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, 1997 and 1996 . . . . . . .    2

            Consolidated Balance Sheets as of June 30, 1997,
              and December 31, 1996 . . . . . . . . . . . . . . . . . .    3

            Consolidated Statements of Cash Flows for
              the six months ended June 30, 1997 and 1996 . . . . . . .    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. . . . .   16

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



























                                      -1-
<PAGE>

                                 PART I.  FINANCIAL INFORMATION

                                         PG ENERGY INC.

                                CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
                                                  Three Months Ended       Six Months Ended
                                                       June 30,                June 30,      
                                                   1997       1996        1997        1996   
                                                            (Thousands of Dollars) 
<S>                                              <C>        <C>         <C>         <C>
OPERATING REVENUES                               $  33,229  $  25,457   $ 113,168   $  94,872
  Cost of gas                                       18,271     12,575      67,410      52,553
OPERATING MARGIN                                    14,958     12,882      45,758      42,319

OTHER OPERATING EXPENSES:
  Operation                                          6,203      6,226      12,665      12,783
  Maintenance                                        1,316      1,492       2,442       2,706
  Depreciation                                       2,266      1,970       4,477       3,869
  Income taxes                                        (241)      (514)      5,590       5,413
  Taxes other than income taxes                      3,310      2,905       7,616       6,712
    Total other operating expenses                  12,854     12,079      32,790      31,483

OPERATING INCOME                                     2,104        803      12,968      10,836

OTHER INCOME (DEDUCTIONS), NET                         (87)       169         152         319

INCOME BEFORE INTEREST CHARGES                       2,017        972      13,120      11,155

INTEREST CHARGES:
  Interest on long-term debt                         2,217      1,243       4,408       3,015
  Other interest                                       137        153         341         488
  Allowance for borrowed funds used
    during construction                                (33)       (50)        (99)        (96)
      Total interest charges                         2,321      1,346       4,650       3,407

INCOME (LOSS) FROM CONTINUING OPERATIONS              (304)      (374)      8,470       7,748

LOSS WITH RESPECT TO DISCONTINUED OPERATIONS             -        (21)          -        (386)

NET INCOME (LOSS)                                     (304)      (395)      8,470       7,362

DIVIDENDS ON PREFERRED STOCK                           318        383         671       1,020

EARNINGS (LOSS) APPLICABLE TO COMMON STOCK       $    (622) $    (778)  $   7,799   $   6,342

COMMON STOCK:
  Earnings (loss) per share of common stock:
    Continuing operations                        $    (.19) $    (.23)  $    2.35   $    1.73
    Discontinued operations                              -       (.01)          -        (.10)
    Net income (loss) before discount (premium)
      on repurchase/redemption of preferred
      stock                                           (.19)      (.24)       2.35        1.63
    Discount (premium) on repurchase/redemption
      of preferred stock                               .24       (.39)        .25        (.33)
    Total                                        $     .05  $    (.63)  $    2.60   $    1.30

  Weighted average number of shares outstanding  3,314,155  3,314,155   3,314,155   3,891,143

  Cash dividends per share                       $       -  $       -   $       -   $  10.217






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

</TABLE>

                                           -2-




<PAGE>

                                PG ENERGY INC.

                          CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                    June 30,      December 31,
                                                      1997            1996    
                                                      (Thousands of Dollars)

ASSETS
<S>                                               <C>             <C>
UTILITY PLANT:
  At original cost                                $     336,020   $    319,205
  Accumulated depreciation                              (85,080)       (79,783)
                                                        250,940        239,422

OTHER PROPERTY AND INVESTMENTS                            4,581          4,894

CURRENT ASSETS:
  Cash and cash equivalents                                 298            690
  Accounts receivable -
    Customers                                            18,785         17,183
    Affiliates, net                                          87             58
    Others                                                  688            565
    Reserve for uncollectible accounts                   (1,631)        (1,140)
  Accrued utility revenues                                2,201         11,830
  Materials and supplies, at average cost                 2,809          2,460
  Gas held by suppliers, at average cost                 12,024         20,265
  Natural gas transition costs collectible                1,633          2,525
  Deferred cost of gas and supplier refunds, net          4,983         19,316
  Prepaid expenses and other                              1,942          1,313
                                                         43,819         75,065

DEFERRED CHARGES:
  Regulatory assets -                                                    
    Deferred taxes collectible                           30,460         29,771
    Other                                                 4,654          4,274
  Unamortized debt expense                                1,067          1,153
  Other                                                     505              -
                                                         36,686         35,198











TOTAL ASSETS                                      $     336,026   $    354,579




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

                                      -3-
<PAGE>

                                     PG ENERGY INC.

