PG ENERGY INC.

                             TABLE OF CONTENTS


                                                                         PAGE

PART I.  FINANCIAL INFORMATION

  Item 1.  Financial Statements

            Statements of Income for the three and nine
              months ended September 30, 1996 and 1995. . . . . . . . .    2

            Balance Sheets as of September 30, 1996,
              and December 31, 1995 . . . . . . . . . . . . . . . . . .    3

            Statements of Cash Flows for the nine
              months ended September 30, 1996 and 1995. . . . . . . . .    5

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

  Item 2.  Management's Discussion and Analysis of Financial
             Condition and Results of Operations. . . . . . . . . . . .   10


PART II. OTHER INFORMATION

  Item 6.  Exhibits and Reports on Form 8-K . . . . . . . . . . . . . .   19






























                                    -1-
<PAGE>

                             PART I.  FINANCIAL INFORMATION

                                     PG ENERGY INC.

                                  Statements of Income
<TABLE>
<CAPTION>
                                                Three Months Ended      Nine Months Ended
                                                  September 30,           September 30,    
                                                 1996       1995        1996        1995   
                                                         (Thousands of Dollars)
<S>                                            <C>        <C>         <C>         <C>       
OPERATING REVENUES                             $  13,998  $  12,119   $ 108,870   $ 105,540
  Cost of gas                                      5,979      4,866      58,532      59,147
OPERATING MARGIN                                   8,019      7,253      50,338      46,393

OTHER OPERATING EXPENSES:
  Operation                                        5,716      5,062      18,499      16,342
  Maintenance                                      1,379      1,452       4,085       3,732
  Depreciation                                     1,969      1,785       5,838       5,361
  Income taxes                                    (2,005)    (2,442)      3,408       1,659
  Taxes other than income taxes                    1,619      1,399       8,331       7,934
    Total other operating expenses                 8,678      7,256      40,161      35,028

OPERATING INCOME (LOSS)                             (659)        (3)     10,177      11,365

OTHER INCOME (DEDUCTIONS), NET                        (8)        20         311         192

INCOME (LOSS) BEFORE INTEREST CHARGES               (667)        17      10,488      11,557

INTEREST CHARGES:
  Interest on long-term debt                       1,665      2,295       4,680       6,954
  Other interest                                      68        571         556       1,258
  Allowance for borrowed funds used
    during construction                              (73)       (19)       (169)        (40)
    Total interest charges                         1,660      2,847       5,067       8,172

INCOME (LOSS) FROM CONTINUING OPERATIONS          (2,327)    (2,830)      5,421       3,385

LOSS WITH RESPECT TO DISCONTINUED
  OPERATIONS (Note 2)                                  -          -        (386)     (3,704)

NET INCOME (LOSS)                                 (2,327)    (2,830)      5,035        (319)

DIVIDENDS ON PREFERRED STOCK                         363        690       1,383       2,073

EARNINGS (LOSS) APPLICABLE TO COMMON STOCK     $  (2,690) $  (3,520)  $   3,652   $  (2,392)

COMMON STOCK
  Earnings (loss) per share of common stock:
    Continuing operations                      $    (.81) $    (.63)  $    1.09   $     .24
    Discontinued operations                            -          -        (.10)       (.67)
    Net income (loss) before premium on
      repurchase/redemption of preferred stock      (.81)      (.63)        .99        (.43)
    Premium on repurchase/redemption of
      preferred stock                               (.03)         -        (.37)          -
    Total                                      $    (.84) $    (.63)  $     .62   $    (.43)

  Weighted average shares outstanding          3,314,155  5,585,882   3,697,410   5,561,257
  Cash dividends per share (Note 3)            $       -  $     .64   $  10.217   $  2.0525


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


<PAGE>

                                            -2-



























































<PAGE>

                                PG ENERGY INC.

