FORM 10-Q

                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 1998

                                       OR

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


          For the transition period from ____________ to _____________

                          Commission file number 1-3490


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


         Pennsylvania                                   24-0717235
(State or other jurisdiction of            (IRS Employer Identification No.)
 incorporation or organization)

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

                                 (717) 829-8843
               (Registrant's telephone number including area code)



    Indicate  by check mark  whether  the  registrant  (1) has filed all reports
    required to be filed by Section 13 or 15(d) of the  Securities  Exchange Act
    of 1934 during the preceding 12 months (or for such shorter  period that the
    registrant was required to file such  reports),  and (2) has been subject to
    such filing requirements for the past 90 days.

                                    Yes X No __

    Indicate the number of shares outstanding of each of the issuer's classes of
    common stock, as of the latest practicable date.

    Registrant had 3,494,418  shares of common stock, no par value,  outstanding
as of October 30, 1998.


<PAGE>



                                 PG ENERGY INC.

                                TABLE OF CONTENTS


                                                                        PAGE

PART I.        FINANCIAL INFORMATION

 Item 1.  Financial Statements

Consolidated Statements of Income for the three and nine months
 ended September 30, 1998 and 1997..............................         2

Consolidated Balance Sheets as of September 30, 1998
 and December 31, 1997..........................................         3

Consolidated Statements of Cash Flows for
 the nine months ended September 30, 1998 and 1997..............         5

Notes to Consolidated Financial Statements......................         6

Item 2.  Management's Discussion and Analysis of Financial
           Condition and Results of Operations..................         9



PART II.  OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K......................         16


<PAGE>
                          PART I. FINANCIAL INFORMATION

                          PG ENERGY INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME

<TABLE>
<CAPTION>
                                                                       Three Months Ended           Nine Months Ended
                                                                          September 30,               September 30,
                                                                   --------------------------   --------------------------
                                                                        1998          1997          1998         1997
                                                                   ------------ -------------  -------------   ------------
                                                                                      (Thousands of Dollars)

<S>                                                               <C>            <C>            <C>            <C>        
OPERATING REVENUES ............................................   $    15,223    $    16,276    $   105,381    $   129,444
     Cost of gas ..............................................         6,118          7,137         56,173         74,547
                                                                  -----------    -----------    -----------    -----------
OPERATING MARGIN ..............................................         9,105          9,139         49,208         54,897
                                                                  -----------    -----------    -----------    -----------

OTHER OPERATING EXPENSES:
     Operation ................................................         6,164          6,065         18,993         18,730
     Maintenance ..............................................         1,302          1,503          3,661          3,945
     Depreciation .............................................         2,438          2,242          7,317          6,719
     Income taxes .............................................        (2,042)        (2,184)         1,257          3,406
     Taxes other than income taxes ............................         1,711          1,997          8,586          9,613
                                                                  -----------    -----------    -----------    -----------
         Total other operating expenses .......................         9,573          9,623         39,814         42,413
                                                                  -----------    -----------    -----------    -----------

OPERATING INCOME (LOSS) .......................................          (468)          (484)         9,394         12,484

OTHER INCOME, NET .............................................            22             92            797            244
                                                                  -----------    -----------    -----------    -----------

INCOME (LOSS) BEFORE INTEREST CHARGES .........................          (446)          (392)        10,191         12,728
                                                                  -----------    -----------    -----------    -----------

INTEREST CHARGES:
    Interest on long-term debt ................................         2,443          2,329          7,485          6,737
    Other interest ............................................            88            199            285            540
    Allowance for borrowed funds used during construction .....           (38)           (45)           (90)          (144)
                                                                  -----------    -----------    -----------    -----------
       Total interest charges .................................         2,493          2,483          7,680          7,133
                                                                  -----------    -----------    -----------    -----------

NET INCOME (LOSS) .............................................        (2,939)        (2,875)         2,511          5,595

DIVIDENDS ON PREFERRED STOCK ..................................           319            320            961            991
                                                                  -----------    -----------    -----------    -----------

EARNINGS (LOSS) APPLICABLE TO COMMON STOCK ....................   $    (3,258)   $    (3,195)   $     1,550    $     4,604
                                                                  ===========    ===========    ===========    ===========

EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
     Before discount (premium) on repurchase of preferred stock   $     (0.93)   $     (0.96)   $      0.45    $      1.39
     Discount (premium) on repurchase of preferred stock ......          --            (0.01)          --             0.23
                                                                  -----------    -----------    -----------    -----------
     Earnings (loss) per share of common stock ................   $     (0.93)   $     (0.97)   $      0.45    $      1.62
                                                                  ===========    ===========    ===========    ===========

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING .................     3,489,055      3,314,155      3,407,752      3,314,155
                                                                  ===========    ===========    ===========    ===========

