UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                                    WASHINGTON, D. C. 20549

                                           FORM 10-K

(Mark One)

(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
    OF 1934 - For the fiscal year ended September 30, 1997

( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
    EXCHANGE ACT OF 1934
    For the transition period from __________ to __________

                                Commission file number: 1-11429

                    PUBLIC   SERVICE   COMPANY   OF  NORTH   CAROLINA,
                    INCORPORATED   (Exact   name  of   registrant   as
                    specified in its charter)

       NORTH CAROLINA                                         56-0233140
(State or other jurisdiction of                            (I. R. S. Employer
incorporation or organization)                             Identification No.)

400 COX ROAD, P. O. BOX 1398
   GASTONIA, NORTH CAROLINA                                 28053-1398
Address of principal executive offices)                      (Zip Code)

           Registrant's telephone number, including area code: (704) 864-6731

            Securities  registered  pursuant to Section 12(b) of the Act:

COMMON STOCK, PAR VALUE $1 PER SHARE                   NEW YORK STOCK EXCHANGE
       (Title of Class)                               (Name of each exchange on
                                                          which registered)

Securities registered pursuant to Section 12(g) of the Act:  NONE
                           ----------------------
     Indicate  by check mark  whether the  registrant  (1) has filed all reports
required to be filed by Section 13 or 15(d) of the  Securities  Exchange  Act of
1934  during  the  preceding  12 months  (or for such  shorter  period  that the
registrant was required to file such reports),  and (2) has been subject to such
filing requirements for the past 90 days. Yes x No

     Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. ( )
                            ----------------------
Estimated aggregate market value of the voting stock held by nonaffiliates of
the registrant at November 28, 1997 . . . . . . . . . . . $403,047,718
                            ----------------------

Number of shares of Common Stock, $1 par value, outstanding at
  November 28, 1997 . . . . . . . . . . .. . . . . . . . . 19,903,591

Documents incorporated by reference:

                                                         1

<PAGE>

     Portions of the proxy  statement  dated  December 19, 1997,  relating to
the January 30, 1998 annual meeting of shareholders, are incorporated by 
reference into Part III of this annual report.


                                                         2

<PAGE>



        PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED

                           FORM 10-K

                        ANNUAL REPORT TO
            THE SECURITIES AND EXCHANGE COMMISSION
          FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997

                          -------------
                       TABLE OF CONTENTS

Item                                                                  Page

                            PART I.

  1.     Business..............................................         2
         Executive Officers of the Registrant..................        12
  2.     Properties............................................        13
  3.     Legal Proceedings.....................................        14
  4.     Submission of Matters to a Vote of Security Holders...        14

                           PART II.

  5.     Market for the Registrant's Common Stock and
           Related Shareholder Matters.........................        14
  6.     Selected Financial Data...............................        15
  7.     Management's Discussion and Analysis of Results
           of Operations and Financial Condition...............        16
  8.     Financial Statements and Supplementary Data...........        27
  9.     Changes in and Disagreements With Accountants on
           Accounting and Financial Disclosure.................        47

                          PART III.

10.      Directors and Executive Officers of the Registrant....        47
11.      Executive Compensation................................        47
12.      Security Ownership of Certain Beneficial Owners
           and Management......................................        48
13.      Certain Relationships and Related Transactions........        48

                           PART IV.

14.      Exhibits, Financial Statement Schedules and
           Reports on Form 8-K.................................        48
         Signatures............................................        55
         Exhibit Index.........................................        56



                                                         3

<PAGE>



                    PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED

                                             PART I

Item 1.  Business


General

         Public  Service  Company of North  Carolina,  Incorporated  (PSNC) is a
public  utility  engaged  primarily in  transporting,  distributing  and selling
natural gas to  approximately  311,000  residential,  commercial  and industrial
customers in North Carolina. It was organized as a North Carolina corporation in
1938,  and its  corporate  office is  located  at 400 Cox Road,  P. O. Box 1398,
Gastonia, North Carolina 28053-1398, telephone (704) 864-6731.

         In  connection  with  its  natural  gas  distribution  business,   PSNC
promotes,  sells and installs both new and replacement  cooking,  water heating,
laundry, space heating,  cooling and humidity control natural gas appliances and
equipment.  PSNC,  through a nonregulated  subsidiary,  provides  conversion and
maintenance  services for natural gas-fueled  vehicles (NGVs) in selected cities
in and  beyond  its  franchised  territory.  PSNC,  through a  subsidiary  and a
multi-state joint venture with Sonat Marketing Company,  L.P., also participates
in nonregulated businesses such as natural gas brokering and supply services.

         During  fiscal years 1997,  1996 and 1995, no single  customer  account
contributed more than 2% of PSNC's total operating revenues.

         PSNC has no reportable  industry  segments.  Revenues  attributable  to
natural gas distribution,  merchandise and jobbing,  and gas marketing and other
activities for each of the fiscal years in the three-year period ended September
30, 1997 were as follows (in thousands):

                                   1997       1996       1995
                                 --------   --------   --------
Natural Gas Distribution(1)      $337,930   $308,882   $247,893
Merchandise and Jobbing(2)         10,053      9,444      8,675
Gas Marketing/Other
 Activities(1)                     19,938     20,179      8,656
                                 --------   --------   --------
Total                            $367,921   $338,505   $265,224
                                 ========   ========   ========


         (1)      See "Results of Operations" on page 16 of this annual
                  report.
         (2)      Primarily the sale and installation of gas appliances.


                                                         4

<PAGE>



Service Territory

         PSNC's 33-county franchised service territory includes Raleigh,  Durham
and the Research  Triangle Park area in the north central  portion of the state;
this area  accounts for  approximately  61% of PSNC's  customers  and 53% of its
throughput (total gas sales and  transportation)  in fiscal 1997. PSNC's central
area includes the cities of Gastonia,  Concord and Statesville which are located
in the greater Charlotte metropolitan area; this area accounts for 27% of PSNC's
customers and 32% of its  throughput.  PSNC's  western area includes  Asheville,
Hendersonville and Brevard,  and accounts for the remaining 12% of customers and
15% of throughput.  PSNC's diversified  industrial base in its service territory
includes  manufacturers  of textiles,  chemicals,  ceramics  and clay  products,
glass,  automotive  products,  minerals,   pharmaceuticals,   plastics,  metals,
electronic  equipment,  furniture  and a variety of food and  tobacco  products.
PSNC's  utility  operations  are  regulated  by  the  North  Carolina  Utilities
Commission (NCUC).

         Over 2.3 million people reside in PSNC's franchised  territory.  During
the past three fiscal years, PSNC has added  approximately  42,800 new customers
to its natural gas transmission and  distribution  systems.  Of those customers,
29,200 were residential,  11,500 were commercial, and 2,100 were industrial. The
resulting  5.4%  average  annual  growth rate is nearly three times the national
industry  average.  PSNC's average annual customer growth rate since fiscal 1987
has been 5.3%. PSNC attributes this growth rate to two primary factors:

         o        The population in PSNC's franchised territory has grown faster
                  than the national  average in recent years, and PSNC estimates
                  that it serves  approximately  one-third  of that  population.
                  PSNC  continually  expands its  transmission  and distribution
                  systems when  economically  feasible to enable it to reach new
                  customers.

         o        The continued growth of the North Carolina economy,  including
                  areas  within  PSNC's  service  territory.  Also,  the State's
                  relatively low  unemployment  rate has been below the national
                  average in recent years.

Business Strategy

         PSNC is expanding its transmission and distribution  systems to deliver
more natural gas throughout  its service  territory.  Of its total  construction
expenditures  of $60.3 million in fiscal 1997,  $60.4 million in fiscal 1996 and
$61.1 million in fiscal 1995,  approximately  $46.5  million,  $45.6 million and
$49.7 million,  respectively,  were expended on the construction of transmission
and distribution pipelines.

         PSNC is focusing on the following marketing priorities:

         o        Retaining existing customers by marketing the replacement of 
                  old appliances and equipment with new gas equipment.

         o        Increasing demand for natural gas by marketing additional gas
                  equipment to PSNC's existing customers.

         o        Adding new customers either on its existing distribution
                  system or by economical short distribution main extensions.

                                                         5

<PAGE>



         In  addition,  PSNC is  evaluating  the  introduction  of emerging  gas
technologies  to  increase  the  long-term  demand  for  natural  gas.  PSNC has
identified the conversion of gasoline-fueled  vehicles to NGVs as an opportunity
to increase  the demand for natural gas in the future.  PSNC was the first local
distribution  company (LDC) in North  Carolina to offer NGV  conversions  to the
public  and  private  sectors.  PSNC also has  identified  natural  gas  cooling
technology  as an  opportunity  to  increase  the demand for natural gas and has
begun  marketing  such  technology.  The  implementation  in 1992 of the Federal
Energy Regulatory  Commission (FERC) Order Nos. 636, 636-A and 636-B (Order 636)
created  new  off-system  marketing  opportunities  for PSNC  and its  marketing
affiliate.

         PSNC's  internal  focus  has  been  to  streamline  its  organizational
structure and improve the performance of management and employees. PSNC has also
focused on increasing employee efficiency, improving its number of customers per
employee  ratio over the last three years from 236 at September 30, 1994, to 277
at  September  30,  1997.  At  November  30,  1997,  PSNC had 284 winter  period
customers per employee.


Gas Supply

         Effective   August  1,  1991,   PSNC's   primary   pipeline   supplier,
Transcontinental  Gas Pipe Line  Corporation  (Transco),  became the first major
pipeline to offer unbundled open-access transportation and storage services. The
primary  advantage  is that  PSNC  now  chooses  and  manages  its  gas  supply,
transportation and storage service requirements separately rather than having to
rely upon a pipeline  supplier  whose service  options are bundled  together and
then  offered  as a  single  city  gate  sales  service.  Unbundled  open-access
transportation and storage services,  however,  do shift the risk of ensuring an
adequate supply of gas from the interstate pipelines to LDCs.


         As a result  of FERC  Order  636,  which  restructured  the  interstate
natural  gas  transportation  industry,  PSNC's gas  purchasing  practices  have
changed  significantly  during the past few years.  The FERC approved  Transco's
restructuring  settlement effective November 1, 1993, and essentially  preserved
Transco's  existing firm service  settlement with PSNC. PSNC has not experienced
any material  adverse effect on its financial  position or results of operations
as a result of the order.  Further,  management  believes  it will  provide  gas
services  marketing  opportunities  both on and off the existing pipeline system
for PSNC and its  subsidiaries  which  should  provide an overall net benefit to
PSNC.

         PSNC  purchases  for resale  most of the  natural  gas that it delivers
(throughput)  to its  customers.  The balance of its  throughput  is natural gas
purchased by certain large volume commercial and industrial  customers  directly
from various producers and marketers. This gas is transported to these customers
by PSNC at a rate which  enables PSNC to earn a margin  equivalent to that which
it would have  earned by selling the same  quantity  of gas to these  customers.
Quantities of  transported  gas  represented  approximately  36%, 26% and 38% of
PSNC's total throughput for fiscal 1997, 1996 and 1995, respectively.

         Management  believes that PSNC's gas supply portfolio will enable it to
continue to provide secure service on a cost-competitive  basis. This balance of
security  and  cost  control,  along  with  flexibility  to  adapt  to  changing
conditions, is achieved through a mix

                                                         6

<PAGE>



of long-term  contractual  obligations,  coupled with  short-term or spot market
purchases.  PSNC's utility gas purchasing practices are reviewed annually by the
NCUC.

         The  following  table  summarizes  the natural  gas supply  sources and
transportation  arrangements  available to PSNC under  contract with Transco and
CNG Transmission Company (CNG). All amounts are shown in dekatherms (DT), a unit
of heating  value equal to one  million  British  Thermal  Units  (BTU).  PSNC's
backhaul  arrangement  with CNG makes  available  additional  daily  capacity of
60,000 DT and is for a combination of storage and firm  transportation.  Natural
gas  purchased  by PSNC from other  sources is  transported  by Transco and CNG.
Natural gas purchased  directly from Williams Energy Services Company, a Transco
marketing affiliate,  accounted for 33% and 30%, respectively,  of PSNC's supply
in fiscal 1997 and 1996.