                                BALANCE SHEETS
[CAPTION]
                                                  September 30,    December 31,
                                                      1996            1995     
                                                      (Thousands of Dollars)

ASSETS
[S]                                               [C]             [C]
UTILITY PLANT:
  At original cost                                $     311,363   $     295,895
  Accumulated depreciation                              (80,708)        (76,882)
                                                        230,655         219,013

OTHER PROPERTY AND INVESTMENTS                            5,159           5,089

CURRENT ASSETS:
  Cash and cash equivalents                                 632             328
  Accounts receivable -
    Customers                                             7,948          18,189
    Affiliates, net                                         122               -
    Others                                                  576             815
    Reserve for uncollectible accounts                     (882)           (781)
  Accrued utility revenues                                1,781          10,319
  Materials and supplies, at average cost                 2,959           2,609
  Gas held by suppliers, at average cost                 25,439          15,140
  Natural gas transition costs collectible                3,134           4,612
  Deferred cost of gas and supplier refunds, net         17,545               -
  Prepaid expenses and other                              1,716           3,281
                                                         60,970          54,512

DEFERRED CHARGES:
  Regulatory assets -
    Deferred taxes collectible                           29,687          30,015
    Other                                                 4,331           3,013
  Unamortized debt expense                                1,196           1,340
                                                         35,214          34,368






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






TOTAL ASSETS                                      $     331,998   $     517,232




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


                                      -3-
<PAGE>

                                PG ENERGY INC.

                                BALANCE SHEETS
[CAPTION]
                                                  September 30,    December 31,
                                                      1996            1995     
                                                      (Thousands of Dollars)

CAPITALIZATION AND LIABILITIES
[S]                                               [C]             [C]
CAPITALIZATION: (Note 4)
  Common shareholder's investment                 $      92,188   $     208,356
  Preferred stock -
    Not subject to mandatory redemption, net             19,192          33,615
    Subject to mandatory redemption                         739           1,680
  Long-term debt:
    Parent                                               37,300               -
    Other                                                55,000          55,000
                                                        204,419         298,651

CURRENT LIABILITIES:
  Current portion of long-term debt                      20,130         115,801
  Preferred stock subject to mandatory redemption            80              80
  Note payable                                                -          10,000
  Accounts payable -
    Suppliers                                            13,785          17,781
    Affiliates, net                                           -             826
  Deferred cost of gas and supplier refunds, net              -             434
  Accrued general business and realty taxes                 525           1,542
  Accrued income taxes                                   27,445             516
  Accrued interest                                          921           2,062
  Accrued natural gas transition costs                    2,292           2,278
  Other                                                   3,609           3,162
                                                         68,787         154,482

DEFERRED CREDITS:
  Deferred income taxes                                  46,096          48,848
  Accrued natural gas transition costs                      384           1,144
  Unamortized investment tax credits                      4,810           4,938
  Operating reserves                                      3,113           3,709
  Other                                                   4,389           5,460
                                                         58,792          64,099




COMMITMENTS AND CONTINGENCIES (Note 6)




TOTAL CAPITALIZATION AND LIABILITIES              $     331,998   $     517,232





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

                                      -4-
<PAGE>

                                PG ENERGY INC.

                           STATEMENTS OF CASH FLOWS
[CAPTION]
                                                          Nine Months Ended    
                                                            September 30,      
                                                          1996          1995   
                                                        (Thousands of Dollars)
[S]                                                     [C]           [C]
CASH FLOW FROM OPERATING ACTIVITIES:
  Income from continuing operations                     $  5,421      $  3,385
  Effects of noncash charges to income -
    Depreciation                                           5,890         5,395
    Deferred income taxes, net                               519           195
    Provisions for self insurance                            742           889
    Other, net                                               953         1,659
  Changes in working capital, exclusive of cash
   and current portion of long-term debt -
    Receivables and accrued utility revenues              18,997        16,664
    Gas held by suppliers                                (10,299)         (130)
    Accounts payable                                      (4,639)       (2,334)
    Deferred cost of gas and supplier refunds, net       (16,801)        7,207
    Other current assets and liabilities, net              1,291       (10,335)
  Other operating items, net                              (4,636)        1,077
      Net cash provided (used) by continuing operations   (2,562)       23,672
  Net cash provided (used) by discontinued operations    (35,470)        3,764
      Net cash provided (used) by operating activities   (38,032)       27,436

CASH FLOW FROM INVESTING ACTIVITIES:
  Additions to utility plant                             (18,501)      (14,907)
  Proceeds from the sale of discontinued operations      261,752             -
  Other, net                                                 212         2,560
      Net cash provided (used) by investing activities   243,463       (12,347)

