<PAGE>   1
                                                                   Exhibit 10.42

                               SEVERANCE AGREEMENT

         THIS AGREEMENT, dated December 1, 1999, is made by and between PIEDMONT
NATURAL GAS COMPANY, INC., a North Carolina corporation (the "Company"), and RAY
B. KILLOUGH (the "Executive").

         WHEREAS, the Company considers it essential to the best interests of
its shareholders to foster the continued employment of key management personnel;
and

         WHEREAS, the Board of the Company recognizes that, as is the case with
many publicly held corporations, the possibility of a Change in Control exists
and that such possibility, and the uncertainty and questions which it may raise
among management, may result in the departure or distraction of management
personnel to the detriment of the Company and its shareholders; and

         WHEREAS, the Board has determined that appropriate steps should be
taken to reinforce and encourage the continued attention and dedication of
members of the Company's management, including the Executive, to their assigned
duties without distraction in the face of potentially disturbing circumstances
arising from the possibility of a Change in Control; and

         WHEREAS, contemporaneous with this Agreement, the Company and the
Executive have entered into an Employment Agreement.

         NOW, THEREFORE, in consideration of the premises and the mutual
covenants herein contained, the Company and the Executive hereby agree as
follows:

         1. Defined Terms. The definitions of capitalized terms used in this
Agreement are provided in the last Section hereof.

         2. Term of Agreement. The Term of this Agreement shall commence on the
date hereof and shall continue in effect through December 31, 2001; provided,
however, that commencing on January 1, 2002 and each January 1 thereafter, the
Term shall automatically be extended for one additional year unless, not later
than fifteen (15) months prior to the applicable January 1, the Company or the
Executive shall have given notice not to extend the Term; and further provided,
however, that if a Change in Control shall have occurred during the Term, the
Term shall expire at the end of the thirty-sixth (36th) calendar month after the
calendar month in which such Change in Control occurred. For example, if a
Change in Control were to occur on July 1, 1999, the Term of this Agreement
would expire on June 30, 2002, and if a Change in Control were to occur on July
1, 2002, the Term of this Agreement would expire on June 30, 2005 (regardless of
whether on or before September 30, 2001 either party had given notice to the
other party not to extend the Term as provided above).



<PAGE>   2

         3. Company's Covenants Summarized. In order to induce the Executive to
remain in the employ of the Company and in consideration of the Executive's
covenants set forth in Section 4 hereof, the Company agrees, under the
conditions described herein, to pay the Executive the Severance Payments and the
other payments and benefits described herein. Except as provided in Section 9.1
hereof, no Severance Payments shall be payable under this Agreement unless there
shall have been (or, under the terms of the second sentence of Section 6.1
hereof, there shall be deemed to have been) a termination of the Executive's
employment with the Company following a Change in Control and during the Term.
This Agreement shall not be construed as creating an express or implied contract
of employment and, except as otherwise agreed in writing between the Executive
and the Company, the Executive shall not have any right to be retained in the
employ of the Company.

         4. The Executive's Covenants. The Executive agrees that, subject to the
terms and conditions of this Agreement, in the event of a Potential Change in
Control during the Term, the Executive will remain in the employ of the Company
until the earliest of (i) a date which is twelve (12) months from the date of
such Potential Change of Control, (ii) the date of a Change in Control, (iii)
the date of termination by the Executive of the Executive's employment for Good
Reason or by reason of death, Disability or Retirement, or (iv) the termination
by the Company of the Executive's employment for any reason. Should the
Executive fail to comply with the provisions of this paragraph 4, the Company's
sole remedy shall be to deny the payment of any Severance Payments to the
Executive.

         5. Compensation Other Than Severance Payments.

                  5.1 Following a Change in Control and during the Term, during
any period that the Executive fails to perform the Executive's full-time duties
with the Company as a result of incapacity due to physical or mental illness,
the Company shall pay the Executive's full salary to the Executive at the rate
in effect at the commencement of any such period, together with all compensation
and benefits payable to the Executive under the terms of any compensation,
benefit or incentive plan, program or arrangement maintained by the Company
during such period, until the Executive's employment is terminated by the
Company for Disability.

                  5.2 If the Executive's employment shall be terminated for any
reason following a Change in Control and during the Term, the Company shall pay
the Executive's full salary to the Executive through the Date of Termination at
the rate in effect immediately prior to the Date of Termination or, if higher,
the rate in effect immediately prior to the first occurrence of an event or
circumstance constituting Good Reason, together with all compensation and
benefits payable to the Executive through the Date of Termination under the
terms of the Company's executive compensation, benefit and incentive plans,
programs or arrangements as in effect immediately prior to the Date of
Termination or, if more favorable to the Executive, as in effect immediately
prior to the first occurrence of an event or circumstance constituting Good
Reason.


