PART I


ITEM  l.  BUSINESS

GENERAL

    PG Energy  Inc.  ("PGE"),  formerly  known  as  Pennsylvania  Gas  and Water
Company, is  a  subsidiary  of  Pennsylvania  Enterprises,  Inc.  ("PEI").  PGE,
incorporated in Pennsylvania in 1867 as  Dunmore Gas & Water Company, is engaged
in the distribution of natural gas.   On  February 14, 1997, PGE acquired all of
the  outstanding  capital  stock  of  Honesdale  Gas  Company  ("Honesdale"),  a
regulated public utility  engaged  in  distributing  natural  gas to portions of
Wayne and Pike Counties, in an area  adjacent to PGE's service territory.  Until
February 16, 1996, when its  water  utility  operations  were sold, PGE was also
engaged in the distribution of water (See "-Sale of Water Utility Operations.").
Both  PGE  and  Honesdale  are  regulated  by  the  Pennsylvania  Public Utility
Commission  ("PPUC").    As  of  December  31,  1996,  PGE  provided  service to
approximately 144,200 natural gas  customers  and  Honesdale provided service to
approximately 3,200 customers.

    PGE employed approximately 570 persons as of December 31, 1996.

Restructuring of Natural Gas Industry

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

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

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

    Prior to the unbundling of  services  by  the interstate pipelines and those
services being made available to end users  as  well as LDCs, and until the PPUC
adopted regulations providing for the transportation of natural gas, PGE charged
all its customers bundled rates.   These rates included a commodity charge based
on the cost, as approved by FERC,  which  PGE paid the pipelines for natural gas
delivered to the  entry  point  on  its  distribution  system.    Except for the



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approximately 500 customers  currently  receiving  transportation service, PGE's
customers continue to be charged  bundled  rates  as approved by the PPUC, which
include a commodity charge based on the  costs prudently incurred by PGE for the
purchase of natural gas and  for interstate pipeline transportation capacity and
storage services.  Customers  receiving  transportation service, which accounted
for approximately 43% of PGE's total  gas  deliveries in 1996, are charged rates
approved by the PPUC, which exclude the  commodity cost that is reflected in the
bundled rates charged to other customers.

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

    PEI and PGE believe that  Pennsylvania may consider similar legislation with
respect to the natural gas industry in  1997.  Such legislation may require that
PGE provide all of its customers with unbundled service over a period of several
years.  While the  rates  for  the  transportation  of natural gas through PGE's
distribution system and the storage services  offered  by PGE may continue to be
price regulated by the PPUC, the commodity  cost of gas may not be so regulated.
Essentially, the transportation  service  which  is  now  available to a limited
number of PGE's customers would  be  extended  to  all its customers.  Customers
would choose the supplier of  their  natural  gas,  which could be PGE, based on
nonregulated market prices and other considerations.

    If Pennsylvania enacts legislation  which  permits  all customers of LDCs to
choose their  supplier  of  natural  gas,  PGE  will  be  faced with significant
competition from other gas utilities and  marketers  for the sale of natural gas
to its customers.  However, under current  regulations of the PPUC, PGE does not
realize a profit or incur any loss with respect to the commodity cost of natural
gas.  Moreover, PGE would not expect  the legislation to result in the bypass of
its distribution system by any  significant  number  of customers because of the
nature of its customer base  and  the  cost  of  any such bypass.  Additionally,
based on the  recently-enacted  electric  industry  legislation, PGE anticipates
that any transition  costs  (such  as  the  negotiated  buyout of contracts with
interstate pipelines,  the  recovery  of  deferred  purchased  gas  costs or the
recovery of regulatory assets) it has or  might incur as a result of legislation
providing for  customer  choice  of  natural  gas  suppliers  would be recovered
through a nonbypassable customer  charge.    Accordingly,  although it cannot be
certain, because the terms of such  legislation  have not been finalized and the
ultimate effect on PGE  cannot  be  determined,  PGE  does  not believe that the
enactment of legislation providing for  customers  to purchase their natural gas
from third parties would have  any  material  adverse  impact on its earnings or
financial condition despite  the  increased  competition  to  which PGE would be
subject regarding the sale of natural gas to its customers.






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<PAGE>

Sale of Water Utility Operations

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

    PEI and PGE are using  the  $203.3  million  of cash proceeds from the sale,
after the payment of  an  estimated  $58.8  million  of federal and state income
taxes, to retire debt,  to  repurchase  stock, for construction expenditures and
for working capital purposes.    (See  "Management's  Discussion and Analysis of
Financial Conditions and Results  of Operations-Liquidity and Capital Resources-
Sale of Water Utility Operations" in Item 7 of this Form 10-K).  

GAS BUSINESS

    PGE distributes natural gas  to  an  area in northeastern Pennsylvania lying
within the  Counties  of  Lackawanna,  Luzerne,  Wyoming, Susquehanna, Columbia,
Montour, Northumberland, Lycoming, Union  and  Snyder, a territory that includes
116 municipalities, in  addition  to  the  cities  of Scranton, Wilkes-Barre and
Williamsport.  The total estimated population of PGE's natural gas service area,
based on the 1990 U.S. Census, is 561,000.

    Number and Type of Customers.   At  December 31, 1996, PGE had approximately
144,200 natural gas customers, from which  it derived total natural gas revenues
of $160.6 million during 1996.    The  following  chart shows a breakdown of the
types of customers and the percentages of gas revenues generated by each type of
customer in 1996:

            Type of Customer             % of Customers         % of Revenues

       Residential                           91.2%                  61.7%   
       Commercial                             8.4                   24.1*  
       Industrial                             0.2                   12.9*   
       Other Users                            0.2                    1.3     
          Total                             100.0%                 100.0%    

    * Includes  the  4.5%  of  total  gas  revenues  derived  from interruptible
      customers.

    During 1996, PGE delivered an  estimated  total of 47,600,000 thousand cubic
feet ("MCF") of natural gas to its  customers, of which 56.1% was sold at normal
tariff rates, 42.9% represented gas transported  for customers and 1.0% was sold
under the Alternate Fuel Rate (as described below).

    PGE sells gas to "firm"  customers  with  the understanding that it will not
interrupt their supply except during  periods  of supply deficiency or emergency
conditions.   "Interruptible"  gas  customers  are  required  to  have equipment
installed capable of using an  alternate  energy form.  Interruptible customers,






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<PAGE>

therefore, do not require a  continuous  supply  of  gas and their supply can be
interrupted by PGE at any time under the conditions set forth in their contracts
for gas service.  In 1996, a total  of  1,321,000 MCF of natural gas was sold by
PGE to  interruptible  customers  and  3,681,000  MCF  was  transported for such
customers, which together represented 10.5%  of  the total deliveries of natural
gas by PGE to its customers during 1996.

    PGE's largest natural gas customer  accounted  for approximately 2.5% of its
operating revenues in 1996.  No other  customer accounted for as much as 2.0% of
such revenues in 1996.

    Transportation and Storage Service.   In accordance with current regulations
of the PPUC, PGE provides  transportation  service  to natural gas customers who
consume at  least  5,000  MCF  of  natural  gas  per  year,  meet  certain other
conditions and execute a transportation agreement.  In addition, groups of up to
ten customers, with a combined consumption  of  at least 5,000 MCF per year, are
eligible for transportation service.  Transportation service is provided on both
a firm and an  interruptible  basis  and  includes provisions regarding over and
under deliveries of gas on behalf of  the respective customer.  In addition, PGE
offers firm transportation customers a  "storage service" pursuant to which such
customers may have gas delivered  to  PGE  during  the period from April through
October for storage and redelivery  during  the  winter period.  PGE also offers
firm transportation customers a "standby  service"  under the terms of which PGE
will supply the customer  with  gas  in  the event the customer's transportation
service is interrupted  or  curtailed  by  its  broker,  supplier or other third
party.

    Set forth below is a summary of the gas transported by PGE and the number of
its customers using transportation service from 1994 to 1996:

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

     1996         503         15,959,000        4,459,000        20,418,000
     1995         480         14,543,000        5,054,000        19,597,000
     1994         574         13,411,000        4,744,000        18,155,000


    During 1997,  PGE  expects  to  transport  approximately  22,000,000  MCF of
natural gas.

    The decrease in the number of customers using transportation service in 1995
was the result of PGE requiring such customers to install telemetering equipment
so that PGE could monitor  the  usage  by  those  customers on a daily basis and
thereby determine  if  the  appropriate  quantities  of  natural  gas were being
delivered for them.  This requirement for telemetering equipment caused a number
of customers, for whom  relatively  small  quantities  of natural gas were being
transported, to revert to sales service.

    The rates charged  by  PGE  for  the  transportation  of  interstate gas are
essentially equal to its tariff rates  for  the  sale  of gas with all gas costs
removed.    Accordingly,  the  transportation  of  interstate  gas  has  had  no
significant adverse effect on earnings.    Prior  to January 15, 1997, the rates
charged   for   the   transportation   of   Pennsylvania-produced   natural  gas
("Pennsylvania gas") were lower  than  those  charged  for the transportation of



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<PAGE>

interstate gas.   As  a  result,  the  rates  charged  for the transportation of
Pennsylvania gas yielded considerably  less  revenue  than the gross margin (gas
operating revenues less the cost of gas) that would be realized from sales under
normal tariff rates.  However, as  of  January  15, 1997, in connection with the
rate increase which was effective on  such  date (see "-Rates"), the lower rates
charged for the transportation  of  Pennsylvania  gas  were eliminated and those
rates were conformed with the rates charged for the transportation of interstate
gas.

    Alternate Fuel Sales.  In  order  to  be  more competitive in terms of price
with certain alternate fuels,  PGE  offers  an  Alternate Fuel Rate for eligible
customers.  This rate applies  to  large commercial and industrial accounts that
have the capability of using No. 2, 4  or  6 fuel oil or propane as an alternate
source of energy.  Whenever the cost of such alternate fuel drops below the cost
of natural gas at PGE's normal  tariff  rates,  PGE  is permitted by the PPUC to
lower its price to these customers  so  that PGE can remain competitive with the
alternate fuel.  However, in  no  instance  may  PGE sell gas under this special
arrangement for less than its average commodity cost of gas purchased during the
month.  PGE's revenues under the Alternate Fuel Rate amounted to $1.8 million in
1996, $2.0 million in 1995, $3.7 million  in 1994.  These revenues reflected the
sale of 491,000 MCF,  603,000  MCF  and  1,223,000  MCF  in 1996, 1995 and 1994,
respectively.  It is  anticipated  that  approximately  426,000 MCF will be sold
under the Alternate Fuel Rate in  1997.    The  change in volumes sold under the
Alternate  Fuel  Rate  reflects  the  switching  by  certain  customers  between
alternate fuel  service  and  transportation  service  as  a  result of periodic
changes in the relative cost of natural gas and alternate fuels.

    FERC Order 636.  On April 8,  1992, FERC issued Order No. 636 ("Order 636"),
requiring interstate pipelines to  restructure  their services and operations in
order to  enhance  competition  and  maximize  the  benefits  of  wellhead price
decontrol.  The objectives of  Order  636  were  to be accomplished primarily by
unbundling the services provided by the interstate pipelines and by making those
services available to end users on the same terms as LDCs.

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




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<PAGE>

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

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

    The PGC Order also indicated that  while Gas Supply Realignment and Stranded
Costs (the "Non-Gas Transition Costs")  are  not  natural gas costs eligible for
recovery under the PGC rate  filing  mechanism,  such  costs are subject to full
recovery by LDCs through the filing of  a tariff pursuant to either the existing
surcharge or base rate provisions  of  the Pennsylvania Public Utility Code (the
"Code").  By Order of the PPUC entered August 26, 1994, PGE began recovering the
Non-Gas Transition Costs that it estimates it will ultimately be billed pursuant
to Order 636 through  the  billing  of  a  surcharge  to its customers effective
September 12, 1994.  It  is  currently  estimated  that $10.1 million of Non-Gas
Transition Costs  will  be  billed  to  PGE,  generally  over  a six-year period
extending through January 1, 1999, of which  $8.0 million had been billed to PGE
and $7.5 million had been recovered from  its customers as of December 31, 1996.
PGE has recorded the estimated transition costs that remained to be billed to it
and the amounts remaining to be recovered from its customers.

    Sources of Supply.  PGE purchases natural gas from marketers, producers, and
integrated energy companies, generally  under  the  terms of supply arrangements
that extend for the heating season (i.e., November through March) or for periods
of one year or longer.  These contracts typically provide for an adjustment each
month in the cost of gas  purchased  pursuant  thereto based on the then current
market prices for natural gas.    The largest individual supplier, an integrated
energy company, accounted for 22.5% of  PGE's  total purchases of natural gas in
1996.  Three other suppliers accounted for 18.7%, 17.9% and 16.2% of PGE's total
purchases of natural gas in 1996.  No other suppliers accounted for more than 3%
of PGE's purchases during 1996.

    The purchases of natural gas by PGE  during each of the years 1996, 1995 and
1994 are summarized below:

                                 Volume                      Average
          Year               Purchased (MCF)               Cost per MCF

          1996                 27,955,000                     $3.35
          1995                 24,173,000                     $2.62
          1994                 28,364,000                     $2.82

    The higher average cost  for  1996  reflected  the  increase in the wellhead
price of natural gas during much  of  the  year that resulted from the unusually
cold weather experienced in the northeastern  United States during the winter of
1995/96 and the associated reduction  in  the  volume  of gas held in storage to
abnormally low levels in the spring of 1996.


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<PAGE>

    During 1997, PGE expects to purchase a total of approximately 28,750,000 MCF
of natural gas under seasonal or  longer-term contracts at a currently projected
average cost of $2.89 per MCF.

    PGE presently has adequate supplies  of  natural  gas to meet the demands of
existing customers through October, 1997, and  PGE believes that it will be able
to obtain sufficient supplies  to  meet  the  demands  of its existing customers
beyond October, 1997 and to  serve  new  customers (of which approximately 4,000
are expected to be added in 1997).

    Pipeline Transportation and Storage Entitlements.   Pursuant to the terms of
Order 636, PGE has entered  into  agreements with its former interstate pipeline
suppliers providing for the firm  transportation  by  those pipelines on a daily
basis of the following quantities of gas:

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

  Transco     Various through 2015        74,100 (b)              55.5%
  Tennessee   1999 and 2000               48,252                  36.2
  Columbia    2004                        11,016                   8.3        
                                         133,368                 100.0%       

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

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

    PGE has also contracted  with  its  former interstate pipeline suppliers for
the following volumes of gas storage and storage withdrawals:

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

  Transco       Various through 2013       6,500,000             131,044
  Tennessee     November 1, 2000           3,500,000              23,031
  Columbia      October 31, 2004           1,100,000              16,036      
                                          11,100,000             170,111      

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

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






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<PAGE>

    Based on its present pipeline transportation and storage entitlements, PGE
is entitled to a maximum daily delivery of the following quantities of gas:

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

  Transco           74,100 (a)       131,044         205,144           67.6%
  Tennessee         48,252            23,031          71,283           23.5
  Columbia          11,016            16,036          27,052            8.9   
                   133,368           170,111         303,479          100.0%  

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

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

    Since September 1, 1993,  PGE  has  released  portions  of its firm pipeline
transportation capacity  to  certain  of  its  customers  and  third parties for
varying periods extending up to  three  years.    During 1996, the average daily
capacity so released was 40,689 MCF, and the maximum capacity so released on any
one day in 1996  was  52,095  MCF.    Through  December  31,  1996, PGE had not,
however, released any of its storage capacity.