CASH FLOW FROM FINANCING ACTIVITIES:
  Issuance of common stock                                   339         5,383
  Repurchase of common stock                             (85,007)            -
  Repurchase/redemption of preferred stock               (15,364)          (80)
  Dividends on common and preferred stock                (35,151)      (13,484)
  Issuance of long-term debt to parent                    49,900             -
  Repayment of long-term debt to parent                  (12,600)            -
  Repayment of long-term debt                            (50,000)       (3,535)
  Net decrease in bank borrowings                        (55,854)       (3,125)
  Other, net                                              (1,390)          (25)
      Net cash used for financing activities            (205,127)      (14,866)

NET INCREASE IN CASH AND CASH EQUIVALENTS                    304           223
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD             328           304
CASH AND CASH EQUIVALENTS AT END OF PERIOD              $    632      $    527

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for:
    Interest (net of amount capitalized)                $  5,704      $ 16,353
    Income taxes                                        $ 34,386      $  8,338 





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

                                      -5-
<PAGE>

                                PG ENERGY INC.

                         NOTES TO FINANCIAL STATEMENTS

(1)  GENERAL

    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.   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.

    On October 30, 1996, PGE signed  a  purchase agreement to acquire all of the
capital stock  of  Honesdale  Gas  Company,  which  distributes  natural  gas to
approximately  3,200  customers  in  portions  of  Wayne  and  Pike  Counties in
northeastern Pennsylvania.  This  acquisition,  which  is subject to approval of
the PPUC, is expected to be consummated in early 1997.

    Interim Financial Statements.    The  interim  financial statements included
herein have been prepared  by  PGE,  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 PGE 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.  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  financial  statements.    It is
suggested that  these  financial  statements  be  read  in  conjunction with the
financial statements and  the  notes  thereto  included  in  PGE'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  which  are difficult to
predict and are beyond  the  control  of  PGE.   Therefore, actual amounts could
differ from these estimates.

(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

                                      -6-
<PAGE>

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 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, principally  the  write-off  of  certain  deferred  regulatory assets and
deferred credits and  the  impact  of  pension  and other postretirement benefit
expenses relative to an early retirement plan, the sale resulted in an after tax
loss of approximately $6.2 million, net  of the income from the water operations
during the phase-out period (which for financial reporting purposes was April 1,
1995, through February 15,  1996).    The  sale  involved  a gain for income tax
purposes, primarily  because  of  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 $58.6 million, of
which $33.5 million had been paid as of September 30, 1996.

    The cash proceeds from the sale  of approximately $203.5 million, net of the
estimated $58.6 million of income taxes, have been used by PEI and PGE to retire
debt, to repurchase stock (see Note  4  of these Notes to Financial Statements),
for construction expenditures and for other  working capital purposes.  With the
sale of PGE's water utility operations, the  principal assets of PEI and PGE now
consist of PGE's gas utility operations and approximately 46,000 acres of land.

    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 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.






















                                      -7-
<PAGE>

    Selected financial information for the  discontinued operations 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)                                   12,756
Deferred charges and other assets                                    25,752
Total assets acquired by
  Pennsylvania-American                                             407,250
Liabilities assumed by
  Pennsylvania-American -
    Long-term debt                                                  141,097
    Other                                                             5,983
                                                                    147,080
Net assets 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
<TABLE>
<CAPTION>

                Loss With Respect to Discontinued Operations

                                         Three Months Ended    Nine Months Ended 
                                            September 30,        September 30,   
                                          1996       1995       1996       1995  
                                                  (Thousands of Dollars)
<S>                                      <C>        <C>        <C>        <C>           
Income from discontinued operations,
    net of related income taxes of
    $1,403,000*                          $     -    $     -    $     -    $ 2,127
Estimated loss on disposal of
    discontinued operations, net of
    income during the phase-out period         -          -       (386)    (5,831)

Loss with respect to discontinued
    operations                           $     -    $     -    $  (386)   $(3,704)

*  Reflects income only  through  March  31,  1995,  the  effective  date of the
   discontinuance of  PGE's  water  utility  operations  for financial statement
   purposes.
</TABLE>
(3) CASH DIVIDENDS

    The cash dividends per share for  the  nine months ended September 30, 1996,
include $9.077 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.  This
note was paid in full by PGE on March 8, 1996.


