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 JUNE 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 July 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 six months
                 ended June 30, 1998 and 1997......................         2

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

              Consolidated Statements of Cash Flows for
                 the six months ended June 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 4.      Submission of Matters to a Vote of Security Holders....      15

 Item 5.      Other Information......................................      15

 Item 6.      Exhibits and Reports on Form 8-K.......................      15


<PAGE>


                          PART I. FINANCIAL INFORMATION

                          PG ENERGY INC. AND SUBSIDIARY

                        CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>

                                                        Three Months Ended     Six Months Ended
                                                             June 30,              June 30,
                                                       --------------------  --------------------
                                                         1998       1997       1998      1997
                                                       ---------- ---------  --------- ----------
                                                                 (Thousands of Dollars)

<S>                                                     <C>       <C>        <C>       <C>      
OPERATING REVENUES                                      $ 25,143  $ 33,229   $ 90,158  $ 113,168
     Cost of gas                                          12,230    18,271     50,055     67,410
                                                         -------   -------    -------     ------
OPERATING MARGIN                                          12,913    14,958     40,103     45,758
                                                         -------   -------    -------     ------

OTHER OPERATING EXPENSES:
     Operation                                             6,066     6,203     12,829     12,665
     Maintenance                                           1,232     1,316      2,359      2,442
     Depreciation                                          2,440     2,266      4,879      4,477
     Income taxes                                           (897)     (241)     3,299      5,590
     Taxes other than income taxes                         2,861     3,310      6,875      7,616
                                                          ------    ------     ------      -----
         Total other operating expenses                   11,702    12,854     30,241     32,790
                                                         -------   -------    -------     ------

OPERATING INCOME                                           1,211     2,104      9,862     12,968

OTHER INCOME (DEDUCTIONS), NET                               902       (87)       775        152
                                                             ---       ---        ---        ---
                                                        
INCOME BEFORE INTEREST CHARGES                             2,113     2,017     10,637     13,120
                                                           -----     -----     ------     ------
                                                         

INTEREST CHARGES:
    Interest on long-term debt                             2,417     2,217      5,042      4,408
    Other interest                                            73       137        197        341
    Allowance for borrowed funds used during construction    (29)      (33)       (52)       (99)
                                                             ----      ----      ----       ----
       Total interest charges                              2,461     2,321      5,187      4,650
                                                          ------    ------     ------      -----

NET INCOME (LOSS)                                           (348)     (304)     5,450      8,470

DIVIDENDS ON PREFERRED STOCK                                 321       318        642        671
                                                            ----      ----       ----        ---

EARNINGS (LOSS) APPLICABLE TO COMMON STOCK                $ (669)   $ (622)   $ 4,808    $ 7,799
                                                          =======   =======   =======    =======

EARNINGS (LOSS) PER SHARE OF COMMON STOCK:
     Before discount on repurchase of preferred stock    $ (0.20)  $ (0.19)    $ 1.43     $ 2.35
     Discount on repurchase of preferred stock                 -      0.24          -       0.25
                                                              --     -----         --       ----
     Earnings (loss) per share of common stock           $ (0.20)   $ 0.05     $ 1.43     $ 2.60
                                                         ========  =======    =======     ======

WEIGHTED AVERAGE NUMBER OF SHARES OUTSTANDING          3,414,344  3,314,155  3,366,427 3,314,155
                                                       ========== ========== ========= =========

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

</TABLE>

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

<PAGE>


                          PG ENERGY INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

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

UTILITY PLANT:
<S>                                                                 <C>                  <C>      
    At original cost                                                $ 362,560            $ 351,106
    Accumulated depreciation                                          (92,954)             (88,129)
                                                                      -------             --------
                                                                      269,606              262,977
                                                                     --------              -------

OTHER PROPERTY AND INVESTMENTS                                          4,082                4,459
                                                                       ------                -----