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

    Peak Day Requirements.  PGE  plans  for  peak  day  demand on the basis of a
daily mean temperature of 0 degrees  Fahrenheit.  Requirements for such a design
peak day, assuming the  curtailment  of  service to interruptible customers, are
currently estimated to be 337,956  MCF,  of  which 252,550 MCF would be required
for customers to  whom  PGE  sells  gas  and  85,406  MCF  would be required for
customers for whom PGE provides  transportation service.  PGE's historic maximum
daily sendout is 307,237 MCF, which  occurred  on January 17, 1997, when service
to interruptible customers and select industrial  users was curtailed.  The mean
temperature in its gas service area on that day was 5 degrees Fahrenheit.

    Construction Expenditures.  PGE's  construction expenditures for gas utility
plant in 1996 totaled $29.2 million  and  are  estimated to be $27.9 million for
1997.  

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





                                         -8-
<PAGE>

    In addition to those  regulations  promulgated  by  the  PPUC, PGE must also
comply with federal,  state  and  local  regulations  relating  generally to the
discharge of  materials  into  the  environment  or  otherwise  relating  to the
protection of the environment.  Compliance with such regulations has not had any
material effect upon the capital  expenditures, earnings or competitive position
of PGE's gas business.  Although  it  cannot  predict the future impact of these
regulations, PGE  believes  that  any  additional  expenditures  and  costs made
necessary by them would be fully recoverable through rates.

    PGE, like many gas  distribution  companies,  once utilized manufactured gas
plants in connection with providing gas service to its customers.  None of these
plants have been in operation since 1960,  and several of the plant sites are no
longer owned by  PGE.    Pursuant  to  the Comprehensive Environmental Response,
Compensation and Liability Act of  1980  ("CERCLA"),  PGE filed notices with the
Environmental Protection Agency (the  "EPA")  with  respect  to the former plant
sites.  None of the sites is  or  was formerly on the proposed or final National
Priorities List.  The EPA  has  conducted  site inspections and made preliminary
assessments of each site and  has  concluded  that no further remedial action is
planned.  While this conclusion does  not constitute a legal prohibition against
further regulatory action  under  CERCLA  or  other  applicable federal or state
laws, PGE does not  believe  that  additional  costs,  if  any, related to these
manufactured gas plant  sites  will  be  material  to  its financial position or
results of operations.

    PGE's gas distribution and transportation  activities are not subject to the
Natural Gas Act, as amended.

    Rates.  On May 24, 1996, PGE  filed  an application with the PPUC seeking an
increase in its base gas rates,  designed to produce $14.1 million in additional
annual revenue, to be effective  July  23,  1996.    On  June 20, 1996, the PPUC
suspended this rate increase for seven months (until February 23, 1997) in order
to investigate the reasonableness of the  proposed  rates.  On November 7, 1996,
PGE and certain parties filing objections  to  the rate increase request filed a
Settlement Agreement and  Joint  Petition  for  Settlement of Rate Investigation
(the "Settlement  Petition")  with  the  Administrative  Law  Judge  assigned to
conduct the  investigation  of  the  rate  increase  request.    This Settlement
Petition provided for an overall 5.3% rate increase that was designed to produce
$7.5 million of additional annual revenue.   By Order adopted December 19, 1996,
the PPUC approved the Settlement Petition effective January 15, 1997.  Under the
terms of the  Settlement  Petition,  the  billing  for  the  impact  of the rate
increase relative to PGE's residential  heating customers (which it is estimated
will total $6.6 million on an  annual basis) is being deferred, without carrying
charges, until July, 1997.  

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




                                         -9-
<PAGE>

    Effective September 14, 1995, the  PPUC adopted regulations that provide for
the quarterly adjustment of the annual  purchased  gas cost rate of larger LDCs,
including PGE.  Such  quarterly  adjustments  are  allowed when the actual costs
vary from the costs reflected in the respective company's tariffs by 2% or more.
Except for reducing the amount  of  any  over  or undercollections of gas costs,
these regulations will not have any  material effect on PGE's financial position
or results of operations, and PGE is  still required to file an annual purchased
gas cost rate.

    In accordance with  these  annual  and  quarterly  procedures,  PGE has been
permitted to make the following changes since  January 1, 1994, to the gas costs
contained in its gas tariff rates:
[CAPTION]
                                    Change in              Calculated
             Effective             Rate per MCF        Increase (Decrease)
                Date              From     To           in Annual Revenue 
           [S]                    [C]     [C]              [C]
           March 1, 1997          $4.18   $4.49            $ 8,300,000
           December 1, 1996        3.01    4.18             32,400,000
           September 1, 1996       2.88    3.01              3,600,000
           June 1, 1996            2.75    2.88              3,400,000
           December 1, 1995        2.42    2.75              9,600,000
           May 15, 1995            3.68    2.42             (8,200,000)*
           December 1, 1994        3.74    3.68             (1,800,000)

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

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

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

    Tax Surcharge Adjustments.  Regulations of the PPUC provide for PGE to apply
a state tax adjustment surcharge tariff  to  its bills for gas service to recoup
any increased taxes or passthrough any decreased taxes resulting from changes in
the law with respect to the Pennsylvania Capital Stock Tax, Corporate Net Income
Tax, Gross Receipts Tax or Public  Utility  Realty Tax.  Currently, no state tax
adjustment surcharge is applied to PGE's bills for gas service.

WATER BUSINESS

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


                                        -10-
<PAGE>

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

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

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

ITEM 2.  PROPERTIES
<TABLE>
<CAPTION>
    <S>   <C>       <C>
    Gas.  PGE's gas system consists of approximately 2,265 miles of distribution
lines, nine city gate and 75 major regulating stations and miscellaneous related
and additional property.    PGE  believes  that  its  gas utility properties are
adequately maintained and in good operating condition in all material respects.  
</TABLE>
    Most of PGE's gas utility  properties  are  subject to a first mortgage lien
pursuant to the Indenture of Mortgage  and  Deed  of Trust dated as of March 15,
1946, as  supplemented  by  thirty  supplemental  indentures  (collectively, the
"Indenture") from PGE  to  First  Trust  of  New  York, National Association, as
Trustee.

    Land.   As  of  March  1,  1997,  PGE  owned  approximately  46,000 acres of
undeveloped land situated in northeastern Pennsylvania.

ITEM 3.  LEGAL PROCEEDINGS

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

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

    During the fourth quarter of 1996, there were no matters submitted to a vote
of security holders of  the  registrant  through  the solicitation of proxies or
otherwise.

















                                        -11-
<PAGE>

                                    PART II

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

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

    The dividends per share of common  stock  paid by PGE during the years ended
December 31, 1996 and 1995, were as follows:
[CAPTION]
                                                  1996              1995 
         [S]                                    [C]               [C]
         First quarter                          $10.2170          $ .7050
         Second quarter                                -            .7075
         Third quarter                                 -            .6400
         Fourth quarter                                -            .6900
           Total                                $10.2170          $2.7425

    The cash dividends per share for  the  first quarter of 1996 include $9.0770
with respect to a  special  $30.0  million  dividend  in  the  form of a 10.125%
promissory note  that  was  issued  by  PGE  to  PEI  on  February  16, 1996, in
connection with the sale of PGE's  water  utility  operations on such date.  The
10.125% promissory note was paid in full by PGE on March 8, 1996.

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
































                                        -12-
<PAGE>

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

RESTRUCTURING OF NATURAL GAS INDUSTRY

    PG Energy  Inc.  ("PGE"),  a  subsidiary  of  Pennsylvania Enterprises, Inc.
("PEI"), is a regulated public utility  engaged  in the sale and distribution of
natural  gas.    The  natural  gas  industry,  which  historically  has included
producers, interstate pipelines  and  local  distribution companies ("LDCs"), is
continuing to  undergo  significant  restructuring.    The  industry  is rapidly
progressing from  a  highly  regulated  environment  to  one  in  which there is
competition, customer choice and only  partial  regulation.   The same change is
also beginning to occur in the electric industry which competes with the natural
gas industry for many of the same energy uses.

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

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

    Prior to the unbundling of  services  by  the interstate pipelines and those
services being made available to end users  as  well as LDCs, and until the PPUC
adopted regulations providing for the transportation of natural gas, PGE charged
all its customers bundled rates.   These rates included a commodity charge based
on the cost, as approved by FERC,  which  PGE paid the pipelines for natural gas
delivered to the  entry  point  on  its  distribution  system.    Except for the
approximately 500 customers  currently  receiving  transportation service, PGE's
customers continue to be charged  bundled  rates  as approved by the PPUC, which
include a commodity charge based on the  costs prudently incurred by PGE for the
purchase of natural gas and  for interstate pipeline transportation capacity and
storage services.  Customers  receiving  transportation service, which accounted
for approximately 43% of PGE's total  gas  deliveries in 1996, are charged rates
approved by the PPUC, which exclude the  commodity cost that is reflected in the
bundled rates charged to other customers.

    In December, 1996, legislation  was  enacted  in Pennsylvania which provides
all customers of electric utilities in  the  state  with the right to choose the
generator of their electricity.    This  customer  choice,  which is intended to
increase competition and to lower costs  for electricity, will be phased in over
a three-year period ending  on  January  1,  2001.   Under this legislation, the
electric utilities  in  Pennsylvania  will  be  required  to unbundle generation
charges from the other  charges  included  in  their currently bundled rates and
customers will contract with  qualified  suppliers  of their choosing, including




                                        -13-
<PAGE>

the utility currently serving them,  to purchase electric energy at nonregulated
rates.  The  electric  utilities  will  continue  to  utilize their transmission
networks to distribute electricity to  their customers regardless of supplier, a
function which will remain subject to rate regulation by the PPUC.

    PEI and PGE believe that  Pennsylvania may consider similar legislation with
respect to the natural gas industry in  1997.  Such legislation may require that
PGE provide all of its customers with unbundled service over a period of several
years.  While the  rates  for  the  transportation  of natural gas through PGE's
distribution system and the storage services  offered  by PGE may continue to be
price regulated by the PPUC, the commodity  cost of gas may not be so regulated.
Essentially, the transportation  service  which  is  now  available to a limited
number of PGE's customers, would  be  extended  to all its customers.  Customers
would choose the supplier of  their  natural  gas,  which could be PGE, based on
nonregulated market prices and other considerations.

    If Pennsylvania enacts legislation  which  permits  all customers of LDCs to
choose their  supplier  of  natural  gas,  PGE  will  be  faced with significant
competition from other gas utilities and  marketers  for the sale of natural gas
to its customers.  However, under current  regulations of the PPUC, PGE does not
realize a profit or incur any loss with respect to the commodity cost of natural
gas.  Moreover, PGE would not expect  the legislation to result in the bypass of
its distribution system by any  significant  number  of customers because of the
nature of its customer base  and  the  cost  of  any such bypass.  Additionally,
based on the  recently-enacted  electric  industry  legislation, PGE anticipates
that any transition  costs  (such  as  the  negotiated  buyout of contracts with
interstate pipelines,  the  recovery  of  deferred  purchased  gas  costs or the
recovery of  regulatory  assets)  it  might  incur  as  a  result of legislation
providing for  customer  choice  of  natural  gas  suppliers  would be recovered
through a nonbypassable customer  charge.    Accordingly,  although it cannot be
certain, because the terms of such  legislation  have not been finalized and the
ultimate effect on PGE  cannot  be  determined,  PGE  does  not believe that the
enactment of legislation providing for  customers  to purchase their natural gas
from third parties would have  any  material  adverse  impact on its earnings or
financial condition despite  the  increased  competition  to  which PGE would be
subject regarding the sale of natural gas to its customers.

DISCONTINUED OPERATIONS

    Pursuant to an Asset  Purchase  Agreement  dated  April 26, 1995, as amended
(the  "Agreement"),  among  PEI,   PGE,   American  Water  Works  Company,  Inc.
("American") and Pennsylvania-American  Water Company ("Pennsylvania-American"),
a wholly-owned subsidiary of American, PEI and PGE sold substantially all of the
assets, properties and rights of PGE's water utility operations to Pennsylvania-
American on February 16, 1996.   Under the terms of the Agreement, Pennsylvania-
American paid PGE $414.3 million  consisting  of  $262.1 million in cash and the
assumption of $152.2 million of  PGE's  liabilities, including $141.0 million of
its long-term debt.  PGE continued  to  operate the water utility business until
February 16, 1996.  The  cash  proceeds  from  the  sale of approximately $203.3
million, net of an estimated $58.8 million of income taxes, were used by PEI and
PGE to retire debt, to  repurchase  stock, for construction expenditures and for
other working capital purposes.

    The sale price reflected a $6.5  million  premium over the book value of the
assets being sold.  However, after transaction costs and the net effect of other
items, the sale resulted in an after tax loss of approximately $6.2 million, net



                                        -14-
<PAGE>

of the income from the water  operations  during the phase-out period (which for
financial reporting purposes was April 1, 1995, through February 15, 1996).

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

RESULTS OF CONTINUING OPERATIONS

    The following table expresses certain items in PGE's statements of income as
percentages of operating revenues for each  of the calendar years ended December
31, 1996, 1995 and 1994:
<TABLE>
<CAPTION>

                                                Percentage of Operating Revenues
                                                    Year Ended December 31,     
                                                 1996         1995         1994 
<S>                                              <C>          <C>          <C>
OPERATING REVENUES...........................    100.0%       100.0%       100.0%
  Cost of gas................................     55.0         55.3         58.7
OPERATING MARGIN.............................     45.0         44.7         41.3

OTHER OPERATING EXPENSES:
  Operation..................................     15.6         14.7         13.5
  Maintenance................................      3.4          3.2          2.6
  Depreciation...............................      4.7          4.6          4.0
  Income taxes...............................      4.0          3.4          3.4
  Taxes other than income taxes..............      6.9          6.5          6.4
    Total operating expenses.................     34.6         32.4         29.9

OPERATING INCOME.............................     10.4         12.3         11.4

OTHER INCOME, NET............................      0.1          0.2            -

INTEREST CHARGES.............................     (4.6)        (7.0)        (5.9)

INCOME FROM CONTINUING OPERATIONS............      5.9          5.5          5.5

INCOME (LOSS) WITH RESPECT TO DISCONTINUED
  OPERATIONS.................................     (0.2)        (2.5)         6.3

NET INCOME...................................      5.7          3.0         11.8

DIVIDENDS ON PREFERRED STOCK(1)..............     (1.1)        (1.8)        (2.8)

EARNINGS APPLICABLE TO COMMON STOCK..........      4.6%         1.2%         9.0%
                    
(1)  None  of  the  dividends  on  preferred  stock  has  been  allocated to the
discontinued operations.

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

    Operating Revenues.  Operating  revenues  increased $7.8 million (5.1%) from
$152.8 million for 1995 to $160.6  million  for  1996 primarily as a result of a
1.5 billion cubic feet (6.8%)  increase  in  sales to residential and commercial
heating customers.  There was a 598  (9.9%) increase in heating degree days from
6,029 (95.8% of normal) during  1995  to  6,627  (105.3% of normal) during 1996.