<TABLE>
<CAPTION>
                                              Daily                                  Contract
                                             Deliver-           Annual              Expiration
  Type of Contract                           ability           Quantity                Date
-------------------------                    --------         ----------            ----------
<S>                                          <C>              <C>                   <C>
Firm Sales Service (1)                         33,542         12,242,830              3/31/00
Firm Sales Service (1)                         41,928         15,303,720              3/31/01
Firm Transportation                           164,151         59,915,115              1/31/12
Firm Transportation                             5,175          1,888,875             10/31/07
Incremental Firm Transportation                 2,264            826,360              3/16/01

Winter Firm Transportation
 (December 1 through
  February 28)                                  4,347            391,230              7/31/11
Southern Expansion Firm
 Transportation:
   November and March                          35,397
   December through February                   39,330          5,698,917             10/31/05
Southeast Expansion Firm
 Transportation:
   Phase 1                                      6,064          2,213,360             11/01/14
   Phase 2                                     20,759          7,577,035             11/01/15
   Phase 3                                     17,804          6,498,460             11/01/15
CNG Firm Transportation                        30,331         11,070,815               (2)


        (1) These are separate and concurrent contracts.
        (2) These represent multiple contracts which expire on
            dates ranging from 10/31/99 to 10/31/16.
</TABLE>

        As discussed further in Note 2 to the financial  statements,  PSNC and a
subsidiary of Piedmont  Natural Gas Company,  Inc.  (Piedmont)  formed  Cardinal
Pipeline  Company,  LLC  (Cardinal)  in March 1994 to  construct  an  intrastate
transmission pipeline. It was placed into service in December 1994, and provides
additional daily capacity to PSNC's eastern service  territory in and around the
Durham and Raleigh  areas.  The NCUC  granted an increase in annual  revenues of
$3,063,000 to recover PSNC's cost of the investment, effective January 26, 1995.
In September  1995,  PSNC,  Piedmont,  Transco,  and North Carolina  Natural Gas
Corporation (NCNG) signed a letter of intent to form Cardinal Extension Company,
LLC  (Cardinal  Extension)  to purchase  and extend the  Cardinal  pipeline.  As
proposed,  the pipeline will be extended 67 miles from the termination  point of
the original  Cardinal Pipeline to a point southeast of Raleigh and will provide
140 million  cubic feet per day  (MCF/Day)  of  additional  firm  capacity  (100
MCF/Day for PSNC and 40 MCF/Day for NCNG). The extension is estimated to cost

                                                         7

<PAGE>



$75 million. Through their respective subsidiaries,  PSNC will own approximately
33%, Piedmont will own approximately 17%, Transco will own approximately 45% and
NCNG will own approximately 5% of Cardinal  Extension.  On November 6, 1997, the
NCUC issued an order granting a certificate of public  convenience and necessity
authorizing  Cardinal  Extension  to  construct,  own and operate  the  pipeline
extension.  Subject to the approval of appropriate  state and federal  agencies,
construction is scheduled to begin in early 1999. The facilities are expected to
be in service on or before November 1, 1999.

        To balance peak winter demands of residential  and commercial  customers
with their much-reduced  summer usage, PSNC uses underground natural gas storage
services and liquefied natural gas (LNG) peaking  facilities.  During periods of
reduced usage,  PSNC purchases  natural gas to replenish the supplies in the LNG
facilities  owned by PSNC and in contract  storage  services  from its  pipeline
suppliers.   The  ability  to  maintain  maximum  delivery  from  these  storage
facilities for an extended period of time is limited.  Information  about PSNC's
storage arrangements, in dekatherms, is shown in the following table.
<TABLE>
<CAPTION>


                                        Daily                                 Contract
                                        Deliver-                              Expiration
    Storage Facility                    ability           Capacity              Date
------------------------                --------          ---------          -----------
<S>                                     <C>               <C>                <C>
CNG General Storage                      29,669           1,776,000            3/31/16
Transco General Storage                  33,218           1,923,485            3/31/13
Transco Washington
  Storage (1)                            32,870           2,794,500            3/31/99
Transco LNG Storage                       5,175              25,875           10/31/16
Transco Eminence Storage                 47,221             475,111           10/31/13
Cove Point LNG Storage                   25,000             250,000            4/15/07
PSNC LNG Storage (2)                    100,000           1,040,000              N/A
Columbia Gas Transmission                11,778           1,060,020           10/31/12

         (1)      No peak day delivery assured by contract.
         (2)      Amounts shown represent maximum peak day capacity.
</TABLE>

         As discussed further in Note 2 to the financial statements, Pine Needle
LNG Company, LLC (Pine Needle) was formed by subsidiaries of Transco,  Piedmont,
NCNG,  Amerada Hess, and PSNC, and the Municipal Gas Authority of Georgia.  PSNC
signed an  amendment  to the  operating  agreement  of Pine Needle to add PSNC's
subsidiary,  PSNC  Blue  Ridge  Corporation  (Blue  Ridge),  as an owner of Pine
Needle.  The facility is estimated to cost $107 million and will be located near
Transco's transmission pipeline northwest of Greensboro, North Carolina. It will
have a storage capacity of four billion cubic feet with vaporization  capability
of 400 million cubic feet per day.  Blue Ridge will own 17% of Pine Needle,  and
PSNC will have the right to use 25% of the facility's  gas storage  capacity and
withdrawal capabilities. On November 27, 1996, the FERC issued an order granting
a certificate of public  convenience and necessity  authorizing the construction
and operation of Pine Needle.  Liquefaction  is expected to begin in May 1999 in
time for withdrawal service to begin in the 1999 winter heating season.

Competition

         Although  PSNC is the sole  distributor  of natural  gas in its service
area, it faces  competition from suppliers of alternate fuels and other types of
energy.  Competition  is  strongest  for sales to large  volume  commercial  and
industrial customers having alternate

                                                         8

<PAGE>



fuel capability but exists for all other customer classes as well.

         During  fiscal  1997,  approximately  38% of gas  delivered by PSNC was
delivered to large volume  commercial and industrial  customers having alternate
fuel  capability.  The primary  alternate fuels available to these customers are
fuel oil and  propane,  and,  to a lesser  extent,  coal  and  combustible  wood
products.  The NCUC has approved a rate  structure that allows PSNC to negotiate
reduced  rates  in order to match  the  cost of  alternate  fuels to  individual
customers  and recover the lost margin  from other  classes of  customers.  PSNC
anticipates  that the need to negotiate  reduced rates with these customers will
continue.

         Electricity   is  the  primary   competition  to  natural  gas  in  the
residential and commercial  markets where the predominate uses of energy are for
space  heating,  water  heating  and  cooking.  Currently,  natural gas enjoys a
competitive  price advantage over electricity for these purposes,  enabling PSNC
in  recent  years  to  obtain  a  significant   share  of  the  new  residential
construction in its service area where natural gas is available.

Regulation and Rates

         PSNC's natural gas transmission and distribution business is subject to
regulation by the NCUC,  including  rates,  issuance of securities,  adequacy of
service, safety standards,  extension and abandonment of facilities,  accounting
and  depreciation  rates.  The NCUC has  seven  commissioners  appointed  by the
Governor of North Carolina for staggered eight-year terms. In an order issued in
PSNC's last general rate case, the NCUC approved an increase in annual  revenues
of  $2,701,000,  effective  as of  October  1, 1996.  The order  allows  PSNC an
opportunity to earn a 10.37% overall return on its net utility investment.

         PSNC's  rates  include a  weather  normalization  adjustment  mechanism
(WNA).  The WNA was  initially  approved  in 1991  and is in  effect  for  bills
rendered  during the period from November 1 through  April 30 of each year.  The
WNA applies only to residential and small general service rates and affects only
the non-gas  portion of PSNC's rates.  Sales to  large-volume  customers are not
normalized  because natural gas usage for such customers is  significantly  less
weather-sensitive.  The WNA  increases  tariff  rates if weather is warmer  than
normal and decreases  rates if weather is colder than normal.  This prevents the
under- or  over-collection of non-gas costs due to variations in the quantity of
natural gas delivered when weather deviates from normal. The WNA does not change
the  seasonality  of PSNC's  earnings  and cash flow;  however,  it does  reduce
fluctuations caused by abnormal weather.

         PSNC also operates under two other rate provisions that serve to reduce
fluctuations in PSNC's  earnings.  First, its Rider D rate mechanism allows PSNC
to recover,  in any manner  authorized by the NCUC,  margin losses on negotiated
gas sales to large  commercial  and  industrial  customers  with  alternate fuel
capability.  The  Rider  D rate  mechanism  also  allows  PSNC to  recover  from
customers all  prudently  incurred gas costs,  including  changes in natural gas
prices.  Second,  PSNC operates with "full margin"  transportation  rates. These
rates  allow  PSNC to  earn  the  same  margin  on gas  delivered  to  customers
regardless  of  whether  the gas is sold  by  PSNC  to the  customer  or is only
transported by PSNC.

         PSNC's rates are established using a base cost of gas approved by the
NCUC

                                                         9

<PAGE>



which may be modified  periodically  to reflect  changes in the market  price of
natural gas and changes in the rates charged by PSNC's pipeline suppliers.  PSNC
may file revised  tariffs with the NCUC  coincident with these changes or it may
track the changes in its deferred  accounts for subsequent  rate  consideration.
The rules of the NCUC allow recovery of all prudently  incurred gas costs. Also,
the NCUC reviews PSNC's gas purchasing practices annually.

         On November 6, 1997,  the NCUC issued an order  permitting  PSNC,  on a
two-year  trial  basis,  to  establish  its  commodity  cost  of gas  for  large
commercial  and  industrial  customers on the basis of market prices for natural
gas. PSNC will continue to establish a benchmark cost of gas for residential and
small commercial customers pursuant to its existing procedures.

         In April 1992,  the NCUC adopted rules to implement the expansion  fund
program  established by the North Carolina  General  Assembly in July 1991. This
act  permits  the  establishment  of  expansion  funds to be used by each  North
Carolina LDC to expand  natural gas service to areas that they are  certificated
to serve that would  otherwise not be economically  feasible to serve.  Separate
funds have been  established for use solely in each LDC's  certificated  service
territory.  Sources for expansion  funds may be each LDC's  respective  supplier
refunds,  special  surcharges or other sources permitted by the NCUC. Subject to
the NCUC's rules and  availability of funds, the LDCs will be allowed to utilize
the expansion funds to the extent necessary to make such projects  feasible on a
net  present  value  basis.  The balance of the  funding  for  projects  will be
supplied by the LDC. Nine counties in PSNC's franchised  territory are currently
unserved  as are  certain  areas in other  counties.  On June 3, 1993,  the NCUC
entered an order  creating an expansion fund for PSNC in the Office of the State
Treasurer.  PSNC began  providing  natural gas service in McDowell County during
December 1996.  This was the first project  undertaken by PSNC using monies from
its expansion fund. PSNC spent  $14,237,000 on the project,  of which $7,781,000
was received from the expansion fund.

         PSNC's next expansion  project will be in western Haywood County;  PSNC
currently serves the eastern part of this county.  The current estimated cost of
this project is $7,182,000. On April 22, 1997, the NCUC approved the project and
authorized disbursements from the expansion fund of $4,127,000.  PSNC expects to
begin providing partial service to western Haywood County by December 1997.

         On  November  14,  1996,  PSNC  filed  an  application  with  the  NCUC
requesting  deferral  accounting  treatment for the costs of a project to ensure
that PSNC's computer  operating systems function properly in the year 2000. PSNC
requested that total  estimated  contractor  labor of $3,000,000 be deferred for
subsequent recovery in a future rate case. On April 29, 1997, the NCUC issued an
order  authorizing  the deferral of each year's costs and requiring a three-year
amortization  of  these  costs  beginning  in  the  year  incurred.  PSNC  began
amortizing  these  costs  in  September  1997  and  will  seek  to  recover  any
unamortized costs at the time of its next general rate case.

Franchises

         Effective July 15, 1996, the NCUC granted PSNC  certificates  of public
convenience  and necessity to serve seven  counties in western  North  Carolina.
PSNC's  certificated  service  territory  now  consists  of all or  parts  of 33
counties in North Carolina.

                                                        10

<PAGE>



Under North Carolina law, no company may construct or operate properties for the
sale or  distribution of natural gas without having obtained such a certificate,
except that no certificate is required for  construction  in the ordinary course
of  business or for  construction  into  territory  contiguous  to that  already
occupied  by an LDC  and not  receiving  similar  service  from  another  public
utility.

         PSNC has  nonexclusive  franchises from 68  municipalities  in which it
delivers  natural  gas; the other  communities  served by PSNC have not required
franchises.  The expiration dates of those franchises having specific expiration
provisions range from 1998 to 2029. The franchises  contain no restrictions of a
materially  burdensome nature and are adequate for PSNC's business as presently,
and as proposed to be,  conducted.  These franchises have been routinely renewed
by the municipalities when they expire.

Non-utility Businesses

         In December 1996, PSNC  Production  Corporation  (PSNC  Production) and
Sonat  Marketing  Company L.P.  (Sonat  Marketing),  a subsidiary of Sonat Inc.,
created  Sonat Public  Service  Company  L.L.C.  (Sonat  Public  Service).  PSNC
Production and Sonat Marketing each owns 50% of the new company. PSNC Production
transferred  its gas  brokering  activities to Sonat Public  Service,  which now
serves 350 accounts  both on and off PSNC's  system.  Clean Energy  Enterprises,
Inc.  continued its  activities in the refueling of natural gas vehicles and the
conversion of  gasoline-fueled  vehicles to natural gas. In 1994,  PSNC sold its
propane operation to Empiregas, Inc., and PSNC Propane Corporation was dissolved
in September 1997.

Environmental Matters

         PSNC is subject to regulation with regard to  environmental  matters by
various federal, state and local authorities. PSNC owns or has owned portions of
six  sites in North  Carolina  on which  manufactured  gas  plants  (MGPs)  were
formerly  operated.  Evaluations have revealed that MGP residuals are present or
suspected  at several  of the sites.  PSNC has  recorded  a total  liability  of
$3,705,000,  which  represents  the minimum amount of the range of $3,705,000 to
$50,145,000   expected  for   investigating   and   monitoring   the  extent  of
environmental degradation and of implementing remedial procedures. See Note 7 to
the  financial   statements  for  further  details   regarding  this  and  other
environmental matters related to PSNC.

Employees

         At November 30, 1997, PSNC had XXXX full-time  employees  compared with
1,148 at November 30, 1996. PSNC considers its  relationship  with its employees
to be good  and has  never  experienced  a  strike  or work  stoppage.  PSNC has
collective bargaining  agreements with the International  Chemical Workers Union
Council  of  the  United  Food  and  Commercial   Workers  locals   representing
approximately   312  construction  and  service   employees.   These  three-year
collective bargaining agreements will expire in December 1999.