                                      -8-
<PAGE>

(4) REPURCHASES OF STOCK

    On February 16, 1996, PGE  repurchased  2,297,297 shares of its common stock
from PEI for an aggregate consideration  of $85.0 million.  Additionally, during
the nine-month period ended September  30,  1996, PGE repurchased 132,988 shares
of its 9% cumulative  preferred  stock  for  an aggregate consideration of $14.4
million and  18,591  shares  of  its  4.10%  cumulative  preferred  stock for an
aggregate consideration of  $947,000,  largely  pursuant  to  self tender offers
conducted during March and April, 1996.   On June 17, 1996, PGE also 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.

(5) ACCOUNTING CHANGES

    Long-Lived Assets.  In March  1995,  FASB Statement 121, "Accounting for the
Impairment of Long-Lived Assets", was issued.  The provisions of this statement,
which are effective for fiscal years beginning after September 15, 1995, require
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 provisions
of FASB Statement 121, which PGE adopted effective January 1, 1996, did not have
a material impact on  the  financial  position  or  results of operations of PGE
since the  carrying  amount  of  all  assets,  including  regulatory assets, are
considered recoverable.

(6)  COMMITMENTS AND CONTINGENCIES

Valve Maintenance

    On November 16, 1993, the PPUC staff issued an Emergency Order, subsequently
ratified by the PPUC (the  "Emergency  Order"),  requiring PGE to survey its gas
distribution system to verify  the  location  and  spacing  of  its gas shut off
valves, to add or repair valves  where  needed and to establish programs for the
periodic inspection and maintenance of  all  such valves and the verification of
all gas service line information.  On  March 31, 1995, the PPUC adopted an Order
approving a plan submitted by PGE  for  complying with the Emergency Order.  PGE
does not believe that its compliance  with  the  terms of such Order will have a
material adverse effect on its financial position or results of operations.

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.

                                      -9-
<PAGE>

                                PG ENERGY INC.

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
                           AND RESULTS OF OPERATIONS                 

DISCONTINUED OPERATIONS

    Pursuant to an Asset  Purchase  Agreement  dated  April 26, 1995, as amended
(the "Agreement"),  among  Pennsylvania  Enterprises,  Inc.  ("PEI"), the parent
company of PG  Energy  Inc.  ("PGE"),  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 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, principally  the  write-off  of  certain  deferred  regulatory assets and
deferred credits and  the  impact  of  pension  and other postretirement benefit
expenses relative to an early retirement plan, the sale resulted in an after tax
loss of approximately $6.2 million, net  of the income from the water operations
during the phase-out period (which for financial reporting purposes was April 1,
1995, through February 15, 1996.)

    The cash proceeds from the sale  of  approximately $203.5 million, net of an
estimated $58.6 million of income taxes, have been used by PEI and PGE to retire
debt, to repurchase stock, for  construction  expenditures and for other working
capital purposes.    With  the  sale  of  PGE's  water  utility  operations, the
principal assets of PEI and PGE now  consist of PGE's gas utility operations and
approximately 46,000 acres of land.

    In accordance with generally accepted accounting principles, PEI's financial
statements reflect PGE's 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.


















                                     -10-
<PAGE>

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 three and nine-month periods
ended September 30, 1996, and September 30, 1995:
<TABLE>
<CAPTION>
                                                   Percentage of Operating Revenues  
                                                Three Months Ended  Nine Months Ended
                                                   September 30,      September 30,  
                                                 1996        1995    1996       1995 
<S>                                              <C>         <C>     <C>        <C>  
OPERATING REVENUES...........................    100.0%      100.0%  100.0%     100.0%
  Cost of gas................................     42.7        40.2    53.8       56.0
OPERATING MARGIN.............................     57.3        59.8    46.2       44.0

OTHER OPERATING EXPENSES:
  Operation..................................     40.8        41.8    17.0       15.5
  Maintenance................................      9.8        12.0     3.8        3.5
  Depreciation...............................     14.1        14.7     5.4        5.1
  Income taxes...............................    (14.3)      (20.1)    3.1        1.6
  Taxes other than income taxes..............     11.6        11.5     7.6        7.5
    Total other operating expenses...........     62.0        59.9    36.9       33.2