                                        -15-
</TABLE>
<PAGE>

The effects of the increased sales to heating customers were partially offset by
lower levels in the purchased gas cost component of PGE's tariffs (the "gas cost
rate").  See "-Rate Matters."

    Cost of Gas.   The  cost  of  gas  increased  $3.9 million (4.6%) from $84.4
million  for  1995  to  $88.3   million   for  1996  primarily  because  of  the
aforementioned increase in sales to  residential and commercial heating customer
the effects of which were  partially  offset  by  lower levels in PGE's gas cost
rate (see "-Rate Matters"). 

    Operating Margin.  The operating  margin  increased $3.9 million (5.7%) from
$68.4 million in 1995 to  $72.3  million  in  1996, primarily because of the 1.5
billion cubic feet (6.8%) increase  in consumption by residential and commercial
heating customers.  As a percentage  of operating revenues, the margin increased
from 44.7% in 1995 to 45.0% in 1996.

    Other Operating Expenses.   Other  operating expenses increased $6.1 million
(12.4%) from $49.5 million for 1995 to  $55.6 million for 1996, and increased as
a percentage of operating revenues from  32.4% during 1995 to 34.6% during 1996.
The $6.1 million increase  in  other  operating  expenses  was attributable to a
number of factors, the  most  significant  of  which  was a $2.6 million (11.7%)
increase in operation expenses,  primarily  as  a  result  of higher payroll and
payroll-related costs.    Payroll  and  payroll-related  costs increased largely
because of  charges,  which  were  previously  allocated  to  PGE's discontinued
operations, that are now  being  absorbed  by  its  continuing operations.  Also
contributing to the higher operating expenses  was a $641,000 (9.2%) increase in
depreciation expense attributable to additions  to  PGE's utility plant, as well
as a  $546,000  (11.0%)  increase  in  maintenance  expenses  caused  by charges
relating to the maintenance of gas valves and a $1.1 million (11.2%) increase in
taxes other than income taxes as a result of increased gross receipts tax.

    Income taxes increased $1.2  million  (23.1%)  from  $5.2 million in 1995 to
$6.4 million in 1996 due to an  increase in income before income taxes (for this
purpose, operating income net of interest charges).

    Operating Income.  As a result  of  the above, operating income decreased by
$2.2 million (11.7%) from $18.9 million for  1995 to $16.7 million for 1996, and
decreased as a percentage  of  total  operating  revenues  for such periods from
12.3% in 1995 to 10.4% in 1996,  primarily  because of the higher level of other
operating expenses.

    Other Income,  Net.    Other  income,  net  decreased  $158,000 (52.5%) from
$301,000 for 1995 to $143,000 for 1996, largely as a result of a $548,000 charge
relative to the sale and abandonment of PGE's interest in certain gas rights and
properties in western Pennsylvania.

    Interest Charges.  Interest charges  decreased  by $3.4 million (31.7%) from
$10.8 million for 1995 to  $7.3  million  for  1996.   This decrease was largely
attributable to the lower level of  indebtedness resulting from the repayment of
PGE's $50.0 million term loan and all of its then outstanding bank borrowings on
February 16, 1996, with proceeds  from  the  sale of its regulated water utility
operations on such date.

    Income  From  Continuing  Operations.    Income  from  continuing operations
increased $1.0 million (12.3%) from  $8.5  million  for 1995 to $9.5 million for
1996.  This increase  was  largely  the  result  of the matters discussed above,



                                        -16-
<PAGE>

principally the  increase  in  operating  margin  and  the  decrease in interest
charges, the effects of which were partially offset by the higher level of other
operating expenses.

    Net Income.  The increase in  net  income  of $4.5 million from $4.6 million
for 1995 to $9.1 million for 1996,  was  largely the result of the higher income
from continuing operations,  as  discussed  above,  and  the decreased loss with
respect to discontinued operations.

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

    Earnings Applicable to Common Stock.  The increase in earnings applicable to
common stock of $5.6 million  from  $1.9  million  for  1995 to $7.4 million for
1996, as well as the increase  in  earnings  per  share of common stock of $1.36
from $.33 per share for 1995 to income of $1.69 per share for 1996 (after a $.37
per share charge for premiums  on  the  repurchase of preferred stock), were the
result of higher  income  from  continuing  operations  and reduced dividends on
preferred stock, as discussed above,  and  the  decrease of $.59 per share, from
$.69 per share for 1995 to $.10 per  share for 1996, in the loss with respect to
discontinued operations.  The  increase  in  earnings applicable to common stock
reflected a 35.3% decrease in the  weighted average number of shares outstanding
for 1996  resulting  from  the  aforementioned  repurchase  of  common  stock on
February 16, 1996.

 o  Year Ended December 31, 1995, compared with year ended December 31, 1994

    Operating Revenues.  Operating revenues  decreased $15.2 million (9.1%) from
$168.0 million for 1994 to $152.8 million for 1995.  This decrease was primarily
the result of a reduction in the gas  cost  rate effective May 16, 1995.  See "-
Rate Matters."  Also contributing to  the decrease in revenues was the switching
of certain commercial  and  industrial  customers  from  sales to transportation
service and a 179 million cubic feet (0.8%) decrease in sales to residential and
commercial heating customers, caused by a  133 (2.2%) decrease in heating degree
days.  There  were  6,029  heating  degree  days  (95.8%  of normal) during 1995
compared to 6,162 (97.9% of normal) during 1994.

    Cost of Gas.  The  cost  of  gas  decreased $14.3 million (14.5%) from $98.7
million  for  1994  to  $84.4  million   for  1995,  primarily  because  of  the
aforementioned reduction in the gas cost  rate  effective  May 16, 1995.  See "-
Rate Matters."  Also contributing to the decrease was the reduced consumption by
residential and commercial heating customers.

    Operating Margin.  The operating margin decreased $955,000 (1.4%) from $69.3
million in 1994 to $68.4 million  in  1995, primarily because of the 179 million
cubic feet (0.8%) decrease in  consumption by residential and commercial heating
customers.  However, as a percentage of operating revenues, the margin increased
from 41.3% in 1994 to 44.7% in 1995  primarily as a result of the higher average
charge per cubic foot to residential and commercial heating customers because of
their lower consumption due to the warmer weather.





                                        -17-
<PAGE>

    Other Operating  Expenses.    Other  operating  expenses  decreased $749,000
(1.5%) from $50.2 million for 1994 to $49.5 million for 1995.  This decrease was
partially the result of a  $481,000  (8.5%)  decrease  in income taxes from $5.6
million in 1994 to $5.2  million  in  1995  due  to  a decrease in income before
income taxes (for this purpose, operating  income net of interest charges) and a
reduction in the Pennsylvania corporate net  income tax rate.  Also contributing
to the decrease  in  other  operating  expenses  was  a  slightly lower level of
operation expenses,  which  declined  $214,000  (0.9%),  and  an $889,000 (8.2%)
decrease in taxes other than  income  taxes,  primarily because of a decrease in
gross receipts tax as a result  of  the  lower level of operating revenues.  The
effect of the decreases in taxes  and operation expenses was partially offset by
a $531,000 (12.0%) increase in maintenance  expenses, principally as a result of
charges relative  to  the  maintenance  of  gas  valves,  and  a $304,000 (4.6%)
increase in depreciation expense  as  a  result  of  additions to utility plant.
Notwithstanding  the  decrease  in   other  operating  expenses,  such  expenses
increased as a percentage of operating  revenues from 29.9% during 1994 to 32.4%
during 1995 because of the relatively greater decrease in revenues.

    Operating Income.    As  a  result  of  the  above,  total  operating income
decreased $206,000 (1.1%) from $19.1 million for 1994 to $18.9 million for 1995.
However, as a percentage of total operating revenues, operating income increased
from 11.4% in 1994 to 12.3%  in  1995,  primarily because of the decrease in the
cost of gas as a percentage of operating revenues.

    Other Income, Net.   Other  income,  net  increased $229,000 from $72,000 in
1994 to $301,000 in  1995,  primarily  as  a  result  of a $227,000 write-off of
expired advances related to income taxes and a $226,000 decrease in amortization
of preferred stock issuance costs.

    Interest Charges.  Interest charges  increased  by $855,000 (8.6%) from $9.9
million for  1994  to  $10.8  million  for  1995.    This  increase  was largely
attributable to interest on overcollections of purchased gas costs and increased
interest on long-term debt.

    Income  From  Continuing  Operations.    Income  from  continuing operations
decreased $832,000 (8.9%) from $9.3 million  for  1994 to $8.5 million for 1995.
This decrease was largely the result of the matters discussed above, principally
the decrease in operating  margin  resulting  from  the  lower level of sales to
residential and commercial  heating  customers.    The  effect  of the decreased
operating margin was partially offset by the lower levels of taxes.

    Net Income.  The decrease in net  income of $15.2 million (76.6%) from $19.8
million for 1994  to  $4.6  million  for  1995  was  largely  the  result of the
estimated loss (equivalent to $1.04  per  share)  on the disposal of PGE's water
utility operations, as discussed above.    Also  contributing to the decrease in
net income was the lower income from continuing operations.

    Dividends on Preferred Stock.   Dividends  on preferred stock decreased $1.9
million (40.4%) from $4.6 million for 1994 to $2.8 million for 1995, as a result
of the redemption by PGE on May  31,  1994, of 150,000 shares ($15.0 million) of
its 9.50% cumulative preferred stock, $100  par value, and on December 16, 1994,
of 150,000 shares ($15.0 million) of  its 8.90% cumulative preferred stock, $100
par value.  No dividends on  preferred  stock were allocated to the discontinued
operations.





                                        -18-
<PAGE>

    Earnings Applicable to Common Stock.  The decrease in earnings applicable to
common stock of $13.3 million from  $15.2  million  for 1994 to $1.9 million for
1995, as well as the decrease  in  earnings  per  share of common stock of $2.40
from $2.73 per share for 1994 (after a  $.19 per share charge for the premium on
redemption of preferred stock)  to  $.33  per  share  for 1995, were largely the
result of the estimated loss  (equivalent  to  $1.04  per  share) on the sale of
PGE's water utility operations, as  discussed  above.   Also contributing to the
decreases in earnings applicable to common stock and earnings per share for 1995
was the lower income from continuing  operations.   The effects of these factors
were partially offset by the  reduced  dividends  on preferred stock and, in the
case of earnings per share,  the  absence  of  any  premium on the redemption of
subsidiary's preferred stock.

RATE MATTERS

    Rate Increase.  On May  24,  1996,  PGE  filed  an application with the PPUC
seeking an increase in its base gas  rates, designed to produce $14.1 million in
additional annual revenue, to be effective July 23, 1996.  On June 20, 1996, the
PPUC suspended this rate increase for  seven months (until February 23, 1997) in
order to investigate the reasonableness of  the  proposed rates.  On November 7,
1996, PGE and certain  parties  filing  objections  to the rate increase request
filed  a  Settlement  Agreement  and  Joint  Petition  for  Settlement  of  Rate
Investigation (the  "Settlement  Petition")  with  the  Administrative Law Judge
assigned to conduct  the  investigation  of  the  rate  increase  request.  This
Settlement Petition provided for an overall 5.3% rate increase that was designed
to produce $7.5 million of additional annual revenue.  By Order adopted December
19, 1996, the PPUC approved  the Settlement Petition effective January 15, 1997.
Under the terms of the Settlement  Petition,  the  billing for the impact of the
rate increase relative  to  PGE's  residential  heating  customers  (which it is
estimated will total $6.6 million on an annual basis) is being deferred, without
carrying charges, until July, 1997.  

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

    Effective September 14, 1995, the  PPUC adopted regulations that provide for
the quarterly adjustment of the annual  purchased  gas cost rate of larger LDCs,
including PGE.  Such  quarterly  adjustments  are  allowed when the actual costs
vary from the costs reflected in the respective company's tariffs by 2% or more.
Except for reducing the amount  of  any  over  or undercollections of gas costs,
these regulations will not have any  material effect on PGE's financial position
or results of operations, and PGE is  still required to file an annual purchased
gas cost rate.







                                        -19-
<PAGE>

    In accordance with  these  annual  and  quarterly  procedures,  PGE has been
permitted to make the following changes since  January 1, 1994, to the gas costs
contained in its gas tariff rates:
[CAPTION]
                                    Change in              Calculated
             Effective             Rate per MCF        Increase (Decrease)
                Date              From     To           in Annual Revenue 
           [S]                    [C]     [C]              [C]
           March 1, 1997          $4.18   $4.49            $ 8,300,000
           December 1, 1996        3.01    4.18             32,400,000
           September 1, 1996       2.88    3.01              3,600,000
           June 1, 1996            2.75    2.88              3,400,000
           December 1, 1995        2.42    2.75              9,600,000
           May 15, 1995            3.68    2.42             (8,200,000)*
           December 1, 1994        3.74    3.68             (1,800,000)

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

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

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

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

    By Order of the PPUC entered August  26, 1994, PGE began recovering the Non-
Gas Transition Costs that it estimates  it will ultimately be billed pursuant to
FERC Order 636 through the  billing  of  a  surcharge to its customers effective
September 12, 1994.  It  is  currently  estimated  that $10.1 million of Non-Gas
Transition Costs  will  be  billed  to  PGE,  generally  over  a six-year period
extending through January 1, 1999, of which  $8.0 million had been billed to PGE
and $7.5 million had been recovered from  its customers as of December 31, 1996.
PGE has recorded the estimated Non-Gas Transition Costs that remain to be billed
to it and the amounts remaining to be recovered from its customers.

    Effects of Inflation.  When utility  property  reaches the end of its useful
life and must be replaced, PGE will  incur replacement costs in amounts that due
to the effects of inflation would  materially exceed either the original cost or



                                        -20-
<PAGE>

the accrued depreciation of such property  as reflected on its books of account.
However, the cost of such replacement property would be includable in PGE's rate
base, and PGE would  be  entitled  to  recover  depreciation  expense and earn a
return thereon, to the extent that its investment in such property was prudently
incurred and the  property  is  used  and  useful  in  furnishing public utility
service.

LIQUIDITY AND CAPITAL RESOURCES

Sale of Water Utility Operations

    On February 16, 1996, PGE  sold  its  regulated water operations and certain
related assets to Pennsylvania-American for $414.3 million, consisting of $262.1
million in cash  and  the  assumption  of  $152.2  million of PGE's liabilities,
including $141.0 million of its  long-term  debt.    PGE and PEI used the $203.3
million of cash proceeds  from  the  sale,  after  an estimated $58.8 million of
federal and state income  taxes  (of  which  $44.6  million  had been paid as of
December 31,  1996),  to  retire  debt,  to  repurchase  stock, for construction
expenditures and for  other  working  capital  purposes.    In  this regard, PGE
repurchased 2,297,297 shares  of  its  common  stock  from  PEI for an aggregate
consideration of $85.0 million, repaid its  $50.0 million term loan due 1996 and
repaid all of its then outstanding bank borrowings on February 16, 1996, and PEI
and PGE temporarily invested the balance  of  the  proceeds.  A portion of these
proceeds were subsequently used by PGE (i)  on March 8, 1996, to repay the $30.0
million principal amount of its 10.125% promissory note (the "10.125% Promissory
Note") which was issued to PEI as  a  common stock dividend on February 16, 1996
(proceeds from the repayment of the 10.125% Promissory Note were used by PEI for
the defeasance of PEI's 10.125% Senior Notes  on September 30, 1996) and (ii) to
repurchase 134,359 shares of its 9%  cumulative preferred stock for an aggregate
consideration of  $14.5  million  and  20,330  shares  of  its  4.10% cumulative
preferred stock for an aggregate consideration of $1.0 million, largely pursuant
to self tender offers conducted during  March and April, 1996.  Additionally, on
June 17, 1996, PGE repurchased  9,408  shares  of its 5.75% cumulative preferred
stock (including 800  shares  redeemed  in  accordance  with annual sinking fund
provisions) for an aggregate consideration of $838,000.  