CASH DIVIDENDS PER SHARE ......................................   $      --      $      --      $      --      $      --
                                                                  ===========    ===========    ===========    ===========



The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
                          PG ENERGY INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
                                                     September 30,  December 31,
                                                        1998          1997
                                                      -----------   ------------
                                                         (Thousands of Dollars)
ASSETS

UTILITY PLANT:
<S>                                                   <C>          <C>      
    At original cost ..............................   $ 369,232    $ 351,106
    Accumulated depreciation ......................     (94,826)     (88,129)
                                                      ---------    ---------
                                                        274,406      262,977
                                                      ---------    ---------

OTHER PROPERTY AND INVESTMENTS ....................       4,001        4,459
                                                      ---------    ---------

CURRENT ASSETS:
     Cash and cash equivalents ....................         422          304
     Accounts receivable -
         Customers ................................       9,346       23,551
         Parent ...................................       1,377         --
         Affiliates, net ..........................         225           63
         Others ...................................         397          280
         Reserve for uncollectible accounts .......      (1,213)      (1,168)
     Accrued utility revenues .....................       2,100       11,680
     Materials and supplies, at average cost ......       3,052        2,716
     Gas held by suppliers, at average cost .......      26,482       21,933
     Deferred cost of gas and supplier refunds, net      11,540        6,316
     Prepaid expenses and other ...................       3,915        1,633
                                                      ---------    ---------
                                                         57,643       67,308
                                                      ---------    ---------

DEFERRED CHARGES:
    Regulatory assets -
        Deferred taxes collectible ................      31,109       30,592
        Other .....................................       6,579        4,415
    Unamortized debt expense ......................       1,015        1,164
    Other .........................................          75          225
                                                      ---------    ---------
                                                         38,778       36,396
                                                      ---------    ---------




TOTAL ASSETS ......................................   $ 374,828    $ 371,140
                                                      =========    =========


The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
                          PG ENERGY INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

                                                    September 30, December 31,
                                                       1998          1997
                                                   ------------   ----------
                                                    (Thousands of Dollars)

CAPITALIZATION AND LIABILITIES

CAPITALIZATION:
<S>                                                   <C>        <C>     
      Common shareholder's investment .............   $122,267   $107,425
      Preferred stock -
           Not subject to mandatory redemption, net      4,839     15,864
           Subject to mandatory redemption ........        560        640
      Long-term debt
           Parent .................................      3,700     23,500
           Other ..................................     95,000    106,000
                                                      --------   --------
                                                       226,366    253,429
                                                      --------   --------

CURRENT LIABILITIES:
      Current portion of long-term debt ...........     46,697     24,776
      Preferred stock subject to repurchase or
          mandatory redemption ....................     11,057         80
      Notes payable ...............................      2,270      2,170
      Accounts payable -
           Suppliers ..............................     15,648     14,515
           Parent .................................       --          199
      Accrued general business and realty taxes ...        427      2,797
      Accrued income taxes ........................      1,436      4,946
      Accrued interest ............................      1,188      1,844
      Accrued natural gas transition costs ........        281      1,087
      Other .......................................        834      1,188
                                                      --------   --------
                                                        79,838     53,602
                                                      --------   --------

DEFERRED CREDITS:
      Deferred income taxes .......................     55,060     52,207
      Unamortized investment tax credits ..........      4,467      4,596
      Operating reserves ..........................      2,578      2,825
      Other .......................................      6,519      4,481
                                                      --------   --------
                                                        68,624     64,109
                                                      --------   --------

COMMITMENTS AND CONTINGENCIES (Note 5)



TOTAL CAPITALIZATION AND LIABILITIES ..............   $374,828   $371,140
                                                      ========   ========

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>
                          PG ENERGY INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>
                                                                                     Nine Months Ended
                                                                                        September 30,
                                                                                   --------------------
                                                                                      1998        1997
                                                                                   ----------  ---------
                                                                                    (Thousands of Dollars)
CASH FLOW FROM OPERATING ACTIVITIES:
<S>                                                                                <C>         <C>     
      Net income ...............................................................   $  2,511    $  5,595
      Gain on sale of other property ...........................................       (914)       --
      Effects of noncash charges to income -
          Depreciation .........................................................      7,374       6,764
          Deferred income taxes, net ...........................................      2,336         904
          Provisions for self insurance ........................................        400         443
          Other, net ...........................................................      1,469       1,335
      Changes in  working  capital,  exclusive  of cash and  current  portion of
           long-term debt and preferred stock -
               Receivables and accrued utility revenues ........................     22,184      17,314
               Gas held by suppliers ...........................................     (4,549)     (5,705)
               Accounts payable ................................................       (492)     (6,528)
               Deferred cost of gas and supplier refunds, net ..................     (6,030)     10,316
               Other current assets and liabilities, net .......................     (9,508)     (1,260)
      Other operating items, net ...............................................     (1,131)     (1,509)
                                                                                   --------    --------
                Net cash provided by continuing operations .....................     13,650      27,669
      Net cash used for discontinued operations, principally for the payment
           of income taxes .....................................................       --       (13,655)
                                                                                   --------    --------
               Net cash provided by operating activities .......................     13,650      14,014
                                                                                   --------    --------