                               CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
                                                    June 30,      December 31,
                                                      1997            1996    
                                                      (Thousands of Dollars)
<S>                                               <C>             <C>
CAPITALIZATION AND LIABILITIES

CAPITALIZATION:
  Common shareholder's investment                 $     104,593   $     96,005
  Preferred stock of PGE -
    Not subject to mandatory redemption, net             15,877         18,851
    Subject to mandatory redemption                         640            739
  Long-term debt                                         83,266         55,000
                                                        204,376        170,595

CURRENT LIABILITIES:
  Current portion of long-term debt -
    Parent                                               27,200         31,400
    Other                                                 9,087         38,721
  Preferred stock subject to repurchase or
    mandatory redemption                                     80            115
  Note payable                                            3,500         10,000
  Accounts payable -
    Suppliers                                            14,798         17,831
    Parent                                                  848            348
  Accrued general business and realty taxes               1,272          2,239
  Accrued income taxes                                    5,865         14,559
  Accrued interest                                        1,264          1,936
  Accrued natural gas transition costs                    1,184          2,095
  Other                                                   2,948          3,375
                                                         68,046        122,619

DEFERRED CREDITS:
  Deferred income taxes                                  50,716         49,119
  Unamortized investment tax credits                      4,682          4,767
  Operating reserves                                      2,892          3,086
  Other                                                   5,314          4,393
                                                         63,604         61,365



COMMITMENTS AND CONTINGENCIES (Note 4)





TOTAL CAPITALIZATION AND LIABILITIES              $     336,026   $    354,579




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

                                      -4-
<PAGE>

                                   PG ENERGY INC.

                        CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
                                                           Six Months Ended    
                                                               June 30,        
                                                           1997         1996  
                                                        (Thousands of Dollars)
<S>                                                     <C>          <C>
CASH FLOW FROM OPERATING ACTIVITIES:
  Income from continuing operations                     $   8,470    $   7,748
  Effects of noncash charges to income -
    Depreciation                                            4,507        3,908
    Deferred income taxes, net                                578          166
    Provisions for self insurance                             281          591
    Other, net                                                826          772
  Changes in working capital, exclusive of cash
   and current portion of long-term debt -
    Receivables and accrued utility revenues                9,056       15,140
    Gas held by suppliers                                   8,241        3,030
    Accounts payable                                       (5,380)      (2,468)
    Deferred cost of gas and supplier refunds, net         14,602       (9,680)
    Other current assets and liabilities, net             (11,933)       2,467
  Other operating items, net                                 (790)      (3,754)
      Net cash provided by continuing operations           28,458       17,920
  Net cash used for discontinued operations                     -      (24,175)
      Net cash provided by (used for) operating
        activities                                         28,458       (6,255)

CASH FLOW FROM INVESTING ACTIVITIES:
  Additions to utility plant                              (13,923)      (8,823)
  Proceeds from the sale of discontinued operations             -      261,752
  Acquisition of regulated business                        (2,009)
  Other, net                                                  471           69
      Net cash provided by (used for) investing 
        activities                                        (15,461)     252,998

CASH FLOW FROM FINANCING ACTIVITIES:
  Issuance of common stock                                      -          339
  Repurchase of common stock                                    -      (85,000)
  Repurchase of preferred stock                            (3,108)     (14,968)
  Dividends on common and preferred stock                    (671)     (34,790)
  Repayment of long-term debt                              (4,646)     (50,000)
  Net decrease in bank borrowings                          (5,782)     (59,943)
  Other, net                                                  818       (1,300)
      Net cash used for financing activities              (13,389)    (245,662)

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS         (392)       1,081
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD              690          328
CASH AND CASH EQUIVALENTS AT END OF PERIOD              $     298    $   1,409

SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:
  Cash paid during the period for:
    Interest (net of amount capitalized)                $   4,953    $   4,277
    Income taxes                                        $  14,536    $  22,441


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

                                      -5-
<PAGE>

                                PG ENERGY INC.