Seasonality

         Due to the seasonal nature of PSNC's business,  the first six months of
its fiscal year are  generally  the most  profitable.  During  fiscal 1997,  the
quarters ended December

                                                        11

<PAGE>



31 and  March 31  together  accounted  for  approximately  74% and 76% of PSNC's
natural gas sales revenues and volumes,  respectively.  The quarters ending June
30 and  September  30 are  generally  PSNC's  least  profitable  quarters due to
decreased demand for natural gas related to lower space heating requirements.

                                                        12

<PAGE>



<TABLE>
<CAPTION>

OPERATING STATISTICS


                                                       For the Fiscal Years Ended September 30,
                                           1997           1996           1995           1994           1993
                                       ------------   ------------   ------------   ------------   ------------
<S>                                    <C>            <C>            <C>            <C>            <C>           
OPERATING REVENUES - GAS:
  Residential Sales                    $183,391,700   $162,967,260   $135,846,213   $137,986,651   $127,119,020
  Commercial Sales                       84,120,824     74,444,770     57,783,940     67,679,342     66,124,813
  Industrial Sales                       46,147,690     52,460,676     31,483,864     49,970,780     80,861,975
  Gas Transported for Others             22,695,985     17,737,092     21,746,901     17,031,426      4,848,112
  Miscellaneous                           1,573,982      1,272,281      1,032,096      1,036,857      1,035,221
                                       ------------   ------------   ------------   ------------   ------------
          Total                        $337,930,181   $308,882,079   $247,893,014   $273,705,056   $279,989,141
                                       ============   ============   ============   ============   ============

GAS SUPPLY (DT):
  Natural Gas Purchased                  46,544,234     51,841,058     37,790,467     47,390,194     54,772,352
  Less Increase (Decrease) in Storage     2,055,564        471,720       (257,091)     1,466,236        104,399
  Less Unbilled, Unaccounted For,
   Company Use and Other                  2,519,194      2,518,774      1,979,901      2,156,027      2,166,864
                                         ----------     ----------     ----------     ----------     ----------
          Total Gas Sold                 41,969,476     48,850,564     36,067,657     43,767,931     52,501,089
                                         ==========     ==========     ==========     ==========     ==========

GAS DELIVERED (DT):
  Residential Sales                      19,760,537     22,398,288     17,566,948     18,781,482     18,058,000
  Commercial Sales                       12,769,424     13,925,422     10,827,444     12,261,918     13,031,684
  Industrial Sales                        9,439,515     12,526,854      7,673,265     12,724,531     21,411,405
  Gas Transported for Others             23,143,824     16,795,268     22,551,006     15,120,391      4,678,292
                                         ----------     ----------     ----------     ----------     ----------
          Total                          65,113,300     65,645,832     58,618,663     58,888,322     57,179,381
                                         ==========     ==========     ==========     ==========     ==========


NUMBER OF CUSTOMERS (AT YEAR END):
  Residential                               264,129        248,940        246,877        234,957        223,004
  Commercial/small industrial                39,349         38,624 (2)     29,497         27,806         26,772
  Large commercial/industrial                 2,419 (3)      1,677            389            376            377
                                            -------        -------        -------        -------        -------
          Total                             305,897        289,241        276,763        263,139        250,153
                                            =======        =======        =======        =======        =======

PER RESIDENTIAL CUSTOMER:
  Average Gas Used (DT)                       74.82          89.98          71.16          79.94          80.98
  Average Revenue                           $694.36        $654.67        $550.28        $587.31        $570.05
  Revenue per DT                              $9.28          $7.28          $7.73          $7.35          $7.04

ANNUAL HEATING DEGREE DAYS (1):
  Actual                                      3,253          3,856          3,030          3,415          3,477
  Normal                                      3,384          3,402          3,384          3,384          3,384
  Percent of Normal                              96%           113%            90%           101%           103%

PEAK DAY DELIVERY (DT)                      406,742        433,045        403,581        420,597        350,131


         (1)   Degree day information is based on the system average.  Fiscal
               1996 reflects an additional day for leap year.

         (2)   Increase  reflects the  reclassification  of approximately  8,000
               customers  from   residential  to   commercial/small   industrial
               classification,  and 1,300 from  commercial/small  industrial  to
               large commercial/industrial classification during fiscal 1996.

         (3)   Increase  reflects  the  reclassification  of  approximately  700
               customers    from    commercial/small    industrial    to   large
               commercial/industrial during fiscal 1997.
</TABLE>


                                                            13

<PAGE>
<TABLE>
<CAPTION>


                      EXECUTIVE OFFICERS OF THE REGISTRANT
<S>                                    <C>                                        <C>                                    
 
                                                                                  Date Elected
 Name and Age (1)                                 Title (1)                        An Officer
-----------------------                -----------------------------              ------------
Charles E. Zeigler, Jr.                Chairman, President and                      11/01/86
   Age - 51                              Chief Executive Officer
John D. Grawe                          Senior Vice President -                      10/03/94
   Age - 49                              Operations
George F. Kast (2)                     Senior Vice President -                      08/24/87
   Age - 51                              Information Systems
Jerry W. Richardson                    Senior Vice President -                      02/23/82
   Age - 52                              Engineering
Fred L. Schmidt                        Senior Vice President -                      01/04/93
   Age - 56                              Human Resources
Robert D. Voigt                        Senior Vice President -                      09/01/81
   Age - 46                              Organizational Development
Franklin H. Yoho                       Senior Vice President -                      02/01/91
   Age - 38                              Marketing and Gas Supply
Herbert B. Cox                         Vice President -                             05/01/90
   Age - 53                              Operations Services
J. Paul Douglas                        Vice President -                             12/21/94
   Age - 50                              Corporate Counsel and
                                          Secretary
Jack G. Mason                         Vice President -                              03/01/95
   Age - 40                           Treasurer and Chief Financial
                                           Officer
Boyce C. Morrow, Jr.                   Vice President -                             03/01/90
   Age - 53                              Governmental Relations
Sharon D. Boone                        Controller and                               03/01/95
   Age - 44                              Assistant Secretary


   (1) As of November 30, 1997.
   (2) Resigned effective October 15, 1997.
</TABLE>


         The present terms of all officers  extend to January 30, 1998, the date
of the next annual meeting of  shareholders  and the annual meeting of the board
of directors, or until their successors are elected and qualified.

         All of the executive officers have served in executive positions with
PSNC for the past five years with the exception of Fred L. Schmidt, J. Paul 
Douglas, John D. Grawe, Jack G. Mason and Sharon D. Boone.

         Fred L.  Schmidt  was  employed  by PSNC on January  4, 1993.  Prior to
joining PSNC,  he was employed by RJR Nabisco,  Incorporated  in  Winston-Salem,
North Carolina as Director - Employee Relations,  Compensation and Benefits, and
Human Resources Information Systems.

         J. Paul Douglas was employed by PSNC on December 21, 1994.  Prior to 
joining PSNC, he was employed by Conoco Inc. as counsel from March 1991 to
December 1994.  Prior to Conoco, he was a partner with the law firm of Katten,
Muchin, Zavis and

                                                        14

<PAGE>



Dombroff  from  February  1990 to March 1991 and a partner  with the law firm of
Grove, Jaskiewicz, Gilliam and Cobert from February 1984 to February 1990.

         John D. Grawe was employed by PSNC on October 3, 1994. Prior to joining
PSNC,  he was  employed by  Wisconsin  Power and Light  Company,  most  recently
serving as Director of Gas Engineering and Operations.

         Jack G. Mason was  employed  by PSNC on July 5,  1979.  During the past
five years,  prior to serving as Vice  President-Treasurer  and Chief  Financial
Officer,  Mr.  Mason held the  positions  of Director - Financial  Projects  and
Assistant  Treasurer,  Assistant  Treasurer,  Assistant  Treasurer and Assistant
Controller and Treasurer.

         Sharon D. Boone was employed by PSNC on November  15, 1982.  During the
past five years,  prior to serving as Controller  and Assistant  Secretary,  Ms.
Boone held the positions of Manager - Plant Accounting and Tax Services, Manager
- Corporate Accounting, and Director - Corporate Accounting.

Item 2.  Properties

         PSNC  owns 728  miles of  transmission  pipelines  of 2 to 24 inches in
diameter  that  connect  its  distribution  systems  with the  Texas to New York
pipeline transmission system of Transco. Transco delivers natural gas to PSNC at
various  points  on  Transco's  pipeline  in  North  Carolina.  Natural  gas  is
distributed  by PSNC  through  its  6,387  miles of  distribution  mains.  These
transmission   pipelines  and  distribution   mains  are  located  primarily  on
rights-of-ways held under easement,  license or permit on lands owned by others.
PSNC also owns 64% of Cardinal  Pipeline  Company,  LLC,  which owns a 37.5 mile
transmission  pipeline,  as  discussed  more  fully  in Note 2 to the  financial
statements.

         PSNC's Energy Center,  which consists of its LNG liquefaction,  storage
and vaporization  facility, is located on a 70-acre tract of land in Cary, North
Carolina.

         PSNC also owns 18 commercial office buildings, a measurement operations
building, a building that houses training, engineering and a call center, eleven
service center buildings, 15 service buildings,  and an energy control building;
PSNC leases six commercial  office buildings for its own use. One of the service
buildings also houses training  facilities.  Another service building is jointly
occupied by a NGV conversion facility.





                                                        15

<PAGE>



Item 3.  Legal Proceedings

         As more fully disclosed in Part I under "Environmental  Matters" and in
Part II in Note 7 to the financial  statements,  PSNC owns or has owned portions
of sites  at  which  manufactured  gas  plants  were  formerly  operated  and is
cooperating  with the North  Carolina  Department  of  Environment,  Health  and
Natural Resources to investigate these sites.

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

         No matters were submitted to a vote of PSNC's  security  holders during
the three months ended September 30, 1997.


                                  PART II

Item 5. Market for the Registrant's Common Stock and Related Shareholder Matters

         PSNC's common stock is traded on the New York Stock  Exchange under the
ticker symbol "PGS." PSNC's stock  quotations  are listed in most  publications,
including  newspapers,  as "PubSvcNC" or "PubSNC."  Prior to March 1, 1995, PSNC
was  traded  in the  over-the-counter  market  and was  included  in the  NASDAQ
National Market System under the symbol "PSNC." At November 30, 1997, there were
approximately 12,773 holders of record of PSNC's common stock.

         The table below  presents the  reported  high and low common stock sale
prices along with cash  dividends  declared per share for each quarter of fiscal
1997 and 1996.

                                                                     Cash
         Quarter                                                   Dividends
          Ended                High                 Low            Declared
         -------              -------             -------          ---------
          Fiscal
           1997
         -------
           Sep 30             $21 7/8             $18 3/4          $.2300
           Jun 30              20                  16 3/4           .2300
           Mar 31              19                  17 3/8           .2200
           Dec 31              19 3/8              17 1/8           .2200

          Fiscal
           1996
          ------
           Sep 30              18 5/8              15 7/8          .2200
           Jun 30              17                  15 1/8          .2200
           Mar 31              17 7/8              15 7/8          .2125
           Dec 31              18 3/4              15 1/4          .2125

         On  November  13,  1997,  the  Board of  Directors  declared  a regular
quarterly cash dividend on PSNC's common stock of 23(cent) per share, payable on
January 1, 1998 to  shareholders  of record on December 10, 1997.  PSNC has paid
regular  quarterly  cash  dividends  on its common  stock  since  1958,  and has
increased cash dividends paid to shareholders each calendar year since 1970.


                                                        16

<PAGE>



<TABLE>
<CAPTION>

Item 6.  Selected Financial Data

For the Fiscal Years Ended September 30,                1997        1996        1995       1994         1993
----------------------------------------              --------    --------    --------   --------     ------
<S>                                                   <C>         <C>         <C>        <C>          <C> 
Operating revenues (000's)........................    $337,930    $308,882    $247,893   $273,705     $279,989
Gross margin (000's)..............................    $155,926    $140,744    $130,828   $118,327     $112,105
Net income (000's)................................    $ 26,347    $ 23,898    $ 21,421   $ 19,976 (2) $ 14,219
Earnings per average common share ................    $   1.35    $   1.26    $   1.16   $   1.17 (2) $    .90
Cash dividends declared per common share .........    $    .90    $   .865    $   .835   $   .805     $   .775
Average number of common shares
 outstanding (000's) .............................      19,550      18,995      18,509     17,012       15,812
Capital expenditures (000's)......................    $ 60,310    $ 60,428    $ 61,119   $ 45,469     $ 40,127
Total assets (000's)..............................    $585,142    $524,889    $456,995   $427,939     $400,946
Common equity (000's).............................    $207,368    $188,635    $173,372   $160,555     $123,662
Long-term debt (000's) (1)........................    $180,850    $140,150    $100,700   $113,680     $124,518


(1) Excludes current maturities.
(2) Includes $1,511,000 or $0.09 per share related to sale of propane assets.
</TABLE>

                                                           17

<PAGE>



Item 7.  Management's Discussion and Analysis of Results
            of Operations and Financial Condition


Results of Operations


Net Margin

For the Fiscal Years Ended September 30,              1997      1996      1995
----------------------------------------            --------  --------  ------

(Amounts in thousands except
 degree day and customer data)

Gross margin                                        $155,926  $140,744  $130,828
Less - Franchise taxes                                10,819     9,885     7,943
                                                    --------  --------  --------
  Net margin                                        $145,107  $130,859  $122,885
                                                    ========  ========  ========


Total throughput (DT):
  Residential                                         19,760    22,398    17,567
  Commercial/small industrial                         12,373    14,307    11,855
  Large commercial/industrial                         32,980    28,941    29,197
                                                      ------    ------    ------
                                                      65,113    65,646    58,619
                                                      ======    ======    ======

System average degree days: (1)
  Actual                                               3,253     3,856     3,030
  Normal                                               3,384     3,402     3,384
  Percent of normal                                      96%      113%       90%

Weather normalization adjustment
  income (refund), net of
  franchise taxes                                    $ 5,960   $(8,733)  $ 5,800

Customers at end of period: (2)
  Residential                                        264,129   248,940   246,877
  Commercial/small industrial                         39,349    38,624    29,497
  Large commercial/industrial                          2,419     1,677       389
                                                     -------   -------   -------
                                                     305,897   289,241   276,763
                                                     =======   =======   =======


         (1) The increase in normal  degree days in 1996 is due to an additional
day for leap year.
         (2)   Reflected   in   customers   at   September   30,   1997  is  the
reclassification of approximately 700 customers from commercial/small industrial
to large commercial/industrial.  Reflected in customers at September 30, 1996 is
the  reclassification  of  approximately  8,000  customers  from  residential to
commercial/small industrial, and 1,300 from commercial/small industrial to large
commercial/industrial.