CASH FLOW FROM INVESTING ACTIVITIES:
      Additions to utility plant ...............................................    (19,955)    (22,810)
      Proceeds from the sale of other property .................................        980        --
      Acquisition of regulated business ........................................       --        (2,019)
      Other, net ...............................................................        204         530
                                                                                   --------    --------
               Net cash used for investing activities ..........................    (18,771)    (24,299)
                                                                                   --------    --------

CASH FLOW FROM FINANCING ACTIVITIES:
      Issuance of long-term debt ...............................................       --        25,000
      Repurchase of preferred stock ............................................       (128)     (3,137)
      Dividends on preferred and common stock ..................................       (961)       (991)
      Issuance of common stock .................................................      6,170        --
      Repayment of long-term debt (Note 3) .....................................    (12,300)     (6,700)
      Net increase (decrease) in bank borrowings ...............................     12,447      (5,021)
      Other, net ...............................................................         11         700
                                                                                   --------    --------
               Net cash provided by financing activities .......................      5,239       9,851
                                                                                   --------    --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ...........................        118        (434)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR .................................        304         690
                                                                                   --------    --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .....................................   $    422    $    256
                                                                                   ========    ========

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
    Cash paid during the period for:
         Interest (net of amount capitalized) ..................................   $  8,042    $  7,203
                                                                                   ========    ========
         Income taxes ..........................................................   $  1,824    $ 15,042
                                                                                   ========    ========

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
<PAGE>



                          PG ENERGY INC. AND SUBSIDIARY

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)    SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

       Nature of the Business.  PG Energy Inc.  ("PG  Energy"),  a  wholly-owned
subsidiary of  Pennsylvania  Enterprises,  Inc.  ("PEI"),  and its  wholly-owned
subsidiary  Honesdale Gas Company  ("Honesdale")  acquired on February 14, 1997,
are regulated public  utilities  subject to the jurisdiction of the Pennsylvania
Public  Utility  Commission  (the  "PPUC")  for  rate and  accounting  purposes.
Together PG Energy and  Honesdale  distribute  natural gas to a  thirteen-county
area in  northeastern  Pennsylvania,  a territory  that  includes  the cities of
Scranton, Wilkes-Barre and Williamsport.

       Principles  of  Consolidation.   The  consolidated  financial  statements
include the accounts of PG Energy and also its subsidiary,  Honesdale, beginning
February 14, 1997,  the date  Honesdale was acquired by PG Energy.  All material
intercompany accounts have been eliminated in consolidation.

       Both PG Energy and Honesdale  (collectively referred to as the "Company")
are subject to the  jurisdiction  of the PPUC for rate and accounting  purposes.
The  financial  information  of  the  Company  that  is  incorporated  in  these
consolidated financial statements has been prepared in accordance with generally
accepted accounting principles, including the provisions of Financial Accounting
Standards  Board ("FASB")  Statement 71,  "Accounting for the Effects of Certain
Types  of  Regulation,"  which  give  recognition  to the  rate  and  accounting
practices of regulatory agencies such as the PPUC.

       Interim  Financial   Statements.   The  interim  consolidated   financial
statements  included  herein have been prepared  without audit,  pursuant to the
rules  and  regulations  of the  Securities  and  Exchange  Commission.  Certain
information and footnote  disclosures  normally included in financial statements
prepared in accordance with generally accepted  accounting  principles have been
condensed  or omitted  pursuant  to such  rules and  regulations,  although  the
Company  believes  that the  disclosures  are  adequate to make the  information
presented not misleading.

       The results for the interim  periods are not indicative of the results to
be expected for the year,  primarily due to the effect of seasonal variations in
weather on the sale of natural gas. However,  in the opinion of management,  all
adjustments,  consisting of only normal recurring accruals, necessary to present
fairly  the  results  for  the  interim  periods  have  been  reflected  in  the
consolidated  financial  statements.  It is  suggested  that these  consolidated
financial  statements be read in  conjunction  with the  consolidated  financial
statements and the notes thereto  included in the Company's latest annual report
on Form 10-K.

       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 which
are  difficult to predict and are beyond the control of the Company.  Therefore,
actual amounts could differ from these estimates.

