  age,  health and
other  qualifications  make him  eligible  to  participate,  and to  continue to
receive all  perquisites as are currently  available to Executive.  In addition,
Executive  shall be eligible for 4 weeks paid vacation during each calendar year
of the Term.

     (b) PEI and/or PGE shall pay for any further  education or annual  training
or licensing  requirements of Executive and training or educational  seminars as
may be required by PEI and/or PGE.

     (c) PEI and PGE shall each  promptly  reimburse  Executive for all business
expenses  and  disbursements   incurred  by  Executive  in  the  performance  of
Executive's  duties  during  the  Term  in  accordance  with  its  then  current
reimbursement policies.

     6. Termination for Death or Disability.

     At the  election of PEI and/or  PGE,  the  employment  of  Executive  shall
terminate  in the event that  Executive  shall fail to render  and  perform  the
services  required of him under this  Agreement on a full-time  basis because of
any physical or mental  incapacity or disability as determined by a physician or
physicians acceptable to Executive and PEI and/or PGE for a total of 180 days or
more  during  any  consecutive  12 month  period  ("Disability").  In the  event
Executive  dies  during  the Term or in the  event  PEI  and/or  PGE  elects  to
terminate the  employment of Executive for  Disability,  all  obligations of PEI
and/or  PGE  under  this  Agreement  will  cease  as of the  date  of  death  or
termination, except that PEI and/or PGE collectively shall pay, and Executive or
his  personal  representative,  as the case may be, shall be entitled to receive
(i) the unpaid  portion of his salary  accrued  through  the end of the month in
which such  Disability  is finally  determined,  to be paid in  accordance  with
Section 4(a) hereof and (ii)  vested,  nonforfeitable  amounts  owing or accrued
under any  benefit  plans or programs  set forth or referred to in Section  5(a)
hereof in which Executive participated as of his termination under the terms and
conditions of the plan or program pursuant to which such benefits were granted.

     7. Termination of Employment Other Than for Death or Disability.

     (a) Cause.  PEI and/or PGE may  terminate  the  employment of Executive for
"Cause"  at any  time in  accordance  with the  provisions  of this  Section  7.
Termination for "Cause" shall mean discharge by PEI and/or PGE on the grounds of
(i) Executive's willful misconduct or gross negligence in the performance of his
obligations under this Agreement,  (ii) the habitual  intoxication of Executive,
(iii)  inexcusable  repeated or prolonged  absence from work by Executive (other
than pursuant to the Disability of Executive),  (iv) the commission by Executive
of an act of fraud or  embezzlement,  (v) any  intentional or grossly  negligent
unauthorized disclosure of Confidential  Information (as defined in Section 8(b)
hereof) of PEI, PGE or any of their respective affiliates,  (vi) a conviction of
Executive  (including  entry  of a guilty  or nolo  contendere  plea)  involving
dishonesty  or moral  turpitude  or (vii) the willful  failure of  Executive  to
perform  faithfully the lawful duties which are assigned to him which are within
the scope of PEI's and/or PGE's  respective  businesses  and such failure is not
cured by Executive  within 14 days after written  notice thereof from PEI and/or
PGE to Executive.  Upon a termination  for Cause,  all obligations of PEI and/or
PGE under this Agreement will cease as of the date of  termination,  except that
PEI and/or PGE collectively shall pay Executive, and Executive shall be entitled
to receive,  (x) the unpaid  portion of his salary pro rated through the date of
termination,  to be paid in accordance  with Section 4(a) hereof and (y) vested,
nonforfeitable  amounts owing or accrued under any benefit plans or programs set
forth or referred to in Section 5(a) hereof in which  Executive  participated as
of his  termination  under  the  terms  and  conditions  of the plan or  program
pursuant to which such benefits were granted.