                                       2
<PAGE>   3

                  5.3 If the Executive's employment shall be terminated for any
reason following a Change in Control and during the Term, the Company shall pay
to the Executive the Executive's normal post-termination compensation and
benefits as such payments become due, including in a lump sum in cash that
portion of the Executive's vacation pay vested and accrued but not paid. Such
post-termination compensation and benefits shall be determined under, and paid
in accordance with, the Company's long-term incentive stock plan, pension,
supplemental retirement, insurance and other executive compensation, benefit or
incentive plans, programs and arrangements as in effect immediately prior to the
Date of Termination or, if more favorable to the Executive, as in effect
immediately prior to the occurrence of the first event or circumstance
constituting Good Reason.

         6. Severance Payments.

                  6.1 Subject to Section 6.2 hereof, if the Executive's
employment is terminated following a Change in Control and during the Term,
other than (A) by the Company for Cause, (B) by reason of death or Disability,
or (C) by the Executive without Good Reason (including Retirement by the
Executive), then the Company shall pay the Executive the amounts, and provide
the Executive the benefits, described in this Section 6.1 ("Severance
Payments"), in addition to any payments and benefits to which the Executive is
entitled under Section 5 hereof. For purposes of this Agreement, the Executive's
employment shall be deemed to have been terminated following a Change in Control
by the Company without Cause or by the Executive with Good Reason, if (i) the
Executive's employment is terminated by the Company without Cause prior to a
Change in Control (whether or not a Change in Control ever occurs) and such
termination was at the request or direction of a Person who has entered into an
agreement with the Company the consummation of which would constitute a Change
in Control, (ii) the Executive terminates his employment for Good Reason prior
to a Change in Control (whether or not a Change in Control ever occurs) and the
circumstance or event which constitutes Good Reason occurs at the request or
direction of such Person, or (iii) the Executive's employment is terminated by
the Company without Cause or by the Executive for Good Reason and such
termination or the circumstance or event which constitutes Good Reason is
otherwise in connection with or in anticipation of a Change in Control (whether
or not a Change in Control ever occurs). For purposes of any determination
regarding the applicability of the immediately preceding sentence, any position
taken by the Executive shall be presumed to be correct unless the Company
establishes by clear and convincing evidence that such position is not correct.

                           (A) In lieu of any further salary payments to the
Executive for periods subsequent to the Date of Termination and in lieu of any
severance benefit otherwise payable to the Executive, the Company shall pay to
the Executive a lump sum severance payment, in cash, equal to 3.00 times the sum
of (i) the Executive's annual base salary as in effect immediately prior to the
Date of Termination or, if higher, in effect immediately prior to the first
occurrence of an event or circumstance constituting Good Reason and (ii) an
amount equal to the average of the Executive's annual W-2 Compensation for the
three years ending on the last day of the month prior to the Date of
Termination.


                                       3
<PAGE>   4

                           (B) For the 36-month period immediately following the
Date of Termination, the Company shall arrange to provide the Executive and his
dependents life, disability, accident and health insurance benefits
substantially similar to those provided to the Executive and his dependents
immediately prior to the Date of Termination or, if more favorable to the
Executive, those provided to the Executive and his dependents immediately prior
to the first occurrence of an event or circumstance constituting Good Reason, at
no greater cost to the Executive than the cost to the Executive immediately
prior to such date or occurrence; provided, however, that, unless the Executive
consents to a different method (after taking into account the effect of such
method on the calculation of "parachute payments" pursuant to Section 6.2
hereof), such health insurance benefits shall be provided through a third-party
insurer. Benefits otherwise receivable by the Executive pursuant to this Section
6.1(B) shall be reduced to the extent benefits of the same type are received by
or made available to the Executive during the 36-month period following the
Executive's termination of employment (and any such benefits received by or made
available to the Executive shall be reported to the Company by the Executive);
provided, however, that the Company shall reimburse the Executive for the
excess, if any, of the cost of such benefits to the Executive over such cost
immediately prior to the Date of Termination or, if more favorable to the
Executive, the first occurrence of an event or circumstance constituting Good
Reason. If the Severance Payments shall be decreased pursuant to Section 6.2
hereof, and the Section 6.1(B) benefits which remain payable after the
application of Section 6.2 hereof are thereafter reduced pursuant to the
immediately preceding sentence, the Company shall, no later than five (5)
business days following such reduction, pay to the Executive the least of (a)
the amount of the decrease made in the Severance Payments pursuant to Section
6.2 hereof, (b) the amount of the subsequent reduction in these Section 6.1(B)
benefits, or (c) the maximum amount which can be paid to the Executive without
being, or causing any other payment to be, nondeductible by reason of section
280G of the Code.