CURRENT ASSETS:
     Cash and cash equivalents                                          1,331                  304
     Accounts receivable -
         Customers                                                     13,012               23,551
         Parent                                                           720                    -
         Affiliates, net                                                  294                   63
         Others                                                           422                  280
         Reserve for uncollectible accounts                            (1,504)              (1,168)
     Accrued utility revenues                                           2,021               11,680
     Materials and supplies, at average cost                            3,106                2,716
     Gas held by suppliers, at average cost                            16,515               21,933
     Deferred cost of gas and supplier refunds, net                     5,470                6,316
     Prepaid expenses and other                                         4,078                1,633
                                                                        -----                -----
                                                                       45,465               67,308
                                                                       ------               ------

DEFERRED CHARGES:
    Regulatory assets -
        Deferred taxes collectible                                     30,932               30,592
        Other                                                           6,290                4,415
    Unamortized debt expense                                            1,065                1,164
    Other                                                                 125                  225
                                                                         ----                  ---
                                                                       38,412               36,396
                                                                       -------              ------







TOTAL ASSETS                                                        $ 357,565            $ 371,140
                                                                    =========            =========
</TABLE>

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

<PAGE>


                          PG ENERGY INC. AND SUBSIDIARY

                           CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

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

CAPITALIZATION AND LIABILITIES

CAPITALIZATION:
<S>                                                                    <C>                 <C>      
      Common shareholder's investment                                  $ 123,666           $ 107,425
      Preferred stock -
           Not subject to mandatory redemption, net                       15,864              15,864
           Subject to mandatory redemption                                   560                 640
      Long-term debt
           Parent                                                          8,500              23,500
           Other                                                         109,000             106,000
                                                                        --------             -------
                                                                         257,590             253,429
                                                                        --------             -------

CURRENT LIABILITIES:
      Current portion of long-term debt                                    6,500              24,776
      Preferred stock subject to repurchase or
          mandatory redemption                                                80                  80
      Notes payable                                                           50               2,170
      Accounts payable -
           Suppliers                                                      16,947              14,515
           Parent                                                              -                 199
      Accrued general business and realty taxes                              484               2,797
      Accrued income taxes                                                 5,304               4,946
      Accrued interest                                                     1,590               1,844
      Accrued natural gas transition costs                                   561               1,087
      Other                                                                  943               1,188
                                                                            ----               -----
                                                                          32,459              53,602
                                                                         -------              ------

DEFERRED CREDITS:
      Deferred income taxes                                               53,801              52,207
      Unamortized investment tax credits                                   4,510               4,596
      Operating reserves                                                   2,684               2,825
      Other                                                                6,521               4,481
                                                                          ------               -----
                                                                          67,516              64,109
                                                                         -------              ------

COMMITMENTS AND CONTINGENCIES (Note 5)





TOTAL CAPITALIZATION AND LIABILITIES                                   $ 357,565           $ 371,140
                                                                      ==========           =========

</TABLE>

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

<PAGE>

                          PG ENERGY INC. AND SUBSIDIARY

                      CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>

                                                                             Six Months Ended
                                                                                 June 30,
                                                                         --------------------------
                                                                           1998            1997
                                                                         ----------      ----------
                                                                          (Thousands of Dollars)

CASH FLOW FROM OPERATING ACTIVITIES:
<S>                                                                        <C>             <C>    
      Net income                                                           $ 5,450         $ 8,470
      Gain on sale of other property                                          (976)              -
      Effects of noncash charges to income -
          Depreciation                                                       4,918           4,507
          Deferred income taxes, net                                         1,254             578
          Provisions for self insurance                                        275             281
          Other, net                                                         1,038             826
      Changes in working capital, exclusive of cash
           and current portion of long-term debt -
               Receivables and accrued utility revenues                     19,451           9,056
               Gas held by suppliers                                         5,418           8,241
               Accounts payable                                                183          (5,380)
               Deferred cost of gas and supplier refunds, net                  320          14,602
               Other current assets and liabilities, net                    (5,286)        (11,933)
      Other operating items, net                                              (546)           (790)
                                                                              ----            ---- 
                Net cash provided by operating activities                   31,499          28,458
                                                                            ------          ------

CASH FLOW FROM INVESTING ACTIVITIES:
      Additions to utility plant                                           (12,257)        (13,923)
      Proceeds from the sale of other property                                 980               -
      Acquisition of regulated business                                          -          (2,009)
      Other, net                                                               115             471
                                                                              ----            ----
               Net cash used for investing activities                      (11,162)        (15,461)
                                                                           --------        --------