     (b) Without Cause. In the event the Executive's employment is terminated by
PEI and/or PGE without Cause, other than by reason of the death or Disability of
Executive,  all obligations of PEI and/or PGE under this Agreement will cease as
of the date of termination,  except that PEI and/or PGE  collectively  shall pay
Executive,  and Executive  shall be entitled to receive  either (i) in the event
such termination does not occur within three years following the date on which a
"Change in Control" (as defined  below) of PEI occurs (A) the unpaid  portion of
his salary to the end of the Term,  to be paid in  accordance  with Section 4(a)
hereof,  and (B)  vested,  nonforfeitable  amounts  owing or  accrued  under any
benefit  plans or programs  set forth or  referred to in Section  5(a) hereof in
which  Executive  participated  as  of  his  termination  under  the  terms  and
conditions  of the plan or program  pursuant to which such benefits were granted
or (ii) in the event such  termination  occurs within three years  following the
date on which a Change in Control of PEI occurs (A) a Severance Payment equal to
two times (2x) Executive's  annual salary for the year in which such termination
occurs  to be paid in a lump sum  within  10 days of such  termination,  (B) the
unpaid portion of Executive's salary with respect to any additional years (other
than the year in which such termination occurs) remaining in the Term to be paid
in accordance with Section 4(a) hereof, (C) a continuation for a period of three
years  following  the date on which a Change in  Control  of PEI occurs or until
such time as Executive has obtained new  employment and is covered by equivalent
benefits,  whichever is sooner,  of  Executive's  coverage at the expense of PEI
and/or PGE under life  insurance,  hospitalization  and medical plans  providing
benefits which are  substantially  comparable to benefits  provided to Executive
under  benefit  plans of PEI, PGE and their  respective  subsidiaries  in effect
immediately prior to the Change in Control of PEI and (D) vested  nonforfeitable
amounts  owing or accrued under any other benefit plans or programs set forth or
referred to in Section  5(a) hereof in which  Executive  participated  as of his
termination  under the terms and  conditions of the plan or program  pursuant to
which such benefits were granted.

     For  purposes  of this  Agreement,  a "Change in  Control"  of PEI shall be
deemed to have occurred if and when:

     (w) there shall be consummated  either (i) any  consolidation  or merger of
PEI in which PEI is not the  continuing or surviving  corporation or pursuant to
which shares of PEI's Common Stock are converted into cash,  securities or other
property,  other than a  consolidation  or merger of PEI in which each holder of
PEI's Common Stock  immediately prior to the merger has upon consummation of the
merger  the same  proportionate  ownership  of  common  stock  of the  surviving
corporation  as such holder had of PEI's Common Stock  immediately  prior to the
merger, or (ii) any sale, lease,  exchange or other transfer (in one transaction
or a series of  transactions  contemplated  or arranged by any party as a single
plan) of all or substantially all of the assets of PEI;

     (x) the  shareholders  of PEI shall  approve any plan or  proposal  for the
liquidation or dissolution of PEI;

     (y) any person (as such term is used in Sections  13(d) and 14(d)(2) of the
Securities  Exchange Act of 1934, as amended (the "Exchange  Act")),  other than
any trustee under any employee  benefit plan of PEI or any of its  subsidiaries,
and  persons  (as such term is so used) who are then  affiliates  (as defined on
August 28, 1996 in Rule 12b-2 under the Exchange Act) of such person, or any one
of them,  shall after the date hereof become the beneficial  owner or owners (as
defined on August 28,  1996 in Rules 13d-3 and 13d-5  under the  Exchange  Act),
directly or indirectly,  of securities of PEI  representing in the aggregate 20%
or more of the voting power of all then outstanding securities of PEI having the
right  under  ordinary  circumstances  to vote in an  election  of the PEI Board
(without  limitation,  any  securities  of PEI having such voting power that any
such person has the right to acquire pursuant to any agreement, or upon exercise
of  conversion  rights,  warrants  or  options,  or  otherwise,  shall be deemed
beneficially owned by such person); or

     (z) during  any period of 13  consecutive  months,  individuals  who at the
beginning of such period  constitute  the entire PEI Board and any new directors
whose  election  by the PEI Board,  or whose  nomination  for  election by PEI's
shareholders, shall have been approved by a vote of at least two-thirds (2/3) of
the directors then still in office who either were directors at the beginning of
the period or whose election or nomination for election  shall  previously  have
been so  approved  shall  cease for any reason to  constitute  a majority of the
members of the PEI Board.