OPERATING INCOME (LOSS)......................     (4.7)       (0.1)    9.3       10.8

OTHER INCOME (DEDUCTIONS), NET...............        -         0.2     0.3        0.2

INTEREST CHARGES.............................    (11.9)      (23.5)   (4.6)      (7.8)

INCOME (LOSS) FROM CONTINUING OPERATIONS.....    (16.6)      (23.4)    5.0        3.2

LOSS WITH RESPECT TO DISCONTINUED OPERATIONS.        -           -    (0.4)      (3.5)

NET INCOME (LOSS)............................    (16.6)      (23.4)    4.6       (0.3)

DIVIDENDS ON PREFERRED STOCK(1)..............     (2.6)       (5.7)   (1.2)      (2.0)

EARNINGS (LOSS) APPLICABLE TO COMMON STOCK...    (19.2)      (29.1)    3.4       (2.3)
                    
(1)  None of the dividends on  preferred stock was allocated to the discontinued
operations.
</TABLE>
                Three Months Ended September 30, 1996, Compared
                  With Three Months Ended September 30, 1995   

    Operating Revenues.  Operating revenues  increased $1.9 million (15.5%) from
$12.1 million for the  three-month  period  ended  September  30, 1995, to $14.0
million for the three-month  period  ended  September  30,  1996, primarily as a
result of price increases due to  increases  in the purchased gas cost component
of PGE's tariffs (the "gas cost  rate")  (See  "-Rate Matters") and a 79 million
cubic feet (6.8%) increase  in  consumption  by PGE's residential and commercial
heating customers largely caused by customer growth and slightly cooler weather.

    Cost of Gas.   The  cost  of  gas  increased  $1.1 million (22.9%) from $4.9
million for the three-month period ended September 30, 1995, to $6.0 million for
the three-month  period  ended  September  30,  1996,  primarily  because of the
aforementioned  increases  in  the  gas  cost  rate  (see  "-Rate  Matters") and
increased sales to residential and commercial heating customers.


                                     -11-
<PAGE>

    Operating Margin.  The operating margin increased $766,000 (10.6%) from $7.3
million in the third quarter of  1995  to  $8.0  million in the third quarter of
1996.  However, as  a  percentage  of  operating  revenues, the operating margin
decreased from 59.8% for the quarter ended  September 30, 1995, to 57.3% for the
quarter ended September 30,  1996,  primarily  because  of the increased cost of
gas.

    Other Operating Expenses.   Other  operating expenses increased $1.4 million
(19.6%) for the three-month  period  ended  September  30, 1996, compared to the
three-month period ended September 30,  1995,  and  increased as a percentage of
operating revenues from 59.9% in the third quarter of 1995 to 62.0% in the third
quarter of 1996.  These increases were  attributable to a number of factors, the
most significant of  which  was  a  higher  level  of  operation expenses, which
increased $654,000  (12.9%)  principally  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 increase in other  operating expenses was a $220,000 (15.7%)
increase in taxes  other  than  income  taxes  as  a  result  of increased gross
receipts tax, which is based on revenues collected from customers, and increased
depreciation expense of $184,000  (10.3%)  attributable  to additions to utility
plant.

    Income taxes increased $437,000 (17.9%) from a credit of $2.4 million in the
third quarter of 1995 to a credit  of  $2.0 million in the third quarter of 1996
due to a lower level of  loss  before  income taxes (for this purpose, operating
income net of interest charges). 

    Operating Income (Loss).   As  a  result  of  the  above, the operating loss
increased by $656,000 from $3,000 for the three-month period ended September 30,
1995, to $659,000  for  the  three-month  period  ended  September 30, 1996, and
increased as a percentage of total operating revenues for such periods from 0.1%
in 1995 to 4.7% in  1996,  primarily  because  of the aforementioned increase in
other operating expenses, the  effects  of  which  were  partially offset by the
increased operating margin.

