PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                             TABLE OF CONTENTS


                                                                         PAGE

PART I.  FINANCIAL INFORMATION

  Item 1.  Financial Statements

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

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

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

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

  Item 2.  Management's Discussion and Analysis of Financial
             Condition and Results of Operations. . . . . . . . . . . .   11


PART II. OTHER INFORMATION

  Item 6.  Exhibits and Reports on Form 8-K . . . . . . . . . . . . . .   21






























                                    -1-
<PAGE>

                               PART I.  FINANCIAL INFORMATION

                       PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
                              Consolidated Statements of Income

                                                  Three Months Ended      Nine Months Ended
                                                     September 30,          September 30,    
                                                   1996       1995*       1996        1995*  
                                                            (Thousands of Dollars) 
<S>                                              <C>        <C>         <C>         <C>
OPERATING REVENUES:
  Gas sales and services                         $  16,208  $  13,298   $ 115,956   $ 111,403
  Pipeline construction and services                 3,095        155       7,634         220
  Other                                                 51         94         108         203
    Total operating revenues                        19,354     13,547     123,698     111,826

OPERATING EXPENSES:
  Cost of gas                                        7,628      5,660      63,335      63,549
  Other operation expenses                           9,398      5,471      27,731      17,528
  Maintenance                                        1,379      1,452       4,085       3,732
  Depreciation                                       2,108      1,787       6,214       5,367
  Income taxes                                      (2,043)    (2,750)      3,486         757
  Taxes other than income taxes                      1,635      1,421       8,380       7,999
    Total operating expenses                        20,105     13,041     113,231      98,932

OPERATING INCOME (LOSS)                               (751)       506      10,467      12,894

OTHER INCOME, NET                                      736         33       2,972         233

INCOME (LOSS) BEFORE INTEREST CHARGES                  (15)       539      13,439      13,127

INTEREST CHARGES:
  Interest on long-term debt                         2,469      3,384       7,660      10,232
  Other interest                                       166        642         623       1,485
  Allowance for borrowed funds used
    during construction                                (73)       (18)       (169)        (40)
      Total interest charges                         2,562      4,008       8,114      11,677

INCOME (LOSS) FROM CONTINUING OPERATIONS            (2,577)    (3,469)      5,325       1,450

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

INCOME (LOSS) BEFORE SUBSIDIARY'S PREFERRED
  STOCK DIVIDENDS                                   (2,577)    (3,469)      4,939      (2,254)

SUBSIDIARY'S PREFERRED STOCK DIVIDENDS                 363        690       1,383       2,073

INCOME (LOSS) BEFORE EXTRAORDINARY LOSS             (2,940)    (4,159)      3,556      (4,327)

EXTRAORDINARY LOSS (NET OF TAX BENEFIT
  OF $575,000) (Note 3)                             (1,117)         -      (1,117)          -

NET INCOME (LOSS)                                $  (4,057) $  (4,159)  $   2,439   $  (4,327)

COMMON STOCK
  Earnings (loss) per share of common stock:
    Continuing operations                        $    (.61) $    (.72)  $     .75   $    (.11)
    Discontinued operations                              -          -        (.07)       (.65)
    Net income (loss) before premium on
      repurchase/redemption of subsidiary's
      preferred stock and extraordinary loss          (.61)      (.72)        .68        (.76)
    Premium on repurchase/redemption of
      subsidiary's preferred stock                    (.02)         -        (.27)          -
    Extraordinary loss                                (.23)         -        (.21)          -
    Earnings (loss) per share of common stock    $    (.86) $    (.72)  $     .20   $    (.76)

  Weighted average shares outstanding            4,810,518  5,754,607   5,214,001   5,715,294
  Cash dividends per share                       $     .55  $     .55   $    1.65   $    1.65

*Reclassified to conform with 1996 consolidated financial statement presentation.
The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
                                              -2-


<PAGE>

                PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS

<TABLE>
<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:
  Nonutility property and equipment                      12,785          11,553
  Accumulated depreciation                               (5,655)         (5,394)
  Other                                                   1,223             983
                                                          8,353           7,142