     (c) For Good Reason.  Executive  may  terminate  his  employment  for "Good
Reason"  upon 90 days'  written  notice to PEI and/or PGE.  For purposes of this
Agreement  "Good Reason" shall mean (i) an adverse change in Executive's  title,
(ii) an assignment of duties to Executive which are inconsistent with his status
as President and Chief Executive  Officer of PEI and/or PGE, (iii) a substantial
adverse  alteration  in  Executive's  status,   nature  of  responsibilities  or
authority  within PEI and/or PGE,  (iv)  following a Change in Control of PEI, a
failure by PEI, PGE or any of their respective  subsidiaries  either to continue
in effect any incentive or  compensation  plan or arrangement in which Executive
shall be participating at the time of the Change in Control of PEI or to provide
other plans or arrangements  providing  Executive with substantially  comparable
benefits or the taking by PEI, PGE or any of their  respective  subsidiaries  of
any action  which  would  directly or  indirectly  materially  adversely  affect
Executive's participation in or materially reduce Executive's benefits under any
such plan or arrangement,  (v) any relocation of Executive's  base of employment
more than 25 miles from Wilkes-Barre,  Pennsylvania  without Executive's written
consent,  (vi)  following a Change in Control of PEI,  any failure by PEI and/or
PGE to provide Executive with the number of paid vacation days per year to which
Executive was entitled  immediately prior to the Change in Control of PEI, (vii)
any breach by PEI and/or PGE of any  material  provision  of this  Agreement  or
(viii)  following  a Change in Control of PEI,  any failure by PEI and/or PGE to
obtain from any successor to PEI a satisfactory  agreement to assume and perform
this Agreement.  In the event that Executive  terminates his employment for Good
Reason,  all obligations of PEI and/or PGE under this Agreement will cease as of
the date of  termination,  except  that PEI  and/or PGE  collectively  shall pay
Executive  and  Executive  shall be entitled to receive  either (x) in the event
such termination does not occur within three years following the date on which a
Change in Control of PEI occurs (A) the unpaid  portion of his salary to the end
of the Term, to be paid in accordance with Section 4(a) hereof,  and (B) vested,
nonforfeitable  amounts owing or accrued under any benefit plans or programs set
forth or referred to in Section 5(a) hereof in which  Executive  participated as
of his  termination  under  the  terms  and  conditions  of the plan or  program
pursuant  to  which  such  benefits  were  granted  or  (y) in  the  event  such
termination  occurs  within three years  following the date on which a Change in
Control  of  PEI  occurs  (A) a  Severance  Payment  equal  to  two  times  (2x)
Executive's  annual salary for the year in which such  termination  occurs to be
paid in a lump sum within 10 days of such termination, (B) the unpaid portion of
Executive's  salary with respect to any additional years (other than the year in
which such  termination  occurs)  remaining in the Term to be paid in accordance
with  Section  4(a)  hereof,  (C) a  continuation  for a period  of three  years
following the date on which a Change in Control of PEI occurs or until such time
as Executive has obtained new employment and is covered by equivalent  benefits,
whichever is sooner,  of  Executive's  coverage at the expense of PEI and/or PGE
under life insurance, hospitalization and medical plans providing benefits which
are  substantially  comparable to benefits  provided to Executive  under benefit
plans of PEI, PGE or any of their respective  subsidiaries in effect immediately
prior to the  Change in Control  of PEI and (D)  vested  nonforfeitable  amounts
owing or accrued under any other benefit plans or programs set forth or referred
to in Section 5(a) hereof in which Executive  participated as of his termination
under the terms and  conditions  of the plan or program  pursuant  to which such
benefits were granted.

     (d) Without Good Reason.  Executive may terminate  his  employment  without
Good Reason by giving PEI and/or PGE 90 days' written notice.  Upon  termination
by Executive  without Good Reason,  all obligations of PEI and/or PGE under this
Agreement  will cease as of the date of  termination  except that PEI and/or PGE
collectively  shall pay Executive and Executive shall be entitled to receive (i)
the unpaid portion of his salary pro rated through the date of termination to be
paid in  accordance  with Section 4(a) hereof and (ii)  vested,,  nonforfeitable
amounts  owing or  accrued  under any  benefit  plans or  programs  set forth or
referred to in Section  5(a) hereof in which  Executive  participated  as of his
termination  under the terms and  conditions of the plan or program  pursuant to
which such benefits were granted.