                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS


(1)  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    Nature of the Business.  PG Energy Inc. ("PGE") a wholly-owned subsidiary of
Pennsylvania Enterprises, Inc. ("PEI"),  and Honesdale Gas Company ("Honesdale")
a wholly-owned subsidiary of PGE  acquired  on  February 14, 1997, are regulated
public utilities.   Together  PGE  and  Honesdale  distribute  natural  gas to a
twelve-county area in northeastern  Pennsylvania,  a territory that includes 129
municipalities,  in  addition  to  the  cities  of  Scranton,  Wilkes-Barre  and
Williamsport.  

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

    Both PGE and Honesdale are  subject  to the jurisdiction of the Pennsylvania
Public Utility  Commission  ("PPUC")  for  rate  and  accounting  purposes.  The
financial statements  of  PGE  and  Honesdale  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 rates and accounting
practices of regulatory agencies such as the PPUC.

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

    The results for the interim periods are  not indicative of the results to be
expected for the year, primarily  due  to  the  effect of seasonal variations in
weather 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 financial statements and
the notes thereto included in PGE's latest annual report on Form 10-K.

    Use of Accounting Estimates.    The  preparation  of financial statements in
conformity with generally accepted  accounting principles requires management to
make estimates and assumptions that  affect  the  reported amounts of assets and
liabilities and disclosure of contingent  assets  and liabilities at the date of
the financial statements  and  the  reported  amounts  of  revenues and expenses
during the reporting period.  These estimates involve judgments with respect to,
among other things, various future economic factors and regulatory matters which
are difficult to predict and are  beyond  the control of PEI.  Therefore, actual
amounts could differ from these estimates.




                                      -6-
<PAGE>

(2)  RATE MATTERS

    Rate Increase.  By Order  adopted  December  19,  1996, the PPUC approved an
overall 5.3% increase in PGE'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 PGE's
residential heating customers, which totaled $2.4 million through June 30, 1997,
was deferred, without carrying charges, until July, 1997.  

    Gas Cost Adjustments.   The  provisions  of  the Pennsylvania Public Utility
Code require that the tariffs  of  local  gas distribution companies ("LDCs") be
adjusted on an annual basis, and, in the  case of larger LDCs such as PGE, 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,  PGE  has  been  permitted to make the
following changes since January 1, 1996,  to  the gas costs contained in its gas
tariff rates:
[CAPTION]
                                    Change in              
             Effective             Rate per MCF        Calculated Increase
                Date              From     To           in Annual Revenue 
           [S]                    [C]     [C]              [C]
           March 1, 1997          $4.18   $4.49            $ 8,300,000
           December 1, 1996        3.01    4.18             32,400,000
           September 1, 1996       2.88    3.01              3,600,000
           June 1, 1996            2.75    2.88              3,400,000

    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)  ACCOUNTING CHANGES

    Earnings Per Share.  In  February,  1997,  FASB Statement 128, "Earnings per
Share"  was  issued.    The  provisions  of  this  statement,  which  supersedes
Accounting Principles Board Opinion No.  15,  "Earnings per Share", simplify the
computation of earnings per share.    FASB  Statement  128 will be effective for
financial statements for both interim  and  annual periods ending after December
15, 1997.  PGE does not  expect  the  adoption  of  FASB Statement 128 to have a
material effect on its calculation of earnings per share.

    Reporting  Comprehensive  Income.    In   June,  1997,  FASB  Statement  130
"Reporting Comprehensive Income", was issued.  The provisions of this statement,
which  are  effective  for  fiscal  years  beginning  after  December  15, 1997,
establish standards for reporting  and  display  of comprehensive income and its
components in financial statements.   The reporting provisions of FASB Statement
130, which PGE will adopt in 1998, are not expected to have a material impact on
its reported results of operations.

(4)  COMMITMENTS AND CONTINGENCIES

    Environmental Matters.   PGE,  like  many  gas  distribution companies, once
utilized manufactured gas plants in connection with providing gas service to its
customers.  None of these plants  has  been in operation since 1960, and several

                                      -7-
<PAGE>

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















































                                      -8-
<PAGE>

                                PG ENERGY INC.