CURRENT ASSETS:
  Cash and cash equivalents                               1,491             629
  Accounts receivable -
    Customers                                            10,461          21,066
    Others                                                  576             815
    Reserve for uncollectible accounts                     (932)           (788)
  Unbilled revenues                                       2,556          10,319
  Materials and supplies, at average cost                 3,220           2,876
  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                              1,900           3,486
                                                         65,390          58,155

DEFERRED CHARGES:
  Regulatory assets -
    Deferred taxes collectible                           29,687          30,015
    Other                                                 4,331           3,013
  Unamortized debt expense                                1,578           2,630
                                                         35,596          35,658



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






TOTAL ASSETS                                      $     339,994   $     524,218


*Reclassified to conform with 1996 consolidated financial statement presentation.

The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
                                      -3-
<PAGE>

                PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                  September 30,    December 31,
                                                       1996           1995*    
                                                      (Thousands of Dollars)
<S>                                               <C>             <C>
CAPITALIZATION AND LIABILITIES
  
CAPITALIZATION (Note 4):
  Common shareholders' investment                 $     116,153   $     162,739
  Preferred stock of PGE -
    Not subject to mandatory redemption, net             19,192          33,615
    Subject to mandatory redemption                         739           1,680
  Long-term debt                                         75,000         106,706
                                                        211,084         304,740

CURRENT LIABILITIES:
  Current portion of long-term debt                      20,130         116,001
  Preferred stock subject to mandatory redemption            80              80
  Notes payable                                               -          10,180
  Accounts payable                                       14,765          18,531
  Deferred cost of gas and supplier refunds, net              -             434
  Accrued general business and realty taxes                 541           1,493
  Accrued income taxes                                   27,004             526
  Accrued interest                                          885           2,307
  Accrued natural gas transition costs                    2,292           2,278
  Other                                                   4,322           3,534
                                                         70,019         155,364

DEFERRED CREDITS:
  Deferred income taxes                                  46,094          48,835
  Accrued natural gas transition costs                      384           1,144
  Unamortized investment tax credits                      4,810           4,938
  Operating reserves                                      3,113           3,709
  Other                                                   4,490           5,488
                                                         58,891          64,114




COMMITMENTS AND CONTINGENCIES (Note 6)







TOTAL CAPITALIZATION AND LIABILITIES              $     339,994   $     524,218


*Reclassified to conform with 1996 consolidated financial statement presentation.

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

                                      -4-
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                PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                          Nine Months Ended    
                                                            September 30,      
                                                          1996         1995    
                                                        (Thousands of Dollars)
<S>                                                     <C>          <C>
CASH FLOW FROM OPERATING ACTIVITIES:
  Income (loss) from continuing operations, net of
    subsidiary's preferred stock dividends              $   3,942    $    (623)
  Effects of noncash charges to income -
    Depreciation                                            6,266        5,395
    Extraordinary loss, net of tax benefit                 (1,117)           -
    Deferred income taxes, net                                530          205
    Provisions for self insurance                             742          889
    Other, net                                              1,861        1,945
  Changes in working capital, exclusive of cash 
   and current portion of long-term debt -
    Receivables and unbilled revenues                      18,751       19,838
    Gas held by suppliers                                 (10,299)        (130)
    Accounts payable                                       (3,583)      (3,696)
    Deferred cost of gas and supplier refunds, net        (16,801)       7,207
    Other current assets and liabilities, net                 992      (10,243)
  Other operating items, net                               (4,583)       1,027 
      Net cash provided (used) by continuing operations    (3,299)      21,814
  Net cash provided (used) by discontinued operations     (35,470)       3,764
      Net cash provided (used) by operating activities    (38,769)      25,578

CASH FLOW FROM INVESTING ACTIVITIES:
  Additions to utility plant                              (18,501)     (14,907)
  Net proceeds from sale of discontinued operations       261,752            -
  Other, net                                               (1,285)       2,560
      Net cash provided (used) by investing activities    241,966      (12,347) 