     8. Covenant Not to Compete; Confidentiality; Litigation Support.

     In  consideration  for PEI's  and  PGE's  execution  and  delivery  of this
Agreement:

     (a)  Executive  hereby  agrees that during the period from the date of this
Agreement through the end of the first year after the termination of Executive's
employment with PEI and/or PGE for any reason other (x) than  termination by PEI
and/or PGE  without  Cause or (y)  termination  by  Executive  for Good  Reason,
Executive will not:

     (i)  carry  on or  engage  in  any  business  that  competes,  directly  or
indirectly with the business of distributing  natural gas, or any other business
being  conducted  by PEI  and/or  PGE at the  date  of  Executive's  termination
(collectively, a "Competing Business") anywhere in the United States;

     (ii) become a stockholder  of a corporation or a member of a partnership or
act as a consultant to or provide any assistance to any enterprise which carries
on or engages in a  Competing  Business  or which  otherwise  competes  with PEI
and/or PGE anywhere in the United States; provided,  however, that Executive may
own shares of stock of a  corporation  that is engaged in a  Competing  Business
provided,  that (A) Executive  does not own more than one-half of one percent of
the  outstanding  shares  of stock of such  corporation,  (B)  such  shares  are
publicly traded on a United States natural  securities  exchange,  NASDAQ or any
over-the-counter public securities market and (C) Executive does not directly or
indirectly   acquire  or  assume  any   management   responsibilities   in  such
corporation;

     (iii) solicit,  raid, entice or induce any person, firm or corporation that
presently  is or at any time  during the Term shall be a client or  customer  of
PEI, PGE or any of their respective affiliates to become a client or customer of
any other person,  firm or corporation  engaged in a Competing Business anywhere
in the United States; or

     (iv) solicit,  raid, entice or induce any person who presently is or at any
time during the Term shall be an employee of PEI, PGE or any of their respective
affiliates to become employed by any other person,  firm or corporation  engaged
in a Competing Business anywhere in the United States.

     (b)  Executive  acknowledges  that  during the Term he will have  access to
confidential information of PEI, PGE and their respective affiliates,  including
plans for future developments and information about costs,  customers,  profits,
markets,  key  personnel,  pricing  policies,  operational  methods,  and  other
business  affairs and methods and other  information not available to the public
or in the public domain (hereinafter referred to as "Confidential Information").
In recognition of the foregoing,  Executive covenants and agrees that, except as
required  by his duties to PEI and/or  PGE, or as required by law or pursuant to
legal process,  Executive will keep secret all Confidential  Information of PEI,
PGE and their respective affiliates and will not, directly or indirectly, either
during the Term of his employment hereunder or at any time thereafter,  disclose
or  disseminate  to  anyone  or make use of,  for any  purpose  whatsoever,  any
Confidential Information, and upon termination of his employment, Executive will
promptly  deliver  to PEI  and/or  PGE  all  tangible  Confidential  Information
(including all copies thereof, whether prepared by Executive or others) which he
may possess or control.

     (c) Executive  acknowledges that the restrictions contained in this Section
8 are a reasonable  and necessary  protection of the immediate  interests of PEI
and PGE, that any violation of these restrictions would cause substantial injury
to PEI and PGE and that PEI and PGE would not have entered  into this  Agreement
without receiving the additional  consideration  offered by Executive by binding
himself to these restrictions.  In the event of a breach or threatened breach by
Executive  of any of these  restrictions,  PEI and/or PGE shall be  entitled  to
apply to any  court of  competent  jurisdiction  for an  injunction  restraining
Executive from such breach or threatened  breach;  provided,  however,  that the
right to apply for an  injunction  shall not be  construed  as  prohibiting  PEI
and/or  PGE from  pursuing  any  other  available  remedies  for such  breach or
threatened breach. In the event that,  notwithstanding the foregoing, a covenant
included in this Section 8 shall be deemed by any court to be unreasonably broad
in any respect, it shall be modified in order to make it reasonable and shall be
enforced accordingly. Without limitation of, and notwithstanding, the foregoing,
in the event that, in any judicial  proceeding,  a court shall refuse to enforce
any of the  covenants  contained  in this  Section  8,  then  the  unenforceable
covenant  shall be deemed  eliminated  from the provisions of this Section 8 for
the purpose of those proceedings to the extent necessary to permit the remaining
covenants to be enforced. If any one or more of the provisions of this Section 8
shall be held to be invalid, illegal or unenforceable, the validity, legality or
enforceability of the remaining provisions of this Section shall not be effected
thereby. To the extent permitted by applicable law, each party hereto waives any
provision of law which renders any provision of this Section 8 invalid,  illegal
or unenforceable in any respect.