CASH FLOW FROM FINANCING ACTIVITIES:
      Issuance of common stock                                               4,260               -
      Repurchase of preferred stock                                            (80)         (3,108)
      Dividends on preferred and common stock                                 (642)           (671)
      Repayment of long-term debt (Note 3)                                  (7,500)         (4,646)
      Net decrease in bank borrowings                                      (15,346)         (5,782)
      Other, net                                                                (2)            818
                                                                                ---            ---
               Net cash used for financing activities                      (19,310)        (13,389)
                                                                           --------        --------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS                         1,027            (392)
CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR                                 304             690
                                                                              ----             ---
CASH AND CASH EQUIVALENTS AT END OF YEAR                                   $ 1,331           $ 298
                                                                          ========           =====

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
    Cash paid during the period for:
         Interest (net of amount capitalized)                              $ 5,238         $ 4,953
                                                                           ========        =======
         Income taxes                                                      $ 1,154        $ 14,536
                                                                           ========       ========
</TABLE>

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

<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  statements  of  the  Company  that  are  incorporated  in  these
consolidated   financial  statements  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.

     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 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:

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

<S>                      <C>     <C>             <C>   
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
</TABLE>

     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
second quarter of 1998.

(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 material 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 anticipate 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  six-month  periods  ended June 30, 1998 and
1997:
<TABLE>
<CAPTION>

                                              Three Months Ended              Six Months Ended
                                                   June 30,                       June 30,
                                         -----------------------------   ----------------------------
                                           1998             1997           1998             1997
                                         ----------       ---------      ---------        ---------

<S>                                          <C>             <C>            <C>              <C>    
OPERATING REVENUES                           100.0 %         100.0 %        100.0 %          100.0 %
    Cost of gas                              48.7            55.0           55.5             59.6
                                             -----           -----          -----            ----
OPERATING MARGIN                             51.3            45.0           44.5             40.4
                                             -----           -----          -----            ----

OTHER OPERATING EXPENSES:
    Operation                                 24.0            18.7           14.2             11.2
    Maintenance                                4.9             3.9            2.6              2.1
    Depreciation                               9.7             6.8            5.4              4.0
    Income taxes                              (3.5)           (0.7)           3.7              4.9
    Taxes other than income taxes             11.4            10.0            7.6              6.7
                                             -----           -----           ----              ---
        Total operating expenses              46.5            38.7           33.5             28.9
                                             -----           -----          -----             ----

OPERATING INCOME                               4.8             6.3           11.0             11.5

OTHER INCOME (DEDUCTIONS)
      NET                                      3.6            (0.2)           0.8              0.1

INTEREST CHARGES                              (9.8)           (7.0)          (5.8)            (4.1)
                                              -----           -----          -----            -----

NET INCOME (LOSS)                             (1.4)           (0.9)           6.0              7.5

DIVIDENDS ON PREFERRED
     STOCK                                    (1.3)           (1.0)          (0.7)            (0.6)
                                              -----           -----          -----            -----

EARNINGS (LOSS) APPLICABLE
     TO COMMON STOCK                          (2.7)%          (1.9)%          5.3  %           6.9  %
                                              =====           =====          ====             ====  

</TABLE>

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

     Operating Revenues.  Operating revenues decreased $8.1 million (24.3%) from
$33.2  million for the quarter  ended June 30,  1997,  to $25.1  million for the
quarter  ended June 30, 1998,  primarily as a result of a 0.8 billion cubic feet
(22.5%) decrease in sales by PG Energy to its residential and commercial heating
customers.  This reduction in sales was  attributable to the  unseasonably  warm
weather  during the second  quarter of 1998 and the  unseasonably  cool  weather
during the same period in 1997,  as well as lower levels in PG Energy's gas cost
rate (see "-Rate  Matters").  There was a 313 (32.4%) decrease in heating degree
days from 965 (126.1% of normal) during the second quarter of 1997 to 652 (85.2%
of normal) during the second quarter of 1998.