                  6.2 (A) Notwithstanding any other provisions of this
Agreement, in the event that any payment or benefit received or to be received
by the Executive in connection with a Change in Control or the termination of
the Executive's employment (whether pursuant to the terms of this Agreement or
any other plan, arrangement or agreement with the Company, any Person whose
actions result in a Change in Control or any Person affiliated with the Company
or such Person) (all such payments and benefits, including the Severance
Payments, being hereinafter called "Total Payments") would not be deductible (in
whole or part), by the Company, an affiliate or Person making such payment or
providing such benefit as a result of section 280G of the Code, then, to the
extent necessary to make such portion of the Total Payments deductible (and
after taking into account any reduction in the Total Payments provided by reason
of section 280G of the Code in such other plan, arrangement or agreement), the
cash Severance Payments shall first be reduced (if necessary, to zero), and all
other Severance Payments shall thereafter be reduced (if necessary, to zero);
provided, however, that the Executive may elect to have the noncash Severance
Payments reduced (or eliminated) prior to any reduction of the cash Severance
Payments.

                           (B) For purposes of this limitation, (i) no portion
of the Total Payments the receipt or enjoyment of which the Executive shall have
waived at such time and in such manner as not to constitute a "payment" within
the meaning of section 280G(b) of the Code shall be taken



                                       4
<PAGE>   5

into account, (ii) no portion of the Total Payments shall be taken into account
which, in the opinion of tax counsel ("Tax Counsel") reasonably acceptable to
the Executive and selected by the accounting firm which was, immediately prior
to the Change in Control, the Company's independent auditor (the "Auditor"),
does not constitute a "parachute payment" within the meaning of section
280G(b)(2) of the Code, including by reason of section 280G(b)(4)(A) of the
Code, (iii) the Severance Payments shall be reduced only to the extent necessary
so that the Total Payments (other than those referred to in clauses (i) or (ii))
in their entirety constitute reasonable compensation for services actually
rendered within the meaning of section 280G(b)(4)(B) of the Code or are
otherwise not subject to disallowance as deductions by reason of section 280G of
the Code, in the opinion of Tax Counsel, and (iv) the value of any noncash
benefit or any deferred payment or benefit included in the Total Payments shall
be determined by the Auditor in accordance with the principles of sections
280G(d)(3) and (4) of the Code.

                           (C) If it is established pursuant to a final
determination of a court or an Internal Revenue Service proceeding that,
notwithstanding the good faith of the Executive and the Company in applying the
terms of this Section 6.2, the Total Payments paid to or for the Executive's
benefit are in an amount that would result in any portion of such Total Payments
being subject to the Excise Tax, then, if such repayment would result in (i) no
portion of the remaining Total Payments being subject to the Excise Tax and (ii)
a dollar-for-dollar reduction in the Executive's taxable income and wages for
purposes of federal, state and local income and employment taxes, the Executive
shall have an obligation to pay the Company upon demand an amount equal to the
sum of (i) the excess of the Total Payments paid to or for the Executive's
benefit over the Total Payments that could have been paid to or for the
Executive's benefit without any portion of such Total Payments being subject to
the Excise Tax; and (ii) interest on the amount set forth in clause (i) of this
sentence at the rate provided in section 1274(b)(2)(B) of the Code from the date
of the Executive's receipt of such excess until the date of such payment.