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

RESULTS OF CONTINUING OPERATIONS

    The following table expresses  certain  items in the consolidated statements
of income of PG Energy  Inc.  ("PGE")  as  percentages of operating revenues for
each of the three and six-month periods ended June 30, 1997 and 1996:
<TABLE>
<CAPTION>
                                                  Percentage of Operating Revenues  
                                               Three Months Ended   Six Months Ended
                                                     June 30,           June 30,    
                                                1997       1996     1997       1996 
<S>                                             <C>        <C>      <C>        <C>
OPERATING REVENUES...........................   100.0%     100.0%   100.0%     100.0%
  Cost of gas................................    55.0       49.4     59.6       55.4
OPERATING MARGIN.............................    45.0       50.6     40.4       44.6

OTHER OPERATING EXPENSES:
  Operation..................................    18.7       24.4     11.2       13.5
  Maintenance................................     3.9        5.9      2.1        2.8
  Depreciation...............................     6.8        7.7      4.0        4.1
  Income taxes...............................    (0.7)      (2.0)     4.9        5.7
  Taxes other than income taxes..............    10.0       11.4      6.7        7.1
    Total operating expenses.................    38.7       47.4     28.9       33.2

OPERATING INCOME.............................     6.3        3.2     11.5       11.4

OTHER INCOME (DEDUCTIONS), NET...............    (0.2)       0.6      0.1        0.4

INTEREST CHARGES.............................    (7.0)      (5.3)    (4.1)      (3.6)

INCOME (LOSS) FROM CONTINUING OPERATIONS.....    (0.9)      (1.5)     7.5        8.2

LOSS WITH RESPECT TO DISCONTINUED OPERATIONS.       -       (0.1)       -       (0.4)

NET INCOME (LOSS) ...........................    (0.9)      (1.6)     7.5        7.8

DIVIDENDS ON PREFERRED STOCK (1).............    (1.0)      (1.5)    (0.6)      (1.1)

EARNINGS (LOSS) APPLICABLE TO COMMON STOCK...    (1.9)      (3.1)     6.9        6.7
</TABLE>
                    
(1)  None of the dividends on  preferred stock was allocated to the discontinued
operations.

o   Three Months Ended June 30, 1997,  Compared With Three Months Ended June 30,
    1996

    Operating Revenues.  Operating revenues  increased $7.8 million (30.5%) from
$25.5 million for the quarter  ended  June  30,  1996,  to $33.2 million for the
quarter ended June 30, 1997, primarily as  a  result of a 186 million cubic feet
(5.7%) increase in sales to  PGE's  residential and commercial heating customers
that was largely attributable to cooler  weather.    There was an increase of 92
(10.6%) heating degree  days  from  872  (114.0%  of  normal)  during the second
quarter of 1996 to 964  (126.0%  of  normal)  during the second quarter of 1997.
Also contributing to the increase were higher  levels in PGE's gas cost rate and
the effect of the rate increase  granted  PGE by the Pennsylvania Public Utility
Commission (the "PPUC") which became  effective  on  January 15, 1997 (see "Rate
Matters"),  as  well  as  the   operating  revenues  of  Honesdale  Gas  Company
("Honesdale"),  which  was  acquired  by  PGE  on  February  14,  1997, totaling
$760,000.

                                      -9-
<PAGE>

    Cost of Gas.  The  cost  of  gas  increased  $5.7 million (45.3%) from $12.6
million for the second quarter of  1996  to $18.3 million for the second quarter
of  1997,  primarily  because  of   the  aforementioned  increase  in  sales  to
residential  and  commercial  heating  customers  during  the  quarter  and  the
inclusion in the second quarter of 1997 of $527,000 of gas costs with respect to
Honesdale, as  well  as  higher  levels  in  PGE's  gas  cost  rate  (see "-Rate
Matters").

    Operating Margin.  The operating  margin increased $2.1 million (16.1%) from
$12.9 million in the  second  quarter  of  1996  to  $15.0 million in the second
quarter of 1997, primarily because of the higher level of sales, the increase in
PGE's gas rates  effective  January  15,  1997  (see  "-Rate  Matters"), and the
inclusion of  Honesdale's  operating  margin.    As  a  percentage  of operating
revenues, the margin, however,  decreased  from  50.6%  in the second quarter of
1996 to 45.0% in the second quarter  of  1997 as a result of the proportionately
higher cost of gas in 1997.