     Cost of Gas.  The cost of gas  decreased  $6.0  million  (33.1%) from $18.3
million for the second  quarter of 1997 to $12.2 million for the second  quarter
of  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 $2.0 million (13.7%) from
$15.0  million  in the  second  quarter  of 1997 to $12.9  million in the second
quarter of 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 45.0% in the second quarter of 1997 to 51.3%
in the second quarter of 1998 as a result of the  proportionately  lower cost of
gas during the period.

     Other Operating  Expenses.  Other operating expenses decreased $1.2 million
(9.0%) from $12.9  million for the quarter ended June 30, 1997, to $11.7 million
for the quarter ended June 30, 1998. This decrease was primarily attributable to
a $656,000  decrease in income  taxes from a credit of  $241,000  for the second
quarter of 1997 to a credit of $897,000 for the second  quarter of 1998 due to a
decrease in income before income taxes (for this purpose,  operating  income net
of interest charges), and a $449,000 (13.6%) 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
$174,000 (7.7%) increase in depreciation  expense as a result of additions to PG
Energy's utility plant. As a percentage of operating  revenues,  other operating
expenses  increased  from 38.7% during the quarter ended June 30, 1997, to 46.5%
during the quarter ended June 30, 1998,  primarily because of the lower level of
operating revenues.

     Operating Income.  As a result of the above,  operating income decreased by
$893,000  (42.4%)  from $2.1  million  for the  second  quarter  of 1997 to $1.2
million for the second  quarter of 1998,  and also  decreased as a percentage of
total  operating  revenues for such  periods from 6.3% in the second  quarter of
1997 to 4.8% in the second quarter of 1998.

     Other Income (Deductions),  Net. Other income  (deductions),  net increased
$989,000 from a deduction of $87,000 for the  three-month  period ended June 30,
1997,  to income of $902,000  for the  three-month  period  ended June 30, 1998,
largely because of a gain on the sale of land in June, 1998.

     Interest  Charges.  Interest charges increased by $140,000 (6.0%) from $2.3
million for the second quarter of 1997 to $2.5 million for the second quarter of
1998. This increase was largely attributable to a higher level of long-term debt
outstanding in 1998.

     Earnings  (Loss)  Applicable  to Common  Stock.  The  increase  in the loss
applicable to common stock of $47,000  (7.6%) from $622,000 for the  three-month
period ended June 30,  1997,  to $669,000  for the  three-month  period June 30,
1998,  as well as the  decrease in earnings  (loss) per share of common stock of
$.25 from earnings of $.05 per share for the  three-month  period ended June 30,
1997 (including a $.24 per share discount on the repurchase of preferred stock),
to a loss of $.20 per share for the three-month period ended June 30, 1998, were
the result of the reduced net income as discussed above.


     o Six Months Ended June 30, 1998,  Compared  With Six Months Ended June 30,
1997

     Operating Revenues. Operating revenues decreased $23.0 million (20.3%) from
$113.2  million for the six months ended June 30, 1997, to $90.2 million for the
six months  ended June 30, 1998,  primarily  as a result of a 2.5 billion  cubic
feet (17.8%)  decrease in sales by PG Energy to its  residential  and commercial
heating customers.  This reduction in sales was attributable to the unseasonably
warm weather  during the six months ended June 30, 1998,  and lower levels in PG
Energy's gas cost rate (see "-Rate  Matters").  There was a 770 (19.5%) decrease
in heating degree days from 3,955 (100.0% of normal) during the six months ended
June 30, 1997,  to 3,185 (80.5% of normal)  during the six months ended June 30,
1998.

     Cost of Gas. The cost of gas  decreased  $17.4  million  (25.7%) from $67.4
million for the six months  ended June 30,  1997,  to $50.0  million for the six
months ended June 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 (12.4%) from
$45.8 million in the six months ended June 30, 1997, to $40.1 million in the six
months ended June 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 40.4% in the six months ended June
30, 1997,  to 44.5% in the six months  ended June 30,  1998,  as a result of the
proportionately lower cost of gas during the period.