         Total  throughput  and net margin,  defined as operating  revenues less
cost of gas and franchise taxes, are more meaningful comparative statistics than
gas sales volumes and operating revenues when analyzing PSNC's utility operating
results.  This is because certain  large-volume  customers purchase gas directly
from gas producers or other gas suppliers and

                                                           18

<PAGE>



transport it through  PSNC's  pipeline  system.  PSNC's  operating  revenues and
expenses do not include the commodity  cost of this  transported  gas;  however,
PSNC earns a margin on the  transported  gas which is  equivalent  to the margin
that PSNC would earn if it purchased  and resold gas to these  customers.  Also,
various  temporary  collection  and  refund  mechanisms  affect  both  operating
revenues and cost of gas equally.

Fiscal 1997

o        Net margin increased by $14,248,000, or 11%, in fiscal 1997 as compared
         to fiscal 1996 primarily due to the general rate increase effective
         October 1, 1996 and to an increased customer base.  This general rate
         increase accounted for approximately $6,200,000 of the variance from 
         fiscal 1996.  The volumes of gas delivered to residential and
         commercial/small industrial customers decreased 12% and 14%,
         respectively, due to weather that was 16% warmer as compared to the 
         prior fiscal year.  Throughput for lower-margin industrial and large 
         commercial customers increased 14% as compared to fiscal 1996.  This 
         reflects decreased weather-related service curtailments to these
         customers during the year as compared to fiscal 1996, along with an 
         increase in the customer base.  Net throughput-related variances for
         all customer classes totaled approximately $7,775,000, including a
         variance of $14,693,000 related to the operation of the weather 
         normalization adjustment (WNA) mechanism. After adjusting for the 
         customer reclassifications as previously discussed, residential, 
         commercial/small industrial and large commercial/industrial customers
         increased 6%, 4% and 2%, respectively, as compared to fiscal 1996.


Fiscal 1996

o        Net margin increased by $7,974,000, or 6%, in fiscal 1996 as compared
         to fiscal 1995 primarily due to throughput-related variances associated
         with an increased customer base.  Also reflected in this increase is
         approximately $1,645,000 related to the Cardinal Pipeline rate increase
         effective January 26, 1995. The volumes of gas delivered to residential
         and commercial/small industrial customers increased 28% and
         21%, respectively, due to weather that was 27% colder as compared to
         the prior fiscal year.  Throughput for lower-margin industrial and
         large commercial customers decreased 1% as compared to fiscal 1995.  
         This reflects increased weather-related service curtailments to these 
         customers during the year as compared to fiscal 1995.  Net throughput-
         related variances for all customer classes totaled approximately
         $6,098,000, including a variance of $14,533,000 related to the
         operation of the WNA mechanism.  Net margin for fiscal 1996 also 
         increased due to a $732,000 refund in fiscal 1995 related to income ta
         credits taken in prior periods. These increases were partially offset 
         by a $734,000 charge to expense related to the resolution of accounting
         issues associated with PSNC's Southern Expansion costs as discussed in
         Note 2 to the financial statements.  After adjusting for the customer
         reclassifications as previously discussed, residential, commercial/
         small industrial and large commercial/industrial customers increased
         4%, 8% and 3%, respectively, as compared to fiscal 1995.




                                                           19

<PAGE>



Fiscal 1995

o        Net margin increased by $13,324,000, or 12%, in fiscal 1995 as compared
         to fiscal 1994 primarily due to rate increases associated with the
         October 7, 1994 general rate case order and the approval of rates for
         the Cardinal Pipeline effective January 26, 1995.  Rate increases that
         affected PSNC's residential and commercial/small industrial customers
         account for approximately $11,723,000 of the increase.  The quantities
         of gas delivered to residential and commercial/small industrial 
         customer bases declined 6% and 5%, respectively, due to 13% warmer 
         weather as compared to the prior fiscal year.  This decrease was 
         somewhat offset by increases in customer bases of 5% and 6%, 
         respectively.  Net throughput-related variances for these customers
         totaled approximately $2,956,000, including $5,938,000 related to the 
         operation of the WNA.  The quantities of gas delivered to large 
         commercial/industrial customers increased 6% due to a 3% increase in
         the customer base and to higher operating levels by some of these
         customers.  This increase resulted in additional net margin of
         approximately $1,346,000; however, the increase was offset by a price- 
         related decline of approximately $1,539,000 due to both changes in the
         sales mix and the general rate case order, and to a decline of $430,000
         from the prior year in penalty billings for unauthorized gas usage. 
         The twelve-month period also reflects a $732,000 refund ordered by the
         North Carolina Utilities Commission (NCUC) in the October 7, 1994 rate
         case order that related to income tax credits taken in prior periods.


Operating Expenses

         Other  operating  expenses  increased  10%  during  fiscal  1997.  This
increase is due primarily to net expenses of $1,034,000 related to the voluntary
early  retirement  program  offered in the first  quarter of fiscal  1997.  On a
straight  comparison  basis  without  this  expense,  other  operating  expenses
increased 8% as compared to fiscal 1996. Salary and employee  benefits,  outside
consulting  expenses,  employee training  programs,  and expenses related to the
outsourcing  of  meter  reading  also  contributed  to the  increase.  Partially
offsetting the increases were reduced expenses for hospitalization insurance due
to PSNC's recent affiliation with a health maintenance organization provider.

         Other operating expenses increased 7% during fiscal 1996. This increase
reflects higher salary expenses and employee benefits and increased expenses for
uncollectibles,  which are based on revenues.  These  increases  were  partially
offset by reduced outside consulting expenses related to information systems and
employee  benefits.  Prior  fiscal year  expenses  were  reduced by  adjustments
related to group life and hospitalization  insurance due to favorable experience
and  the  transfer  of a large  number  of  employees  to a less  costly  health
maintenance  organization provider. On a straight comparison basis without these
insurance adjustments, operating expenses for fiscal 1996 increased 5%.

         Other operating expenses increased 4% during fiscal 1995. This increase
reflects higher salary expenses and the payroll reallocations implemented during
November 1994 to  standardize  labor  distributions.  Also  contributing  to the
increase   were   employee    severance   expenses   related   to   departmental
reorganizations,  fees  related to listing on the New York Stock  Exchange,  and
expenses for outside consulting services related to information systems

                                                           20

<PAGE>



and  employee   benefits.   These   increases  were  partially   offset  by  the
reclassification  of certain sales  compensation  expenses to merchandising  and
jobbing,  and  adjustments  related to group life insurance and  hospitalization
insurance due to favorable  experience realized by PSNC, along with the transfer
of a large number of employees to a less costly health maintenance  organization
provider.

         Maintenance  expenses  increased  17% in fiscal 1997 due  primarily  to
telecommunications  expenses  and  higher  salaries.  Also  contributing  to the
increase  were  charges of $143,000  related to the early  retirement  severance
packages.  On a straight  comparison  basis  without this  expense,  maintenance
expenses  increased  14%  as  compared  to  fiscal  1996.  Maintenance  expenses
increased 20% in fiscal 1996 and decreased 8% in fiscal 1995 due to the $750,000
reversal of expenses  related to the  investigation  of former  manufactured gas
plant (MGP) sites,  originally  recorded in fiscal 1992. The reversing entry was
recorded in fiscal 1995. On a straight comparison basis without this adjustment,
maintenance expenses for fiscal 1996 increased 2%.

         Depreciation  expense for all three fiscal years increased due to plant
additions.   Depreciation   expense  for  fiscal  1995  also  reflected   higher
depreciation rates approved in the October 1994 general rate case order. General
taxes increased  during fiscal 1997 and 1996 due to an increase in franchise tax
expense reflecting an increase in revenues. The decrease in general taxes during
fiscal 1995 is due to a reduction in franchise tax expense reflecting a decrease
in revenues.

Other Income (Deductions)

         Other income (deductions)  increased $535,000 during fiscal 1997. Other
interest income  increased  $792,000 over fiscal 1996 due to interest on amounts
due  from  customers  through  the  operation  of the  Rider  D rate  mechanism.
Winter-period  increases  in the market  price of natural  gas  resulted in PSNC
recording  uncollected  gas costs,  along with  increased  demand  costs,  which
totaled  $18,385,000 at September 30, 1997. Prior to December 1996,  income from
secondary  market  transactions  was  recorded  as  other  income.  Income  from
secondary  market  transactions  are  now  recorded  in  subsidiary  operations.
Secondary market  transactions are any transactions that utilize capacity rights
on interstate pipelines. PSNC Production Corporation (PSNC Production) and Sonat
Marketing Company L.P. (Sonat  Marketing),  a subsidiary of Sonat Inc.,  created
Sonat Public  Service  Company L.L.C.  (Sonat Public  Service) in December 1996.
Upon creation of Sonat Public Service, $4,845,000 of restricted cash received by
PSNC  Production  from Sonat  Marketing  was  deferred,  and during fiscal 1997,
$816,000 of this amount was recognized as subsidiary income.  With the formation
of Sonat Public  Service,  PSNC  Production and Sonat Marketing split evenly the
25% share of net income from the  earnings  from these  transactions.  PSNC also
realized a $205,000 improvement in merchandise and jobbing. This improvement was
reduced by  approximately  $231,000  related to the early  retirement  severance
package.  Without this expense,  merchandise  and jobbing would have improved by
approximately $436,000.

         Other income  (deductions)  increased  $3,132,000  during  fiscal 1996.
Other interest income  increased  $1,133,000 over fiscal 1995 due to interest on
amounts due from customers  through the operation of the Rider D rate mechanism.
Winter-period  increases  in the market  price of natural  gas  resulted in PSNC
recording  uncollected  gas costs,  along with  increased  demand  costs,  which
totaled $17,925,000 at September 30, 1996. Income from

                                                           21

<PAGE>



nonregulated  subsidiary operations exceeded fiscal 1995 by $925,000 due largely
to gains realized from natural gas brokering  activities.  Income from secondary
market  transactions  increased  $582,000  over the prior  year.  PSNC  realized
increases  in both  the  amount  of  margin  generated  and an  increase  in the
shareholder  portion of these  margins from 10% to 25%,  pursuant to an order of
the NCUC effective November 1, 1995. PSNC also realized a $265,000 gain from the
sale of property and a $250,000 improvement in merchandise and jobbing.

         Other income (deductions)  decreased  $4,350,000 during fiscal 1995 due
mainly  to  proceeds  received  in  fiscal  1994  from the sale of PSNC  Propane
Corporation and the absence of operating  income from propane  operations.  PSNC
Propane  Corporation was sold for a $.09 per share after-tax capital gain. Other
income  (deductions)  also  decreased due to a loss in  merchandise  and jobbing
largely  due to a  reclassification  of certain  sales  commission  expenses  to
merchandise  and jobbing from other  operating  expenses in connection  with the
October 1994 general rate case order.  Also contributing to the decrease was the
fiscal  1994  reclassification  of income  from  pipeline  capacity  sales  from
operating revenues to other income.

Interest Deductions

         Interest  deductions for fiscal 1997 increased  $2,512,000  over fiscal
1996.  This increase was due mainly to increased  interest  expense on long-term
debt of $2,887,000  resulting  from the December 1996 issuance of $50,000,000 of
7.45% Senior Debentures due 2026.  Interest expense on short-term debt decreased
$299,000 due to lower average short-term bank loans outstanding.

         Interest  deductions for fiscal 1996 increased  $1,885,000  over fiscal
1995.  This increase was due mainly to increased  interest  expense on long-term
debt of $1,136,000  resulting  from the January 1996 issuance of  $50,000,000 of
6.99% Senior Debentures due 2026.  Interest expense on short-term debt increased
$845,000 due to higher average short-term bank loans outstanding.

         Interest  deductions for fiscal 1995  decreased  $391,000 due mainly to
lower interest  expense on declining  balances in long-term  debt. The declining
balance in  long-term  debt was due to sinking  fund  payments  and to the early
redemption  in May 1994 of the 9 7/8%  First  Mortgage  Bonds  due  1995.  These
decreases  were  partially  offset by increased  interest  expense due to higher
rates on higher average short-term bank loans outstanding.