                  6.3 The payments provided in subsection (A) of Section 6.1
hereof shall be made not later than the fifth day following the Date of
Termination; provided, however, that if the amounts of such payments, and the
limitation on such payments set forth in Section 6.2 hereof, cannot be finally
determined on or before such day, the Company shall pay to the Executive on such
day an estimate, as determined in good faith by the Company of the minimum
amount of such payments to which the Executive is clearly entitled and shall pay
the remainder of such payments (together with interest on the unpaid remainder
(or on all such payments to the extent the Company fails to make such payments
when due) at 120% of the rate provided in section 1274(b)(2)(B) of the Code) as
soon as the amount thereof can be determined but in no event later than the
thirtieth (30th) day after the Date of Termination. In the event that the amount
of the estimated payments exceeds the amount subsequently determined to have
been due, such excess shall constitute a loan by the Company to the Executive,
payable on the fifth (5th) business day after demand by the Company (together
with interest at 120% of the rate provided in section 1274(b)(2)(B) of the
Code). At the time that payments are made under this Agreement, the Company
shall provide the Executive with a written statement setting forth the manner in
which such payments were calculated and the basis for such calculations
including, without limitation, any opinions or other advice the Company has



                                       5
<PAGE>   6

received from Tax Counsel, the Auditor or other advisors or consultants (and any
such opinions or advice which are in writing shall be attached to the
statement).

         7. Termination Procedures and Compensation During Dispute.

                  7.1 Notice of Termination. After a Change in Control and
during the Term, any purported termination of the Executive's employment (other
than by reason of death) shall be communicated by written Notice of Termination
from one party hereto to the other party hereto in accordance with Section 10
hereof. For purposes of this Agreement, a "Notice of Termination" shall mean a
notice which shall indicate the specific termination provision in this Agreement
relied upon and shall set forth in reasonable detail the facts and circumstances
claimed to provide a basis for termination of the Executive's employment under
the provision so indicated. Further, a Notice of Termination for Cause is
required to include a copy of a resolution duly adopted by the affirmative vote
of not less than three-quarters (3/4) of the entire membership of the Board at a
meeting of the Board which was called and held for the purpose of considering
such termination (after reasonable notice to the Executive and an opportunity
for the Executive, together with the Executive's counsel, to be heard before the
Board) finding that, in the good faith opinion of the Board, the Executive was
guilty of conduct set forth in clause (i) or (ii) of the definition of Cause
herein, and specifying the particulars thereof in detail.

                  7.2 Date of Termination. "Date of Termination," with respect
to any purported termination of the Executive's employment after a Change in
Control and during the Term, shall mean (i) if the Executive's employment is
terminated for Disability, thirty (30) days after Notice of Termination is given
(provided that the Executive shall not have returned to the full-time
performance of the Executive's duties during such thirty (30) day period), and
(ii) if the Executive's employment is terminated for any other reason, the date
specified in the Notice of Termination (which, in the case of a termination by
the Company, shall not be less than thirty (30) days (except in the case of a
termination for Cause) and, in the case of a termination by the Executive, shall
not be less than fifteen (15) days nor more than sixty (60) days, respectively,
from the date such Notice of Termination is given).

                  7.3 Dispute Concerning Termination. If within fifteen (15)
days after any Notice of Termination is given, or, if later, prior to the Date
of Termination (as determined without regard to this Section 7.3), the party
receiving such Notice of Termination notifies the other party that a dispute
exists concerning the termination, the Date of Termination shall be extended
until the earlier of (i) the date on which the Term ends or (ii) the date on
which the dispute is finally resolved, either by mutual written agreement of the
parties or by a final judgment, order or decree of an arbitrator or a court of
competent jurisdiction (which is not appealable or with respect to which the
time for appeal therefrom has expired and no appeal has been perfected);
provided, however, that the Date of Termination shall be extended by a notice of
dispute given by the Executive only if such notice is given in good faith and
the Executive pursues the resolution of such dispute with reasonable diligence.


                                       6
<PAGE>   7

                  7.4 Compensation During Dispute. If a purported termination
occurs following a Change in Control and during the Term and the Date of
Termination is extended in accordance with Section 7.3 hereof, the Company shall
continue to pay the Executive the full compensation in effect when the notice
giving rise to the dispute was given (including, but not limited to, salary) and
continue the Executive as a participant in all compensation, benefit and
insurance plans in which the Executive was participating when the notice giving
rise to the dispute was given, until the Date of Termination, as determined in
accordance with Section 7.3 hereof. Amounts paid under this Section 7.4 are in
addition to all other amounts due under this Agreement (other than those due
under Section 5.2 hereof) and shall not be offset against or reduce any other
amounts due under this Agreement.

         8. No Mitigation. The Company agrees that, if the Executive's
employment with the Company terminates during the Term, the Executive is not
required to seek other employment or to attempt in any way to reduce any amounts
payable to the Executive by the Company pursuant to Section 6 hereof or Section
7.4 hereof. Further, the amount of any payment or benefit provided for in this
Agreement (other than Section 6.1(B) hereof) shall not be reduced by any
compensation earned by the Executive as the result of employment by another
employer, by retirement benefits, by offset against any amount claimed to be
owed by the Executive to the Company, or otherwise.