     Other Operating  Expenses.  Other operating expenses decreased $2.5 million
(7.8%) from $32.8 million for the six-month period ended June 30, 1997, to $30.2
million  for the  six-month  period  ended  June 30,  1998.  This  decrease  was
primarily  attributable to a $2.3 million (41.0%)  decrease in income taxes from
$5.6 million for the six months ended June 30, 1997, to $3.3 million for the six
months ended June 30, 1998, due to a decrease in income before income taxes (for
this purpose,  operating income net of interest charges),  and a $741,000 (9.7%)
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 $402,000  (9.0%)  increase in depreciation
expense as a result of additions to PG Energy's  utility plant.  As a percentage
of operating revenues,  other operating expenses increased from 28.9% during the
six-month period ended June 30, 1997, to 33.5% during the six-month period ended
June 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 (24.0%) from $13.0 million for the six-month  period ended June 30,
1997,  to $9.9 million for the  six-month  period ended June 30, 1998,  and also
decreased  as a  percentage  of total  operating  revenues for such periods from
11.5% in 1997 to 11.0% in the six-month period ended June 30, 1998.

     Other Income (Deductions),  Net. Other income  (deductions),  net increased
$623,000 from $152,000 for the six-month period ended June 30, 1997, to $775,000
for the six-month  period ended June 30, 1998,  largely because of a gain on the
sale of land in June, 1998.

     Interest Charges.  Interest charges increased by $537,000 (11.5%) from $4.7
million  for the  six-month  period of 1997 to $5.2  million  for the  six-month
period ended June 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 $3.0  million  (35.7%) from $8.5
million for the  six-month  period ended June 30, 1997,  to $5.5 million for the
six-month  period ended June 30, 1998, was largely the result of the lower level
of operating income and the increased interest charges,  as discussed above, the
effects of which were partially offset by the increase in other income.

     Earnings Applicable to Common Stock. The decrease in earnings applicable to
common stock of $3.0 million (38.4%) from $7.8 million for the six-month  period
ended June 30, 1997, to $4.8 million for the six-month  period June 30, 1998, as
well as the decrease in earnings per share of common stock of $1.17 (45.0%) from
$2.60 per share for the six-month  period ended June 30, 1997  (including a $.25
per share discount on the repurchase of preferred stock), to $1.43 per share for
the  six-month  period ended June 30,  1998,  were the result of the reduced net
income as discussed above.

RATE MATTERS

     Rate Increase.  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, 1998.

     Proposed Rate  Increase.  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
April 23, 1998,  the PPUC  suspended  this rate increase for seven months (until
December 15, 1998) in order to investigate  the  reasonableness  of the proposed
rates.  It is not  presently  possible  to  determine  what action the PPUC will
ultimately take in this matter.

     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.

     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:
<TABLE>
<CAPTION>

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

<S>                    <C>      <C>              <C>        
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
</TABLE>

     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 $71.0 million of unsecured  revolving bank credit,  which is deemed  adequate
for its immediate needs. Specifically,  PG Energy currently has seven bank lines
of credit with an aggregate  borrowing  capacity of $70.0  million which provide
for borrowings at interest  rates  generally less than prime and which mature at
various times during 1998 and 1999.  Honesdale has a $1.0 million revolving bank
line of credit which provides for borrowing at the prime rate  (currently  8.5%)
and which matures in June,  1999. The Company  intends to renew or replace these
lines of credit as they  expire.  As of July 30,  1998,  the  Company  had $17.0
million of borrowings outstanding under these bank lines of credit. In addition,
PG Energy can borrow up to $70.0 million from PEI through  December 31, 1999 (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 PG Energy.  As of July 30, 1998, PG
Energy had $8.5 million  outstanding  under its borrowing  arrangement with PEI.
Such interim  borrowings by PG Energy from PEI will be repaid with proceeds from
bank  borrowings  by PG Energy.  PG Energy 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.

     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
six-month period ended June 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 (the
"DRP") and Customer  Stock  Purchase  Plan (the  "Customer  Plan").  During 1998
(through  July 30) PG Energy  realized  $4.7  million and $1.5  million from the
issuance  of common  stock to PEI in  connection  with the DRP and the  Customer
Plan, respectively.