(2)    RATE MATTERS

       Rate Increase.  By Order adopted  December 19, 1996, the PPUC approved an
overall 5.3%  increase in PG Energy's  base gas rates,  designed to produce $7.5
million of additional  annual  revenue,  effective  January 15, 1997.  Under the
terms of the Order, the billing for the impact of the rate increase  relative to
PG Energy's  residential  heating customers,  which totaled $2.4 million through
June 30, 1997, was deferred, without carrying charges, until July, 1997.

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

       In accordance with these  procedures PG Energy has been permitted to make
the following  changes since January 1, 1997, to the gas costs  contained in its
tariff rates:

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

September 1, 1998        $ 4.18           $ 4.25             $ 1,900,000
June 1, 1998               3.95             4.18               5,800,000
March 1, 1998              4.05             3.95              (2,100,000)
December 1, 1997           4.49             4.05             (12,100,000)
March 1, 1997              4.18             4.49               8,300,000

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

 (3)   CONTRIBUTION OF CAPITAL

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

(4)    ACCOUNTING CHANGES

       Reporting  Comprehensive  Income.  Effective January 1, 1998, the Company
adopted the provisions of FASB Statement 130 "Reporting  Comprehensive  Income."
However,  because there were no items comprising other comprehensive income, the
adoption of FASB 130 had no effect on the Company's financial statements for the
periods ended September 30, 1998.

       Accounting for Derivative  Instruments  and Hedging  Activities.  In June
1998, FASB Statement No. 133, "Accounting for Derivative Instruments and Hedging
Activities" was issued.  The provisions of this  statement,  which are effective
for fiscal  quarters  beginning  after June 15, 1999,  establish  accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments embedded in other contracts,  and for hedging activities.  While the
Company generally has not used derivative  instruments,  it expects to adopt, to
the extent  necessary,  the  provisions  of FASB  Statement No. 133 in the third
quarter of 1999. The impact of such adoption on the Company's  future  financial
condition  and  results of  operations  will  depend  upon a number of  factors,
including the extent to which the Company may use  derivative  instruments,  and
the designation and effectiveness of such derivative hedging market risk.

(5)    COMMITMENTS AND CONTINGENCIES

       Environmental  Matters. PG Energy, like many gas distribution  companies,
once utilized  manufactured  gas plants in connection with providing gas service
to its  customers.  None of these plants has been in operation  since 1972,  and
several of the plant  sites are no longer  owned by PG Energy.  Pursuant  to the
Comprehensive  Environmental  Response,  Compensation  and Liability Act of 1980
("CERCLA"),  PG  Energy  filed  notices  with the  United  States  Environmental
Protection  Agency (the "EPA") with respect to the former  plant sites.  None of
the sites is or was formerly on the proposed or final National  Priorities List.
The EPA has conducted site inspections and made preliminary  assessments of each
site  and  has   concluded   that  no  further   remedial   action  is  planned.
Notwithstanding  this determination by the EPA, some of the sites may ultimately
require remediation.  One site that was owned by PG Energy from 1951 to 1967 and
at which it operated a  manufactured  gas plant from 1951 to 1954 was subject to
remediation  in 1996. The  remediation at this site,  which was performed by the
party from whom PG Energy  acquired  the site in 1951,  required  the removal of
materials from two former gas holders. The cost of such remediation is purported
to  have  been  approximately  $525,000,  of  which  the  party  performing  the
remediation is seeking to recover a portion from PG Energy. PG Energy,  however,
believes that any liability it may have with respect to such  remediation  would
be considerably less than the amount that the other party is seeking.  While the
final resolution of the matter is uncertain,  PG Energy does not believe that it
will  have  any  material  impact  on  its  financial  position  or  results  of
operations.  Although the  conclusion by the EPA that it  anticipates no further
remedial  action  with  respect  to  the  sites  at  which  PG  Energy  operated
manufactured gas plants does not constitute a legal prohibition  against further
regulatory  action  under CERCLA or other  applicable  federal or state law, the
Company  does not  believe  that  additional  costs,  if any,  related  to these
manufactured  gas plant sites would be  material  to its  financial  position or
results of  operations  since  environmental  remediation  costs  generally  are
recoverable through rates over a period of time.