         9. Successors; Binding Agreement.

                  9.1 In addition to any obligations imposed by law upon any
successor to the Company, the Company will require any successor (whether direct
or indirect, by purchase, merger, consolidation or otherwise) to all or
substantially all of the business and/or assets of the Company to expressly
assume and agree to perform this Agreement in the same manner and to the same
extent that the Company would be required to perform it if no such succession
had taken place. Failure of the Company to obtain such assumption and agreement
prior to the effectiveness of any such succession shall be a breach of this
Agreement and shall entitle the Executive to compensation from the Company in
the same amount and on the same terms as the Executive would be entitled to
hereunder if the Executive were to terminate the Executive's employment for Good
Reason after a Change in Control, except that, for purposes of implementing the
foregoing, the date on which any such succession becomes effective shall be
deemed the Date of Termination.

                  9.2 This Agreement shall inure to the benefit of and be
enforceable by the Executive's personal or legal representatives, executors,
administrators, successors, heirs, distributees, devisees and legatees. If the
Executive shall die while any amount would still be payable to the Executive
hereunder (other than amounts which, by their terms, terminate upon the death of
the Executive) if the Executive had continued to live, all such amounts, unless
otherwise provided herein, shall be paid in accordance with the terms of this
Agreement to the executors, personal representatives or administrators of the
Executive's estate.

         10. Notices. For the purpose of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when



                                       7
<PAGE>   8

delivered or mailed by United States registered mail, return receipt requested,
postage prepaid, addressed, if to the Executive, to the address inserted below
the Executive's signature on the final page hereof and, if to the Company, to
the address set forth below, or to such other address as either party may have
furnished to the other in writing in accordance herewith, except that notice of
change of address shall be effective only upon actual receipt:

                           To the Company:

                           Piedmont Natural Gas Company, Inc.
                           P.O. Box 33068
                           Charlotte, North Carolina 28233

                           Attention: Corporate Secretary

         11. Miscellaneous. No provision of this Agreement may be modified,
waived or discharged unless such waiver, modification or discharge is agreed to
in writing and signed by the Executive and such officer as may be specifically
designated by the Board. No waiver by either party hereto at any time of any
breach by the other party hereto of, or of any lack of compliance with, any
condition or provision of this Agreement to be performed by such other party
shall be deemed a waiver of similar or dissimilar provisions or conditions at
the same or at any prior or subsequent time. This Agreement supersedes any other
agreements or representations, oral or otherwise, express or implied, with
respect to the subject matter hereof which have been made by either party;
provided, however, that this Agreement shall supersede any agreement setting
forth the terms and conditions of the Executive's employment with the Company
only in the event that the Executive's employment with the Company is terminated
on or following a Change in Control (i) by the Company other than for Cause or
(ii) by the Executive for Good Reason. The validity, interpretation,
construction and performance of this Agreement shall be governed by the laws of
the State of North Carolina. All references to sections of the Exchange Act or
the Code shall be deemed also to refer to any successor provisions to such
sections. Any payments provided for hereunder shall be paid net of any
applicable withholding required under federal, state or local law and any
additional withholding to which the Executive has agreed. The obligations of the
Company and the Executive under this Agreement which by their nature may require
either partial or total performance after the expiration of the Term (including,
without limitation, those under Sections 6 and 7 hereof) shall survive such
expiration.

         12. Validity. The invalidity or unenforceability of any provision of
this Agreement shall not affect the validity or enforceability of any other
provision of this Agreement, which shall remain in full force and effect.

         13. Counterparts. This Agreement may be executed in several
counterparts, each of which shall be deemed to be an original but all of which
together will constitute one and the same instrument.

         14. Settlement of Disputes; Arbitration.


                                       8
<PAGE>   9

                  14.1 All claims by the Executive for benefits under this
Agreement shall be directed to and determined by the Board and shall be in
writing. Any denial by the Board of a claim for benefits under this Agreement
shall be delivered to the Executive in writing and shall set forth the specific
reasons for the denial and the specific provisions of this Agreement relied
upon. The Board shall afford a reasonable opportunity to the Executive for a
review of the decision denying a claim and shall further allow the Executive to
appeal to the Board a decision of the Board within sixty (60) days after
notification by the Board that the Executive's claim has been denied.