    Interest Charges.  Interest charges  decreased  by $1.2 million (41.7%) from
$2.8 million for  the  three-month  period  ended  September  30,  1995, to $1.7
million for the three-month period ended  September 30, 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  (Loss)  From  Continuing  Operations.    The  loss  from  continuing
operations decreased $503,000 (17.8%)  from  $2.8  million for the quarter ended
September 30, 1995, to $2.3  million  for  the quarter ended September 30, 1996.
This decrease was largely the result of the matters discussed above, principally
the increase in operating margin  and  decrease in interest charges, the effects
of which were partially offset by the increased other operating expenses.

    Dividends on  Preferred  Stock.    Dividends  on  preferred  stock decreased
$327,000 (47.4%) from $690,000  for  the  three-month period ended September 30,
1995, to $363,000 for the three-month period ended September 30, 1996, primarily
as a result of  the  repurchase  by  PGE  in  1996  of  132,988 shares of its 9%
cumulative preferred stock, 9,408 shares of its 5.75% cumulative preferred stock
and 18,591 shares of its  4.10%  cumulative  preferred stock, largely during the
second quarter of the year.

                                     -12-
<PAGE>

    Earnings (Loss) Applicable to Common Stock.  The decrease in loss applicable
to common stock of $830,000 (23.6%) from $3.5 million for the three-month period
ended September 30,  1995,  to  $2.7  million  for  the three-month period ended
September 30, 1996, was largely the result of the factors discussed above.

    As a result of PGE's repurchase of 2,297,297 shares of its common stock from
PEI on February 16, 1996, which  acted  to reduce the weighted average number of
shares outstanding for  the  three-month  period  ended  September  30, 1996, by
40.6%, and the $.03  per  share  charge  for  the  premium  on the repurchase of
preferred stock, the loss per share of  common stock increased by $.21 per share
from $.63 per share for the three-month period ended September 30, 1995, to $.84
per share for the three-month period  ended  September 30, 1996.  While premiums
on the repurchase of preferred  stock  are  charged to retained earnings and are
not  a  determinant  of  earnings  applicable  to  common  stock,  the  premiums
associated with  repurchases  must  be  taken  into  account  in calculating the
earnings (loss) per share of common stock.

                Nine Months Ended September 30, 1996, Compared
                   With Nine Months Ended September 30, 1995  

    Operating Revenues.  Operating  revenues  increased $3.3 million (3.2%) from
$105.5 million for the  nine-month  period  ended  September 30, 1995, to $108.9
million for the  nine-month  period  ended  September  30,  1996, primarily as a
result of a 1.9 billion cubic feet  (13.0%) increase in sales to residential and
commercial heating customers.    There  was  a  660  (17.9%) increase in heating
degree days from 3,696 (90.7% of normal) during the first nine months of 1995 to
4,356 (106.9% of normal) during the first  nine  months of 1996.  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 decreased $615,000 (1.0%) from $59.1 million
for the nine-month period ended  September  30,  1995,  to $58.5 million for the
nine-month  period  ended  September   30,   1996,   primarily  because  of  the
aforementioned lower levels in PGE's  gas  cost  rate (see "-Rate Matters"), the
effects of which were partially offset by the increased sales to residential and
commercial heating customers. 

    Operating Margin.  The operating  margin  increased $3.9 million (8.5%) from
$46.4 million in  the  nine-month  period  ended  September  30,  1995, to $50.3
million in the nine-month period ended  September 30, 1996, primarily because of
the 1.9 billion cubic feet  (13.0%)  increase  in consumption by residential and
commercial heating customers.  As a percentage of operating revenues, the margin
increased from 44.0% in the first nine months of 1995 to 46.2% in the first nine
months of 1996.

    Other Operating Expenses.   Other  operating expenses increased $5.1 million
(13.2%) from $35.0 million for  the  nine-month period ended September 30, 1995,
to $40.2  million  for  the  nine-month  period  ended  September  30, 1996, and
increased as a percentage of operating revenues from 33.2% during the first nine
months of 1995 to 36.9% during the first nine months of 1996, in part because of
the decrease in cost of gas  and  the  corresponding reduction in revenues.  The
$5.1 million increase in other  operating  expenses was attributable to a number
of factors, the most significant of which was a $2.2 million (13.2%) 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

                                     -13-
<PAGE>

operating expenses  was  a  $477,000  (8.9%)  increase  in  depreciation expense
attributable to additions to PGE's utility  plant,  as well as a $353,000 (9.5%)
increase in maintenance expenses caused  by  charges relating to the maintenance
of gas valves and a $397,000 (5.0%) increase in taxes other than income taxes as
a result of increased gross receipts tax.