Liquidity and Capital Resources

         PSNC's  primary  capital  needs  are  the  funding  of  its  continuing
construction  program and the  seasonal  funding of its stored gas  inventories.
PSNC uses short-term bank loans temporarily,  together with internally generated
funds,  long-term debt and equity financing to fund its continuing  construction
program.  PSNC has committed lines of credit with seven  commercial  banks which
vary monthly depending upon seasonal requirements and a five-year revolving line
of credit with one bank. For the  twelve-month  period  beginning April 1, 1997,
total lines of credit with these banks range from a minimum of  $37,000,000 to a
winter-period maximum of $81,000,000.  At September 30, 1997, committed lines of
credit  totaled  $61,000,000,  and  uncommitted  annual lines of credit  totaled
$80,000,000. Lines of credit

                                                           22

<PAGE>



are  evaluated  periodically  by  management  and  renegotiated  to  accommodate
anticipated  short-term  financing  needs.  Management  believes these lines are
currently  adequate to finance budgeted  construction  expenditures,  stored gas
inventories  and other corporate  needs. At September 30, 1997 and 1996,  PSNC's
total  short-term  bank loans  outstanding  were  $38,000,000  and  $59,500,000,
respectively.

         During September 1996, PSNC made the final  additional  payment allowed
on its 10% Senior Debentures due 2003 of $1,250,000. During September 1995, PSNC
paid an additional  $2,500,000,  the maximum additional annual payment permitted
pursuant to the terms of this debenture agreement.

         PSNC also generates  equity capital through its dividend  reinvestment,
employee stock purchase and nonqualified stock option plans. During fiscal 1997,
1996 and 1995, the dividend reinvestment plan generated  $7,277,000,  $5,187,000
and $5,069,000,  respectively, of additional equity capital. In August 1996, the
dividend  reinvestment  plan was amended to allow the initial purchase of shares
directly  from  PSNC  and  also  to  increase  the  amount  of  cash  individual
shareholders   could  invest.   The  employee   stock  purchase  plan  generated
$1,318,000,  $1,198,000  and  $1,174,000,  respectively,  of  additional  equity
capital.  The  nonqualified  stock option plan  generated net equity  capital of
$1,181,000, $1,232,000 and $447,000 for the respective three fiscal years.

         On December  20,  1995,  PSNC filed with the  Securities  and  Exchange
Commission  a  registration  statement  covering  up to an  aggregate  amount of
$125,000,000  of  senior   unsecured  debt.  On  January  10,  1996,  PSNC  sold
$50,000,000 of 6.99% Senior  Debentures due 2026 in a public  offering.  The net
proceeds of $49,314,000 were used to pay down a significant  portion of the then
outstanding short-term bank debt. On December 17, 1996, PSNC sold $50,000,000 of
7.45%  Senior  Debentures  due 2026 in a public  offering.  The net  proceeds of
$49,404,000 were used to pay down a significant  portion of the then outstanding
short-term bank debt. At September 30, 1997,  $25,000,000  remained on the shelf
registration.

         The  ratio of  long-term  debt to  total  capitalization  was  46.6% at
September 30, 1997, 42.6% at September 30, 1996 and 36.7% at September 30, 1995.
PSNC's goal is to maintain a capital structure with a ratio of long-term debt to
total capitalization in the 45% range with periodic moderate fluctuations.

         For  fiscal  1997,  1996  and  1995,  construction   expenditures  were
$60,310,000, $60,428,000 and $61,119,000,  respectively. For fiscal 1998, PSNC's
Board  of  Directors  approved  a  budget  of  $69,781,000  for  PSNC's  ongoing
construction  program.  PSNC  anticipates  spending  $45,000,000  to $60,000,000
annually on its construction program for the next several years.

         As discussed more fully in Note 4 to the financial statements, PSNC and
its subsidiaries sponsor a noncontributory defined benefit pension plan covering
substantially  all employees.  During fiscal 1997 and 1996,  contributions  were
$3,306,000 and $2,855,000,  respectively.  The increase in fiscal 1997 is due to
the funding  requirement of the previously  mentioned voluntary early retirement
program. Projected fiscal 1998 plan contributions total $2,582,000.


                                                           23

<PAGE>



         PSNC paid from its assets $3,555,000 of special termination benefits to
eligible  employees in  connection  with a voluntary  early  retirement  program
available  from  October  14,  1996 until  November  27,  1996.  This amount was
recorded  during the first quarter of fiscal 1997 in addition to regular pension
benefits paid from plan assets.  As a result of the voluntary  early  retirement
program,  PSNC  recognized a pension  gain of  approximately  $1,739,000,  which
lowered pension  expense in fiscal 1997.  PSNC estimates a permanent  savings in
annual salaries of approximately  $1,100,000  beginning in the second quarter of
fiscal 1997 and an increase in annual pension  expense of $200,000  beginning in
fiscal 1998.

         Restricted  cash and  temporary  investments  and  restricted  supplier
refunds relate to refunds of $9,888,000  received from PSNC's pipeline  supplier
that have not yet been  deposited  into the expansion  fund in the Office of the
State  Treasurer.  This fund was created by an order of the NCUC,  dated June 3,
1993, to finance the  construction  of natural gas lines into unserved  areas of
PSNC's service  territory that otherwise would not be  economically  feasible to
serve.

         On August  21,  1995,  the NCUC  approved  an  expansion  project  into
McDowell  County  to be funded  from  PSNC's  expansion  fund in an amount up to
$8,194,000.  PSNC began  providing  natural gas  service in  McDowell  County in
December 1996.  Construction  expenditures  as of September 30, 1997 relating to
this project were approximately $14,237,000, of which $7,781,000 was refunded to
PSNC from the expansion fund during fiscal 1997.  PSNC's next expansion  project
will be in Haywood County.  PSNC currently  provides  natural gas service to the
eastern part of this county.  The current  estimated  cost to expand  service to
western  Haywood County,  including  Waynesville,  Clyde and Lake Junaluska,  is
$7,182,000.  On  December  30,  1996,  PSNC filed an  application  with the NCUC
requesting  expansion  funds  for this  project.  On April  22,  1997,  the NCUC
approved this project and  authorized  disbursements  from the expansion fund of
$4,127,000.  PSNC expects to begin  providing  partial service to this county by
December 1997.

         Net accounts receivable  increased  $8,717,000 as compared to September
30, 1996.  This increase was due  primarily to gas brokering and  transportation
pooling activities.

         Stored gas  inventories  increased  $5,027,000 as compared to September
30, 1996.  This increase was due to additional  quantities of natural gas stored
and the addition of another storage service.

         Net deferred gas costs fluctuate in response to the operation of PSNC's
Rider D rate  mechanism.  This  mechanism  allows PSNC to recover all  prudently
incurred gas costs from customers.  It also allows PSNC to recover margin losses
on negotiated sales to large commercial and industrial  customers with alternate
fuel  capability.  On a  monthly  basis,  any  difference  in  amounts  paid and
collected  is  recorded  for  subsequent  refund to or  collection  from  PSNC's
customers.  Deferred  gas costs at  September  30, 1997 and  September  30, 1996
reflect  undercollections  from customers primarily related to the unanticipated
surge in  natural  gas prices  during  the  respective  winter  periods.  PSNC's
deferred gas costs balances are approved by the NCUC in annual gas cost prudence
reviews and are  refunded  to or  collected  from  customers  over a  subsequent
twelve-month  period.  Amounts that have not been refunded to or collected  from
customers bear interest at an annual rate of 10% as required by the NCUC. PSNC's
strategy is to manage the balance of deferred gas costs to a minimal  level over
a twelve-month period. On November 6, 1997, the NCUC issued an order

                                                           24

<PAGE>



permitting  PSNC, on a two-year trial basis,  to establish its commodity cost of
gas for large commercial and industrial  customers on the basis of market prices
for natural gas.  PSNC will  continue to  establish a benchmark  cost of gas for
residential and small commercial customers pursuant to its existing procedures.

         The balance in long-term  restricted cash is due to the restricted cash
contribution from Sonat Marketing.  Sonat Marketing  contributed  $4,944,000 for
its 50%  ownership in Sonat Public  Service,  of which  $4,845,000  is currently
restricted.  Sonat Marketing is entitled to a partial refund of its contribution
if the economics of the  transaction  are adversely  modified by any  regulatory
body over a five-year period. Restricted cash will be released annually in equal
amounts beginning in December 1998 and extending through December 2001.

         The $420,000 increase in the asset for debt expense relates to expenses
associated with the 7.45% Senior Debentures due 2026 sold on December 17, 1996.

         Other assets  increased  $1,325,000  primarily due to deferred  charges
related to costs of a project to ensure that PSNC's computer  operating  systems
function  properly in the year 2000. These charges are being amortized to income
over a three-year period beginning  September 1997 per an NCUC order dated April
29, 1997.

         The increase in accounts  payable at September  30, 1997 as compared to
September 30, 1996 is due to additional  secondary  market  transactions  and to
natural gas purchased at higher costs.

         The increase in other  current  liabilities  at  September  30, 1997 as
compared to September 30, 1996 is primarily due to recording the current portion
of the deferred  revenue  associated  with the creation of Sonat Public Service.
The noncurrent portion is recorded in deferred revenues.

         The $21,500,000 decrease in interim bank loans at September 30, 1997 as
compared  to  September  30, 1996  relates to the sale on  December  17, 1996 of
$50,000,000 of 7.45% Senior  Debentures due 2026, the net proceeds of which were
used to pay down a significant  portion of the then outstanding  short-term bank
loans.

         The increase in accrued  interest at September  30, 1997 as compared to
September 30, 1996  reflects  interest on the 7.45% Senior  Debentures  due 2026
sold on December 17, 1996.

         Deferred  credits  and other  liabilities  increased  primarily  due to
deferred revenue of $3,100,000,  which is the noncurrent portion of the deferred
revenue received from the creation of Sonat Public Service. Also contributing to
the increase was additional deferred income taxes of $3,205,000. These increases
were partially offset by the previously discussed pension gain.

         As discussed  more fully in Note 7 to the  financial  statements,  PSNC
owns or has owned  portions  of six sites in North  Carolina  on which MGPs were
formerly  operated.  Evaluations of these sites have revealed that MGP residuals
are present or suspected at several of the sites. The North Carolina  Department
of Environment,  Health and Natural Resources  (NCDEHNR) has recommended that no
further action be taken with respect to one

                                                           25

<PAGE>



site.  An  environmental  consulting  firm retained by PSNC  estimated  that the
minimum  aggregate costs to investigate and monitor the extent of  environmental
degradation and to implement  remedial  procedures with respect to the remaining
five sites may range from $3,705,000 to $50,145,000 over a 30-year period.  PSNC
is unable to  determine  the rate at which costs may be incurred  over this time
period.  In October 1994, PSNC entered into an  administrative  order of consent
with NCDEHNR to investigate the Durham, North Carolina,  site in accordance with
standards  and methods  approved by NCDEHNR.  At September  30,  1997,  PSNC had
recorded a total liability and a corresponding  regulatory  asset of the minimum
amount of the range, or $3,705,000.

         As discussed more fully in Note 2 to the financial statements, PSNC and
a subsidiary of Piedmont Natural Gas Company,  Inc.  (Piedmont)  formed Cardinal
Pipeline  Company,  LLC  (Cardinal)  in March 1994 to  construct  an  intrastate
transmission  pipeline. The pipeline was placed into service in December 1994 at
a cost of  approximately  $26,000,000,  of which PSNC owns 64%, and extends 37.5
miles to provide  additional daily capacity to PSNC's eastern service  territory
in and around the Durham and Raleigh areas. In September 1995,  PSNC,  Piedmont,
Transcontinental Gas Pipe Line Corporation  (Transco) and North Carolina Natural
Gas  Corporation  (NCNG)  signed a letter of intent to form  Cardinal  Extension
Company, LLC (Cardinal Extension),  to purchase and extend the existing Cardinal
Pipeline.  As proposed,  the extension will span approximately 67 miles from the
termination  point of the  original  Cardinal  Pipeline to a point  southeast of
Raleigh.  This  project  is  estimated  to cost  $75,000,000.  PSNC,  through  a
subsidiary,  will own approximately 33% of the new 104.5-mile pipeline, and will
contribute  its net book  investment in the existing  pipeline  plus  additional
equity capital of approximately  $1,000,000 for its ownership share. On December
23, 1996,  Cardinal Extension filed an application with the NCUC for approval of
this  project.  A public  hearing was held on May 20,  1997,  and on November 6,
1997, the NCUC issued an order  approving the proposed  project.  Subject to the
approvals by state and federal  agencies,  construction is scheduled to begin in
early  1999,  and the  facilities  are  expected  to be in  service on or before
November 1, 1999.

         As discussed  more fully in Note 2 to the  financial  statements,  Pine
Needle LNG Company,  LLC (Pine  Needle) was formed by  subsidiaries  of Transco,
Piedmont,  NCNG,  Amerada  Hess,  and PSNC,  and the  Municipal Gas Authority of
Georgia.  Pine Needle will own and operate a four billion  cubic foot  liquefied
natural gas storage facility in North Carolina. Construction began in 1997 at an
estimated  cost of  $107,000,000.  The facility is expected to be operational by
May 1999.  PSNC,  through  its  subsidiary,  PSNC Blue Ridge  Corporation  (Blue
Ridge), will own 17% of the facility,  and PSNC has contracted to use 25% of the
facility's gas storage  capacity and withdrawal  capabilities.  At September 30,
1997, Blue Ridge's  investment in Pine Needle totaled $421,000.  Blue Ridge will
make capital  contributions  approximating  $9,000,000  during the  construction
period.