Construction Expenditures and Related Financings

     Expenditures  for the  construction  of utility plant totaled $12.1 million
during the six months  ended June 30,  1998 and are  currently  estimated  to be
$24.2  million  during the remainder of the year.  It is  anticipated  that such
expenditures  will  be  financed  with  internally   generated  funds  and  bank
borrowings and by the periodic issuance of stock and long-term debt.

Current Maturities of Long-Term Debt and Preferred Stock

     As of June 30,  1998,  $6.5 million of  long-term  debt,  and $80,000 of PG
Energy's    preferred    stock    was    required    to   be    repaid    within
twelve months.

Year 2000

         The Company is currently  replacing its  financial  and human  resource
systems with purchased software packages. The installation of these new systems,
along  with  modifications  currently  being  made to its  customer  information
system,  will resolve the primary year 2000 issues.  The new financial and human
resource systems are anticipated to be fully operational by January, 1999, while
modifications to the new customer  information  system are now anticipated to be
completed and tested by March 31, 1999.

         The  Company  has  completed  a review of the  program  coding of other
significant  in-house  developed  applications  and  determined  that  they  are
presently  year 2000  compliant.  Additionally,  the  Company is  reviewing  its
installed  base of personal  computers to identify  non-compliant  machines that
would be in service at year 2000.
<PAGE>

Forward-Looking Statements

     Certain statements made above relating to plans, conditions, objectives and
economic  performance  go  beyond  historical  information  and may  provide  an
indication  of  future  results.   To  that  extent,  they  are  forward-looking
statements  within the meaning of Section 21E of the Securities  Exchange Act of
1934,  and each is subject to factors that could cause actual  results to differ
from those in the forward-looking  statement, such as the nature of Pennsylvania
legislation   restructuring  the  natural  gas  industry  and  general  economic
conditions and  uncertainties.  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 4.       Submission of Matters to a Vote of Security Holders

     On May 6, 1998, Pennsylvania Enterprises, Inc., the sole common shareholder
of PG Energy  Inc.,  executed  an action  in lieu of a meeting  of  shareholders
re-electing the following incumbent directors of PG Energy Inc. to an additional
one year term: Kenneth L. Pollock,  William D. Davis, Thomas F. Karam, Robert J.
Keating,  James A. Ross, John D. McCarthy,  Ronald W. Simms, Kenneth M. Pollock,
Paul R. Freeman, John D. McCarthy, Jr. and Richard A. Rose, Jr.

Item 5.       Other Information

       Effective  August 4, 1998,  Paul R. Freeman  resigned as a Director of PG
Energy Inc.

Item 6.       Exhibits and Reports on Form 8-K

(a)    Exhibits

     10-1 Form of Stock Option Grant,  dated as of May 6, 1998,  between PEI and
certain of its Officers - - filed as Exhibit 10-1 to PEI's  Quarterly  Report on
Form 10-Q for the quarter ended June 30, 1998, File No. 0-7812.

     10-2 Form of Stock Option Grant,  dated as of May 6, 1998,  between PEI and
certain  of its  non-employee  directors  - - filed  as  Exhibit  10-2 to  PEI's
Quarterly  Report on Form 10-Q for the  quarter  ended June 30,  1998,  File No.
0-7812.

     10-3 Stock Option Grant, dated as of May 6, 1998, between PEI and Thomas F.
Karam - - filed as Exhibit 10-3 to PEI's  Quarterly  Report on Form 10-Q for the
quarter ended June 30, 1998, File No. 0-7812.

     10-4 Amended  Employment  Agreement  dated as of May 6, 1998,  by and among
PEI,  PG Energy  Inc.  and Thomas F.  Karam - - filed as  Exhibit  10-4 to PEI's
Quarterly  Report on Form 10-Q for the  quarter  ended June 30,  1998,  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.


<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:  August 11, 1998        By:        /s/ Donna M. Abdalla                
      ------------------         ---------------------------------------
                                             Donna M. Abdalla
                                             Acting Secretary

Date:  August 11, 1998        By:       /s/ John F. Kell, Jr.               
      ------------------        ----------------------------------------
                                            John F. Kell, Jr.
                                   Vice President, Financial Services
                                   (Principal Financial Officer and
                                     Principal Accounting Officer)