Liquidity

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

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

    With the repayment of its term loan  and all its bank borrowings on February
16, 1996, and the availability of  cash  proceeds from the sale of its regulated
water operations,  PGE  terminated  its  $60.0  million  bank  credit agreement.
However, in order to finance construction  expenditures and to meet its seasonal



                                        -21-
<PAGE>

borrowing requirements, PGE has  since  made  arrangements  for a total of $65.5
million of unsecured revolving  bank  credit,  which  is deemed adequate for its
immediate needs.  Specifically, PGE currently  has six bank lines of credit with
an aggregate borrowing capacity of $65.5 million which provide for borrowings at
interest rates generally less than prime  and  which mature during mid-1997.  As
of March 1, 1997, PGE  had  $27.2  million of borrowings outstanding under these
bank lines of credit.  In addition, PGE  can borrow up to $70.0 million from PEI
during 1997  (at  interest  rates  generally  less  than  prime)  to  repay bank
borrowings  and  for  construction   expenditures   and  other  working  capital
requirements, to the extent that PEI has funds available for lending to PGE.  As
of March 1, 1997,  PGE  had  approximately  $31.0  million outstanding under its
borrowing arrangement with PEI.  Such interim borrowings by PGE from PEI will be
repaid with proceeds from bank borrowings by  PGE.  PGE plans to arrange new and
replacement bank lines of credit when the funds that are available for borrowing
from PEI are no  longer  available  and  as  it  requires additional funding for
working capital and other purposes.

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

Long-Term Debt and Capital Stock Financings

    PGE periodically engages in long-term  debt  and capital stock financings in
order to obtain funds required for construction expenditures, the refinancing of
existing debt and  various  working  capital  purposes.    Set  forth below is a
summary of such  financings  consummated  by  PGE  since  the beginning of 1995,
exclusive  of  interim  bank   borrowings,   the  10.125%  Promissory  Note  and
indebtedness that was assumed  by  Pennsylvania-American  in connection with its
purchase of PGE's water utility operations.

    On July 28,  1994,  PEI  implemented  a  Customer  Stock  Purchase Plan (the
"Customer Plan") which provided the  residential  customers of PGE with a method
of purchasing newly-issued shares of  PEI's  common  stock at a 5% discount from
the market price.  The proceeds from the issuance of shares through the Customer
Plan were used by PEI to purchase  PGE  common stock.  PGE realized $2.4 million
and $1.7 million from the issuance of common stock to PEI in connection with the
Customer Plan during 1995 and 1994,  respectively.    Effective May 9, 1995, PEI
suspended the Customer Plan because  of  the  significant reduction in PEI's and
PGE's capital  requirements  resulting  from  the  sale  of  PGE's water utility
operations to Pennsylvania-American.

    PGE also obtains external funds from the  sale of its common stock to PEI in
connection with PEI's Dividend Reinvestment and Stock Purchase Plan (the "DRP").
However,  from  June  14,  1996,  through  December  31,  1996,  PEI temporarily
suspended the sale of stock to the DRP as a result of the proceeds received from
the sale of PGE's  water  utility  operations,  and  during  that period the DRP
obtained shares  of  PEI  common  stock  for  participants  through  open market
purchases.  Although effective January 1, 1997, PEI resumed selling stock to the
DRP.  PGE does not expect to make sales of its common stock to PEI in connection
with the DRP during 1997 because  of  the significant reduction in PGE's capital
requirements resulting  from  the  sale  of  PGE's  water  utility operations to
Pennsylvania-American.






                                        -22-
<PAGE>

    Through the DRP, holders of shares  of  PEI's common stock may reinvest cash
dividends and/or make cash investments  in  common  stock  of PEI.  During 1996,
1995  and  1994,  PGE  realized   $340,000,   $3.3  million  and  $1.8  million,
respectively, from the issuance of  common  stock  to PEI in connection with the
DRP.

    On October 12, 1995, PGE borrowed $50.0 million under a term loan agreement.
The proceeds from the term loan,  along  with  other funds provided by PGE, were
utilized on October 13, 1995,  to  redeem  the $50.0 million principal amount of
PGE's 9.57% Series First  Mortgage  Bonds  due  September 1, 1996, in connection
with the then-pending sale  of  PGE's  water utility operations to Pennsylvania-
American.  PGE repaid its  $50.0  million  term  loan on February 16, 1996, with
proceeds from the sale of its water utility operations to Pennsylvania-American.

Construction Expenditures and Related Financings

    Expenditures for the construction  of  utility  plant totaled $29.2 million,
$21.1 million and $19.6  million  in  1996,  1995  and 1994, respectively.  Such
expenditures were financed with  internally-generated funds and bank borrowings,
and to the extent  necessary  by  the  periodic  issuance of stock and long-term
debt.

    PGE currently  estimates  that  its  capital  expenditures  will total $27.9
million during 1997.  Capital expenditures  are currently expected to range from
$25.0-30.0 million in each of the years  1998  and 1999.  It is anticipated that
such expenditures will  be  financed  with  internally  generated funds and bank
borrowings, pending the periodic issuance of stock and long-term debt.

Current Maturities of Long-Term Debt and Preferred Stock

    As of December 31, 1996, $70.1  million of PGE's long-term debt and $115,000
of PGE's preferred stock was required  to  be  repaid within twelve months.  The
$70.1 million of PGE's long-term  debt  consisted of borrowings of $38.7 million
under its lines of bank credit and $31.4 million of borrowings from PEI.

Forward-Looking Statements

    Certain statements made above relating  to plans, conditions, objectives and
economic  performance  go  beyond  historical  information  and  may  provide an
indication  of  future  results.    To  that  extent,  they  are forward-looking
statements within the meaning of Section  21E  of the Securities Exchange Act of
1934, and each is subject to  factors  that could cause actual results to differ
from those in the forward-looking statement,  such as the nature of Pennsylvania
legislation  restructuring  the  natural   gas  industry  and  general  economic
conditions and uncertainties.

ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The financial  statements  of  PGE  and  the  report  of  independent public
accountants thereon are presented on pages 24 through 48 of this Form 10-K.









                                        -23-
<PAGE>

                   REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS



To PG Energy Inc.:

We have audited the accompanying balance sheets and statements of capitalization
of PG Energy Inc. ("PGE"), formerly  known as Pennsylvania Gas and Water Company
(a  Pennsylvania  corporation  and  a  wholly-owned  subsidiary  of Pennsylvania
Enterprises, Inc.) as of December 31,  1996 and 1995, and the related statements
of income, common shareholder's investment, and cash flows for each of the three
years in the period ended December 31, 1996.  These financial statements are the
responsibility of PGE's management.  Our responsibility is to express an opinion
on these financial statements based on our audits.

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

In our opinion, the financial  statements  referred  to above present fairly, in
all material respects, the financial position  of  PG Energy Inc. as of December
31, 1996 and 1995, and the results of its operations and its cash flows for each
of the three years in  the  period  ended  December 31, 1996, in conformity with
generally accepted accounting principles.

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



                                  ARTHUR ANDERSEN LLP


New York, N.Y.
February 19, 1997












                                        -24-
<PAGE>

                                  PG ENERGY INC.

                               STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                      Year Ended December 31,     
                                                    1996        1995        1994  
                                                       (Thousands of Dollars)
<S>                                              <C>         <C>         <C>
OPERATING REVENUES                               $ 160,594   $ 152,756   $ 167,992 
  Cost of gas                                       88,291      84,372      98,653
OPERATING MARGIN                                    72,303      68,384      69,339

OTHER OPERATING EXPENSES:
  Operation                                         25,070      22,438      22,652
  Maintenance                                        5,513       4,967       4,436
  Depreciation                                       7,612       6,971       6,667
  Income taxes                                       6,364       5,168       5,649
  Taxes other than income taxes                     11,028       9,918      10,807
      Total other operating expenses                55,587      49,462      50,211

OPERATING INCOME                                    16,716      18,922      19,128

OTHER INCOME, NET (Note 4)                             143         301          72

INCOME BEFORE INTEREST CHARGES                      16,859      19,223      19,200

INTEREST CHARGES:
  Interest on long-term debt                         6,862       9,304       8,914
  Other interest                                       658       1,543       1,005
  Allowance for borrowed funds used
    during construction                               (177)        (94)        (21)
      Total interest charges                         7,343      10,753       9,898

INCOME FROM CONTINUING OPERATIONS                    9,516       8,470       9,302

INCOME (LOSS) WITH RESPECT TO DISCONTINUED
  OPERATIONS (Note 2)                                 (363)     (3,834)     10,504

NET INCOME                                           9,153       4,636      19,806 

DIVIDENDS ON PREFERRED STOCK                         1,730       2,763       4,639

EARNINGS APPLICABLE TO COMMON STOCK              $   7,423   $   1,873   $  15,167

COMMON STOCK:
  Earnings (loss) per share of common stock:
    Continuing operations                        $    2.16   $    1.02   $     .90
    Discontinued operations                           (.10)       (.69)       2.02
    Income before premium on repurchase/
      redemption of preferred stock                   2.06         .33        2.92
    Premium on repurchase/redemption of
      preferred stock                                 (.37)          -        (.19)
    Total                                        $    1.69   $     .33   $    2.73

Weighted average number of shares outstanding    3,601,072   5,569,765   5,189,108





</TABLE>

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

                                        -25-
<PAGE>

                                PG ENERGY INC.

                                BALANCE SHEETS

[CAPTION]
                                                              December 31,    
                                                          1996          1995  
                                                        (Thousands of Dollars)
ASSETS
[S]                                                     [C]           [C]
UTILITY PLANT:
  At original cost                                      $319,205      $295,895
  Accumulated depreciation                               (79,783)      (76,882)
                                                         239,422       219,013

OTHER PROPERTY AND INVESTMENTS                             4,894         5,089

CURRENT ASSETS:
  Cash and cash equivalents                                  690           328
  Accounts receivable -
    Customers                                             17,183        18,189
    Affiliates, net                                           58             -
    Others                                                   565           815
    Reserve for uncollectible accounts                    (1,140)         (781)
  Accrued utility revenues                                11,830        10,319
  Materials and supplies, at average cost                  2,460         2,609
  Gas held by suppliers, at average cost                  20,265        15,140
  Natural gas transition costs collectible                 2,525         4,612
  Deferred cost of gas and supplier refunds, net          19,316             -
  Prepaid expenses and other                               1,313         3,281
                                                          75,065        54,512


DEFERRED CHARGES:
  Regulatory assets -
    Deferred taxes collectible                            29,771        30,015
    Other                                                  4,274         3,013
  Unamortized debt expense                                 1,153         1,340
                                                          35,198        34,368






NET ASSETS OF DISCONTINUED OPERATIONS (Note 2)                 -       204,250






TOTAL ASSETS                                            $354,579      $517,232



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


                                        -26-
<PAGE>

                                   PG ENERGY INC.

                                   BALANCE SHEETS

[CAPTION]
                                                              December 31,    
                                                          1996          1995  
                                                        (Thousands of Dollars)
CAPITALIZATION AND LIABILITIES
[S]                                                     [C]           [C]
CAPITALIZATION (see accompanying statements):
  Common shareholder's investment (Notes 5 and 8)       $ 96,005      $208,356
  Preferred stock of PGE (Note 6) -
    Not subject to mandatory redemption, net              18,851        33,615
    Subject to mandatory redemption                          739         1,680
  Long-term debt (Note 7)                                 55,000        55,000
                                                         170,595       298,651

CURRENT LIABILITIES:
  Current portion of long-term debt (Notes 7 and 9)
    Parent                                                31,400             -
    Other                                                 38,721       115,801
  Preferred stock subject to repurchase or mandatory
    redemption (Note 6)                                      115            80
  Note payable (Note 9)                                   10,000        10,000
  Accounts payable -
    Suppliers                                             17,831        17,781
    Parent                                                   348           760
    Affiliates, net                                            -            66
  Deferred cost of gas and supplier refunds, net               -           434
  Accrued general business and realty taxes                2,239         1,542
  Accrued income taxes                                    14,559           516
  Accrued interest                                         1,936         2,062
  Accrued natural gas transition costs (Note 3)            2,095         2,278
  Other                                                    3,375         3,162
                                                         122,619       154,482


DEFERRED CREDITS:
  Deferred income taxes                                   49,119        48,848
  Accrued natural gas transition costs (Note 3)                -         1,144
  Unamortized investment tax credits                       4,767         4,938
  Operating reserves                                       3,086         3,709
  Other                                                    4,393         5,460
                                                          61,365        64,099

COMMITMENTS AND CONTINGENCIES (Notes 11 and 12)





TOTAL CAPITALIZATION AND LIABILITIES                    $354,579      $517,232



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


                                        -27-
<PAGE>

                                   PG ENERGY INC.

                              STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                       Year Ended December 31,    
                                                      1996       1995       1994  
                                                       (Thousands of Dollars)
<S>                                                <C>         <C>        <C>
CASH FLOW FROM OPERATING ACTIVITIES:
  Income from continuing operations                $   9,516   $  8,470   $  9,302
  Effects of noncash charges to income -
    Depreciation                                       7,675      7,018      6,693
    Deferred income taxes, net                         1,940       (265)       725
    Provisions for self insurance                      1,042      2,652      1,030
    Other, net                                         1,390      5,190      2,755
  Changes in working capital, exclusive of cash 
   and current portion of long-term debt -
    Receivables and accrued utility revenues              46     (3,309)     1,546
    Gas held by suppliers                             (5,125)     4,885      6,625
    Accounts payable                                     215        839     (5,609)
    Deferred cost of gas and supplier refunds, net   (18,493)     5,715      5,784
    Other current assets and liabilities, net          2,958     (6,622)      (658)
  Other operating items, net                          (5,644)     2,675     (4,020)
      Net cash provided by (used for) continuing
        operations                                    (4,480)    27,248     24,173
  Net cash provided by (used for) discontinued
    operations                                       (45,173)     3,764        552
      Net cash provided by (used for) operating
        activities                                   (49,653)    31,012     24,725

CASH FLOW FROM INVESTING ACTIVITIES:
  Additions to utility plant                         (29,312)   (20,615)   (16,960)
  Proceeds from the sale of discontinued 
    operations                                       261,752          -          -
  Other, net                                           1,078     (4,934)     1,098 
      Net cash provided by (used for) investing
        activities                                   233,518    (25,549)   (15,862) 

CASH FLOW FROM FINANCING ACTIVITIES:
  Issuance of common stock                               339      5,720     23,439
  Repurchase of common stock                         (85,008)         -          -
  Redemption of preferred stock                      (15,670)       (80)   (30,080) 
  Dividends on common and preferred stock            (35,498)   (18,032)   (14,244)
  Issuance of long-term debt                               -     50,000     30,000
  Issuance of long-term debt to parent                49,900          -          -
  Repayment of long-term debt                        (50,000)   (53,535)   (31,055)
  Repayment of long-term debt to parent              (18,500)         -          -
  Repayment of note payable to parent                      -          -     (3,680)
  Net increase (decrease) in bank borrowings         (27,723)    10,519     15,370
  Other, net                                          (1,343)       (31)    (1,023) 
      Net cash used for financing activities        (183,503)    (5,439)   (11,273) 

NET INCREASE (DECREASE) IN CASH AND CASH
  EQUIVALENTS                                            362         24     (2,410) 
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR           328        304      2,714 
CASH AND CASH EQUIVALENTS AT END OF YEAR           $     690   $    328   $    304

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the year for:
    Interest (net of amount capitalized)           $   7,139   $ 23,802   $ 21,001

    Income taxes                                   $  46,483   $  8,694   $  7,353

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

</TABLE>
                                        -28-
<PAGE>

                                     PG ENERGY INC.