Effects of Inflation

         The margin  charged to PSNC's firm gas  customers  may not be increased
without a general  rate case.  Accordingly,  in the absence of  authorized  rate
increases and except for changes in the cost of gas sold, which are passed along
to customers on a timely basis through various rate adjustment mechanisms,  PSNC
must  look  to  performance   improvement   and  higher   throughput  to  offset
inflationary increases in its cost of operations. Current rates only permit PSNC
to recover its historical cost of utility plant and give no recognition to the

                                                           26

<PAGE>



replacement  cost of these  facilities.  PSNC's last general rate case was filed
March 1, 1996 and  became  effective  October 1,  1996.  Management  continually
reviews  operations  and economic  conditions  to assess the need for filing for
general rate relief.

Recently Issued but Not Yet Effective Accounting Statements

         In February  1997,  the  Financial  Accounting  Standards  Board (FASB)
issued Statement of Financial Accounting Standards (SFAS) No. 128, "Earnings per
Share." This  statement  establishes  standards  for  computing  and  presenting
earnings per share (EPS).  It replaces  the  presentation  of primary EPS with a
presentation  of basic EPS.  It also  requires  dual  presentation  of basic and
diluted EPS on the face of the income  statement  for all entities  with complex
capital  structures and requires  reconciliation of the computation of basic EPS
to diluted EPS. Basic EPS excludes  dilution and is computed by dividing  income
available  to  shareholders  by the  weighted  average  number of common  shares
outstanding  for the period.  This  statement  will be adopted by PSNC beginning
October 1, 1997.

         In  February  1997,  the  FASB  issued  SFAS  No.129,   "Disclosure  of
Information  About Capital  Structure." This statement  applies to all entities,
public  and  nonpublic.   It  supersedes  specific  disclosure  requirements  of
Accounting Principles Board (APB) Opinions No. 10 and No. 15 and SFAS No. 47 and
consolidates  them  in  this  statement.   There  is  no  change  in  disclosure
requirements for entities previously subject to these requirements.

         In June 1997,  the FASB issued SFAS No. 130,  "Reporting  Comprehensive
Income."  This  statement  establishes  standards  for  reporting and display of
comprehensive  income  and  its  components  in a full  set of  general  purpose
financial statements.  "Comprehensive Income" is the total of net income and all
other  non-owner  changes  in  equity.  This  statement  will be adopted by PSNC
effective  October  1,  1998.  PSNC does not  anticipate  the  adoption  of this
statement to have a material impact.

         In June 1997, the FASB issued SFAS No. 131,  "Disclosure About Segments
of an Enterprise and Related Information." This statement introduces a new model
for segment  reporting  based on the way senior  management  organizes  segments
within a company for making operating decisions and assessing performance.  This
statement  will be adopted  by PSNC  effective  October  1, 1998.  PSNC does not
anticipate the adoption of this statement to have a material impact.

Forward-looking Statements

         Statements  contained in this  document and the notes to the  financial
statements  which are not  historical in nature are  forward-looking  statements
within the  meaning of the  Private  Securities  Litigation  Reform Act of 1995.
Forward-looking statements are subject to risks and uncertainties that may cause
future results to differ materially from those set forth in such forward-looking
statements.  PSNC undertakes no obligation to update forward-looking  statements
to  reflect  events or  circumstances  after  the date  hereof.  Such  risks and
uncertainties with respect to PSNC include,  but are not limited to, its ability
to successfully  implement internal  performance goals,  performance issues with
natural gas suppliers and transporters,  the capital-intensive  nature of PSNC's
business,  regulatory issues (including rate relief to recover increased capital
and operating costs), competition, weather, exposure to environmental issues and
liabilities, variations in natural gas prices and general and

                                                           27

<PAGE>



specific economic conditions.  From time to time,  subsequent to the date of the
filing of this  document,  PSNC may include  forward-looking  statements in oral
statements or other written documents.


                                                           28

<PAGE>



Item 8.  Financial Statements and Supplementary Data

<TABLE>

         Public Service Company of North Carolina, Incorporated and Subsidiaries

                           Consolidated Statements of Income

<CAPTION>

For the Fiscal Years Ended September 30,       1997           1996          1995
----------------------------------------   ------------   ------------   ------------

<S>                                        <C>            <C>            <C>    

Operating revenues                         $337,930,181   $308,882,079   $247,893,014
Cost of gas                                 182,003,740    168,137,830    117,065,047
                                           ------------   ------------   ------------
Gross margin                                155,926,441    140,744,249    130,827,967
                                           ------------   ------------   ------------

Operating Expenses and Taxes:
  Other operating expenses                   55,180,279     50,074,438     47,006,721
  Maintenance                                 6,007,234      5,128,699      4,261,832
  Provision for depreciation                 22,387,370     19,748,947     18,156,134
  General taxes                              16,924,868     16,005,669     13,823,123
  Income taxes -
    Federal                                  12,535,400     11,579,200     10,776,500
    State                                     3,175,800      2,917,300      2,743,800
                                           ------------   ------------   ------------
     Total operating expenses and taxes     116,210,951    105,454,253     96,768,110
                                           ------------   ------------   ------------
Operating income                             39,715,490     35,289,996     34,059,857
                                           ------------   ------------   ------------

Other Income (Deductions):
  Allowance for equity funds used
   during construction                             -              -            18,244
  Merchandise and jobbing                       121,554        (83,582)      (333,914)
  Subsidiary operations, net of
   income taxes                               1,677,391      1,327,561        402,344
  Interest income and other                   2,086,826      2,106,868        132,543
                                           ------------   ------------   ------------
     Total other income (deductions)          3,885,771      3,350,847        219,217
                                           ------------   ------------   ------------
Gross income                                 43,601,261     38,640,843     34,279,074
                                           ------------   ------------   ------------

Interest Deductions:
  Interest on long-term debt                 15,139,409     12,252,379     11,115,979
  Amortization of debt expense                  163,173        151,978        137,122
  Other interest                              2,293,555      2,589,033      1,974,268
  Allowance for borrowed funds used
   during construction                         (341,429)      (250,765)      (369,522)
                                           ------------   ------------   ------------
     Total interest deductions               17,254,708     14,742,625     12,857,847
                                           ------------   ------------   ------------
Net income                                 $ 26,346,553   $ 23,898,218   $ 21,421,227
                                           ============   ============   ============


Average common shares outstanding            19,549,656     18,995,035     18,509,049


Earnings per average common share                 $1.35          $1.26          $1.16
                                                  =====          =====          =====


Cash dividends declared per common share           $.90          $.865          $.835

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

                                                              29

<PAGE>



         Public Service Company of North Carolina, Incorporated and Subsidiaries
                              Consolidated Balance Sheets


September 30,                                      1997           1996
-------------------------------------------    ------------   ------------
Assets
------
Gas Utility Plant:
 In service                                    $679,488,467   $619,831,020
 Less - Accumulated depreciation                203,224,735    183,529,378
                                               ------------   ------------
 Net plant in service                           476,263,732    436,301,642
 Construction work in progress                    4,738,227      9,386,643
                                               ------------    ------------
                                                481,001,959    445,688,285
                                               ------------    ------------

Non-utility Property, net of
 accumulated depreciation (1997 -
 $143,128 and 1996 - $134,789)                      641,666         691,145
                                               ------------    ------------

Current Assets:
 Cash and temporary investments                   1,641,371       3,360,640
 Restricted cash and temporary investments        9,887,844       6,394,634
 Receivables, less allowance for
  doubtful accounts (1997 - $2,521,983 and 
  1996 - $2,481,943)                             26,616,667       17,899,381
 Inventories, at average cost -
  Materials, supplies and merchandise             7,644,432        6,704,622
  Stored gas                                     20,890,195       15,862,819
 Deferred gas costs, net                         19,337,797       17,525,347
 Prepayments                                      2,403,445        2,275,674
                                               ------------      ------------
                                                 88,421,751        70,023,117
                                               ------------      ------------

Deferred Charges and Other Assets:
 Long-term restricted cash                        4,845,120             -
 Debt expense                                     1,838,815         1,418,463
 Other                                            8,392,229         7,067,699
                                               ------------      ------------
                                                 15,076,164         8,486,162
                                                ------------     ------------
                                               $585,141,540      $524,888,709
                                               ============      ============


Capitalization and Liabilities
------------------------------
Capitalization (see statements):
 Common equity                                 $207,367,763      $188,635,405
 Long-term debt                                 180,850,000       140,150,000
                                               ------------      ------------
                                                388,217,763       328,785,405
                                               ------------      ------------

Current Liabilities:
 Current maturities of long-term debt             9,300,000         6,800,000
 Accounts payable                                27,799,188        20,300,451
 Accrued taxes                                    4,303,522         3,074,823
 Customer prepayments and deposits                6,978,565         6,013,886
 Accrued interest                                 4,447,660         3,096,993
 Cash dividends declared                          4,534,095         4,222,283
 Restricted supplier refunds                      9,887,844         6,394,634
 Other                                            5,149,824         3,960,098
                                               ------------      ------------
                                                 72,400,698        53,863,168
 Interim bank loans, due within one year         38,000,000        59,500,000
                                               ------------      ------------
                                                110,400,698       113,363,168
                                               ------------      ------------

Deferred Credits and Other Liabilities:
 Income taxes, net                               59,437,911        56,232,845
 Deferred revenue                                 3,099,888              -
 Investment tax credits                           3,780,581         4,210,269
 Accrued pension cost                             9,531,887        12,213,788
 Other                                           10,672,812        10,083,234
                                                -----------      ------------
                                                 86,523,079        82,740,136
                                                ------------      ------------
                                                $585,141,540      $524,888,709
                                                ============      ============

The accompanying notes to consolidated financial statements are an integral part
of these balance sheets.

                                                        30

<PAGE>



        Public Service Company of North Carolina, Incorporated and Subsidiaries

                      Consolidated Statements of Capitalization

September 30,                                          1997             1996
------------------------------------------         ------------     -----------

Common Equity:
  Common stock, $1 par, 30,000,000
   shares authorized; shares outstanding
   1997 - 19,770,843 and 1996 - 19,204,385         $ 19,770,843     $ 19,204,385
  Capital in excess of par value                    123,474,119      114,007,859
  Retained earnings                                  64,122,801       55,423,161
                                                   ------------     ------------
                                                    207,367,763      188,635,405
                                                   ------------     ------------
Long-term Debt:
  Senior debentures (unsecured) -
    8.65% due 2002                                   12,500,000       15,000,000
    10% due 2003                                     11,250,000       11,250,000
    10% due 2004                                     34,400,000       38,700,000
    8.75% due 2012                                   32,000,000       32,000,000
    6.99% due 2026                                   50,000,000       50,000,000
    7.45% due 2026                                   50,000,000             -
                                                   ------------     ------------
                                                    190,150,000      146,950,000
  Less - Current maturities                           9,300,000        6,800,000
                                                   ------------     ------------
                                                    180,850,000      140,150,000
                                                   ------------     ------------
                                                   $388,217,763     $328,785,405
                                                   ============     ============


                  Consolidated Statements of Retained Earnings

For the Fiscal Years Ended September 30,     1997          1996         1995
----------------------------------------  -----------   -----------  -----------

Balance, beginning of year                $55,423,161   $48,027,708  $42,142,636

Add - Net income                           26,346,553    23,898,218   21,421,227
                                          -----------   -----------  -----------
                                           81,769,714    71,925,926   63,563,863

Deduct - Cash dividends declared
          on common stock and other        17,646,913    16,502,765   15,536,155
                                          -----------  ------------  -----------

Balance, end of year                      $64,122,801   $55,423,161  $48,027,708
                                          ===========  ============  ===========


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


                                                           31

<PAGE>


<TABLE>



                              Public Service Company of North Carolina, Incorporated and Subsidiaries

                                              Consolidated Statements of Cash Flows

<CAPTION>

For the Fiscal Years Ended September 30,            1997          1996          1995
----------------------------------------         -----------   -----------   -------
<S>                                              <C>           <C>           <C>      
Cash Flows from Operating Activities:
  Net income                                     $26,346,553   $23,898,218   $21,421,227
   Adjustments to reconcile net income to net
    cash provided by operating activities:
     Depreciation charged to operating expenses   22,387,370    19,748,947    18,156,134
     Depreciation charged to other accounts        2,528,055     2,821,518     2,350,489
     Amortization of debt expense and other          175,592       151,978       137,122
     Provision for doubtful accounts               1,396,636     1,706,466     1,404,268
     Amortization of investment tax credits, net    (429,688)     (435,156)     (435,154)
     Deferred income taxes, net                    3,205,066     3,627,210     4,136,329
                                                 -----------   -----------   -----------
                                                  55,609,584    51,519,181    47,170,415

     Change in assets and liabilities:
      Receivables                                (10,113,922)   (6,001,263)    1,639,855
      Inventories                                 (5,967,186)   (4,849,607)    2,690,078
      Deferred gas costs, net                     (1,812,450)  (13,833,212)   (2,958,509)
      Deferred revenues                            3,099,888          -             -
      Prepayments                                   (127,771)     (186,824)      482,864
      Accounts payable                             7,498,737      (111,061)    4,755,558
      Accrued taxes                                1,228,699     1,251,185    (3,963,760)
      Customer prepayments and deposits              964,679       272,239       171,656
      Accrued interest                             1,350,667       645,473       138,428
      Other                                       (4,911,920)    1,602,404       268,917
      Accrued pension cost                        (2,681,901)     (717,013)   (2,600,758)
                                                 -----------   -----------   -----------
Net cash provided by operating activities         44,137,104    29,591,502    47,794,744
                                                 -----------   -----------   -----------