<PAGE>


                          PG ENERGY INC. AND SUBSIDIARY

           MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                            AND RESULT OF OPERATIONS
-------------------------------------------------------------------------------

RESULTS OF CONTINUING OPERATIONS

       The  following  table  expresses   certain  items  in  the   consolidated
statements of income of PG Energy Inc. ("PG Energy") as percentages of operating
revenues for each of the three and nine-month  periods ended  September 30, 1998
and 1997:
<TABLE>
<CAPTION>
                                                          Three Months Ended                    Nine Months Ended
                                                            September 30,                         September 30,
                                                  --------------------------------      ------------------------------
                                                     1998                 1997             1998                1997
                                                  -----------          -----------      -----------         ----------

<S>                                                    <C>                  <C>              <C>                 <C>    
OPERATING REVENUES                                     100.0 %              100.0 %          100.0 %             100.0 %
    Cost of gas                                         40.2                 43.9             53.3                57.6
                                                       -----                -----            -----                ----
OPERATING MARGIN                                        59.8                 56.1             46.7                42.4
                                                       -----                -----            -----                ----

OTHER OPERATING EXPENSES:
    Operation                                           40.5                 37.2             18.0                14.5
    Maintenance                                          8.5                  9.2              3.5                 3.1
    Depreciation                                        16.0                 13.8              6.9                 5.2
    Income taxes                                       (13.4)               (13.4)             1.2                 2.6
    Taxes other than income taxes                       11.2                 12.3              8.1                 7.4
                                                       -----                -----             ----                ---
        Total operating expenses                        62.8                 59.1             37.7                32.8
                                                       -----                -----             ----                ----

OPERATING INCOME                                        (3.0)                (3.0)             9.0                 9.6

OTHER INCOME, NET                                        0.1                  0.6              0.7                 0.2

INTEREST CHARGES                                       (16.4)               (15.3)            (7.3)               (5.5)
                                                       ------               ------            -----               -----

NET INCOME (LOSS)                                      (19.3)               (17.7)             2.4                 4.3

DIVIDENDS ON PREFERRED
     STOCK                                              (2.1)                (1.9)            (0.9)               (0.7)
                                                        -----                -----            -----               -----

EARNINGS (LOSS) APPLICABLE
     TO COMMON STOCK                                   (21.4)%              (19.6)%            1.5 %               3.6  %
                                                       ======               ======            ====                 ====

</TABLE>

     o Three Months Ended  September 30, 1998,  Compared With Three Months Ended
September 30, 1997

     Operating  Revenues.  Operating revenues decreased $1.1 million (6.5%) from
$16.3 million for the quarter ended September 30, 1997, to $15.2 million for the
quarter ended  September  30, 1998,  primarily as a result of a 50 million cubic
feet (4.0%)  decrease in sales by PG Energy to its  residential  and  commercial
heating  customers.  This reduction in sales was attributable to the warmer than
normal  temperatures  during the third  quarter of 1998 and colder  than  normal
temperatures  during  the same  period  in 1997,  as well as lower  levels in PG
Energy's gas cost rate (see "-Rate Matters").  The number of heating degree days
decreased by 97 (46.2%) from 210 (175.0% of normal)  during the third quarter of
1997 to 113 (94.2% of normal) during the third quarter of 1998.

       Cost of Gas. The cost of gas  decreased  $1.0  million  (14.3%) from $7.1
million for the third  quarter of 1997 to $6.1 million for the third  quarter of
1998, primarily because of the aforementioned  decrease in the volume of natural
gas sold by PG Energy to its  residential and commercial  heating  customers and
lower levels in PG Energy's gas cost rate (see "-Rate Matters").

       Operating  Margin.  The operating margin decreased  $34,000 (0.4%) in the
third  quarter of 1998 compared to the third quarter of 1997. As a percentage of
operating revenues, the margin increased from 56.1% in the third quarter of 1997
to 59.8% in the third quarter of 1998 due to the  proportionately  lower cost of
gas during the period.

       Other Operating  Expenses.  Other operating  expenses  decreased  $50,000
(0.5%) for the quarter ended  September 30, 1997,  compared to the quarter ended
September  30, 1998.  This  decrease was  primarily  attributable  to a $201,000
(13.4%) decrease in maintenance expense and a $286,000 (14.3%) decrease in taxes
other than  income  taxes  resulting  from a lower level of gross  receipts  tax
related to the decrease in sales.  The effects of these decreases were partially
offset by a $196,000  (8.7%)  increase  in  depreciation  expense as a result of
additions to utility plant and a $142,000 increase in income taxes from a credit
of $2.2  million for the third  quarter of 1997 to a credit of $2.0  million for
the third quarter of 1998 due to a decrease in the loss before income taxes (for
this  purpose,  operating  income net of interest  charges).  As a percentage of
operating  revenues,  other operating  expenses  increased from 59.1% during the
quarter ended  September  30, 1997, to 62.8% during the quarter ended  September
30, 1998, primarily because of the lower level of operating revenues.

       Operating  Income  (Loss).  As a result of the above,  the operating loss
decreased  by $16,000  (3.3%)  from  $484,000  for the third  quarter of 1997 to
$468,000 for the third quarter of 1998,  but remained  unchanged as a percentage
of total operating revenues for such periods.