CASH FLOW FROM FINANCING ACTIVITIES:
  Issuance of common stock                                    555        3,376
  Repurchase of common stock                              (39,663)           -
  Dividends on common stock                                (8,533)      (9,430)
  Repurchase/redemption of preferred stock of PGE         (15,364)         (80)
  Repayment of long-term debt                             (81,906)      (3,535)
  Net decrease in bank borrowings                         (56,034)      (3,125)
  Other, net                                               (1,390)          (5)
      Net cash used for financing activities             (202,335)     (12,799)

NET INCREASE IN CASH AND CASH EQUIVALENTS                     862          432
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD              629          330
CASH AND CASH EQUIVALENTS AT END OF PERIOD              $   1,491    $     762

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for:
    Interest (net of amount capitalized)                $   8,700    $  19,634 
    Income taxes                                        $  34,584    $  10,018 





The accompanying notes are an integral part of the consolidated financial statements.
</TABLE>
                                      -5-
<PAGE>

                PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(1)  GENERAL

    Nature of the Business.  Pennsylvania Enterprises, Inc. ("the Company") is a
holding company whose principal subsidiary,  PG Energy Inc. ("PGE"), a regulated
public utility formerly known as Pennsylvania Gas and Water Company, 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  Company,  through  its other subsidiaries, Pennsylvania
Energy Resources, Inc. ("PERI"),  Theta  Land  Corporation and Keystone Pipeline
Services, Inc. ("Keystone"), a wholly-owned  subsidiary of PERI, is also engaged
in  various  non-regulated  activities,  including  energy-related  services and
pipeline construction and  service  activities,  which  prior  to  1996 were not
significant to the operations of  the  Company  as a whole.  Pennsylvania Energy
Marketing Company, which was also a  subsidiary  of the Company, was merged into
PERI on May 31, 1996.

    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  Pennsylvania  Public  Utility  Commission   ("PPUC"),  is  expected  to  be
consummated in early 1997.

    Principles of Consolidation.   The consolidated financial statements include
the accounts of the  Company  and  its  wholly-owned subsidiaries, PGE, PERI and
Theta.  The  consolidated  financial  statements  also  include  the accounts of
Keystone beginning December 4,  1995,  the  date  Keystone was acquired by PERI.
All material intercompany accounts have been eliminated in consolidation.

    PGE is a regulated public  utility  subject  to the jurisdiction of the PPUC
for rate and accounting  purposes.    The  financial  statements of PGE 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 by the Company 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  PGE.    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.

                                      -6-
<PAGE>

    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  the Company.  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 the  Company,  PGE,  American Water Works Company, Inc.
("American") and Pennsylvania-American  Water Company ("Pennsylvania-American"),
a wholly-owned subsidiary of  American,  the  Company 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 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 the Company and PGE
to retire debt, to repurchase stock  (see  Note 4 of these Notes to Consolidated
Financial Statements),  for  construction  expenditures  and  for  other working
capital purposes.    With  the  sale  of  PGE's  water  utility  operations, the
principal assets of  the  Company  and  PGE  now  consist  of  PGE's gas utility
operations and approximately 46,000 acres of land.

    The  accompanying  consolidated  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 the Company's interest expense
were allocated to the discontinued operations.





                                      -7-
<PAGE>

    Selected financial information for the  discontinued operations is set forth
below:
[CAPTION]
                    Net Assets of Discontinued Operations

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

(3) EXTRAORDINARY LOSS

    On September 30, 1996,  the  Company  defeased the $28.7 million outstanding
principal amount of its 10.125% Senior  Notes (the "Senior Notes"), due June 15,
1999, and recorded an extraordinary loss  of  $1.1 million ($1.6 million, net of
$575,000 of related income tax benefits).  The loss on the defeasance represents
the interest expense on the  Senior  Notes  from  the date of defeasance through
June 15, 1997, the date on  which  the  Senior  Notes will be redeemed, plus the
writeoff of the unamortized balance  of  issuance expenses related to the Senior

                                      -8-
<PAGE>

Notes, less (i) the interest income that  will  be earned on the funds that were
deposited with  the  Trustee  for  the  Senior  Notes  in  connection with their
defeasance and (ii) the related income tax benefit.