     (d) Executive agrees that during the Term and thereafter Executive shall be
available  to PEI and PGE and shall  assist PEI and PGE in  connection  with any
litigation  brought by or against PEI and/or PGE  relating to the period  during
which  Executive  was employed by PEI and/or PGE;  provided,  however,  that all
costs and expenses in connection with the foregoing shall be borne by PEI and/or
PGE .

     (e) The  provisions  of this  Section 8 shall  survive the  termination  or
expiration of this Agreement in accordance with the terms hereof.

     9. Governing Law.

     This  Agreement  is  governed  by and is to be  construed  and  enforced in
accordance with the laws of the  Commonwealth of Pennsylvania  without regard to
conflicts of law principles. If under such law, any portion of this Agreement is
at any  time  deemed  to be in  conflict  with  any  applicable  statute,  rule,
regulation or ordinance,  such portion shall be deemed to be modified or altered
to  conform  thereto  or,  if that is not  possible,  to be  omitted  from  this
Agreement. The invalidity of any such portion shall not affect the force, effect
and validity of the remaining portion hereof.

     10. Arbitration.

     If a  dispute  arises  between  the  parties  respecting  the terms of this
Agreement or  Executive's  employment  by PEI and/or PGE , such dispute shall be
settled by binding arbitration in Wilkes-Barre, Pennsylvania, in accordance with
the rules of the American Arbitration Association. Each party shall bear its own
expense of any such  arbitration;  provided,  however,  that Executive  shall be
entitled to receive reimbursement of his reasonable legal fees and out-of-pocket
expenses  from PEI and/or PGE with  respect to any claim or dispute  relating to
the  interpretation or enforcement of this Agreement promptly after invoices for
such fees and expenses are  rendered  unless the position  taken by Executive is
determined by a court of competent jurisdiction to be frivolous.

     11. Additional Payments.

     (a) In the event that any payment or benefit (within the meaning of Section
280G(b)(2) of the Internal  Revenue Code of 1986, as amended (the  "Code")),  to
Executive or for his benefit  paid or payable or  distributed  or  distributable
pursuant to the terms of this  Agreement  or otherwise in  connection  with,  or
arising out of, his employment  with PEI and/or PGE (a "Payment" or "Payments"),
would be subject to the  excise tax  imposed by Section  4999 of the Code or any
interest or penalties are incurred by Executive  with respect to such excise tax
(such excise tax, together with any such interest and penalties, are hereinafter
collectively  referred to as the "Excise Tax"),  then Executive will be entitled
to receive an additional  payment (a "Gross-Up  Payment") in an amount such that
after  payment by Executive of all taxes  (including  any interest or penalties,
other than interest and penalties  imposed by reason of  Executive's  failure to
file timely a tax return or pay taxes  shown due on his  return),  imposed  with
respect to such  Gross-Up  Payment and the Excise Tax,  including any Excise Tax
imposed upon the Gross-Up  Payment,  Executive retains an amount of the Gross-Up
Payment equal to the Excise Tax imposed upon the Payments.  Executive  shall not
receive a Gross-Up  Payment for the Excise Tax, if any,  imposed with respect to
the options referred to in Section 4(c) hereof.

     (b) An initial  determination  as to whether a Gross-Up Payment is required
pursuant to this Agreement and the amount of such Gross-Up Payment shall be made
at PEI's and/or PGE's expense by an accounting  firm selected by PEI and PGE and
reasonably  acceptable  to  Executive  which  is  designated  as one of the five
largest  accounting  firms in the United  States (the  "Accounting  Firm").  The
Accounting Firm shall provide its determination (the "Determination"),  together
with detailed supporting  calculations and documentation,  to PEI and/or PGE and
Executive within five days of the date on which Executive's  employment with PEI
and/or PGE is terminated if  applicable,  or such other time as requested by PEI
and/or PGE or by Executive (provided  Executive  reasonably believes that any of
the  Payments  may be  subject  to the Excise  Tax) and if the  Accounting  Firm
determines  that no Excise Tax is payable by Executive with respect to a Payment
or Payments, it shall furnish Executive with an opinion reasonably acceptable to
Executive that no Excise Tax will be imposed with respect to any such Payment or
Payments.  Within ten days of the delivery of the  Determination  to  Executive,
Executive shall have the right to dispute the Determination (the "Dispute"). The
Gross-Up Payment,  if any, as determined pursuant to this Section 11(b) shall be
paid by PEI and/or PGE collectively to Executive within five days of the receipt
of the  Determination.  The existence of the Dispute shall not in any way affect
Executive's  right to  receive  the  Gross-Up  Payment  in  accordance  with the
Determination. If there is no Dispute, the Determination shall be binding, final
and conclusive  upon PEI and/or PGE and Executive  subject to the application of
Section 11(c) below.