       Other Income,  Net.  Other income,  net  decreased  $70,000  (76.1%) from
$92,000 for the three-month  period ended September 30, 1997, to $22,000 for the
three-month  period ended September 30, 1998,  largely because of an increase in
property taxes on other physical property and a lower level of other income.

       Earnings  (Loss)  Applicable to Common Stock.  The slight increase in the
loss  applicable  to common  stock of $63,000  (2.0%) from $3.2  million for the
three-month period ended September 30, 1997, to $3.3 million for the three-month
period  September 30, 1998, was primarily the result of the lower level of other
income,  as discussed  above.  Despite the increase in loss applicable to common
stock, the loss per share of common stock decreased $.04 per share from $.97 per
share for the three-month  period ended September 30, 1997 (including a $.01 per
share premium on the  repurchase  of preferred  stock) to $.93 per share for the
three-month period ended September 30, 1998, as a result of the 5.3% increase in
the weighted average number of shares outstanding.

     o Nine Months Ended  September  30, 1998,  Compared  With Nine Months Ended
September 30, 1997

       Operating  Revenues.  Operating  revenues decreased $24.1 million (18.6%)
from $129.4  million for the nine months ended  September  30,  1997,  to $105.3
million for the nine months ended September 30, 1998, primarily as a result of a
2.5 billion cubic feet (16.7%) decrease in sales by PG Energy to its residential
and commercial  heating  customers.  This reduction in sales was attributable to
the warmer than normal weather during the nine months ended  September 30, 1998,
and lower levels in PG Energy's gas cost rate (see "-Rate Matters").  The number
of heating  degree days  decreased by 867 (20.8%) from 4,165  (102.2% of normal)
during the nine months  ended  September  30,  1997,  to 3,298 (80.9% of normal)
during the nine months ended September 30, 1998.

       Cost of Gas. The cost of gas decreased  $18.4 million  (24.6%) from $74.5
million for the nine months ended  September  30, 1997, to $56.2 million for the
nine months ended September 30, 1998,  primarily  because of the  aforementioned
decrease in sales to PG Energy's  residential and commercial  heating  customers
and lower levels in PG Energy's gas cost rate (see "-Rate Matters").

       Operating  Margin.  The operating  margin  decreased $5.7 million (10.4%)
from $54.9 million in the nine months ended September 30, 1997, to $49.2 million
in  the  nine  months  ended  September  30,  1998,  primarily  because  of  the
aforementioned   reduction  in  sales  to  residential  and  commercial  heating
customers.  As a percentage of operating  revenues,  the margin  increased  from
42.4% in the nine months ended  September  30, 1997, to 46.7% in the nine months
ended September 30, 1998, as a result of the  proportionately  lower cost of gas
during the period.

       Other  Operating  Expenses.  Other  operating  expenses  decreased  $ 2.6
million (6.1%) from $42.4 million for the nine-month  period ended September 30,
1997, to $39.8 million for the nine-month  period ended September 30, 1998. This
decrease was primarily attributable to a $2.1 million (63.1%) decrease in income
taxes from $3.4 million for the nine months ended  September  30, 1997,  to $1.3
million for the nine  months  ended  September  30,  1998,  due to a decrease in
income before income taxes (for this purpose,  operating  income net of interest
charges),  and a $1.0 million (10.7%)  decrease in taxes other than income taxes
resulting  from a lower  level of gross  receipts  tax  related  to PG  Energy's
decrease in sales.  The effects of these  decreases were  partially  offset by a
$598,000  (8.9%)  increase in  depreciation  expense as a result of additions to
utility plant. As a percentage of operating  revenues,  other operating expenses
increased from 32.8% during the nine-month  period ended  September 30, 1997, to
37.7% during the  nine-month  period ended  September  30, 1998,  because of the
lower level of operating revenues.

       Operating Income. As a result of the above, operating income decreased by
$3.1  million  (24.8%)  from  $12.5  million  for the  nine-month  period  ended
September 30, 1997, to $9.4 million for the  nine-month  period ended  September
30, 1998,  and also  decreased as a percentage of total  operating  revenues for
such periods from 9.6% in 1997 to 9.0% in the nine-month  period ended September
30, 1998.

       Other Income, Net. Other income, net increased $553,000 from $244,000 for
the nine-month  period ended  September 30, 1997, to $797,000 for the nine-month
period ended  September 30, 1998,  largely because of a gain on the sale of land
in June, 1998.

       Interest Charges. Interest charges increased by $547,000 (7.7%) from $7.1
million for the  nine-month  period of 1997 to $7.7  million for the  nine-month
period ended  September 30, 1998.  This increase was largely  attributable  to a
higher level of long-term debt outstanding in 1998.