                  14.2 Any further dispute or controversy arising under or in
connection with this Agreement shall be settled exclusively by arbitration in
Charlotte, North Carolina in accordance with the rules of the American
Arbitration Association then in effect; provided, however, that the evidentiary
standards set forth in this Agreement shall apply. Judgment may be entered on
the arbitrator's award in any court having jurisdiction. Notwithstanding any
provision of this Agreement to the contrary, the Executive shall be entitled to
seek specific performance of the Executive's right to be paid until the Date of
Termination during the pendency of any dispute or controversy arising under or
in connection with this Agreement.

         15. Definitions. For purposes of this Agreement, the following terms
shall have the meanings indicated below:

                  (A) "Affiliate" shall have the meaning set forth in Rule 12b-2

promulgated under Section 12 of the Exchange Act.

                  (B) "Auditor" shall have the meaning set forth in Section 6.2
hereof.

                  (C) "Base Amount" shall have the meaning set forth in section
280G(b)(3) of the Code.

                  (D) "Beneficial Owner" shall have the meaning set forth in
Rule 13d-3 under the Exchange Act.

                  (E) "Board" shall mean the Board of Directors of the Company.

                  (F) "Cause" for termination by the Company of the Executive's
employment shall mean (i) the willful and continued failure by the Executive to
substantially perform the Executive's duties with the Company (other than any
such failure resulting from the Executive's incapacity due to physical or mental
illness or any such actual or anticipated failure after the issuance of a Notice
of Termination for Good Reason by the Executive pursuant to Section 7.1 hereof)
which failure shall continue unabated for thirty (30) days after a written
demand for substantial performance is delivered to the Executive by the Board,
which demand specifically identifies the manner in which the Board believes that
the Executive has not substantially performed the Executive's duties, or (ii)
the willful engaging by the Executive in conduct which is demonstrably



                                       9
<PAGE>   10

and materially injurious to the Company or its subsidiaries, monetarily or
otherwise. For purposes of clauses (i) and (ii) of this definition, (x) no act,
or failure to act, on the Executive's part shall be deemed "willful" unless
done, or omitted to be done, by the Executive not in good faith and without
reasonable belief that the Executive's act, or failure to act, was in the best
interest of the Company and (y) in the event of a dispute concerning the
application of this provision, no claim by the Company that Cause exists shall
be given effect unless the Company establishes by clear and convincing evidence
that Cause exists.

                  (G) A "Change in Control" shall be deemed to have occurred if
the event set forth in any one of the following paragraphs shall have occurred:

                           (I) any Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Company (not including in the
securities beneficially owned by such Person any securities acquired directly
from the Company or its affiliates) representing 20% or more of the combined
voting power of the Company's then outstanding securities, excluding any Person
who becomes such a Beneficial Owner in connection with a transaction described
in clause (i) of paragraph (III) below; or

                           (II) the following individuals cease for any reason
to constitute a majority of the number of directors then serving: individuals
who, on the date hereof, constitute the Board and any new director (other than a
director whose initial assumption of office is in connection with an actual or
threatened election contest, including but not limited to a consent
solicitation, relating to the election of directors of the Company) whose
appointment or election by the Board or nomination for election by the Company's
shareholders was approved or recommended by a vote of at least two-thirds (2/3)
of the directors then still in office who either were directors on the date
hereof or whose appointment, election or nomination for election was previously
so approved or recommended; or

                           (III) there is consummated a merger or consolidation
of the Company or any direct or indirect subsidiary of the Company with any
other corporation, other than (i) a merger or consolidation which would result
in the voting securities of the Company outstanding immediately prior to such
merger or consolidation continuing to represent (either by remaining outstanding
or by being converted into voting securities of the surviving entity or any
parent thereof), in combination with the ownership of any trustee or other
fiduciary holding securities under an employee benefit plan of the Company or
any subsidiary of the Company, at least 50% of the combined voting power of the
securities of the Company or such surviving entity or any parent thereof
outstanding immediately after such merger or consolidation, or (ii) a merger or
consolidation effected to implement a recapitalization of the Company (or
similar transaction) in which no Person is or becomes the Beneficial Owner,
directly or indirectly, of securities of the Company (not including in the
securities Beneficially owned by such Person any securities acquired directly
from the Company or its Affiliates other than in connection with the acquisition
by the Company or its Affiliates of a business) representing 20% or more of the
combined voting power of the Company's then outstanding securities; or


                                       10
<PAGE>   11

                           (IV) the shareholders of the Company approve a plan
of complete liquidation or dissolution of the Company or there is consummated an
agreement for the sale or disposition by the Company of all or substantially all
of the Company's assets, other than a sale or disposition by the Company of all
or substantially all of the Company's assets to an entity, at least 50% of the
combined voting power of the voting securities of which are owned by
shareholders of the Company in substantially the same proportions as their
ownership of the Company immediately prior to such sale.