    Other Operating  Expenses.    Other  operating  expenses  increased $775,000
(6.4%) from $12.1 million for the quarter  ended June 30, 1996, to $12.9 million
for the quarter ended June 30,  1997.   This increase was primarily attributable
to a $296,000 (15.0%) increase in depreciation expense, as a result of additions
to utility plant, and a  $405,000  (13.9%)  increase  in taxes other than income
taxes resulting from  a  higher  level  of  gross  receipts  tax  because of the
increased sales by  PGE  and  the  sales  by  Honesdale.    The effects of these
increases were partially offset  by  lower  levels  of operation and maintenance
expense.   As  a  percentage  of  operating  revenues,  other operating expenses
decreased from 47.4% during the quarter ended June 30, 1996, to 38.7% during the
quarter ended June  30,  1997,  primarily  as  a  result  of the proportionately
greater increase in operating revenues.

    Income taxes for the three-month  period  ended  June 30, 1997, increased by
$273,000 (53.1%) from a credit of  $514,000  in  1996 to a credit of $241,000 in
1997 due to  a  lower  level  of  loss  before  income  taxes (for this purpose,
operating income net of interest charges).

    Operating Income.  As a result  of  the above, operating income increased by
$1.3 million (162.0%) from  $803,000  for  the  second  quarter  of 1996 to $2.1
million for the second quarter of  1997,  and increased as a percentage of total
operating revenues from 3.2% in the second quarter of 1996 to 6.3% in the second
quarter of 1997.

    Other Income (Deductions), Net.    Other  income (deductions), net decreased
$256,000 from income of $169,000 for the three-month period ended June 30, 1996,
to a deduction  of  $87,000  for  the  three-month  period  ended June 30, 1997,
largely as a result of the  absence  of  income from the temporary investment of
certain proceeds from the sale  of  PGE's  regulated water utility operations in
February, 1996, because the second quarter  of 1996 included a greater amount of
gains on the condemnation of certain of PGE's property for highway construction.

    Interest Charges.  Interest charges  increased by $975,000 (72.4%) from $1.3
million for the second quarter of 1996 to $2.3 million for the second quarter of
1997.  This increase  was  largely  attributable  to  bank  borrowings by PGE to
finance construction expenditures and  for  other  working capital needs and the
reduction in PGE's interest expense in the second quarter of 1996 resulting from
the repayment of its $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.


                                     -10-
<PAGE>

    Income  (Loss)  From  Continuing  Operations.    The  loss  from  continuing
operations decreased $70,000 (18.7%)  from  $374,000  for the quarter ended June
30, 1996, to $304,000 for the quarter  ended  June 30, 1997.  The decreased loss
was largely the result of the  matters discussed above, principally the increase
in operating margin, the effects  of  which  were partially offset by the higher
levels of other operating expenses and interest charges.

    Net Income (Loss).    The  decrease  in  net  loss  of  $91,000 (23.0%) from
$395,000 for the second quarter of  1996  to  $304,000 for the second quarter of
1997, was largely the result  of  the  lower loss from continuing operations, as
discussed above, and, to a lesser  extent,  the absence of any loss with respect
to discontinued operations.

    Dividends on  Preferred  Stock.    Dividends  on  preferred  stock decreased
$65,000 (17.0%) from $383,000 for the second quarter of 1996 to $318,000 for the
second quarter of 1997, primarily as a  result  of the repurchase by PGE in 1996
of 134,359 shares of  its  9%  cumulative  preferred  stock, 9,408 shares of its
5.75% cumulative preferred  stock  and  20,330  shares  of  its 4.10% cumulative
preferred stock, largely during the second  quarter  of the year, as well as its
repurchase of an  additional  30,090  shares  of  the 4.10% cumulative preferred
stock in 1997.