     (c) As a result of the  uncertainty in the application of Sections 4999 and
280G of the Code, it is possible that a Gross-Up  Payment (or a portion thereof)
will be paid which should not have been paid (an "Excess Payment") or a Gross-Up
Payment (or a portion  thereof)  which  should have been paid will not have been
paid (an  "Underpayment").  An Underpayment shall be deemed to have occurred (i)
upon notice  (formal or  informal)  to Executive  from any  governmental  taxing
authority  that  Executive's  tax liability  (whether in respect of  Executive's
current  taxable year or in respect of any prior  taxable year) may be increased
by reason of the  imposition  of the Excise Tax on a Payment  or  Payments  with
respect  to which  PEI  and/or  PGE has  failed  to make a  sufficient  Gross-Up
Payment,  (ii) upon a determination by a court, (iii) by reason of determination
by PEI and/or PGE (which  shall  include the  position  taken by PEI and/or PGE,
together with its consolidated  group, on its federal income tax return) or (iv)
upon  the  resolution  of  the  Dispute  to  Executive's  satisfaction.   If  an
Underpayment  occurs,  Executive  shall  promptly  notify PEI and/or PGE and PEI
and/or PGE shall  promptly,  but in any  event,  at least five days prior to the
date on which the applicable  government taxing authority has requested payment,
pay to  Executive  an  additional  Gross-Up  Payment  equal to the amount of the
Underpayment  plus any interest and penalties (other than interest and penalties
imposed  by reason of  Executive's  failure  to file  timely a tax return or pay
taxes shown due on Executive's  return) imposed on the  Underpayment.  An Excess
Payment  shall  be  deemed  to  have  occurred  upon a Final  Determination  (as
hereinafter  defined) that the Excise Tax shall not be imposed upon a Payment or
Payments (or portion  thereof) with respect to which  Executive  had  previously
received a Gross-Up  Payment.  A "Final  Determination"  shall be deemed to have
occurred  when  Executive  has received from the  applicable  government  taxing
authority a refund of taxes or other  reduction in Executive's  tax liability by
reason of the Excise  Payment  and upon either (x) the date a  determination  is
made by, or an  agreement  is entered  into with,  the  applicable  governmental
taxing authority which finally and conclusively  binds Executive and such taxing
authority,  or in the event that a claim is brought  before a court of competent
jurisdiction,  the date upon which a final  determination  has been made by such
court and either all appeals  have been taken and  finally  resolved or the time
for all appeals has expired or (y) the statute of  limitations  with  respect to
Executive's  applicable  tax  return  has  expired.  If  an  Excess  Payment  is
determined to have been made,  the amount of the Excess Payment shall be treated
as a loan by PEI and/or PGE to Executive and  Executive  shall pay to PEI and/or
PGE on demand (but not less than 10 days after the  determination of such Excess
Payment and written  notice has been  delivered to Executive)  the amount of the
Excess Payment plus interest at an annual rate equal to the  Applicable  Federal
Rate  provided  for in Section  1274(d)  of the Code from the date the  Gross-Up
Payment (to which the Excess  Payment  relates) was paid to Executive  until the
date of repayment to PEI and/or PGE.

     (d)  Notwithstanding  anything contained in this Agreement to the contrary,
in the event that, according to the Determination, an Excise Tax will be imposed
on any  Payment  or  Payments,  PEI  and/or  PGE  collectively  shall pay to the
applicable  government taxing authorities as Excise Tax withholding,  the amount
of the Excise Tax that PEI and/or PGE has actually  withheld from the Payment or
Payments.

     12. Allocation of Responsibility to Make Certain Payments

     Responsibility  for  payment of the  amounts  payable  pursuant to Sections
4(a),  5(b), 6, 7, 8(d), 10 and 11 of this Agreement shall be allocated  between
PEI and PGE as agreed upon from time to time by PEI and PGE.