                              STATEMENTS OF CAPITALIZATION
<TABLE>
<CAPTION>
                                                          December 31,        
                                                    1996                1995  
                                                    (Thousands of Dollars)
<S>                                              <C>                <C>
COMMON SHAREHOLDER'S INVESTMENT (Notes 5 and 8):
  Common stock, no par value
    (stated value $10 per share) 
    Authorized - 15,000,000 shares
    Outstanding - 3,314,155 and
      5,602,480 shares, respectively             $  33,142           $  56,025
  Additional paid-in capital                        32,677              94,463
  Retained earnings                                 30,186              57,868
     Total common shareholder's investment          96,005   56.3%     208,356   69.8%

PREFERRED STOCK, par value $100 per share 
  Authorized - 997,500 shares (Note 6):
    Not subject to mandatory redemption, net -
      4.10% cumulative preferred,
         79,670 and 100,000 shares outstanding,
         respectively                                7,967              10,000
      Less current repurchases                         (35)                  -
      9% cumulative preferred, 115,641 and
        250,000 shares outstanding, respectively,
        net of issuance costs                       10,919              23,615
    Total preferred stock not subject to
        mandatory redemption, net                   18,851   11.1%      33,615   11.2%
    Subject to mandatory redemption -
      5.75% cumulative preferred, 8,192 and 
        17,600 shares outstanding, respectively        819               1,760
      Less current redemption requirements             (80)                (80)

    Total preferred stock subject to
        mandatory redemption                           739    0.4%       1,680    0.6%

LONG-TERM DEBT (Note 7):
  First mortgage bonds                              55,000              55,000  
  Notes                                             70,121             115,801
  Less current maturities and sinking
    fund requirements                              (70,121)           (115,801)
     Total long-term debt                           55,000   32.2%      55,000   18.4%

TOTAL CAPITALIZATION                             $ 170,595  100.0%   $ 298,651  100.0%   










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



</TABLE>
                                        -29-
<PAGE>

                                     PG ENERGY INC.

                      STATEMENTS OF COMMON SHAREHOLDER'S INVESTMENT

                  FOR THE YEARS ENDED DECEMBER 31, 1994, 1995 AND 1996
[CAPTION]

                                             Additional 
                                    Common    Paid-In      Retained 
                                    Stock     Capital      Earnings      Total  
                                             (Thousands of Dollars)
[S]                                [C]        [C]          [C]         [C]
Balance at December 31, 1993       $48,687    $  72,642    $ 66,682    $188,011 

Net income for 1994                      -            -      19,806      19,806 
Issuance of common stock             5,880       17,559           -      23,439 
Premium on redemption of preferred
  stock                                  -            -        (980)       (980)
Dividends on:
  Preferred stock (Note 6)               -            -      (4,639)     (4,639)
  Common stock ($1.81 per share)         -            -      (9,605)     (9,605)

Balance at December 31, 1994        54,567       90,201      71,264     216,032 

Net income for 1995                      -            -       4,636       4,636 
Issuance of common stock             1,458        4,262           -       5,720 
Dividends on:
  Preferred stock (Note 6)               -            -      (2,763)     (2,763)
  Common stock ($2.7425 per share)       -            -     (15,269)    (15,269)

Balance at December 31, 1995        56,025       94,463      57,868     208,356 

Net income for 1996                      -            -       9,153       9,153 
Issuance of common stock                90          249           -         339 
Repurchase of common stock         (22,973)     (62,035)          -     (85,008)
Premium on repurchase of
  preferred stock                        -            -      (1,337)     (1,337)
Dividends on:
  Preferred stock (Note 6)               -            -      (1,730)     (1,730)
  Common stock ($10.217 per share)       -            -     (33,768)    (33,768)

Balance at December 31, 1996       $33,142   $   32,677    $ 30,186    $ 96,005 














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


                                        -30-
<PAGE>

                                PG ENERGY INC.

                         NOTES TO FINANCIAL STATEMENTS


(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Nature  of  the  Business.    PG  Energy  Inc.  ("PGE"),  formerly  known as
Pennsylvania Gas and Water  Company,  a  wholly-owned subsidiary of Pennsylvania
Enterprises,  Inc.  ("PEI"),  is  a  regulated  public  utility  subject  to the
jurisdiction of the Pennsylvania Public Utility Commission ("PPUC") for rate and
accounting purposes.   PGE  distributes  natural  gas  to  a  ten-county area in
northeastern Pennsylvania,  a  territory  that  includes  116 municipalities, in
addition to the cities of Scranton,  Wilkes-Barre and Williamsport.  On February
14, 1997, PGE acquired all  of  the  outstanding  capital stock of Honesdale Gas
Company ("Honesdale"), a  regulated  public  utility serving approximately 3,200
customers in portions of Pike and Wayne Counties in northeastern Pennsylvania. 

    The financial  statements  of  PGE  have  been  prepared  in accordance with
generally accepted accounting principles,  including the provisions of Financial
Accounting Standards Board ("FASB") Statement 71, "Accounting for the Effects of
Certain Types of Regulation," which give  recognition to the rate and accounting
practices of regulatory agencies such as the PPUC.

    Use of Accounting Estimates.    The  preparation  of financial statements in
conformity with generally accepted  accounting principles requires management to
make estimates and assumptions that  affect  the  reported amounts of assets and
liabilities and disclosure of contingent  assets  and liabilities at the date of
the financial statements  and  the  reported  amounts  of  revenues and expenses
during the reporting period.  These estimates involve judgments with respect to,
among other things, various future  economic factors and regulatory matters (see
"Management's Discussion and  Analysis  of  Financial  Conditions and Results of
Operations - Restructuring of Natural Gas Industry" in Item 7 of this Form 10-K)
which are difficult to predict and  are  beyond  the control of PEI.  Therefore,
actual amounts could differ from these estimates.

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

    The allowance for funds used during construction ("AFUDC") is defined as the
net cost  during  the  period  of  construction  of  borrowed  funds  used and a
reasonable rate upon other funds  when  so  used.   Such allowance is charged to
utility plant and reported as a  reduction  of interest expense (with respect to
the cost of borrowed funds)  in  the  accompanying  statements of income.  AFUDC
varies according to changes in the level of construction work in progress and in
the sources and costs of capital.   The weighted average rate for such allowance
was approximately 9% in 1996, 8% in 1995 and 7% in 1994.

    PGE provides  for  depreciation  on  a  straight-line  basis.   Exclusive of
transportation and work  equipment,  the  annual  provision for depreciation, as
related to the average depreciable original  cost of utility plant, was 2.60% in
1996, 2.75% in 1995 and 2.77% in 1994, respectively.






                                        -31-
<PAGE>

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

    Revenues and  Cost  of  Gas.    PGE  bills  its  customers  monthly based on
estimated or actual meter readings  on  cycles that extend throughout the month.
The estimated unbilled amounts from the  most recent meter reading dates through
the end of the period being reported on are recorded as accrued revenues.

    PGE generally passes on to its customers increases or decreases in gas costs
from those reflected in its tariff  charges.  In accordance with this procedure,
PGE defers any current under  or  over-recoveries  of  gas costs and collects or
refunds such amounts in  subsequent  periods.    PGE  had underrecoveries of gas
costs totaling $29.6 million, $10.4 million and $15.8 million as of December 31,
1996, 1995 and 1994, respectively.

    Deferred Charges  (Regulatory  Assets).    PGE  generally  accounts  for and
reports its costs in accordance with the  economic effect of rate actions by the
PPUC.  To this extent,  certain  costs  are recorded as deferred charges pending
their recovery in rates.   These  amounts  relate to previously-issued orders of
the PPUC and are of a  nature  which,  in  PGE's opinion, will be recoverable in
future rates,  based  on  such  rate  orders.    In  addition  to deferred taxes
collectible, which represent the probable future rate recovery of the previously
unrecorded deferred taxes primarily relating to certain temporary differences in
the basis of utility  plant  not  previously  recorded because of the regulatory
rate practices of  the  PPUC,  the  following  deferred  charges are included as
"Other" regulatory assets as of December 31, 1996 and 1995:
[CAPTION]
                                                   1996              1995 
                                                   (Thousands of Dollars)
    [S]                                          [C]               [C]
    Computer software costs                      $ 1,293           $   415
    Early retirement plan charges                    664               710
    Rate case expense                                588                11
    Low income usage reduction program               492               429
    Extraordinary charges due to flooding            426                 -
    Customer assistance program                      219               109
    Corrosion control costs                          194               341
    Natural gas transition costs collectible           -               497
    Other                                            398               501

      Total                                      $ 4,274           $ 3,013

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

    Cash and Cash Equivalents.    For  the  purposes  of  the statements of cash
flows,  PGE  considers  all  highly  liquid  debt  instruments  purchased, which
generally have a maturity of three months or less, to be cash equivalents.  Such
instruments are carried at cost, which approximates market value.






                                        -32-
<PAGE>

    Income Taxes.   PGE  provides  for  deferred  taxes  in  accordance with the
provisions of FASB Statement 109.   The  components of PGE's net deferred income
tax liability relative to  continuing  operations  as  of  December 31, 1996 and
1995, are shown below:
[CAPTION]
                                                   1996              1995 
                                                   (Thousands of Dollars)
    [S]                                          [C]               [C]
    Utility plant basis differences              $53,132           $51,822
    FERC Order 636 transition costs                  181               700
    Postretirement benefits                         (726)             (536)
    Take-or-pay costs, net                          (467)             (467)
    Alternative minimum tax                            -            (1,947)
    Operating reserves                            (1,406)           (1,300)
    Other                                         (1,595)              576

        Net deferred income tax liability        $49,119           $48,848

    The provision for income taxes relative to continuing operations consists of
the following components:
[CAPTION]
                                                  1996       1995       1994  
                                                    (Thousands of Dollars)
    [S]                                          [C]        [C]        [C]
    Included in operating expenses:
      Currently payable -
        Federal                                  $ 3,235    $ 4,457    $ 3,013
        State                                      1,361      1,169      1,128
          Total currently payable                  4,596      5,626      4,141
      Deferred, net -
        Federal                                    2,059        198      1,785
        State                                       (119)      (463)      (105)
          Total deferred, net                      1,940       (265)     1,680
      Amortization of investment tax credits        (172)      (193)      (172)
          Total included in operating expenses     6,364      5,168      5,649

    Included in other income, net:
      Currently payable -
        Federal                                      (59)       135        213
        State                                        (19)        43         85
          Total currently payable                    (78)       178        298
      Deferred, net -
        Federal                                        -          -         (5)
        State                                          -          -          -
          Total deferred, net                          -          -         (5)
          Total included in other income, net        (78)       178        293

          Total provision for income taxes       $ 6,286    $ 5,346    $ 5,942












                                        -33-
<PAGE>

    The total provision for income taxes relative to continuing operations shown
in the accompanying statements of income  differs from the amount which would be
computed by applying the  statutory  federal  income  tax  rate to income before
income taxes.    The  following  table  summarizes  the  major  reasons for this
difference:
[CAPTION]
                                                   1996       1995       1994 
                                                    (Thousands of Dollars)
    [S]                                          [C]        [C]        [C]
    Income before income taxes                   $15,802    $13,816    $15,293
    Tax expense at statutory federal
      income tax rate                            $ 5,531    $ 4,836    $ 5,353
    Increases (reductions) in taxes
      resulting from -
        State income taxes, net of
          federal income tax benefit                 795        487        879  
        Amortization of investment tax 
          credits                                   (172)      (193)      (172)
        Other, net                                   132        216       (118)

      Total provision for income taxes           $ 6,286    $ 5,346    $ 5,942

    Long Lived Assets.  FASB  Statement  121,  "Accounting for the Impairment of
Long-Lived Assets", requires  that  long-lived assets, identifiable intangibles,
capital leases and goodwill be reviewed  for impairment whenever events occur or
changes in circumstances indicate that the carrying amount of the assets may not
be recoverable.  In addition, FASB Statement 121 requires that regulatory assets
meet the recovery criteria  of  FASB  Statement  71,  "Accounting for Effects of
Certain Types of Regulation", on an ongoing basis in order to avoid a writedown.
The implementation of FASB  Statement  121  in  1996  did not have a significant
impact on PGE.  The carrying  amount of all assets, including regulatory assets,
is considered recoverable.

(2)  DISCONTINUED OPERATIONS

    Pursuant to an Asset  Purchase  Agreement  dated  April 26, 1995, as amended
(the  "Agreement"),  among  PEI,   PGE,   American  Water  Works  Company,  Inc.
("American") and Pennsylvania-American  Water Company ("Pennsylvania-American"),
a wholly-owned subsidiary of American, PEI and PGE sold substantially all of the
assets, properties and rights of PGE's water utility operations to Pennsylvania-
American on February 16, 1996.   Under the terms of the Agreement, Pennsylvania-
American paid PGE $414.3 million  consisting  of  $262.1 million in cash and the
assumption of $152.2 million of  PGE's  liabilities, including $141.0 million of
its long-term debt.  PGE continued  to  operate the water utility business until
February 16, 1996.   The  cash  proceeds  from  the sale of approximately $203.3
million, net of the estimated $58.8  million  of income taxes, have been used by
PEI and PGE to retire debt,  to  repurchase  stock  (see  Note 5 of the Notes to
Financial Statements), for construction expenditures and for working capital for
their continuing operations.  

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



                                        -34-
<PAGE>

the accelerated depreciation that had  been  claimed  by PGE with respect to the
water utility plant that  was  sold.    It  is  estimated  that the income taxes
payable on  the  sale,  for  which  deferred  income  taxes  had previously been
provided, will be approximately $58.8  million,  of which $44.6 million had been
paid as of December 31, 1996.