(4) REPURCHASES OF STOCK

    During  the  nine-month  period  ended   September  30,  1996,  the  Company
repurchased 1,011,539 shares of its  common stock for an aggregate consideration
of $39.7 million,  and  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.  Additionally, on  June  17,  1996, PGE repurchased 9,408 shares of
its  5.75%  cumulative  preferred  stock   (including  800  shares  redeemed  in
accordance with annual sinking  fund  provisions) for an aggregate consideration
of $838,000.

(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  the  Company  and PGE adopted effective January 1,
1996, did not have a  material  impact  on  the financial position or results of
operations of either the Company or PGE since the carrying amount of all assets,
including regulatory assets, are considered recoverable.

    Accounting for Stock-Based Compensation.    In October, 1995, FASB Statement
123, "Accounting for Stock-Based Compensation," was issued.  The Company adopted
this statement in the  first  quarter  of  1996,  but  will  continue to use the
intrinsic value based method  of  accounting prescribed by Accounting Principles
Board Opinion No. 25, "Accounting  for  Stock Issued to Employees," supplemented
by the required footnote disclosures  of  FASB  Statement 123.  Adoption of FASB
Statement 123 had no effect upon  the Company's financial position or results of
operations.

(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.  The
Company does not believe that PGE's compliance with the terms of such Order will
have  a  material  adverse  effect  on  its  financial  position  or  results of
operations.



                                      -9-
<PAGE>

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, 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.










































                                     -10-
<PAGE>

                PENNSYLVANIA ENTERPRISES, INC. AND SUBSIDIARIES

          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 the  Company,  PG  Energy  Inc. ("PGE"), American Water
Works  Company,  Inc.  ("American")   and  Pennsylvania-American  Water  Company
("Pennsylvania-American"), a wholly-owned  subsidiary  of  American, the Company
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 the Company 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  the  Company  and  PGE  now  consist  of  PGE's gas utility
operations and approximately 46,000 acres of land.

    In accordance with generally  accepted  accounting principles, the Company's
consolidated 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 the Company's
continuing operations.   For  additional  information regarding the discontinued
operations, see Note  2  of  the  accompanying  Notes  to Consolidated Financial
Statements.


















                                     -11-
<PAGE>

RESULTS OF CONTINUING OPERATIONS

    The following table expresses  certain  items  in the Company's consolidated
statements of income as percentages of  total 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:
  Gas sales and services.....................    83.7%      98.2%    93.7%      99.6%
  Pipeline construction and services.........    16.0        1.1      6.2        0.2
  Other......................................     0.3        0.7      0.1        0.2
    Total operating revenues.................   100.0      100.0    100.0      100.0

OPERATING EXPENSES:
  Cost of gas................................    39.4       41.8     51.2       56.8
  Other operation expenses...................    48.6       40.4     22.4       15.7
  Maintenance................................     7.1       10.7      3.3        3.3
  Depreciation...............................    10.9       13.2      5.0        4.8
  Income taxes...............................   (10.6)     (20.3)     2.8        0.7
  Taxes other than income taxes..............     8.5       10.5      6.8        7.2
    Total operating expenses.................   103.9       96.3     91.5       88.5

OPERATING INCOME (LOSS)......................    (3.9)       3.7      8.5       11.5

OTHER INCOME, NET............................     3.8        0.2      2.4        0.2

INTEREST CHARGES (1).........................   (13.2)     (29.5)    (6.6)     (10.4)

INCOME (LOSS) FROM CONTINUING OPERATIONS.....   (13.3)     (25.6)     4.3        1.3

LOSS WITH RESPECT TO DISCONTINUED OPERATIONS.       -          -     (0.3)      (3.3)

INCOME (LOSS) BEFORE SUBSIDIARY'S PREFERRED
  STOCK DIVIDENDS............................   (13.3)     (25.6)     4.0       (2.0)

SUBSIDIARY'S PREFERRED STOCK DIVIDENDS(1)....    (1.9)      (5.1)    (1.1)      (1.9)

INCOME (LOSS) BEFORE EXTRAORDINARY LOSS......   (15.2)     (30.7)     2.9       (3.9)

EXTRAORDINARY LOSS...........................    (5.8)         -     (0.9)         -

NET INCOME (LOSS)............................   (21.0)     (30.7)     2.0       (3.9)
</TABLE>
                    
(1)   None  of  the  Company's  interest  expense  nor  any  of the subsidiary's
preferred stock dividends was allocated to the discontinued operations.