     13. Miscellaneous.

     (a) This Agreement  cancels and supersedes any and all prior agreements and
understandings between or among any or all of the parties hereto with respect to
the  employment  of Executive by PEI and PGE.  This  Agreement  constitutes  the
entire  agreement among the parties with respect to the matters herein provided,
and no modification or waiver of any provision  hereof shall be effective unless
in writing and signed by the parties hereto.

     (b) Neither this Agreement nor the rights or  obligations  hereunder of any
party hereto shall be assignable without the written consent of (i) PEI and PGE,
with respect to an  assignment  or attempted  assignment  by Executive  and (ii)
Executive,  with respect to an assignment or attempted  assignment by PEI and/or
PGE; provided,  however,  that no consent of Executive shall be required for any
assignment  by PEI and/or PGE  whereby  the  assignee,  by  operation  of law or
otherwise,  continues to carry on substantially  the business of PEI and/or PGE,
as the case may be, prior to the  assignment.  This  Agreement  shall be binding
upon and inure to the benefit of the successors and permitted assigns of PEI and
PGE.

     (c) Whenever under this Agreement it becomes necessary to give notice, such
notice shall be in writing,  signed by the party or parties giving or making the
same,  and shall be served on the person or persons  for whom it is  intended or
who should be advised or notified, by Federal Express or other similar overnight
service or by certified or registered mail,  return receipt  requested,  postage
prepaid  and  addressed  to such party at the address set forth below or at such
other address as may be designated by such party by like notice:


                  If to PEI:

                           Pennsylvania Enterprises, Inc.
                           One PEI Center
                           Wilkes-Barre, Pennsylvania  18711

                           Attention:  Secretary




                  If to PGE:

                           PG Energy, Inc.
                           One PEI Center
                           Wilkes-Barre, Pennsylvania  18711

                           Attention:  Secretary


                  If to Executive:

                           Thomas F. Karam
                           331 Glenburn Road
                           Clarks Summit, Pennsylvania  18411

In the case of Federal Express or other similar overnight  service,  such notice
or advice  shall be  effective  when sent,  and,  in the cases of  certified  or
registered mail, shall be effective 2 days after delivery to the U.S.
Post Office.

     (d) The invalidity of any portion of this Agreement  shall not be deemed to
render the remainder of this Agreement invalid.

     (e) The headings of this  Agreement are for  convenience  of reference only
and do not constitute a part hereof.

     (f) The  failure  of any party at any time to  require  performance  by any
other party of any provision  hereof or to resort to any remedy  provided herein
or at law or in equity shall in no way affect the right of such party to require
such performance or to resort to such remedy at any time  thereafter,  nor shall
the waiver by any party of a breach of any of the provisions hereof be deemed to
be a waiver of any subsequent breach of such provisions. No such waiver shall be
effective  unless in writing and signed by the party against whom such waiver is
sought to be enforced.

     (g) The amounts required to be paid by PEI and/or PGE to Executive pursuant
to this Agreement shall not be subject to offset.

     (h) In the  event  that  Executive's  employment  with  PEI  and/or  PGE is
terminated  for any  reason,  Executive  shall  not be  required  to seek  other
employment or otherwise to mitigate Executive's damages under this Agreement.

     IN WITNESS  WHEREOF,  Executive  has  hereunto set his hand and PEI and PGE
have caused this instrument to be duly executed as of the 6th day of May, 1998.

                                   PENNSYLVANIA ENTERPRISES, INC.


                                   By:  /s/ Kenneth L. Pollock
                                   Name:    Kenneth L. Pollock
                                   Title:   Chairman of the Board of Directors


                                   PG ENERGY, INC.


                                   By:   /s/ Kenneth L. Pollock
                                   Name:     Kenneth L. Pollock
                                   Title:    Chairman of the Board of Directors


                                    Executive

                                     /s/ Thomas F. Karam  
                                         Thomas F. Karam

APPROVED:

COMPENSATION COMMITTEE OF
THE BOARD OF DIRECTORS OF
PENNSYLVANIA ENTERPRISES, INC.


By:       /s/ John D. McCarthy                                        
     Name:    John D. McCarthy
     Title:    Chairman


By:      /s/ Ronald W. Simms
     Name:   Ronald W. Simms


By:      /s/ William D. Davis
     Name:   William D. Davis


By:     /s/ Richard A. Rose, Jr.
     Name:  Richard A. Rose, Jr.