       Net Income.  The decrease in net income of $3.1 million (55.1%) from $5.6
million for the nine-month  period ended September 30, 1997, to $2.5 million for
the nine-month period ended September 30, 1998, was largely  attributable to the
lower level of revenues  because of warmer than normal weather and the increased
interest charges, as discussed above, the effects of which were partially offset
by the increase in other income.

       Earnings  (Loss)  Applicable  to Common  Stock.  The decrease in earnings
applicable  to common  stock of $3.1  million  (66.3%) from $4.6 million for the
nine-month  period ended  September 30, 1997, to $1.6 million for the nine-month
period  September  30,  1998,  as well as the  decrease in earnings per share of
common  stock of $1.17  (72.2%) from $1.62 per share for the  nine-month  period
ended  September 30, 1997 (including a $.23 per share discount on the repurchase
of preferred stock), to $.45 per share for the nine-month period ended September
30, 1998, were the result of the reduced net income, as discussed above, and the
2.8% increase in the weighted average number of shares outstanding.

RATE MATTERS

       Rate  Increases.  By Order adopted  December 19, 1996,  the  Pennsylvania
Public Utility  Commission (the "PPUC")  approved an overall 5.3% increase in PG
Energy's base gas rates,  designed to produce $7.5 million of additional  annual
revenue,  effective  January 15, 1997. Under the terms of the Order, the billing
for the impact of the rate increase relative to PG Energy's  residential heating
customers,  which  totaled $2.4 million  through  June 30, 1997,  was  deferred,
without carrying charges, until July, 1997.

       On March 16, 1998, PG Energy filed an  application  with the PPUC seeking
an  increase  in its base gas  rates,  designed  to  produce  $15.0  million  in
additional annual revenue,  to be effective May 15, 1998. On September 29, 1998,
PG Energy and certain  parties  filing  objections to the rate increase  request
filed a  Settlement  Petition  with the  Administrative  Law Judge  assigned  to
conduct the investigation of the rate increase request. By Order adopted October
16, 1998,  the PPUC  approved the  Settlement  Petition and granted PG Energy an
overall  4.1%  increase in its base rates,  designed to produce  $7.4 million of
additional annual revenue, effective October 17, 1998.

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


<PAGE>


       In accordance with these procedures, PG Energy has been permitted to make
the following  changes since January 1, 1997, to the gas costs  contained in its
gas tariff rates:

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

September 1, 1998     $ 4.18       $ 4.25               $ 1,900,000
June 1, 1998            3.95         4.18                 5,800,000
March 1, 1998           4.05         3.95                (2,100,000)
December 1, 1997        4.49         4.05               (12,100,000)
March 1, 1997           4.18         4.49                 8,300,000

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

LIQUIDITY AND CAPITAL RESOURCES

Liquidity

       The primary capital needs of PG Energy and its  wholly-owned  subsidiary,
Honesdale Gas Company (collectively referred to as the "Company") continue to be
the funding of PG Energy's  construction program and the seasonal funding of its
gas purchases and increases in its customer accounts  receivable.  The Company's
revenues are highly seasonal and  weather-sensitive,  with  approximately 75% of
its revenues  normally  being  realized in the first and fourth  quarters of the
calendar year when the temperatures in its service area are the coldest.

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

       In order to temporarily finance construction expenditures and to meet its
seasonal borrowing  requirements,  the Company has made arrangements for a total
of $64.0 million of unsecured  revolving bank credit,  which is deemed  adequate
for its needs.  Specifically,  PG Energy  currently has six bank lines of credit
with an  aggregate  borrowing  capacity  of  $63.0  million  which  provide  for
borrowings  at  interest  rates  generally  less than prime and which  mature at
various times during 1999.  Honesdale has a $1.0 million  revolving bank line of
credit which provides for borrowing at the prime rate (currently 8.0%) and which
matures in June,  1999.  The Company  intends to renew or replace these lines of
credit as they expire.  As of October 30, 1998, the Company had $39.2 million of
borrowings  outstanding  under these bank lines of credit.  In  addition,  as of
October 30, 1998,  PG Energy had $3.9 million  outstanding  under its  borrowing
arrangement with Pennsylvania  Enterprises,  Inc.  ("PEI"),  its parent company.
Such interim  borrowings by PG Energy from PEI will be repaid with proceeds from
bank borrowings by PG Energy.

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

Long-Term Debt and Capital Stock Financings

       The Company  periodically  engages in  long-term  debt and capital  stock
financings in order to obtain funds required for construction expenditures,  the
refinancing of existing debt and various working capital purposes.  No long-term
debt or capital stock  financings  were  consummated  by the Company  during the
nine-month period ended September 30, 1998.