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

    Operating Revenues.  Operating revenues  increased $5.8 million (42.9%) from
$13.5 million for the  three-month  period  ended  September  30, 1995, to $19.4
million for the three-month period ended September 30, 1996.  Slightly more than
half of the increase was the  result  of  $3.1  million of revenues in the third
quarter of  1996  from  the  pipeline  construction  and  services activities of
Keystone Pipeline Services, Inc.  ("Keystone"),  which was acquired in December,
1995.  Also contributing to the  higher  revenues was a $1.9 million increase in
PGE's gas sales and services  primarily  as  a  result of price increases due to

                                     -12-
<PAGE>

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.

    Operating Expenses.  Operating  expenses,  including depreciation and income
taxes, increased $7.1 million  (54.2%)  from  $13.0  million for the three-month
period ended September 30,  1995,  to  $20.1  million for the three-month period
ended September  30,  1996.    As  a  percentage  of  operating  revenues, total
operating expenses increased from  96.3%  during  the  third  quarter of 1995 to
103.9% during the third quarter of 1996.

    The cost of gas increased  $2.0  million  (34.8%)  from $5.7 million for the
three-month period ended September 30, 1995, to $7.6 million for the three-month
period  ended  September  30,  1996,  primarily  because  of  the aforementioned
increases in PGE's gas cost  rate  (see  "-Rate Matters") and increased sales to
PGE's residential and commercial heating customers.

    Other than the cost of gas and income taxes, operating expenses increased by
$4.4 million  (43.3%)  from  $10.1  million  for  the  three-month  period ended
September 30, 1995, to $14.5 million  for the three-month period ended September
30, 1996.  This  increase  was  largely  attributable  to a $3.9 million (71.8%)
increase in other operation expenses, primarily  as  a result of $3.0 million of
expenses relative to Keystone's  pipeline  construction and services activities,
and a $654,000 (12.9%) increase  in  expenses  with respect to PGE's operations,
which  was  principally  attributable  to  payroll  and  payroll-related  costs.
Payroll and payroll-related costs  increased  largely  because of charges, which
had formerly been allocated to PGE's discontinued operations, now being absorbed
by its  continuing  operations.    Also  contributing  to  the  higher operating
expenses were increased depreciation expense of $321,000 (18.0%), primarily as a
result  of  $137,000  of   depreciation   relative   to  Keystone  and  $184,000
attributable to additions to PGE's utility plant.

    Income taxes for the three-month  period ended September 30, 1996, increased
by $707,000 (25.7%) from a credit of  $2.7  million  in 1995 to a credit of $2.0
million in 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, operating income
decreased by $1.3 million  from  income  of  $506,000 for the three-month period
ended September 30, 1995, to a loss of $751,000 for the three-month period ended
September 30, 1996, and decreased  as  a  percentage of total operating revenues
for such periods from 3.7% in 1995 to a negative 3.9% in 1996.

    Other Income, Net.  Other  income,  net  increased $703,000 from $33,000 for
the three-month period ended September 30, 1995, to $736,000 for the three-month
period ended September  30,  1996,  largely  as  a  result  of investment income
totaling $743,000 relative  to  the  temporary  investment  of  a portion of the
proceeds from the sale of PGE's regulated water utility operations.

    Interest Charges.  Interest charges  decreased  by $1.4 million (36.1%) from
$4.0 million for  the  three-month  period  ended  September  30,  1995, to $2.6
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.


                                     -13-
<PAGE>

    Income  (Loss)  From  Continuing  Operations.    The  loss  from  continuing
operations decreased $884,000 from $3.5  million for the quarter ended September
30, 1995, to $2.6  million  for  the  quarter  ended  September  30, 1996.  This
decrease was largely the result of  the matters discussed above, principally the
increase in  operating  revenues  and  other  income,  net  and  the decrease in
interest charges, the effects of  which  were  partially offset by the increased
operating expenses.