                  (H) "Code" shall mean the Internal Revenue Code of 1986, as
amended from time to time.

                  (I) "Company" shall mean Piedmont Natural Gas Company, Inc.
and, except in determining under Section 15(G) hereof whether or not any Change
in Control of the Company has occurred, shall include any successor to its
business and/or assets which assumes and agrees to perform this Agreement by
operation of law, or otherwise.

                  (J) "Date of Termination" shall have the meaning set forth in
Section 7.2 hereof.

                  (K) "Disability" shall be deemed the reason for the
termination by the Company of the Executive's employment, if, as a result of the
Executive's incapacity due to physical or mental illness, the Executive shall
have been absent from the full-time performance of the Executive's duties with
the Company for a period of six (6) consecutive months, the Company shall have
given the Executive a Notice of Termination for Disability, and, within thirty
(30) days after such Notice of Termination is given, the Executive shall not
have returned to the full-time performance of the Executive's duties.

                  (L) "Exchange Act" shall mean the Securities Exchange Act of
1934, as amended from time to time.

                  (M) "Executive" shall mean the individual named in the first
paragraph of this Agreement.

                  (N) "Good Reason" for termination by the Executive of the
Executive's employment shall mean the occurrence (without the Executive's
express written consent) after any Change in Control, or prior to a Change in
Control under the circumstances described in clauses (ii) and (iii) of the
second sentence of Section 6.1 hereof (treating all references in paragraphs (I)
through (VII) below to a "Change in Control" as references to a "Potential
Change in Control"), of any one of the following acts by the Company, or
failures by the Company to act, unless, in the case of any act or failure to act
described in paragraph (I), (V), (VI) or (VII) below, such act or failure to act
is corrected prior to the Date of Termination specified in the Notice of
Termination given in respect thereof:


                                       11
<PAGE>   12

                           (I) the assignment to the Executive of any duties
inconsistent with the Executive's status as a senior executive officer of the
Company, a change in the Executive's reporting responsibilities, titles or
offices, or a substantial adverse alteration in the nature or status of the
Executive's responsibilities from those in effect immediately prior to the
Change in Control other than any such alteration primarily attributable to the
fact that the Company may no longer be a public company;

                           (II) a reduction by the Company in the Executive's
annual base salary as in effect on the date hereof or as the same may be
increased from time to time except for across-the-board salary reductions (not
to exceed 10%) similarly affecting all senior executives of the Company and all
senior executives of any Person in control of the Company including the Chief
Executive Officer;

                           (III) the relocation of the principal executive
offices to a location more than 35 miles from the Company's principal executive
offices immediately prior to the Change in Control or the Company's requiring
the Executive to be based anywhere other than the location of the Company's
executive offices except for required travel on the Company's business to an
extent substantially consistent with the Executive's present business travel
obligations;

                           (IV) the failure by the Company to pay to the
Executive any portion of the Executive's current compensation or benefits except
pursuant to an across-the-board compensation or benefit deferral (not to exceed
10%) similarly affecting all senior executives of the Company and all senior
executives of any Person in control of the Company including the Chief Executive
Officer, or to pay to the Executive any portion of an installment of deferred
compensation under any deferred compensation program of the Company, within
seven (7) days of the date such compensation is due;

                           (V) the failure by the Company to continue in effect
any compensation plan in which the Executive participates immediately prior to
the Change in Control which is material to the Executive's total compensation,
including but not limited to the Company's long-term incentive plans or any
substitute plans adopted prior to the Change in Control, unless an equitable
arrangement (embodied in an ongoing substitute or alternative plan) has been
made with respect to such plan, or the failure by the Company to continue the
Executive's participation therein (or in such substitute or alternative plan) on
a basis not less favorable, both in terms of the amount or timing of payment of
benefits provided and the level of the Executive's participation relative to
other participants, as existed immediately prior to the Change in Control;