    Income taxes increased $1.7 million (105.4%)  from $1.7 million in the first
nine months of 1995 to $3.4 million in  the  first nine months of 1996 due to an
increase in income before income  taxes  (for this purpose, operating income net
of interest charges).

    Operating Income  (Loss).    As  a  result  of  the  above, operating income
decreased by $1.2 million (10.5%)  from  $11.4 million for the nine-month period
ended September 30,  1995,  to  $10.2  million  for  the nine-month period ended
September 30, 1996, and decreased  as  a  percentage of total operating revenues
for such periods from 10.8% in  1995  to  9.3% in 1996, primarily because of the
higher level of other operating expenses.

    Interest Charges.  Interest charges  decreased  by $3.1 million (38.0%) from
$8.2 million for the nine-month period ended September 30, 1995, to $5.1 million
for the nine-month period ended September  30,  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 (Loss) From Continuing Operations.  Income from continuing operations
increased $2.0 million  (59.9%)  from  $3.4  million  for  the nine months ended
September 30, 1995, to  $5.4  million  for  the  nine months ended September 30,
1996.  This increase  was  largely  the  result  of the matters discussed above,
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 (Loss).  The increase in  net  income of $5.4 million from a loss
of $319,000 for the nine-month  period  ended  September  30, 1995, to income of
$5.0 million for the nine-month period ended September 30, 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
$690,000 (33.3%) from $2.1 million for the nine-month period ended September 30,
1995, to $1.4  million  for  the  nine-month  period  ended  September 30, 1996,
primarily as a result of the repurchase by  PGE in 1996 of 132,988 shares of its
9% cumulative preferred stock,  9,408  shares  of its 5.75% cumulative preferred
stock and 18,591 shares of its  4.10% cumulative preferred stock, largely during
the second quarter of the year.

    Earnings (Loss)  Applicable  to  Common  Stock.    The  increase in earnings
applicable to common stock of $6.0 million  from  a loss of $2.4 million for the
nine-month period ended September 30,  1995,  to  income of $3.7 million for the
nine-month period ended September 30, 1996,  as well as the increase in earnings
per share of common stock of $1.05  from  a  loss of $.43 per share for the nine
months ended September 30, 1995, to income of $.62 per share for the nine months
ended September 30, 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 $.57 per share from  $.67  per share for the nine-month period ended

                                     -14-
<PAGE>

September 30, 1995, to $.10 per  share for the nine-month period ended September
30, 1996, in the loss with respect  to discontinued operations.  The increase in
earnings applicable to common  stock  occurred  despite  a 33.5% decrease in the
weighted average number of  shares  outstanding  for the nine-month period ended
September 30, 1996, resulting from the aforementioned repurchase of common stock
on February 16, 1996.

RATE MATTERS

    Proposed 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
("ALJ") assigned to  conduct  the  investigation  of  the rate increase request.
This Settlement Petition provides  for  an  overall  5.3%  rate increase that is
designed to produce $7.5 million  of  additional annual revenue.  The Settlement
Petition requests PPUC approval  for  the  rate  increase to become effective by
January 15, 1997.  Additionally, under  the terms of the Settlement Petition, to
the extent the  proposed  rate  increase  is  approved  and  permitted to become
effective no later than January  31,  1997,  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) will be deferred, without carrying
charges, until July, 1997.    It  is  not  presently  possible to determine what
action either the ALJ or the PPUC will ultimately take with respect to this rate
increase request or the Settlement Petition.

    Gas Cost Adjustment.  The provisions of the Pennsylvania Public Utility Code
(the "Code"), require that the  tariffs  of  gas distribution companies, 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.    In addition,
effective September 14, 1995, the PPUC  adopted regulations that provide for the
quarterly adjustment  of  the  annual  purchased  gas  cost  rate  of larger gas
distribution companies, including PGE.    Such quarterly adjustments are allowed
when the actual purchased gas costs  vary  from the estimated costs reflected in
the respective company's  tariffs  by  2%  or  more.    In accordance with these
procedures, PGE has been permitted  to  make the following changes since January
1, 1995, 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             $35,500,000
       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)

    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.