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

    Selected  financial  information  for  the  discontinued  operations  as  of
December 31, 1995, and for the  years  ended  December  31, 1995 and 1994 is set
forth below:

                    Net Assets of Discontinued Operations
[CAPTION]
                                                              As of
                                                        December 31, 1995
                                                     (Thousands of Dollars)
[S]                                                     [C]
Net utility plant                                       $         368,742
Current assets (primarily accounts receivable
  and accrued revenues)                                            38,508
Total assets being acquired by
  Pennsylvania-American                                           407,250
Liabilities being assumed by
  Pennsylvania-American                                           147,080
Net assets being acquired by
  Pennsylvania-American                                           260,170
Estimated liability for income taxes on
  sale of discontinued operations                                 (56,710)
Estimated net income of discontinued operations
  during the remainder of the phase-out period                        790
 
Total net assets of discontinued operations             $         204,250

                      Income From Discontinued Operations
[CAPTION]
                                                    Years ended December 31,
                                                     1995*           1994  
                                                     (Thousands of Dollars)
[S]                                                 [C]            [C]
Operating revenues                                  $ 15,640       $ 66,731
Operating expenses, excluding income taxes             8,875         36,677
Operating income before income taxes                   6,765         30,054
Income taxes                                           1,403          6,850
Operating income                                       5,362         23,204
Other income                                               9             49
Allocated interest charges                            (3,244)       (12,749)

Income from discontinued operations                 $  2,127       $ 10,504

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

                                        -35-
<PAGE>

                 Net Cash Provided by Discontinued Operations

[CAPTION]
                                                    Years ended December 31,
                                                      1995*          1994  
                                                     (Thousands of Dollars)
[S]                                                 [C]            [C]
Income from discontinued operations                 $  2,127       $ 10,504
Noncash charges (credits) to income:
    Depreciation                                       1,946          7,672
    Deferred treatment plant costs, net                  145            581
    Deferred income taxes                                447          5,146
    Deferred water utility billings                        -         (5,574)
Changes in working capital, exclusive
  of long-term debt                                    1,648            353
Additions to utility plant                            (2,276)       (20,980)
Utilization of restricted funds                            -          9,753
Net increase (decrease) in long-term
  debt                                                 1,010         (6,834)
Other, net                                            (1,283)           (69)

Net cash provided by discontinued
  operations                                        $  3,764       $    552

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

(3)  RATE MATTERS

    Rate Increase.  On May  24,  1996,  PGE  filed  an application with the PPUC
seeking an increase in its base gas  rates, designed to produce $14.1 million in
additional annual revenue, to be effective July 23, 1996.  On June 20, 1996, the
PPUC suspended this rate increase for  seven months (until February 23, 1997) in
order to investigate the reasonableness of  the  proposed rates.  On November 7,
1996, PGE and certain  parties  filing  objections  to the rate increase request
filed  a  Settlement  Agreement  and  Joint  Petition  for  Settlement  of  Rate
Investigation (the  "Settlement  Petition")  with  the  Administrative Law Judge
assigned to conduct  the  investigation  of  the  rate  increase  request.  This
Settlement Petition provided for an overall 5.3% rate increase that was designed
to produce $7.5 million of additional annual revenue.  By Order adopted December
19, 1996, the PPUC approved  the Settlement Petition effective January 15, 1997.
Under the terms of the Settlement  Petition,  the  billing for the impact of the
rate increase relative  to  PGE's  residential  heating  customers  (which it is
estimated will total $6.6 million on an annual basis) is being deferred, without
carrying charges, until July, 1997.  

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





                                        -36-
<PAGE>

    In accordance with these  procedures,  PGE  has  been  permitted to make the
following changes since January 1, 1994,  to  the gas costs contained in its gas
tariff rates:
[CAPTION]

                                    Change in              Calculated
             Effective             Rate per MCF        Increase (Decrease)
                Date              From     To           in Annual Revenue 
           [S]                     [C]     [C]              [C]
           December 1, 1996        3.01    4.18             32,400,000
           September 1, 1996       2.88    3.01              3,600,000
           June 1, 1996            2.75    2.88              3,400,000
           December 1, 1995        2.42    2.75              9,600,000
           May 15, 1995            3.68    2.42             (8,200,000)*
           December 1, 1994        3.74    3.68             (1,800,000)

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

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

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

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

    By Order of the PPUC entered August  26, 1994, PGE began recovering the Non-
Gas Transition Costs that it estimates  it will ultimately be billed pursuant to
FERC Order 636 through the  billing  of  a  surcharge to its customers effective
September 12, 1994.  It  is  currently  estimated  that $10.1 million of Non-Gas
Transition Costs  will  be  billed  to  PGE,  generally  over  a six-year period
extending through January 1, 1999, of which  $8.0 million had been billed to PGE
and $7.5 million had been recovered from  its customers as of December 31, 1996.
PGE has recorded the estimated Non-Gas Transition Costs that remain to be billed
to it and the amounts remaining to be recovered from its customers.








                                        -37-
<PAGE>

(4)  OTHER INCOME, NET

    Other income, net was comprised of the following elements: 
[CAPTION]
                                                  Year ended December 31,   
                                                1996       1995       1994  
                                                   (Thousands of Dollars)
    [S]                                        [C]        [C]        [C]
    Net interest income on the temporary
      investment of proceeds from the sale
      of PGE's water utility operations        $   267    $     -    $     -
    Loss on sale and retirement of gas wells
      and related abandonment of subsurface gas
      rights, net of related income taxes         (321)         -          -
    Gain on sale of land and other property,
      net of related income taxes                  141          -        165
    Write-off of expired advances relating
      to income taxes, net of related
      income taxes                                   -        227          -
    Amortization of preferred stock issuance
      costs, net of related income tax
      benefits                                     (13)        (1)      (227)
    Other                                           69         75        134
      Total                                    $   143    $   301    $    72

(5)  COMMON STOCK

    On May 31, 1994, PGE issued  500,000  shares  of its common stock to PEI for
aggregate net proceeds of $20.0 million.  The proceeds from the shares issued on
May 31, 1994, were used by PGE to  redeem $15.0 million of its 9.50% 1988 series
cumulative preferred stock, to fund the $534,375 premium in connection with such
redemption, to repay a portion  of  its  bank borrowings and for working capital
purposes.    Other  than  shares   issued  in  connection  with  PEI's  Dividend
Reinvestment and Stock Purchase Plan  and  Customer Stock Purchase Plan, PGE has
not issued any other shares of common stock since January 1, 1994.

    On July 28,  1994,  PEI  implemented  a  Customer  Stock  Purchase Plan (the
"Customer Plan") which provided the  residential  customers of PGE with a method
of purchasing newly-issued shares of PEI common  stock at a 5% discount from the
market price.   PEI  uses  proceeds  from  the  issuance  of  shares through the
Customer Plan to purchase common stock  of  PGE.   PGE realized $2.4 million and
$1.7 million from the issuance  of  common  stock  to PEI in connection with the
Customer Plan during 1995 and  1994,  respectively.   Effective May 9, 1995, the
Customer Plan was suspended because  of  the  significant reduction in PEI's and
PGE's capital  requirements  resulting  from  the  sale  of  PGE's water utility
operations to Pennsylvania-American.

    PGE also obtains external funds from the  sale of its common stock to PEI in
connection with PEI's Dividend Reinvestment and Stock Purchase Plan (the "DRP").
However,  from  June  14,  1996,  through  December  31,  1996,  PEI temporarily
suspended the sale of stock to the DRP as a result of the proceeds received from
the sale of PGE's  water  utility  operations,  and  during  that period the DRP
obtained shares  of  PEI  common  stock  for  participants  through  open market
purchases.  Although effective January 1, 1997, PEI resumed selling stock to the
DRP, PGE does not expect to make sales  of its common stock to PEI in connection
with the DRP during 1997 because  of  the significant reduction in PGE's capital
requirements resulting  from  the  sale  of  PGE's  water  utility operations to
Pennsylvania-American.

                                        -38-
<PAGE>

    Through the DRP, holders of shares  of  PEI's common stock may reinvest cash
dividends and/or make cash investments  in  common  stock  of PEI.  During 1996,
1995  and  1994,  PGE  realized   $340,000,   $3.3  million  and  $1.8  million,
respectively, from the issuance of  common  stock  to PEI in connection with the
DRP.

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

(6)  PREFERRED STOCK

    Preferred Stock Subject  to  Mandatory  Redemption.    On  May 31, 1994, PGE
redeemed the remaining  150,000  outstanding  shares  of  its  9.50% 1988 series
cumulative preferred stock, $100 par value,  at  a price of $103.5625 per share,
which included a voluntary redemption premium  of $3.5625 per share ($534,375 in
the aggregate), plus accrued dividends. 

    On  December  16,  1994,  PGE  redeemed  all  150,000  shares  of  its 8.90%
cumulative preferred stock at a  price  of  $102.97  per share, which included a
voluntary redemption premium of $2.97 per share ($445,500 in the aggregate). 

    The holders of the  5.75%  cumulative  preferred  stock have a noncumulative
right each year to tender to PGE  and  to  require it to purchase at a per share
price not  exceeding  $100,  up  to  (a)  that  number  of  shares  of the 5.75%
cumulative preferred stock which can be acquired for an aggregate purchase price
of $80,000 less  (b)  the  number  of  such  shares  which  PGE may already have
purchased during the year at  a  per  share  price  of  not  more than $100.  On
June 17, 1996, PGE repurchased  9,408  shares  of its 5.75% cumulative preferred
stock (including 800  shares  redeemed  in  accordance  with annual sinking fund
provisions) for an  aggregate  consideration  of  $838,000.   Eight hundred such
shares  were  acquired  and  cancelled  by  PGE  in  each  of  the  years  ended
December 31, 1995 and 1994,  for  an  aggregate  purchase  price in each year of
$80,000.

    As of December 31,  1996,  the  sinking  fund requirements relative to PGE's
5.75% cumulative preferred stock (the only  series of preferred stock subject to
mandatory redemption that was outstanding as of such date) were $80,000 for each
of the years 1997 through 2001.  At PGE's option, the 5.75% cumulative preferred
stock may currently be redeemed at a price of $102.00 per share ($836,000 in the
aggregate).

    Preferred Stock Not Subject to Mandatory  Redemption.  During the year ended
December 31, 1996, PGE repurchased 134,359 shares of its 9% cumulative preferred
stock, $100 par value, for an  aggregate consideration of $14.5 million, largely
pursuant to a self tender offer conducted  during March and April, 1996.  The 9%
cumulative preferred stock is  not  redeemable  at  the  option  of PGE prior to
September 15, 1997.  Thereafter, it is redeemable at the option of PGE, in whole
or in part, upon not less than  30  days' notice, at $100 per share plus accrued
dividends to the date of redemption and at a premium of $8 per share if redeemed
from September 15, 1997, to September 14, 1998, and a premium of $4 per share if
redeemed from September 15, 1998, to September 14, 1999.  

    During the year ended December  31,  1996,  PGE repurchased 20,330 shares of
its  4.10%  cumulative  preferred  stock,  $100  par  value,  for  an  aggregate
consideration of $1.0 million, largely pursuant to a self tender offer conducted
during March and April,  1996.    An  additional  350 shares of 4.10% cumulative


                                        -39-
<PAGE>

preferred  stock  were   repurchased   in   January,   1997,  for  an  aggregate
consideration of $19,000.  At PGE's option, the 4.10% cumulative preferred stock
may currently be redeemed at a redemption  price  of $105.50 per share or for an
aggregate redemption price of $8,368,260.

    Dividend Information.  The dividends on  the  preferred stock of PGE in each
of the three years in the period ended December 31, 1996, were as follows:
[CAPTION]
         Series                        1996         1995         1994 
                                           (Thousands of Dollars)
          [S]                         [C]          [C]          [C]
          4.10%                       $  348       $  410       $  410
          5.75%                           72          103          108
          8.90%                            -            -        1,280
          9.00%                        1,310        2,250        2,250
          9.50% 1988 series                -            -          591

           Total                      $1,730       $2,763       $4,639

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

(7)  LONG-TERM DEBT

    Long-term debt consisted of  the  following  components at December 31, 1996
and 1995:
[CAPTION]
                                                          1996          1995   
                                                        (Thousands of Dollars)
  [S]                                                   [C]           [C]
  First mortgage bonds -
    8.375% Series, due 2002                             $  30,000     $  30,000
    9.23 % Series, due 1999                                10,000        10,000
    9.34 % Series, due 2019                                15,000        15,000
                                                           55,000        55,000
  Notes -
    Term loan, due 1996                                         -        50,000
    Bank borrowings, at weighted average interest
      rates of 6.18% and 6.62%, respectively (Note 9)      38,721        65,801
    Note payable to PEI                                    31,400             -
                                                           70,121       115,801

  Less current maturities and sinking
    fund requirements                                     (70,121)     (115,801)
    Total long-term debt                                $  55,000     $  55,000

    On October 12, 1995,  PGE  borrowed  $50.0  million  pursuant to a term loan
agreement.  Proceeds from the loan, along with other funds provided by PGE, were
utilized on October 13, 1995,  to  redeem  the $50.0 million principal amount of
PGE's 9.57% Series First Mortgage Bonds  due  September 1, 1996.  PGE repaid its
$50.0 million term loan on February 16, 1996, with proceeds from the sale of its
water operations to Pennsylvania-American.

    On August 22, 1996, the PPUC  granted  PGE  permission to borrow up to $70.0
million from PEI during 1996,  and  also  1997 (at interest rates generally less
than prime), to  repay  bank  borrowings  and  for construction expenditures and
other working capital requirements, to  the  extent that PEI has funds available
for lending to PGE.  As of  December 31, 1996, PGE had $31.4 million outstanding
under its borrowing arrangement with PEI.    Such interim borrowings by PGE from
PEI will be repaid with proceeds from bank borrowings by PGE.

                                        -40-
<PAGE>

    Maturities and Sinking Fund  Requirements.    As  of  December 31, 1996, the
aggregate annual maturities and sinking  fund requirements of long-term debt for
each of the next five years ending December 31, were:
[CAPTION]
                           Year              Amount   
                           [S]            [C]
                           1997           $ 70,121,000 (a)
                           1998           $          -    
                           1999           $ 10,000,000 (b)
                           2000           $          -
                           2001           $          -

    (a) Includes $38.7 million of bank borrowings outstanding as of December 31,
        1996, and $31.4 million of borrowings payable to PEI.

    (b) Represents PGE's 9.23%  Series  First  Mortgage  Bonds  in the principal
        amount of $10.0 million due September 1, 1999.

(8)  DIVIDEND RESTRICTIONS

    The preferred stock provisions  of  PGE's Restated Articles of Incorporation
and certain of the agreements under  which PGE has issued long-term debt provide
for certain dividend restrictions.  As  of  December 31, 1996, $5,416,000 of the
retained earnings of PGE were  restricted  against the payment of cash dividends
on common stock under the most restrictive of these covenants.

(9)  BANK NOTES PAYABLE

    As of April 19, 1993, PGE entered into a revolving bank credit agreement, as
subsequently amended (the "Credit Agreement"),  with  a group of six banks under
the terms of which $60.0 million was  available for borrowing by PGE through May
31, 1996.  The Credit Agreement  was  terminated on February 26, 1996, following
the sale of  PGE's  water  operations  to  Pennsylvania-American on February 16,
1996, and the repayment of all borrowings outstanding under the Credit Agreement
with proceeds from such sale.  The  interest rate on borrowings under the Credit
Agreement was generally less  than  prime.    The  Credit Agreement required the
payment of a commitment fee of  .195%  per  annum on the average daily amount of
the unused portion of the available funds.  