    Subsidiary  Preferred  Stock  Dividends.     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.

    Income (Loss) Before  Extraordinary  Loss.    The  decrease  of $1.2 million
(29.3%) in the loss before extraordinary  loss, from $4.2 million for the three-
month period ended  September  30,  1995,  to  $2.9  million for the three-month
period ended September 30, 1996, was  largely  the result of the decrease in the
loss from continuing operations and the reduced dividends on preferred stock, as
discussed above.

    Extraordinary Loss.  On September  30,  1996, the Company defeased the $28.7
million outstanding principal amount  of  its  10.125% Senior Notes (the "Senior
Notes"),  due  June  15,  1999,  and  recorded  an  extraordinary  loss  on such
defeasance of $1.1 million ($1.6 million,  net of $575,000 of related income tax
benefits).  The loss on  the  defeasance  represents the interest expense on the
Senior Notes from the date  of  defeasance  through  June  15, 1997, the date on
which the Senior Notes will  be  redeemed,  plus the writeoff of the unamortized
balance of issuance expenses related to  the Senior Notes, less (i) the interest
income that will be earned on the funds that were deposited with the Trustee for
the Senior Notes in connection with their defeasance and (ii) the related income
tax benefit.

    Net Income (Loss).  The  decrease  of  $102,000  in  the net loss, from $4.2
million for the three-month period ended September 30, 1995, to $4.1 million for
the three-month period ended September 30, 1996, as well as the decrease of $.11
in  the  loss  per   share   of   common   stock   before  the  premium  on  the
repurchase/redemption of  subsidiary's  preferred  stock  and  the extraordinary
loss, from $.72 per share for the  quarter ended September 30, 1995, to $.61 per
share for the quarter ended September  30,  1996, were largely the result of the
factors  discussed  above.    While  the  net  loss  from  continuing operations
decreased by $.11 per share,  the  $.23  per  share charge for the extraordinary
loss and the  $.02  per  share  charge  for  the  premium  on  the repurchase of
subsidiary's preferred stock acted  to  increase  the  loss  per share of common
stock for the quarter ended  September  30,  1996,  to $.86 per share.  Although
premiums on the repurchase of  preferred  stock are charged to retained earnings
and  are  not  a  determinant  of  net  income,  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 $11.9 million (10.6%) from
$111.8 million for the  nine-month  period  ended  September 30, 1995, to $123.7
million for the nine-month period ended  September 30, 1996, largely as a result

                                     -14-
<PAGE>

of $7.6 million of operating revenues  relative to the pipeline construction and
services activities of Keystone,  which  was  acquired  in December, 1995.  Also
contributing to  the  increase  in  operating  revenues  was  a  higher level of
revenues attributable to PGE's gas sales  and services, 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."

    Operating Expenses.  Operating  expenses,  including depreciation and income
taxes, increased $14.3 million  (14.5%)  from  $98.9  million for the nine-month
period ended September 30,  1995,  to  $113.2  million for the nine-month period
ended September  30,  1996.    As  a  percentage  of  operating  revenues, total
operating expenses  increased  from  88.5%  during  the  nine-month period ended
September 30, 1995 to  91.5%  during  the  nine-month period ended September 30,
1996.

    The cost of gas decreased $214,000  (0.3%)  from $63.5 million for the nine-
month period ended  September  30,  1995,  to  $63.3  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
largely offset by  the  increased  sales  to  residential and commercial heating
customers.

    Other than the cost of gas and income taxes, operating expenses increased by
$11.8 million  (34.0%)  from  $34.6  million  for  the  nine-month  period ended
September 30, 1995, to $46.4  million  for the nine-month period ended September
30, 1996.  This increase  was  largely  attributable  to a $10.2 million (58.2%)
increase in other operation expenses, primarily  as  a result of $7.5 million of
expenses relative to Keystone's  pipeline  construction and services activities,
and  a  $2.2  million  (13.2%)  increase  in  expenses  with  respect  to  PGE's
operations, which was  principally  the  result  of  higher payroll and payroll-
related costs.  Payroll and  payroll-related  costs increased largely because of
charges, which had formerly been allocated to PGE's discontinued operations, now
being absorbed by its continuing  operations.    Also contributing to the higher
operating expenses was a $847,000 (15.8%)  increase in depreciation expense as a
result  of  $370,000  of  depreciation  relative  to  Keystone  and  $477,000 of
depreciation attributable to additions to PGE's utility plant.