                                     -15-
<PAGE>

    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 ("Gas
Transition Costs") are subject to  recovery  through the annual PGC rate filings
made with the PPUC by  PGE  and  other  larger local gas distribution companies.
The PGC Order also  indicated  that  while  Gas  Supply Realignment and Stranded
Costs ("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 local distribution companies 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,  $858,000  was  recovered by PGE over a
twelve-month period ended January 31, 1995, through an increase in its PGC rate,
$252,000 is being recovered by  PGE  in  its  annual  PGC rate that the PPUC has
approved  effective  December  1,  1995,  and  the  remaining  $213,000  will be
recovered by PGE in its PGC  rate  that the PPUC has approved 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 $10.0 million of Non-Gas
Transition Costs will  be  billed  to  PGE,  generally  over  a four-year period
extending through the fourth quarter  of  1997,  of  which $7.3 million had been
billed to PGE and  $6.8  million  had  been  recovered  from its customers as of
September 30, 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.

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 used the $203.5 million of
cash proceeds from the sale, after the  payment of an estimated $58.6 million of
federal and state income  taxes  (of  which  $33.5  million  had been paid as of
September 30, 1996),  to  retire  debt,  to  repurchase  stock, for construction
expenditures and  for  other  working  capital  purposes.    In  this regard, on
February 16, 1996, 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 all  of  its  then outstanding bank borrowings and temporarily
invested the balance of the proceeds.  










                                     -16-
<PAGE>

    During  the  nine  months  ended   September   30,  1996,  as  part  of  the
recapitalization  following  the  sale  of  its  water  utility  operations  PGE
repurchased 132,988 shares of its 9% cumulative preferred stock for an aggregate
consideration of  $14.4  million  and  18,591  shares  of  its  4.10% cumulative
preferred stock for an aggregate  consideration of $947,000, largely pursuant to
self tender offers conducted during March  and  April,  1996.  On June 17, 1996,
PGE also  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 are 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
borrowing requirements, PGE has  since  made  arrangements  for a total of $55.5
million of unsecured revolving  bank  credit,  which  is deemed adequate for its
immediate needs.  Specifically, PGE currently has five bank lines of credit with
an aggregate borrowing capacity of $55.5 million which provide for borrowings at
interest rates generally less than prime  and  which mature during mid-1997.  As
of November 7, 1996, PGE had $25.7 million of borrowings outstanding under these
bank lines of credit.  In addition, PGE  can 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  November  7,  1996,  PGE  had  $37.3  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.    No  long-term debt or
capital stock financings were  consummated  by  PGE during the nine-month period
ended September 30, 1996.

                                     -17-
<PAGE>

    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").
PEI has, however, 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.  As a
consequence, although PGE realized $340,000 from the issuance of common stock to
PEI in connection with the DRP during  the six-month period ended June 30, 1996,
PGE has not subsequently so issued any common stock.

Construction Expenditures and Related Financings

    Expenditures for the  construction  of  utility  plant  by PGE totaled $18.2
million during the first nine months  of  1996 and are currently estimated to be
$11.4 million during the remainder  of  the  year.   Such expenditures are being
financed with  proceeds  from  the  sale  of  PGE's  regulated water operations,
internally-generated funds, loans  from  PEI  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, 1996, $80,000 of PGE's preferred stock and $20.1 million
of PGE's bank borrowings were required to be repaid within twelve months.

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.





























                                     -18-
<PAGE>

                          PART II.  OTHER INFORMATION

Item 6.  Exhibits and Reports on Form 8-K

(a)  Exhibits

     10-1   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.

     10-2   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.

     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.





































                                     -19-
<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 12, 1996             By:           /s/ Thomas J. Ward           
                                                       Thomas J. Ward
                                                         Secretary



Date:  November 12, 1996             By:         /s/ John F. Kell, Jr.          
                                                     John F. Kell, Jr.
                                            Vice President, Financial Services
                                             (Principal Financial Officer and
                                               Principal Accounting Officer)




























                                     -20-
<PAGE>