    Earnings (Loss) Applicable to Common Stock.  The decrease in loss applicable
to common stock of  $156,000  (20.0%)  from  $778,000 for the three-month period
ended June 30, 1996, to $622,000 for the three-month period ended June 30, 1997,
as well as the increase in  earnings  per  share  of common stock of $.68 from a
loss of $.63 per share for the  second  quarter of 1996 (after reflecting a $.39
per share premium on  redemption  of  preferred  stock)  to earnings of $.05 per
share for the second quarter of 1997 (after reflecting a $.24 per share discount
on the repurchase of preferred stock) were  the result of the higher income from
continuing operations and the reduced dividends on preferred stock, as discussed
above.  The $.39 per share charge for the premium on the repurchase of preferred
stock in the second quarter  of  1996  acted  to  increase the loss per share of
common stock for the  quarter  ended  June  30,  1996,  to  $.63 per share.  The
discount on redemption of preferred stock in the second quarter of 1997 acted to
increase the earnings per share for  the  quarter  by $.24 per share to $.05 per
share.  While discounts and  premiums  on  the repurchase of preferred stock are
reflected in retained earnings  and  are  not  a  determinant of earnings (loss)
applicable  to  common  stock,  the   discounts  and  premiums  associated  with
repurchases must be taken into  account  in  calculating the earnings (loss) per
share of common stock.

o   Six Months Ended June 30, 1997, Compared With Six Months Ended June 30, 1996

    Operating Revenues.  Operating revenues increased $18.3 million (19.3%) from
$94.9 million for the six months ended  June 30, 1996, to $113.2 million for the
six months ended June 30, 1997, primarily  as a result of higher levels in PGE's
gas cost rate and the effect of the  rate increase granted PGE by the PPUC which
became effective on January 15, 1997  (see  "Rate  Matters").  The effect of the
increase in rates  was  partially  offset  by  a  1.0  billion cubic feet (6.9%)
decrease in sales to PGE's residential  and commercial heating customers.  There
was a decrease of 238 (5.7%)  heating  degree days from 4,192 (106.0% of normal)
during the first six months of 1996 to 3,954 (100.0% of normal) during the first
six months of 1997.  Operating  revenues of Honesdale totaling $1.6 million from
its February 14, 1997, acquisition  date through June 30, 1997, also contributed
to the increased operating revenues.



                                     -11-
<PAGE>

    Cost of Gas.  The  cost  of  gas  increased $14.9 million (28.3%) from $52.6
million for the first six  months  of  1996  to  $67.4 million for the first six
months of 1997, primarily because of  higher  levels in PGE's gas cost rate (see
"-Rate Matters") and the inclusion of $1.1  million of gas costs with respect to
Honesdale from its February 14,  1997,  acquisition  date through June 30, 1997.
The effect of the increase in PGE's gas  cost rate was partially offset by a 1.0
billion cubic feet (6.9%) decrease  in  sales  to its residential and commercial
heating customers.

    Operating Margin.  The operating  margin  increased $3.4 million (8.1%) from
$42.3 million in the first six months of  1996 to $45.8 million in the first six
months of 1997, primarily because  of  the  aforementioned increase in PGE's gas
rates effective January 15,  1997  (see  "-Rate  Matters")  and the inclusion of
Honesdale's operating margin from its February 14, 1997, acquisition date.  As a
percentage of operating revenues, the  margin,  however, decreased from 44.6% in
the first six months of 1996  to  40.4%  in  the  first  six months of 1997 as a
result of the proportionately higher cost of gas in 1997.

    Other Operating Expenses.   Other  operating expenses increased $1.3 million
(4.2%) from $31.5 million for the first six months of 1996, to $32.8 million for
the first six months of  1997.    This  increase was primarily attributable to a
$608,000 (15.7%) increase in depreciation  expense,  as a result of additions to
utility plant, and a $904,000 (13.5%)  increase in taxes other than income taxes
resulting from a higher level  of  gross  receipts  tax because of the increased
sales by PGE and the sales by  Honesdale from its acquisition date.  The effects
of these increases  were  partially  offset  by  lower  levels  of operation and
maintenance expense.  As  a  percentage  of  operating revenues, other operating
expenses decreased from 33.2%  during  the  first  six  months of 1996, to 28.9%
during  the  first  six  months   of   1997,   primarily  as  a  result  of  the
proportionately greater increase in operating revenues during the period.

    Income taxes increased $177,000 (3.3%)  from  $5.4  million in the first six
months of 1996 to  $5.6  million  in  the  first  six  months  of 1997 due to an
increase in income before income  taxes  (for this purpose, operating income net
of interest charges).

    Operating Income.  As a result  of  the above, operating income increased by
$2.1 (19.7%) from $10.8  million  for  the  first  six  months  of 1996 to $13.0
million for the first six months of 1997, and increased as a percentage of total
operating revenues from 11.4% in the  first  six  months of 1996 to 11.5% in the
first six months of 1997.