    Income taxes increased $2.7 million  from  $757,000 in the first nine months
of 1995 to $3.5 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 $2.4 million (18.8%)  from  $12.9 million for the nine-month period
ended September 30,  1995,  to  $10.5  million  for  the nine-month period ended
September 30, 1996, and decreased  as  a  percentage of total operating revenues
for such periods from 11.5% in  1995  to  8.5% in 1996, primarily because of the
higher level of operating expenses.

    Other Income, Net.  Other  income,  net increased $2.7 million from $233,000
for the nine-month period  ended  September  30,  1995,  to $3.0 million for the
nine-month period ended September 30,  1996,  largely  as a result of investment
income totaling $2.5 million relative  to  the temporary investment of a portion
of the proceeds from the sale of PGE's regulated water utility operations.

                                     -15-
<PAGE>

    Interest Charges.  Interest charges  decreased  by $3.6 million (30.5%) from
$11.7 million for  the  nine-month  period  ended  September  30,  1995, to $8.1
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 $3.9 million (266.7%)  from  $1.5  million  for  the nine months ended
September 30, 1995, to  $5.3  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  revenues  and  other income, net and the
decrease in interest charges,  the  effects  of  which  were partially offset by
increased operating expenses.

    Subsidiary's  Preferred  Stock  Dividends.    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. 

    Income (Loss) Before  Extraordinary  Loss.    The  increase in income before
extraordinary loss of $7.9 million  from  a  loss  of $4.3 million for the nine-
month period ended September 30, 1995,  to  income of $3.6 million for the nine-
month period ended September 30, 1996, was largely the result of the increase in
income  from  continuing  operations  and   the  lower  level  of  dividends  on
subsidiary's preferred stock,  as  discussed  above,  and  the reduction of $3.3
million, from $3.7 million to $386,000, in the loss with respect to discontinued
operations.

    Extraordinary Loss.  On September  30,  1996, the Company defeased the $28.7
million outstanding principal amount of  its  10.125% Senior Notes, due June 15,
1999, and recorded an extraordinary loss  of  $1.1 million ($1.6 million, net of
$575,000 of related income tax benefit).   The loss on the defeasance represents
the interest expense on the  Senior  Notes  from  the date of defeasance through
June 15, 1997, the date on  which  the  Senior  Notes will be redeemed, plus the
writeoff of the unamortized balance  of  issuance expenses related to the Senior
Notes, less (i) the interest income that  will  be earned on the funds that were
deposited with  the  Trustee  for  the  Senior  Notes  in  connection with their
defeasance and (ii) the related income tax benefit.

    Net Income (Loss).  The increase in  net  income of $6.8 million from a loss
of $4.3 million for the nine-month period ended September 30, 1995, to income of
$2.4 million for the nine-month period ended  September 30, 1996, as well as the
increase in earnings per share of common  stock  of $.96 from a loss of $.76 per
share for the nine months  ended  September  30,  1995,  to earnings of $.20 per
share for the nine  months  ended  September  30,  1996  (after a $.27 per share
charge for the premium on repurchase  of subsidiary's preferred stock and a $.21
per share charge relative to  the  extraordinary  loss),  were the result of the
higher  income  from  continuing   operations   and  the  reduced  dividends  on
subsidiary's preferred stock, as discussed  above,  and the decrease of $.58 per
share, from $.65 per share for  the  nine-month period ended September 30, 1995,
to $.07 per share for  the  nine-month  period  ended September 30, 1996, in the
loss with respect to discontinued operations.


                                     -16-
<PAGE>

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.

    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

                                     -17-
<PAGE>

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.    The Company and 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, PGE repaid its $50.0  million  term  loan  due  1996 and all of its then
outstanding bank borrowings  on  February  16,  1996,  and  the  Company and PGE
temporarily invested the balance of the proceeds.  