                           (VI) the failure by the Company to continue to
provide the Executive with benefits substantially similar to those enjoyed by
the Executive under any of the Company's pension, supplement retirement,
savings, life insurance, supplemental life insurance, medical, health and
accident, or disability plans in which the Executive was participating
immediately prior to the Change in Control (except for across-the-board changes
similarly affecting all senior executives of the Company and all senior
executives of any Person in control of the Company, including the Chief
Executive Officer, not to exceed 10%), the taking of any other action by the
Company which would



                                       12
<PAGE>   13

directly or indirectly materially reduce any of such benefits or deprive the
Executive of any material fringe benefit enjoyed by the Executive at the time of
the Change in Control, or the failure by the Company to provide the Executive
with the number of paid vacation days to which the Executive is entitled either
by prior written agreements or on the basis of years of service with the Company
in accordance with the Company's normal vacation policy in effect at the time of
the Change in Control; or

                           (VII) any purported termination of the Executive's
employment which is not effected pursuant to a Notice of Termination satisfying
the requirements of Section 7.1 hereof; for purposes of this Agreement, no such
purported termination shall be effective.

                  The Executive's right to terminate the Executive's employment
for Good Reason shall not be affected by the Executive's incapacity due to
physical or mental illness. The Executive's continued employment shall not
constitute consent to, or a waiver of rights with respect to, any act or failure
to act constituting Good Reason hereunder.

                  For purposes of any determination regarding the existence of
Good Reason, any claim by the Executive that Good Reason exists shall be
presumed to be correct unless the Company establishes by clear and convincing
evidence that Good Reason does not exist.

                  (O) "Notice of Termination" shall have the meaning set forth
in Section 7.1 hereof.

                  (P) "Person" shall have the meaning given in Section 3(a)(9)
of the Exchange Act, as modified and used in Sections 13(d) and 14(d) thereof,
except that such term shall not include (i) the Company or any of its
subsidiaries, (ii) a trustee or other fiduciary holding securities under an
employee benefit plan of the Company or any of its Affiliates, (iii) an
underwriter temporarily holding securities pursuant to an offering of such
securities, or (iv) a corporation owned, directly or indirectly, by the
shareholders of the Company in substantially the same proportions as their
ownership of stock of the Company.

                  (Q) "Potential Change in Control" shall be deemed to have
occurred if the event set forth in any one of the following paragraphs shall
have occurred:

                           (I) the Company enters into an agreement, the
consummation of which would result in the occurrence of a Change in Control;

                           (II) the Company or any Person publicly announces an
intention to take or to consider taking actions which, if consummated, would
constitute a Change in Control;

                           (III) any Person becomes the Beneficial owner,
directly or indirectly, of securities of the Company representing 15% or more of
either the then outstanding shares of common stock of the Company or the
combined voting power of the Company's then outstanding



                                       13
<PAGE>   14

securities (not including in the securities beneficially owned by such Person
any securities acquired directly from the Company or its affiliates); or

                           (IV) the Board adopts a resolution to the effect
that, for purposes of this Agreement, a Potential Change in Control has
occurred.

                  (R) "Retirement" shall be deemed the reason for the
termination by the Executive of the Executive's employment if such employment is
terminated voluntarily by the Executive in accordance with the Company's
retirement policy, including early retirement, generally applicable to its
salaried employees.

                  (S) "Severance Payments" shall have the meaning set forth in
Section 6.1 hereof.

                  (T) "Tax Counsel" shall have the meaning set forth in Section
6.2 hereof.

                  (U) "Term" shall mean the period of time described in Section
2 hereof (including any extension, continuation or termination described
therein).

                  (V) "Total Payments" shall mean those payments so described in
Section 6.2 hereof.

                  (W) "W-2 Compensation" shall mean all amounts received for
services actually rendered in the course of employment with the Company to the
extent that such amounts are includible in gross income as wages for federal
income tax purposes plus all amounts that are contributed by the Company
pursuant to a salary reduction agreement and which are not includible in the
gross income of the Executive under Code Sections 125 or 401(k) and minus all
amounts includible in the gross income of the Executive for annual base salary,
expense reimbursements or allowances, moving expenses, club initiation fees or
special assessments, deferred compensation and welfare benefits, or gross-ups
for taxes.


                                   PIEDMONT NATURAL GAS COMPANY


                                   By: /s/ John H. Maxheim
                                       -----------------------------------------
                                   Name: John H. Maxheim
                                   Title: Chairman and Chief Executive Officer

                                   RAY B. KILLOUGH

                                   /s/ Ray B. Killough
                                   ---------------------------------------------
                                   Address: 5025 Old Monroe Road
                                            Matthews, NC 28105



                                       14