    PGE currently has arrangements for  six  revolving bank lines of credit with
an aggregate borrowing capacity of $65.5 million which provide for borrowings at
interest rates generally less than prime  and  which mature during mid-1997.  As
of March 1, 1997, PGE had  $27.2  million  outstanding under these bank lines of
credit.  

    Because of limitations imposed by the terms of PGE's preferred stock, PGE is
prohibited, without the consent of the  holders of a majority of the outstanding
shares of its preferred stock, from issuing more than $12.0 million of unsecured
debt due on demand or within one year  from issuance.  PGE had $10.0 million due
on demand or within one year from issuance outstanding as of December 31, 1996.









                                        -41-
<PAGE>

    Information relating to  PGE's  bank  lines  of  credit and borrowings under
those lines of credit is set forth below:
<TABLE>
<CAPTION>

                                                    As of December 31,        
                                              1996         1995         1994  
                                                  (Thousands of Dollars)
      <S>                                   <C>          <C>          <C>
      Borrowings under lines of credit
        Short-term                          $ 10,000     $ 10,000     $      -
        Long-term                             38,721       65,801       65,500
                                            $ 48,721     $ 75,801     $ 65,500

      Unused lines of credit
        Short-term                          $      -     $      -     $      -
        Long-term                             16,779        4,699        2,000
                                            $ 16,779     $  4,699     $  2,000

      Total lines of credit
        Prime rate                          $      -     $      -     $      -
        Other than prime rate                 65,500       80,500       67,500
                                            $ 65,500     $ 80,500     $ 67,500

      Short-term bank borrowings (a)
        Maximum amount outstanding          $ 10,000     $ 10,000     $  5,692
        Daily average amount outstanding    $  1,392     $  2,581     $    441
        Weighted daily average interest 
          rate                                6.241%       6.513%       3.984%
        Weighted average interest rate at
          year-end                            6.206%       6.334%           -    
        Range of interest rates               5.875-       6.290-       3.700-
                                              6.438%       6.660%       6.000%

    (a) PGE had no short-term  bank  borrowings  outstanding  as of December 31,
        1994.

(10)  POSTEMPLOYMENT BENEFITS

    Pension Benefits.  Substantially all  employees  of PGE are covered by PEI's
trusteed, noncontributory, defined benefit  pension  plan.  Pension benefits are
based on years of service and average  final salary.  PGE's funding policy is to
contribute an amount necessary to provide for benefits based on service to date,
as well  as  for  benefits  expected  to  be  earned  in  the  future by current
participants.  To the  extent  that  the  present  value of these obligations is
fully covered by assets in  the  trust,  a  contribution  may  not be made for a
particular year.  

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



                                        -42-
</TABLE>
<PAGE>

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

    Net pension  costs  relative  to  continuing  operations,  including amounts
capitalized, were  $385,000,  $353,000  and  $309,000  in  1996,  1995 and 1994,
respectively.  The  following  items  were  the  components  of such net pension
costs:
[CAPTION]
                                                 1996        1995        1994  
                                                    (Thousands of Dollars)
    [S]                                        [C]         [C]         [C]
    Present value of benefits earned 
      during the year                          $    799    $    430    $    549
    Interest cost on projected benefit 
      obligations                                 2,731       1,459       1,400
    Return on plan assets                        (5,875)     (1,502)        535
    Net amortization and deferral                   (79)        (34)        (55)
    Deferral of investment (loss) gain            2,809           -      (2,120)
        Net pension cost                       $    385    $    353    $    309

    The funded status of the  plan  as  of  December  31,  1996 and 1995, was as
follows:
[CAPTION]
                                                             1996        1995  
                                                          (Thousands of Dollars)
    [S]                                                   [C]          [C]
    Actuarial present value of the projected
      benefit obligations:
        Accumulated benefit obligations
          Vested                                           $ 28,613    $ 29,100
          Nonvested                                              21          47
            Total                                            28,634      29,147
        Provision for future salary increases                 6,933       7,841
        Projected benefit obligations                        35,567      36,988
    Approximate market value of plan assets, primarily 
      invested in equities and bonds                         39,000      34,000
    Plan assets in excess of (less than) projected
      benefit obligations                                     3,433      (2,988)
    Unrecognized net transition asset as of 
      January 1, 1986, being amortized over 20 years         (1,939)     (2,155)
    Unrecognized prior service costs                          2,258       1,507
    Unrecognized net (gain) loss                             (4,259)      2,155

    Accrued pension cost at year-end                       $   (507)   $ (1,481)

    The assumptions used in determining pension obligations were:
[CAPTION]
                                                 1996       1995       1994 
         [S]                                     [C]       [C]        [C]
         Discount rate                           7.75%     7.00 %     8.75 %
         Expected long-term rate of return
           on plan assets                        9.00%     9.00 %     9.00 %
         Projected increase in future
           compensation levels                   5.00%     5.00 %     5.50 %
  



                                        -43-
<PAGE>

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

    Under the terms of the agreement  regarding  the sale of PGE's water utility
operations to Pennsylvania-American, on February 16, 1996, Pennsylvania-American
assumed PGE's obligation  to  provide  retiree  health  care  and life insurance
benefits to the Transferred Employees, as well as 45% of PGE's retired employees
as of that date.  In this  regard,  plan assets in an amount proportional to the
actuarial present value of accumulated plan benefits relative to the Transferred
Employees and 45% of the  retired  employees  as  of  February 16, 1996, will be
transferred to trusts established by Pennsylvania-American, which is expected to
occur in the second quarter  of  1997.  Pennsylvania-American is reimbursing PGE
for benefit plan payments  made  on  behalf  of  the  retired employees for whom
Pennsylvania-American has assumed responsibility.   As a result of the transfer,
early retirement and  displacement  of  employees,  PGE  recognized an estimated
settlement and curtailment loss of $385,000  ($225,000 net of the related income
tax benefit)  as  part  of  the  loss  on  the  disposal  of  its  water utility
operations.

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

    The following items were the  components  of  the net cost of postretirement
benefits other than pensions  relative  to  continuing  operations for the years
1996, 1995 and 1994:
<TABLE>
<CAPTION>
                                                   1996       1995       1994  
                                                     (Thousands of Dollars)
    <S>                                          <C>        <C>        <C>
    Present value of benefits earned during
      the year                                   $    253   $    127   $    148
    Interest cost on accumulated benefit
      obligation                                      506        577        532
    Return on plan assets                               -        (69)        (4) 
    Net amortization and deferral                     314        391        360

    Net cost of postretirement benefits other
      than pensions                                 1,073      1,026      1,036
    Less disbursements for benefits                  (501)      (555)      (543)

    Increase in liability for postretirement
      benefits other than pensions               $    572   $    471   $    493










                                        -44-
</TABLE>
<PAGE>

    Reconciliations  of  the  accumulated  benefit  obligation  to  the  accrued
liability for postretirement benefits  other  than  pensions  as of December 31,
1996 and 1995 follow:
[CAPTION]
                                                        1996       1995  
                                                    (Thousands of Dollars)
    [S]                                               [C]        [C]
    Accumulated benefit obligation:
      Retirees                                        $  4,359   $  6,514
      Fully eligible active employees                    1,033        850
      Other active employees                             1,552      1,074
                                                         6,944      8,438
    Plan assets at fair value                              169          -
    Accumulated benefit obligation 
      in excess of plan assets                           6,775      8,438
    Unrecognized transition obligation
      being amortized over 20 years                     (5,022)    (5,438)
    Unrecognized net gain (loss)                         1,116       (703)

    Accrued liability for postretirement
      benefits other than pensions                    $  2,869   $  2,297

    The assumptions used in determining other postretirement benefit obligations
were:
[CAPTION]
                                                 1996       1995       1994 
         [S]                                    [C]        [C]        [C]
         Discount rate                          7.75 %     7.00 %     8.75 %
         Expected long-term rate of return
           on plan assets                       9.00 %     9.00 %     9.00 %
         Projected increase in future
           compensation levels                  5.00 %     5.00 %     5.50 %

    It was also assumed that the per capita cost of covered health care benefits
would increase at an annual  rate  of  8-1/2%  in  1997 and that this rate would
decrease gradually  to  5-1/2%  for  the  year  2003  and  remain  at that level
thereafter.  The health care cost trend rate assumption had a significant effect
on the amounts accrued.  To  illustrate, increasing the assumed health care cost
trend rate by 1  percentage  point  in  each  year would increase the transition
obligation as of January 1, 1997, by approximately $294,000 and the aggregate of
the service and  interest  cost  components  of  the  net cost of postretirement
benefits other than pensions for the year 1996 by approximately $31,000.

    Since PGE did not seek to  increase  its  base  gas rates prior to 1996, the
$442,000 ($259,000 net  of  related  income  taxes),  $441,000  ($258,000 net of
related income taxes), and $447,000  ($256,000  net  of related income taxes) of
additional cost incurred in 1996,  1995  and  1994, respectively, as a result of
the adoption of the provisions of  FASB  Statement 106 were expensed without any
adjustment being made to its gas  rates.    Effective with its January 15, 1997,
base rate increase (see Note 3  of  the Notes to Financial Statements), PGE will
begin  funding  its  accumulated  benefit  obligations  with  respect  to  other
postretirement benefits.

(11)  CONSTRUCTION EXPENDITURES

    PGE estimates the  cost  of  its  1997  construction  program  will be $27.9
million.   It  is  anticipated  that  such  expenditures  will  be financed with
internally generated funds and bank borrowings, and, to the extent necessary, by
the periodic issuance of stock and long-term debt.







                                        -45-
<PAGE>

(12)  COMMITMENTS AND CONTINGENCIES

    Environmental Matters.   PGE,  like  many  gas  distribution companies, once
utilized manufactured gas plants in connection with providing gas service to its
customers.  None of these plants  has  been in operation since 1960, and several
of the plant sites are no  longer  owned  by PGE.  Pursuant to the Comprehensive
Environmental Response, Compensation and  Liability  Act of 1980 ("CERCLA"), PGE
filed notices with the United States Environmental Protection Agency (the "EPA")
with respect to the former plant sites.  None of the sites is or was formerly on
the proposed or final  National  Priorities  List.    The EPA has conducted site
inspections and made preliminary assessments of each site and has concluded that
no  further  remedial  action  is  planned.    While  this  conclusion  does not
constitute a legal prohibition against further regulatory action under CERCLA or
other applicable federal or  state  law,  PGE  does  not believe that additional
costs, if any, related to these  manufactured  gas plant sites would be material
to  its  financial  position  or   results  of  operations  since  environmental
remediation costs generally are recoverable through rates over a period of time.










































                                        -46-
<PAGE>

(13) QUARTERLY FINANCIAL DATA (UNAUDITED)
[CAPTION]
                                                 QUARTER ENDED                  
                                March 31,  June 30,  September 30,  December 31,
                                  1996       1996        1996           1996    
                                (Thousands of Dollars, Except Per Share Amounts)
[S]                             [C]        [C]       [C]            [C]
Operating revenues              $  69,415  $ 25,457  $      13,998  $     51,724
Operating income (loss)            10,033       803           (659)        6,539
Income (loss) from continuing
  operations                        7,485      (757)        (2,690)        3,748
Loss with respect to
  discontinued operations            (365)      (21)             -            23
Net income (loss)               $   7,120  $   (778) $      (2,690) $      3,771

Earnings (loss) per share
  of common stock: (a)
 Continuing operations          $    1.67  $   (.23) $        (.81) $       1.13
 Discontinued operations             (.08)     (.01)             -           .01
 Net income (loss) before
   premium on repurchase/
   redemption of preferred
   stock                             1.59      (.24)          (.81)         1.14
 Premium on repurchase/
   redemption of preferred
   stock                                -      (.39)          (.03)          .01
 Earnings (loss) per share of
   common stock (a)             $    1.59  $   (.63) $        (.84) $       1.15

<TABLE>
<CAPTION>
                                                 QUARTER ENDED                  
                                March 31,  June 30,  September 30,  December 31,
                                  1995       1995        1995           1995    
                                (Thousands of Dollars, Except Per Share Amounts)
<S>                             <C>        <C>       <C>            <C>
Operating revenues              $  68,237  $ 25,184  $      12,119  $     47,216
Operating income                    9,500     1,867             (3)        7,558
Income (loss) from continuing
  operations                        6,413    (1,581)        (3,520)        4,395
Loss with respect to
  discontinued operations          (3,704)        -              -          (130)
Net income (loss)               $   2,709  $ (1,581) $      (3,520) $      4,265

Earnings (loss) per share
  of common stock: (a)
 Continuing operations          $    1.16  $   (.28) $        (.63) $        .78
 Discontinued operations             (.67)        -              -          (.02)
 Earnings (loss) per share of
   common stock (a)             $     .49  $   (.28) $        (.63) $        .76

</TABLE>

(a)  The total of the earnings  per  share  for  the quarters does not equal the
     earnings per share  for  the  year,  as  shown  elsewhere  in the financial
     statements and supplementary data  of  this  report,  as  a result of PGE's
     issuance of additional shares of common  stock at various dates in 1994 and
     1995 and its repurchase of shares of common stock during 1996.

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

                                        -47-
<PAGE>

(14) DISCLOSURES ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS

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

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

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

    The  carrying  amounts  and   estimated   fair  values  of  PGE's  financial
instruments at December 31, 1996 and 1995, were as follows:
[CAPTION]
                                               1996                 1995        
                                        Carrying Estimated   Carrying Estimated
                                         Amount  Fair Value   Amount  Fair Value
                                                 (Thousands of Dollars)
[S]                                     [C]      [C]         [C]      [C]
Long-term debt (including current
  portion)                              $125,121 $  130,622  $170,801 $  175,431
Preferred stock subject to
  mandatory redemption (including
  current portion)                           819        836     1,760      1,795

    PGE believes that the regulatory  treatment  of  any excess or deficiency of
fair value relative to the carrying  amounts  of these items, if such items were
settled at amounts approximating those  above,  would dictate that these amounts
be used to increase or reduce  its  rates over a prescribed amortization period.
Accordingly, any settlement  would  not  result  in  a  material impact on PGE's
financial position or the results of operations of either PEI or PGE.

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

    None.
















                                        -48-
<PAGE>

                                    PART IV


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

(a)  1.  Financial Statements
             The following financial  statements,  notes to financial statements
         and report of independent public  accountants  for PGE are presented in
         Item 8 of this Form 10-K.
                                                                            Page

           Report of Independent Public Accountants . . . . . . . . . . . .  24

           Statements of Income for each of the three years in the
             period ended December 31, 1996 . . . . . . . . . . . . . . . .  25

           Balance Sheets as of December 31, 1996 and 1995. . . . . . . . .  26

           Statements of Cash Flows for each of the three years in the 
             period ended December 31, 1996 . . . . . . . . . . . . . . . .  28

           Statements of Capitalization as of December 31, 1996 and 1995. .  29

           Statements of Common Shareholder's Investment for each of
             the three years in the period ended December 31, 1996. . . . .  30

           Notes to Financial Statements. . . . . . . . . . . . . . . . . .  31

     2.  Financial Statement Schedules
             The following financial statement  schedule  for  PGE is filed as a
         part of this  Form  10-K.    Schedules  not  included have been omitted
         because they are not applicable or the required information is shown in
         the financial statements or notes thereto.