Cash Flows from Investing Activities:
  Construction expenditures                      (60,310,383)  (60,428,321)  (61,118,541)
  Non-utility property and other                     875,413    (1,801,879)   (1,015,502)
                                                 -----------   -----------   -----------
Net cash used in investing activities            (59,434,970)  (62,230,200)  (62,134,043)
                                                 -----------   -----------   -----------

Cash Flows from Financing Activities:
  Issuance of common stock through dividend
   reinvestment, stock purchase and stock
   option plans                                    9,809,642     7,674,585     6,762,526
  Increase (decrease) in interim bank loans, net (21,500,000)    8,500,000    28,000,000
  Sale of senior debentures, net                  49,404,056    49,313,951          -
  Retirement of long-term debt                    (6,800,000)  (14,230,000)   (7,740,000)
  Retirement of common stock                         (33,670)      (58,056)      (71,811)
  Cash dividends                                 (17,301,431)  (16,194,228)  (14,152,550)
                                                 -----------   -----------   -----------
Net cash provided by financing
   activities                                     13,578,597    35,006,252    12,798,165
                                                 -----------   -----------   -----------

Net increase (decrease) in cash and
 temporary investments                            (1,719,269)    2,367,554    (1,541,134)
Cash and temporary investments at beginning
 of year                                           3,360,640       993,086     2,534,220
                                                 -----------   -----------   -----------
Cash and temporary investments at end of year    $ 1,641,371   $ 3,360,640   $   993,086
                                                 ===========   ===========   ===========

Cash paid during the year for:
  Interest (net of amount capitalized)           $15,514,606   $13,787,781   $12,137,583
  Income taxes                                   $12,935,000   $11,480,000   $13,486,095


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




                                                                 32

<PAGE>




                      Public Service Company of North Carolina, Incorporated

                                         and Subsidiaries

                             Notes to Consolidated Financial Statements

                   For the Fiscal Years Ended September 30, 1997, 1996 and 1995


1.       SIGNIFICANT ACCOUNTING POLICIES

         Principles of Consolidation and Segment Data

                The  consolidated  financial  statements  include Public Service
         Company  of  North  Carolina,   Incorporated's   (PSNC),   wholly-owned
         subsidiaries,   Clean  Energy   Enterprises,   Inc.,  PSNC  Blue  Ridge
         Corporation,  PSNC  Production  Corporation,  PSNC Propane  Corporation
         (dissolved in fiscal 1997), and PSNC Cardinal Pipeline Company. Through
         its  subsidiaries,  PSNC also owns an  interest  in  Cardinal  Pipeline
         Company,  LLC,  Cardinal  Extension  Company,  LLC and Pine  Needle LNG
         Company,  LLC. On December 2, 1996,  PSNC  Production  Corporation  and
         Sonat Marketing Company L.P., a subsidiary of Sonat Inc., created Sonat
         Public Service  Company L.L.C.  PSNC  Production  Corporation and Sonat
         Marketing Company L.P. each owns 50% of this multi-state joint venture.
         All  significant  intercompany  transactions  have been  eliminated  in
         consolidation.

                PSNC  and its  subsidiaries  operate  in one  dominant  business
         segment,   distribution   of  natural  gas.   PSNC,   through   various
         subsidiaries  and a joint  venture also  participates  in  nonregulated
         businesses  such as natural gas brokering  and supply  services and the
         conversion and fueling of natural gas vehicles.

         Utility Plant

                Utility plant is stated at the historical cost of  construction.
         Included in historical cost are certain construction-related costs such
         as taxes,  pensions and other fringe benefits, as well as the estimated
         cost of funds used during construction  (AFUDC). PSNC capitalizes AFUDC
         on a pre-tax basis for both the cost of short-term debt and the allowed
         overall cost rate.

         Depreciation

                PSNC provides for  depreciation on a straight-line  basis by the
         application  of specific  rates to the various  classes of  depreciable
         property.  These rates,  which have been approved by the North Carolina
         Utilities   Commission   (NCUC),   approximate  3.9%  of  the  cost  of
         depreciable  property for each of the fiscal years 1997, 1996 and 1995,
         on a composite basis.

         Revenues

                Certain  customers  (primarily  residential  and commercial) are
         billed on a cycle basis while other  customers are billed as of the end
         of each month.  Revenues are recorded at the time of billing.  The cost
         of gas delivered but unbilled is deferred and  recognized in the period
         in which the related revenue is billed.


                                                        33

<PAGE>



         Income Taxes

                PSNC  accounts  for income  taxes  pursuant to the  Statement of
         Financial  Accounting  Standards  (SFAS)  No.  109,  which  requires  a
         liability method of accounting for income taxes. Under this method, the
         deferred  tax  liability   represents   the  tax  effect  of  temporary
         differences between the financial statement and tax bases of assets and
         liabilities and is measured using current tax rates.

                PSNC uses deferral accounting for investment tax credits,  which
         amortizes  the  credits  to income  over the  service  life of  related
         property.

         Cash and Temporary Investments

                For  purposes  of  reporting  cash  flows,  cash  and  temporary
         investments   include  cash  on  hand  and  investments  with  original
         maturities  of 45 days or  less.  Investments  may  include  repurchase
         agreements,   U.S.   Treasury   bills,   federal   agency   securities,
         certificates of deposit and high-grade commercial paper.

                Since fiscal 1992,  PSNC has received  refunds from its pipeline
         transporters  for which the investment and use have been  restricted by
         an order of the NCUC. Pursuant to an order of the NCUC, these funds are
         to remain  segregated  from PSNC's  general  funds and will be used for
         expansion  of  PSNC's  facilities  into  unserved  territories.   These
         refunds,   along  with  interest  earned  thereon,   are   periodically
         transferred  to the  Office of the State  Treasurer.  The  balance  not
         transferred  is reported in restricted  cash and temporary  investments
         and  restricted  supplier  refunds  on  the  accompanying  consolidated
         balance sheets.

         Long-term Restricted Cash and Deferred Revenue

                The balance in long-term restricted cash reflects the restricted
         cash contribution from Sonat Marketing Company L.P. (Sonat  Marketing).
         PSNC Production  Corporation  (PSNC  Production)  and Sonat  Marketing,
         created Sonat Public Service  Company L.L.C.  (Sonat Public Service) in
         December  1996.  Sonat  Marketing  contributed  $4,944,000  for its 50%
         ownership, of which $4,845,000 is currently restricted. Sonat Marketing
         is entitled to a partial refund of its contribution if the economics of
         the  transaction  are adversely  modified by any regulatory body over a
         five-year  period.  Restricted cash will be released  annually in equal
         amounts beginning in December 1998 and extending through December 2001.

                The  contribution  was recorded as deferred revenue and is being
         recognized by the company over the  five-year  period.  The  noncurrent
         portion is  reflected  in deferred  revenue  with the  current  portion
         reflected in other current liabilities on the accompanying consolidated
         balance sheets.

         Debt Expense

                PSNC amortizes  issuance costs for its debentures  over the life
         of the related debt. PSNC is amortizing the redemption  premium and the
         unamortized  issuance costs on its previously  refunded  Series K First
         Mortgage  Bonds  over  15  years,  in  accordance  with  the  treatment
         authorized by the NCUC.

                                                        34

<PAGE>



         Fair Value of Financial Instruments

                Financial instruments include cash and temporary investments and
         long-term debt. The amount reported for cash and temporary  investments
         are considered to be reasonable approximations of their fair values due
         to their  short-term  nature.  The carrying  amount of  long-term  debt
         (including current  maturities) at September 30, 1997 and September 30,
         1996, is $190,150,000 and $146,950,000,  respectively, as compared to a
         fair market value of $207,729,000 and $158,369,000,  respectively.  The
         fair  market  value of these  instruments  is based on  current  market
         prices and yields for similar issues.

         Use of Estimates in the Preparation of Financial Statements

                The  preparation  of financial  statements  in  conformity  with
         generally accepted  accounting  principles  requires management to make
         certain estimates and assumptions. These 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.  Actual
         results could differ from those estimates.


2.       REGULATORY MATTERS

                PSNC's  Rider D rate  mechanism  authorizes  the recovery of all
         prudently  incurred gas costs from  customers on a monthly  basis.  Any
         difference  in amounts paid and  collected  for these costs is deferred
         for subsequent  refund to or collection from  customers.  Additionally,
         PSNC can recover its margin losses on  negotiated  gas sales to certain
         large commercial and industrial  customers in any manner  authorized by
         the NCUC.  At September  30,  1997,  the balance of net gas costs to be
         collected  from  customers   pursuant  to  Rider  D  was  approximately
         $18,385,000 as compared to $17,925,000 at September 30, 1996.

                In PSNC's 1991 general rate case order, a weather  normalization
         adjustment  (WNA) mechanism was authorized.  This mechanism allows PSNC
         to adjust its  winter-period  gas sales rates to certain  customers  to
         avoid  undercollections  or overcollections of its non-gas costs due to
         weather fluctuations from normal.

                On  September  25,  1996,  the NCUC  issued  an order in  PSNC's
         general rate case filed in March 1996. The order,  effective October 1,
         1996,  granted  additional  annual revenues of $2,701,000 and allowed a
         10.37%  overall  return  on  PSNC's  net  utility  investment.  It also
         approved the  continuation of the previously  mentioned WNA and Rider D
         mechanisms.

                Effective  November  1,  1990,  PSNC  obtained  additional  firm
         capacity from  Transcontinental  Gas Pipe Line Corporation's  (Transco)
         Southern  Expansion  project.  On October 16, 1995,  the Federal Energy
         Regulatory Commission (FERC) issued an order on remand, from the United
         States Court of Appeals for the District of Columbia Circuit, requiring
         Transco to file revised  tariff sheets for Southern  Expansion  service
         provided from November 1, 1990,  through  October 31, 1991. As a result
         of this order, PSNC received additional charges for the period April 5,
         1991,  through  October 31, 1991,  and recorded  additional  expense of
         $734,000  during the fourth quarter of fiscal 1996.  Based upon a prior
         NCUC order,  PSNC could not collect  these  charges from its  customers
         through the Rider D  mechanism.  PSNC  believes  the October 16,  1995,
         order to be the final order

                                                        35

<PAGE>



         regarding  Southern  Expansion  charges  incurred  prior to November 1,
         1991, and anticipates no further exposure from this issue.

                PSNC began  providing  natural gas  service in  McDowell  County
         during  December  1996.  This was the first project  undertaken by PSNC
         using  monies  from its NCUC  approved  expansion  fund.  The  original
         estimate to complete  this project was  approximately  $14,500,000,  of
         which  $8,193,500  would be financed by PSNC's expansion fund and local
         government assistance payments. Through September 30, 1997, $14,237,000
         was spent on the project,  of which  $7,781,000  was received  from the
         expansion fund. PSNC will receive an additional  $412,500 over the next
         five years in the form of local government assistance payments.

                PSNC  currently  provides  natural  gas  service to the  eastern
         portion  of  Haywood  County  and began  extending  service  to western
         Haywood County,  including  Waynesville,  Clyde and Lake Junaluska,  in
         September  1997.  The current  estimated cost to expand service to this
         area is  $7,182,000.  On December 30, 1996,  PSNC filed an  application
         with the NCUC requesting expansion funds for this project. On April 22,
         1997, the NCUC approved this project and authorized  disbursements from
         the  expansion  fund of  $4,127,000.  PSNC  expects to begin  providing
         partial service to this county by December 1997.

                PSNC and a  subsidiary  of Piedmont  Natural Gas  Company,  Inc.
         (Piedmont) formed Cardinal  Pipeline  Company,  LLC (Cardinal) in March
         1994,  to  construct  and  operate a  24-inch,  37.5-mile  natural  gas
         pipeline. It was placed into service on December 31, 1994, and provides
         130 million cubic feet per day  (MCF/Day) of  additional  firm capacity
         (70 MCF/Day for PSNC and 60 MCF/Day for Piedmont).  In September  1995,
         PSNC,  Piedmont,  Transco,  and North Carolina  Natural Gas Corporation
         (NCNG)  signed a letter of intent to form Cardinal  Extension  Company,
         LLC (Cardinal  Extension) to purchase and extend the Cardinal pipeline.
         As  proposed,  the pipeline  will extend 67 miles from the  termination
         point of the original Cardinal Pipeline to a point southeast of Raleigh
         and will provide 140 MCF/Day of  additional  firm capacity (100 MCF/Day
         for  PSNC  and  40  MCF/Day   for   NCNG).   The   extension   will  be
         project-financed  at  an  estimated  cost  $75,000,000.  Through  their
         respective subsidiaries, PSNC will own approximately 33%, Piedmont will
         own  approximately  17%, Transco will own  approximately  45%, and NCNG
         will own  approximately  5% of  Cardinal  Extension.  PSNC,  through  a
         subsidiary,   will  contribute  to  Cardinal  Extension  its  net  book
         investment in the existing  pipeline plus additional  equity capital of
         approximately  $1,000,000.  On December  23, 1996,  Cardinal  Extension
         filed an  application  with the NCUC for  approval of this  project.  A
         public  hearing  was held on May  20,1997.  Subject to the  approval of
         state and federal agencies, construction is scheduled to begin in early
         1999.  The  facilities  are  expected  to be in  service  on or  before
         November 1, 1999.