       PG Energy also obtains  external  funds from the sale of its common stock
to PEI in connection  with PEI's Dividend  Reinvestment  and Stock Purchase Plan
and its Customer Stock Purchase Plan. During 1998 (through October 30) PG Energy
realized  $6.2 million  from the  issuance of common stock to PEI in  connection
with these plans.

Construction Expenditures and Related Financings

       Expenditures  for the construction of utility plant totaled $20.0 million
during the nine months ended  September 30, 1998 and are currently  estimated to
be $10.0 million during the remainder of the year.  These  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 September  30,  1998,  $46.7  million of  long-term  debt and $11.1
million of PG Energy's  preferred  stock was required to be repaid within twelve
months.  The $46.7 million of long-term debt includes $36.7 million  outstanding
under PG Energy's bank lines of credit which is due at various times during 1999
and $10.0 million of PG Energy's 9.23% series first mortgage bonds which are due
September 1, 1999. The $11.1 million of PG Energy preferred stock includes $11.0
million  relative to all of the outstanding  shares of PG Energy's 9% cumulative
preferred  stock,  $100 par value,  which have been  called  for  redemption  on
December 1, 1998, at a price of $104 per share, plus accrued dividends.

         PG Energy  intends to finance its current  maturities of long-term debt
and preferred stock with internally  generated funds and bank borrowings pending
the periodic issuance of long-term debt and capital stock.

Year 2000

       The Company has  performed an inventory  and  assessment  of its computer
systems  and  applications,  as well as devices  with  embedded  technology,  to
identify  year 2000 issues and to develop a plan for  addressing  those  issues.
This plan,  which was  initiated in 1996,  is scheduled to be completed by March
31, 1999, for all  applications and devices that could have a material effect on
the  Company's  operations,  and by June 30,  1999,  with  respect  to all other
issues.  The plan involves the  replacement  of certain  systems with  purchased
software,  the renovation of other systems, and the purchase of certain hardware
and other devices. The Company is utilizing both internal resources and contract
personnel to implement the plan, which is currently on schedule.  In view of the
substantial progress that has been made to date,  management does not anticipate
the  expenditures  necessary to carry out the plan will be material  relative to
the Company's financial position or results of operations.

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

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

Forward-Looking Statements

       Certain statements made above relating to plans,  conditions,  objectives
and economic  performance go beyond  historical  information  and may provide an
indication   of  future   results.   To  that  extent,   such   statements   are
forward-looking  statements  within the meaning of Section 21E of the Securities
Exchange  Act of 1934,  and each is subject to factors  that could cause  actual
results  to differ  from those in the  forward-looking  statement.  The  Company
cautions  that  assumptions,  projections,  expectations,  intentions or beliefs
about  future  events  may  and  often  do  vary  from  actual  results  and the
differences  between  assumptions,  projections,   expectations,  intentions  or
beliefs  and  actual  results  can be  material.  Accordingly,  there  can be no
assurance that actual results will not differ materially from those expressed or
implied by the forward-looking statements. The following are some of the factors
that could cause actual  achievements and events to differ materially from those
expressed  or  implied  in  such  forward-looking   statements:  the  nature  of
Pennsylvania  legislation  restructuring the natural gas industry; the impact of
year 2000  compliance;  industrial,  commercial  and  residential  growth in the
service  territories  of the Company and its  subsidiary;  the weather and other
natural  phenomena;  the timing and  extent of changes in  commodity  prices and
interest rates; changes in environmental and other laws and regulations to which
the Company and its subsidiary are subject or other external  factors over which
the Company has no control; and general economic conditions, in each case curing
the periods covered by the forward-looking statements. The Company undertakes no
obligation to publicly release any revision to these forward-looking  statements
to reflect events or circumstances after the date of this filing.


<PAGE>


                           PART II. OTHER INFORMATION

Item 6.       Exhibits and Reports on Form 8-K

(a)    Exhibits

       27-1     Financial Data Schedule - - filed herewith.

(b)    Reports on Form 8-K

       No  reports  on Form 8-K were filed  during  the  quarter  for which this
report is filed.


<PAGE>


                                 PG ENERGY INC.

                                   SIGNATURES

Pursuant  to the  requirements  of the  Securities  Exchange  Act of  1934,  the
Registrant  has duly  caused  this  Report  to be  signed  on its  behalf by the
undersigned thereunto duly authorized.



                                                           PG ENERGY INC.
                                                           (Registrant)

Date:November 5, 1998     By:                       /s/ Donna M. Abdalla
                                                         Donna M. Abdalla
                                                        Acting Secretary

Date:November 5, 1998      By:                      /s/ John F. Kell, Jr.
                                                        John F. Kell, Jr.
                                              Vice President, Financial Services
                                               (Principal Financial Officer and
                                                  Principal Accounting Officer)
<PAGE>