           Schedule Number                                                  Page
             II  Valuation and Qualifying Accounts for the three-year
                   period ended December 31, 1996 . . . . . . . . . . . . .  51

     3.  Exhibits
             See "Index to Exhibits" located  on  page  53  for a listing of all
         exhibits filed herein  or  incorporated  by  reference  to a previously
         filed registration statement or report with the Securities and Exchange
         Commission.
















                                        -49-
<PAGE>
<TABLE>
<CAPTION>
<S>      <C>                 <C>
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K - continued

(b)  Reports on Form 8-K
         No reports on Form 8-K were filed during the last quarter of 1996.

(c)  Executive Compensation Plans and Arrangements

     The following  listing  includes  PGE's  executive  compensation  plans and
     arrangements in effect as of December 31, 1996.

     Exhibit

     10-23  Form of Change in Control  Agreement  between PEI and certain of its
            Officers -- filed as Exhibit  10-34  to  PGE's Annual Report on Form
            10-K for 1989, File No. 1-3490.

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

     10-25  Agreement dated as of March  15,  1991,  by and between PEI, PGE and
            Robert L. Jones -- filed as Exhibit No. 10-38 to PGE's Annual Report
            on Form 10-K for 1990, File No. 1-3490.

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

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

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

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

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

     10-31  Employment Agreement dated as of August  28, 1996, by and among PEI,
            PGE and Thomas F. Karam --  filed as Exhibit 10-2 to PEI's Quarterly
            Report on Form 10-Q for  the  quarter ended September 30, 1996, File
            No. 0-7812.

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





</TABLE>
                                        -50-
<PAGE>

Schedule II


























































                                        -51-
<PAGE>

                                  SIGNATURES

    Pursuant to the  requirements  of  Section  13  or  15(d)  of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
<TABLE>
<CAPTION>
                                                         PG ENERGY INC.          
                                                         (Registrant)
<S>       <C>                            <C>
Date:     March 6, 1997                  By:         /s/ Thomas F. Karam         
                                                         Thomas F. Karam
                                            President and Chief Executive Officer
                                                 (Principal Executive Officer)

Date:     March 6, 1997                  By:        /s/ John F. Kell, Jr.        
                                                        John F. Kell, Jr.
                                             Vice President, Financial Services
                                                 (Principal Financial Officer
                                              and Principal Accounting Officer)

    Pursuant to the requirements of  the  Securities  Exchange Act of 1934, this
report has  been  signed  below  by  the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.

          Signature                         Capacity                   Date    


   /s/ Kenneth L. Pollock          Chairman of the Board of       March 6, 1997
       Kenneth L. Pollock           Directors

   /s/ William D. Davis            Vice Chairman of the Board     March 6, 1997
       William D. Davis             of Directors

   /s/ Thomas F. Karam             Director, President and        March 6, 1997
       Thomas F. Karam              Chief Executive Officer

  /s/ Paul R. Freeman                     Director                March 6, 1997
      Paul R. Freeman

   /s/ Robert J. Keating                  Director                March 6, 1997
       Robert J. Keating

   /s/ John D. McCarthy                   Director                March 6, 1997
       John D. McCarthy

  /s/ John D. McCarthy, Jr.               Director                March 6, 1997
      John D. McCarthy, Jr.

  /s/ Kenneth M. Pollock                  Director                March 6, 1997
      Kenneth M. Pollock

  /s/ Richard A. Rose, Jr.                Director                March 6, 1997
      Richard A. Rose, Jr.

   /s/ James A. Ross                      Director                March 6, 1997
       James A. Ross

   /s/ Ronald W. Simms                    Director                March 6, 1997
       Ronald W. Simms

                                        -52-
</TABLE>
<PAGE>

                                INDEX TO EXHIBITS
Exhibit
Number

(2) Plan of Acquisition, Reorganization, Arrangement, Liquidation or Succession:

 2-1        Asset Purchase Agreement dated as of April 26, 1995, among PEI, PGE,
            American Water Works Company,  Inc., and Pennsylvania-American Water
            Company -- filed as Exhibit  2-1  to  PGE's Quarterly Report on Form
            10-Q for the quarter ended March 31, 1995, File No. 1-3490.

(3) Articles of Incorporation and By Laws:

 3-1        Restated Articles of Incorporation --  filed as Exhibit 3-1 to PGE's
            Annual Report on Form 10-K for 1995, File No. 1-3490.

 3-2        By-Laws of PGE, as amended and  restated  -- filed as Exhibit 3-2 to
            PGE's Annual Report on Form 10-K for 1995, File No. 1-3490.

(4) Instruments Defining the Rights of Security Holders, Including Debentures:

 4-1        Indenture of Mortgage and Deed of Trust, dated as of March 15, 1946,
            between Scranton-Spring Brook  Water  Service  Company (now PGE) and
            First Trust of New York,  National Association, as Successor Trustee
            to Morgan Guaranty Trust  Company  of  New  York -- filed as Exhibit
            2(c) to PGE's Bond Form S-7, Registration No. 2-55419. 

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

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

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

 4-5        Twelfth Supplemental Indenture, dated as  of  July 15, 1960 -- filed
            as Exhibit 2(g) to PGE's Bond Form S-7, Registration No. 2-55419.
 
 4-6        Fourteenth Supplemental Indenture, dated as  of December 15, 1961 --
            filed as Exhibit 2(h) to  PGE's  Bond  Form S-7, Registration No. 2-
            55419.
 
 4-7        Fifteenth Supplemental Indenture, dated  as  of December 15, 1963 --
            filed as Exhibit 2(i) to  PGE's  Bond  Form S-7, Registration No. 2-
            55419.

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

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

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



                                        -53-
<PAGE>

Exhibit
Number

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

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

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

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

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

 4-16       Twenty-fourth Supplemental Indenture, dated as of September 1, 1991,
            -- filed as Exhibit 4-3 to PEI's Common Stock Form S-2, Registration
            No. 33-43382.

 4-17       Twenty-fifth Supplemental Indenture, dated  as of September 1, 1992,
            -- filed as Exhibit 4-1 to  PGE's  Quarterly Report on Form 10-Q for
            the quarter ended September 30, 1992, File No. 1-3490.

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

 4-19       Twenty-seventh Supplemental Indenture, dated as of December 1, 1992,
            -- filed as Exhibit 4-19  to  PGE's  Annual  Report on Form 10-K for
            1992, File No. 0-7812.

 4-20       Twenty-eighth Supplemental Indenture, dated  as of December 1, 1993,
            -- filed as Exhibit 4-20  to  PGE's  Annual  Report on Form 10-K for
            1993, File No. 1-3490.

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

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


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






                                        -54-
<PAGE>

Exhibit
Number

(10) Material Contracts:

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

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

10-3        Service Agreement  for  storage  service  under  Rate Schedule SS-2,
            dated April 1, 1990, between  PGE and Transcontinental Gas Pipe Line
            Corporation -- filed as Exhibit 10-8 to PEI's Common Stock Form S-2,
            Registration No. 33-43382.

10-4        Service Agreement for sales  service  under  Rate Schedule FS, dated
            August 1,  1991,  between  PGE  and  Transcontinental  Gas Pipe Line
            Corporation -- filed as Exhibit 10-6  to PGE's Annual Report on Form
            10-K for 1991, File No. 1-3490.

10-5        Service Agreement for transportation service under Rate Schedule FT,
            dated August 1, 1991, between PGE and Transcontinental Gas Pipe Line
            Corporation -- filed as Exhibit 10-10  to PEI's Common Stock Form S-
            2, Registration No. 33-43382.

10-6        Service Agreement for transportation service under Rate Schedule IT,
            dated January 31, 1992,  between  PGE  and Transcontinental Gas Pipe
            Line Corporation -- filed as Exhibit  10-8 to PGE's Annual Report on
            Form 10-K for 1991, File No. 1-3490.

10-7        Service Agreement for storage service under Rate Schedule LSS, dated
            October 1, 1993, by  and  between  PGE and Transcontinental Gas Pipe
            Line Corporation -- filed as Exhibit  10-7 to PGE's Annual Report on
            Form 10-K for 1993, File No. 1-3490.

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

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

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





                                        -55-
<PAGE>

Exhibit
Number

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

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

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

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

10-15       Service Agreement  (Contract  No.  946)  for  transportation service
            under Rate Schedule FT-A,  dated  September  1, 1993, by and between
            PGE and Tennessee Gas Pipeline  Company  -- filed as Exhibit 10-1 to
            PGE's Quarterly Report on Form  10-Q for the quarter ended September
            30, 1993, File No. 1-3490.

10-16       Service  Agreement  (Service  Package  No.  171)  for transportation
            service under Rate Schedule  FT-A,  dated  September 1, 1993, by and
            between PGE and Tennessee Gas  Pipeline  Company -- filed as Exhibit
            10-2 to PGE's Quarterly Report  on  Form  10-Q for the quarter ended
            September 30, 1993, File No. 1-3490.

10-17       Service  Agreement  (Service  Package  No.  187)  for transportation
            service under Rate Schedule  FT-A,  dated  September 1, 1993, by and
            between PGE and Tennessee Gas  Pipeline  Company -- filed as Exhibit
            10-3 to PGE's Quarterly Report  on  Form  10-Q for the quarter ended
            September 30, 1993, File No. 1-3490.

10-18       Service  Agreement  (Service  Package  No.  190)  for transportation
            service under Rate Schedule  FT-A,  dated  September 1, 1993, by and
            between PGE and Tennessee Gas  Pipeline  -- filed as Exhibit 10-4 to
            PGE's Quarterly Report on Form  10-Q for the quarter ended September
            30, 1993, File No. 1-3490.

10-19       Service Agreement (Contract No. 2289) for storage service under Rate
            Schedule FS,  dated  September  1,  1993,  by  and  between  PGE and
            Tennessee Gas Pipeline -- filed  as  Exhibit 10-5 to PGE's Quarterly
            Report on Form 10-Q for  the  quarter ended September 30, 1993, File
            No. 1-3490.

10-20       Service Agreement for transportation service under Rate Schedule FT,
            dated April 1, 1995,  by  and  between  PGE and Transcontinental Gas
            Pipe Line Corporation --  filed  as  Exhibit 10-1 to PGE's Quarterly
            Report on Form 10-Q for the  quarter  ended March 31, 1995, File No.
            1-3490.

                                        -56-
<PAGE>

Exhibit
Number

10-21       Service Agreement for storage service dated October 13, 1995, by and
            between PGE and Avoca Natural  Gas  Storage -- filed as Exhibit 10-1
            to PGE's  Quarterly  Report  on  Form  10-Q  for  the  quarter ended
            September 30, 1995, File No. 1-3490.

10-22       Bond Purchase Agreement, dated September  1, 1989, relating to PGE's
            First Mortgage Bonds 9.23% Series  due 1999 and First Mortgage Bonds
            9.34%  Series  due  2019  among  Allstate  Life  Insurance  Company,
            Allstate Life Insurance Company  of  New  York  and  PGE -- filed as
            Exhibit 10-33 to PGE's Annual Report on Form 10-K for 1989, File No.
            1-3490.

10-23       Form of Change in Control  Agreement  between PEI and certain of its
            Officers -- filed as Exhibit  10-34  to  PGE's Annual Report on Form
            10-K for 1989, File No. 1-3490.

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

10-25       Agreement, dated as of March 15,  1991,  by and between PEI, PGE and
            Robert L. Jones -- filed as  Exhibit 10-38 to PGE's Annual Report on
            Form 10-K for 1990, File No. 1-3490.

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

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

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

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

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

10-31       Employment Agreement dated as of August  28, 1996, by and among PEI,
            PGE and Thomas F. Karam --  filed as Exhibit 10-2 to PEI's Quarterly
            Report on Form 10-Q for  the  quarter ended September 30, 1996, File
            No. 0-7812.




                                        -57-
<PAGE>

                                  TABLE OF CONTENTS



PART I                                                                     PAGE

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

    Item  2.  PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . .  11

    Item  3.  LEGAL PROCEEDINGS  . . . . . . . . . . . . . . . . . . . . .  11

    Item  4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS  . . . .  11


PART II

    Item  5.  MARKET FOR THE REGISTRANT'S COMMON EQUITY AND RELATED
                STOCKHOLDER MATTERS  . . . . . . . . . . . . . . . . . . .  12

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

    Item  7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                CONDITION AND RESULTS OF OPERATIONS  . . . . . . . . . . .  13

    Item  8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA  . . . . . . . .  23

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


PART III

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

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

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

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


PART IV

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

              SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . .  52


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

 ** The "Index to Exhibits" is located on page 53.



<PAGE>

                                  SIGNATURES

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

                                                       PG ENERGY INC.           
                                                       (Registrant)

Date:     March 6, 1997                 By:                                     
                                                      Thomas F. Karam
                                           President and Chief Executive Officer
                                               (Principal Executive Officer)

Date:     March 6, 1997                 By:                                     
                                                     John F. Kell, Jr.
                                            Vice President, Financial Services
                                               (Principal Financial Officer
                                            and Principal Accounting Officer)

    Pursuant to the requirements of  the  Securities  Exchange Act of 1934, this
report has  been  signed  below  by  the  following  persons  on  behalf  of the
Registrant and in the capacities and on the dates indicated.

          Signature                         Capacity                   Date    


                                   Chairman of the Board of       March 6, 1997
       Kenneth L. Pollock           Directors

                                   Vice Chairman of the Board     March 6, 1997
       William D. Davis             of Directors

                                   Director, President and        March 6, 1997
       Thomas F. Karam              Chief Executive Officer

                                          Director                March 6, 1997
       Paul R. Freeman

                                          Director                March 6, 1997
       Robert J. Keating

                                          Director                March 6, 1997
       John D. McCarthy

                                          Director                March 6, 1997
       John D. McCarthy, Jr.

                                          Director                March 6, 1997
       Kenneth M. Pollock

                                          Director                March 6, 1997
       Richard A. Rose, Jr.

                                          Director                March 6, 1997
       James A. Ross

                                          Director                March 6, 1997
       Ronald W. Simms


<PAGE>
<TABLE>
<CAPTION>
                                                  PG ENERGY INC.
                                  SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
                                 FOR THE THREE-YEAR PERIOD ENDED DECEMBER 31, 1996

                                                      Balance at    Charged   Charged                    Balance
                                                      beginning       to      to other                   at end 
             Description                               of year      income    accounts   Deductions      of year

                                                                          (Thousands of Dollars)
<S>                                                   <C>          <C>        <C>        <C>             <C>
Deducted from the asset to which it applies:

  Reserve for uncollectible accounts-

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

    Year ended December 31, 1995                      $      921   $ 1,541    $      -   $    1,681(a)   $   781

    Year ended December 31, 1994                      $      811   $ 1,756    $      -   $    1,646(a)   $   921





Shown as operating reserves on the balance sheets:

    Insurance -

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

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

       Year ended December 31, 1994                   $    1,863   $ 1,695    $      -   $    1,175(b)   $ 2,383





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

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












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