    Other Income (Deductions), Net.    Other  income (deductions), net decreased
$167,000 (52.4%) from $319,000 for the  six-month period ended June 30, 1996, to
$152,000 for the six-month period ended  June  30,  1997, largely as a result of
the absence of income from the temporary investment of certain proceeds from the
sale of PGE's regulated water utility operations in February, 1996.

    Interest Charges.  Interest charges  increased  by $1.2 million (36.5%) from
$3.4 million for the first six months of  1996 to $4.6 million for the first six
months of 1997.  This  increase  was  largely attributable to bank borrowings by
PGE to finance construction expenditures and for other working capital needs and
the reduction  in  PGE's  interest  expense  in  the  first  six  months of 1996
resulting from the repayment of its $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.



                                     -12-
<PAGE>

    Income (Loss) From Continuing Operations.  Income from continuing operations
increased $722,000 (9.3%) from $7.7 million  for the six-month period ended June
30, 1996, to $8.5 million for  the  six-month  period ended June 30, 1997.  This
increase was largely the result of  the matters discussed above, principally the
increase in operating margin, the effects  of which were partially offset by the
higher levels of other operating expenses and interest charges.

    Net Income (Loss).  The increase in  net income of $1.1 million (15.1%) from
$7.4 million for the first six months of  1996 to $8.5 million for the first six
months of 1997 was  largely  the  result  of  the  higher income from continuing
operations, as discussed above, and, to a lesser extent, the absence of any loss
with respect to discontinued operations.

    Dividends on  Preferred  Stock.    Dividends  on  preferred  stock decreased
$349,000 (34.2%) from $1.0 million for the  first six months of 1996 to $671,000
for the first six months of 1997, primarily as a result of the repurchase by PGE
in 1996 of 134,359 shares of its  9% cumulative preferred stock, 9,408 shares of
its 5.75% cumulative preferred stock  and  20,330 shares of its 4.10% cumulative
preferred stock, largely during the second quarter  of that year, as well as its
repurchase of an  additional  30,090  shares  of  the 4.10% cumulative preferred
stock in 1997.

    Earnings Applicable to Common Stock.  The increase in earnings applicable to
common stock of $1.5 million (23.0%)  from $6.3 million for the six-month period
ended June 30, 1996, to  $7.8  million  for  the six-month period ended June 30,
1997, as well as the increase  in  earnings  per  share of common stock of $1.30
from $1.30 per share for the first  six  months of 1996 (after reflecting a $.33
per share premium on redemption of  preferred  stock) to $2.60 per share for the
first six  months  of  1997  (after  reflecting  a  $.25  per  share discount on
redemption of  preferred  stock)  were  the  result  of  the  higher income from
continuing operations and the reduced dividends on preferred stock, as discussed
above, and the absence of any loss with respect to discontinued operations.  The
increase in earnings applicable to common  stock also reflected a 14.8% decrease
in the  weighted  average  number  of  shares  outstanding  as  a  result of the
repurchase by PGE of  shares  of  its  common  stock  on February 16, 1996, with
proceeds from the sale of its regulated water utility operations.

RATE MATTERS

    Rate Increase.  By Order  adopted  December  19,  1996, the PPUC approved an
overall 5.3% increase in PGE'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 PGE's
residential heating customers, which totaled $2.4 million through June 30, 1997,
was deferred, without carrying charges, until July, 1997.  

    Gas Cost Adjustments.   The  provisions  of  the Pennsylvania Public Utility
Code require that the tariffs  of  local  gas distribution companies ("LDCs") be
adjusted on an annual basis, and, in the  case of larger LDCs such as PGE, 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.  





                                     -13-
<PAGE>

    In accordance with these  procedures,  PGE  has  been  permitted to make the
following changes since January 1, 1996,  to  the gas costs contained in its gas
tariff rates:
[CAPTION]
                                    Change in             
             Effective             Rate per MCF        Calculated Increase 
                Date              From     To           in Annual Revenue 
           [S]                    [C]     [C]              [C]
           March 1, 1997          $4.18   $4.49            $ 8,300,000
           December 1, 1996        3.01    4.18             32,400,000
           September 1, 1996       2.88    3.01              3,600,000
           June 1, 1996            2.75    2.88              3,400,000

    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.