    During the nine months  ended  September  30,  1996, the Company repurchased
1,011,539 shares of its  common  stock  for  an aggregate consideration of $39.7
million, of which 890,602  shares  were  acquired  in  April  pursuant to a self
tender offer and 120,937 shares  were  acquired  from  time to time through open
market transactions and an oddlot buyback program.  PGE also 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.    Additionally,  on June 17, 1996, PGE
repurchased 9,408 shares of its  5.75% cumulative preferred stock (including 800
shares redeemed  in  accordance  with  annual  sinking  fund  provisions) for an
aggregate consideration of $838,000.

Liquidity

    The  primary  capital  needs  of  the  Company  are  the  funding  of  PGE's
construction program  and  the  seasonal  funding  of  PGE's  gas  purchases and
increases in  its  customer  accounts  receivable.    PGE's  revenues are highly

                                     -18-
<PAGE>

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.

    Additionally, as the Company's non-regulated activities expand, capital will
be required for  those  activities,  especially  the  residential and commercial
development that is planned for  certain  Company-owned  land.  The two projects
that are currently planned by the Company are in the initial planning and design
phases, and the amount and type of  funding that those projects will require has
not yet been finalized.  Nonetheless, it is expected that they will be funded by
a combination of capital provided by the Company, bank borrowings and other debt
financing.

    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 the
Company 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 the Company has funds available
for lending to PGE.  As of  November  7, 1996, PGE had $37.3 million outstanding
under its borrowing arrangement with  the  Company.   Such interim borrowings by
PGE from the Company 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 the Company are no longer available and as
it requires additional funding for working capital and other purposes.

    The Company believes that PGE 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.    Likewise,  the  Company believes that its
non-regulated subsidiaries will be able to  raise such funds as are required for
their needs, including that  required  for  the  residential and commercial real
estate development that is planned.

Long-Term Debt and Capital Stock Financings

    Both the Company and PGE  periodically  engage 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
either the Company or PGE during the nine-month period ended September 30, 1996.




                                     -19-
<PAGE>

    The Company also obtains external  funds  from  the sale of its common stock
through its Dividend Reinvestment and Stock  Purchase Plan (the "DRP"), its 1992
Stock Option Plan and its  Employees'  Savings  Plan.  The Company has, however,
temporarily suspended the sale of stock  to  both the DRP and Employees' Savings
Plan as a result of the proceeds  received  from the sale of PGE's water utility
operations, and the two plans  are  currently obtaining shares of Company common
stock for participants through  open  market  purchases.   During the nine-month
period ended September 30,  1996,  the  Company  realized $340,000, $555,000 and
$195,000 from the issuance of common stock under the DRP, 1992 Stock Option Plan
and Employees' Savings Plan, respectively.

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 the  Company 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.

    On September 30, 1996,  the  Company  defeased the $28.7 million outstanding
principal amount of its 10.125%  Senior  Notes,  due  June 15, 1999 (the "Senior
Notes").  Specifically, on that  date,  the Company deposited $29.9 million with
the trustee for the Senior  Notes,  which  will  be used, together with interest
earned on the funds so  deposited,  to  pay the Company's interest and principal
obligations through June 15, 1997, the  date  on  which the Senior Notes will be
redeemed.  The deposit of  such  funds  acted  to discharge all of the Company's
obligations with respect to the Senior Notes.   Of the $29.9 million required to
defease the Senior Notes, $17.2 million  was obtained through the liquidation of
the Company's temporary cash investments  and $12.7 million was obtained through
the repayment of loans that had been made by the Company to PGE.

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.














                                     -20-
<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 the
           Company, PGE and Kenneth L. Pollock -- filed herewith.

     10-2  Employment Agreement dated as of  August  28,  1996, by and among the
           Company, PGE and Thomas F. Karam -- filed herewith.

     11-1  Statement Re Computation of Per Share Earnings -- filed herewith.

     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.







































                                     -21-
<PAGE>

                        PENNSYLVANIA ENTERPRISES, 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.






                                              PENNSYLVANIA ENTERPRISES, 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)




























                                     -22-
<PAGE>