    Recovery of FERC Order 636 Transition  Costs.   By Order of the PPUC entered
August 26, 1994, PGE  began  recovering  the  Non-Gas Transition Costs (i.e. Gas
Supply Realignment and Stranded Costs)  that  it estimates it will ultimately be
billed pursuant to Federal  Energy  Regulatory  Commission Order 636 through the
billing of a surcharge to  its  customers  effective  September 12, 1994.  It is
currently estimated that  $10.8  million  of  Non-Gas  Transition  Costs will be
billed to PGE, generally  over  a  six-year  period extending through January 1,
1999, of which $9.0  million  had  been  billed  to  PGE  and recovered from its
customers as  of  June  30,  1997.    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

Liquidity

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

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

    In order to temporarily  finance  construction  expenditures and to meet its
seasonal borrowing requirements, PGE has made  arrangements for a total of $83.5
million of unsecured revolving  bank  credit,  which  is deemed adequate for its
ongoing needs.  Specifically, PGE currently  has eight bank lines of credit with
an aggregate borrowing capacity of $83.5 million which provide for borrowings at
interest rates generally less than  prime,  which mature at various times during
1997 and 1998 and which PGE intends to  renew  or replace as they expire.  As of
August 1, 1997, PGE had $46.3 million of borrowings outstanding under these bank
lines of credit.  



                                     -14-
<PAGE>

    In addition, as of June 30,  1997,  PGE had borrowed $27.2 million from PEI.
The terms and conditions  regarding  such  borrowing  provide for the payment of
interest at rates generally less  than  prime  and the repayment of principal on
December 31, 1997.  It is anticipated  that the repayment date of this loan will
be extended beyond December  31,  1997,  until  such  date as the funds borrowed
thereunder are required for use by PEI.  PGE plans to ultimately repay this loan
from PEI with borrowings under its bank lines of credit.

    PGE, as well as Honesdale,  believe  that  they  will  be able to raise in a
timely  manner  such  funds  as  are  required  for  their  future  construction
expenditures, refinancings and other working capital requirements.  

Long-Term Debt and Capital Stock Financings

    PGE periodically engages in long-term  debt  and capital stock financings in
order to obtain funds required for construction expenditures, the refinancing of
existing debt and  various  working  capital  purposes.    No  long-term debt or
capital stock financings were  consummated  by  PGE  during the six-month period
ended June 30, 1997.   However,  PGE  plans  to issue $50.0 million of unsecured
term notes during the third  quarter  of  1997,  of  which $25.0 million will be
issued to a syndicate of banks  and  $25.0  million will be issued to accredited
private placement investors.  The  proceeds from these long-term debt financings
will be used to repay a portion of PGE's bank borrowings.

Construction Expenditures and Related Financings

    Expenditures for the  construction  of  utility  plant totaled $13.9 million
during the first six months  of  1997  and  are  currently estimated to be $19.8
million during  the  remainder  of  the  year.    It  is  anticipated  that such
expenditures  will  be  financed  with   internally  generated  funds  and  bank
borrowings, pending the periodic issuance of stock and long-term debt.

Current Maturities of Long-Term Debt and Preferred Stock

    As of June 30, 1997, $36.3  million of PGE's long-term debt, including $27.2
million borrowed from PEI, and $80,000 of its preferred stock was required to be
repaid within twelve months.

Forward-Looking Statements

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











                                     -15-
<PAGE>

                          PART II.  OTHER INFORMATION


Item 4.  Submission of Matters to a Vote of Security Holders

     On  May  14,  1997,   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 6.  Exhibits and Reports on Form 8-K

(a)  Exhibits

     10-1   Director Deferred Compensation Plan  dated  as  of April 23, 1997 --
            filed as Exhibit 10-1 to PEI's Quarterly Report on Form 10-Q for the
            quarter ended June 30, 1997, File No. 0-7812.

     27-1   Financial Data Schedule -- filed herewith.

(b)  Reports on Form 8-K

     PGE filed a report on  Form  8-K  dated  May  28, 1997, pursuant to Item 4.
     Changes in Registrant's Certifying Accountant, reporting the appointment of
     the accounting firm of Price Waterhouse LLP as independent accountants.































                                     -16-
<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 6, 1997             By:           /s/ Thomas J. Ward           
                                                       Thomas J. Ward
                                                         Secretary



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




























                                     -17-
<PAGE>