                Pine  Needle  LNG  Company,  LLC  (Pine  Needle)  was  formed by
         subsidiaries of Transco,  Piedmont,  NCNG,  Amerada Hess, and PSNC, and
         the  Municipal  Gas  Authority  of  Georgia.  Pine  Needle will own and
         operate a liquefied  natural gas storage  facility,  with an  estimated
         cost of  $107,000,000.  This  facility  will be located near  Transco's
         pipeline  northwest  of  Greensboro,  North  Carolina,  and will have a
         storage   capacity  of  four  billion  cubic  feet  with   vaporization
         capability  of 400 million  cubic feet per day. On April 30, 1996,  the
         FERC made a preliminary  determination to grant Pine Needle certificate
         authority to construct, own and

                                                        36

<PAGE>



         operate the LNG storage facility. It approved a 12.75% return on equity
         for the  project  and  stated  that  the  debt  component  of the  rate
         structure will be determined after permanent financing is obtained.  On
         May 30,  1996,  the NCUC  filed an  application  for  rehearing  of the
         preliminary  determination.  On November 27,  1996,  the FERC issued an
         order granting a certificate of convenience  and necessity  authorizing
         the construction  and operation of Pine Needle,  and denying the NCUC's
         request  for  rehearing.  The NCUC then filed a petition  for review of
         FERC's  November 27 order with the United  States  Court of Appeals for
         the District of Columbia  Circuit.  On October 7, 1997, Pine Needle and
         the NCUC signed an agreement  relating to the NCUC's appeal of the Pine
         Needle certificate order. Based upon this agreement between Pine Needle
         and the NCUC,  the NCUC filed a motion on October  20, 1997 to withdraw
         its petition for review.  Liquefaction is expected to begin in May 1999
         in time for  withdrawal  service  to begin in the 1999  winter  heating
         season.  PSNC Blue Ridge  Corporation  (Blue  Ridge) will make  capital
         contributions totaling approximately $9,000,000 during the construction
         period. Through September 30, 1997, Blue Ridge has invested $421,000 in
         the facility.

                On November 14, 1996,  PSNC filed an  application  with the NCUC
         requesting deferral accounting  treatment for the costs of a project to
         ensure that PSNC's computer  operating systems function properly in the
         year  2000  (Year  2000  costs).  Similar  costs  will be  incurred  by
         businesses  worldwide,  and  the  Emerging  Issues  Task  Force  of the
         Financial  Accounting  Standards  Board has determined that these costs
         should be expensed as incurred.  PSNC  requested  that total  estimated
         contractor labor of $3,000,000 be deferred for subsequent recovery in a
         future  rate  case.  On  April  29,  1997,  the  NCUC  issued  an order
         authorizing   the  deferral  of  each  year's  costs  and  requiring  a
         three-year  amortization of these costs beginning in the year incurred.
         PSNC began  amortizing  these costs in September  1997 and will seek to
         recover  any  unamortized  costs at the time of its next  general  rate
         case. At September 30, 1997, the unamortized balance of Year 2000 costs
         were $1,692,000.



                                                        37

<PAGE>



3.       COMMON STOCK

                The  changes in common  stock and capital in excess of par value
         for the three years ended September 30, 1997 were as follows:

                                               Common Stock
                                           $1 Par, Authorized
                                            30,000,000 Shares       Capital in
                                           Shares                    Excess of
                                         Outstanding     Amount      Par Value
                                         -----------  -----------  ------------
        September 30, 1994                18,212,047  $18,212,047  $100,200,706

          Issuance through dividend
           reinvestment plan (DRP)           349,315      349,315     4,720,158

          Issuance through employee
           stock purchase plan (ESPP)         90,574       90,574     1,083,265

          Issuance through nonqualified
           stock option plan (NSOP) - net     37,410       37,410       481,804

          Compensation expense - NSOP           -            -          113,583

          Recognition of permanent tax
           differences related to stock
           options exercised                    -            -           55,800
                                         -----------  -----------  ------------

        September 30, 1995                18,689,346   18,689,346   106,655,316

          Issuance through DRP               326,618      326,618     4,860,612

          Issuance through ESPP               92,405       92,405     1,105,164

          Issuance through NSOP - net         96,016       96,016     1,193,770

          Compensation expense - NSOP           -            -           29,197

          Recognition of permanent tax
           differences related to stock
           options exercised                    -            -          163,800
                                         -----------  -----------  ------------

        September 30, 1996                19,204,385   19,204,385   114,007,859

          Issuance through DRP               406,388      406,388     6,870,434

          Issuance through ESPP               81,349       81,349     1,236,505

          Issuance through NSOP - net         78,721       78,721     1,136,237

          Compensation expense - NSOP           -            -           95,884

          Recognition of permanent tax
           differences related to stock
           options exercised                    -            -          127,200
                                         -----------  -----------  ------------

        September 30, 1997                19,770,843  $19,770,843  $123,474,119
                                         ===========  ===========  ============



                                                             38

<PAGE>



Stock Compensation Plans

         At September 30, 1997,  PSNC had two  stock-based  compensation  plans,
which are  described  below.  PSNC  applies  Accounting  Principles  Board (APB)
Opinion  No.  25 and  related  interpretations  in  accounting  for  its  plans.
Accordingly,  no  compensation  cost has been  recognized for its employee stock
purchase plan. For fiscal 1997,  1996 and 1995, the  compensation  cost that has
been charged against income for its nonqualified  stock option plan was $96,000,
$29,000 and $114,000,  respectively.  In October 1995,  the FASB issued its SFAS
No. 123, "Accounting for Awards of Stock-Based  Compensation to Employees." This
statement defines a fair value method of accounting for stock options or similar
equity  instruments and was adopted by PSNC effective  October 1, 1996. SFAS No.
123 permits companies to continue to account for stock-based compensation awards
under  existing  accounting  rules,  but  requires  disclosure  in a note to the
financial  statements  of the pro forma net income and  earnings per share as if
PSNC had adopted the new method of accounting.  Had compensation cost for PSNC's
two stock-based plans been determined  consistent with the fair value method for
compensation  expense  encouraged  under  SFAS No.  123,  PSNC's  net income and
earnings per share (EPS) would have been reduced to the pro forma  amounts shown
below:


                                1997          1996          1995
                                ----          ----          ----
Net income     As reported  $26,346,553   $23,898,218   $21,421,227
               Pro forma    $25,971,801   $23,469,513   $21,018,334

Primary EPS    As reported        $1.35         $1.26         $1.16
               Pro forma          $1.33         $1.24         $1.14


Nonqualified Stock Option Plans

         In accordance with PSNC's 1992 Nonqualified  Stock Option Plan, options
to purchase an aggregate of up to 600,000  shares of PSNC's  common stock can be
granted to officers and key  employees  of PSNC  annually  beginning  October 1,
1992. Options are granted at 90% of the fair market value determined on the date
of the grant, are exercisable beginning two years from the date of the grant and
expire  five years  from the date of the grant.  An  exception  to the  two-year
exercise  date  is  allowed  upon  the  retirement,  disability  or  death  of a
participant.

         Options  granted,  exercised  and  canceled  for the three  years ended
September 30, 1997 were as follows:

                                  Options      Exercise Price
                                Outstanding      Per Share
                                -----------    --------------
    September 30, 1994          348,431
     Granted                    120,000          $12.86
     Exercised                  (46,095)         $10.56 to $15.57
     Canceled                    (1,479)         $15.57
                                -------
    September 30, 1995          420,857
     Granted                    120,000          $14.29
     Exercised                 (101,624)         $10.56 to $15.57
     Canceled                   (11,994)         $12.86 to $15.57
                                -------
    September 30, 1996          427,239
     Granted                    118,967          $16.59
     Exercised                  (81,532)         $10.56 to $16.59
     Canceled                      (736)         $14.29
                                -------
    September 30, 1997          463,938
                                =======

                                                        39

<PAGE>



         On September 3, 1997,  PSNC registered with the Securities and Exchange
Commission  (SEC) an additional  1,560,000 shares of common stock to be reserved
for use in the 1997 Nonqualified Stock Option Plan.


Employee Stock Purchase Plan

         Under the 1992  Employee  Stock  Purchase  Plan,  PSNC is authorized to
issue up to 720,000  shares to its full-time  employees,  nearly all of whom are
eligible to participate.  Under the terms of the plan, employees may choose each
year to have from 2% to 10% of their base  salary or wages  withheld to purchase
PSNC's  common  stock.  The  purchase  price of stock is 90% of the lower of its
beginning-of-year  or  end-of-year  fair  market  value as  defined in the plan.
Seventy-two percent of eligible employees participated in the plan during fiscal
1997. In fiscal 1997, 1996 and 1995, PSNC issued to employees 81,349, 92,405 and
90,574 shares, respectively.

         At September 30, 1997,  there were 1,262,228 common shares reserved for
issuance under PSNC's Stock Purchase and Automatic  Dividend  Reinvestment Plan,
1,560,000 common shares reserved for granting under the 1997 Nonqualified  Stock
Option Plan and 287,869  common shares  reserved for issuance under the Employee
Stock Purchase Plan.

4.       PENSION AND POSTRETIREMENT PLANS

                PSNC and its  subsidiaries  sponsor  a  noncontributory  defined
         benefit pension plan covering substantially all employees. The benefits
         are based on years of service and the  employee's  compensation  during
         the five consecutive  years of employment that will produce the highest
         average  pay.  Contributions  to the plan are  determined  on an annual
         basis with the amount of such  contributions  being  within the minimum
         required  for  funding   standard  account  purposes  and  the  maximum
         deductible for federal income tax purposes.

                Net pension cost in fiscal 1997,  1996 and 1995 consisted of the
         following components (amounts in thousands):


                                              1997      1996      1995
                                             ------    ------    -----
         Service cost                        $2,156    $2,034   $1,977
         Interest cost                        3,282     2,972    3,173
         Actual return on assets             (8,328)   (2,845)  (3,320)
         Net amortization                     5,253       (23)     228
                                             ------    ------   ------
         Net pension cost                    $2,363    $2,138   $2,058
                                             ======    ======   ======



                The table  below  sets  forth the  amount  recognized  on PSNC's
         consolidated  balance sheets at September 30, 1997 and 1996 (amounts in
         thousands):


                                                  1997      1996
         Actuarial present value of benefit
          obligations:
         Accumulated benefit obligation,
          including vested benefits in
          1997 of $28,692 and 1996 of $29,405   $29,852   $30,434
                                                =======   =======


                                                                 40

<PAGE>



         Projected benefit obligation           $42,920   $44,458
         Plan assets at fair value               39,253    38,503
                                                -------   -------

         Plan assets under projected
          benefit obligation                      3,667     5,955
         Unrecognized transition amount           1,716     2,539
         Unrecognized net gain                    8,301     8,444
         Unrecognized prior service cost         (4,152)   (4,724)
                                                -------   -------
         Accrued pension cost                   $ 9,532   $12,214
                                                =======   =======

         Actuarial assumptions:

         Weighted average discount rate             7.50%    7.75%
         Rate of increase in future
          compensation levels                 3.50%-6.50%  3.75%-6.75%
         Weighted average expected
          long-term rate of return                     8%           8%
 

                The  majority of plan assets is invested in  equities,  with the
         balance primarily in fixed income investments. The fair value of PSNC's
         own  common  stock  held by the  plan at the  respective  1997 and 1996
         measurement dates was approximately $3,251,000 and $2,731,000.

                The decrease in accrued  pension  cost at September  30, 1997 is
         due to the  recognition  of  $1,739,000 of  unrecognized  net gains and
         assets in the pension plan related to the  voluntary  early  retirement
         program.  This accelerated  recognition was in accordance with SFAS No.
         88, "Employers'  Accounting for Settlements and Curtailments of Defined
         Benefit Pension Plans and for Termination Benefits."

                PSNC offers medical,  life and dental insurance  coverage to its
         qualified  salaried and hourly  retirees.  These benefits are unfunded.
         Retirees  are  required  to  contribute  for the cost of the  coverage.
         PSNC's policy is to review the contributions  required from retirees on
         an annual basis and to increase  retiree  contributions  as  necessary.
         Effective  October 1, 1993,  PSNC  adopted  SFAS No.  106,  "Employers'
         Accounting  for  Postretirement  Benefits  Other  Than  Pensions."  The
         standard provides for the accrual of the costs of retiree medical, life
         and  dental  insurance  benefits  over  the  working  lifetime  of  the
         employees.

                Based  on the  actuarial  valuation  of  October  1,  1993,  the
         adoption  of SFAS  No.  106  resulted  in a  transition  obligation  of
         approximately  $7,400,000.  The following  table  reconciles the plan's
         funded status to the accrued  benefit cost as of September 30, 1997 and
         1996 (amounts in thousands):



                                                1997          1996
                                              -------       ------
         Fair value of plan assets            $  -          $  -

         Accumulated postretirement 
           benefit obligation (APBO):
           Retirees and dependents            $ 3,853       $ 2,507
           Other fully eligible participants      917         1,445
           Other active participants            2,833         3,380
                                              -------       -------
                                                7,603         7,332

         Unrecognized prior service cost         (531)         (574)

                                                        41

<PAGE>



         Unrecognized net gain                    498           256
         Unrecognized transition obligation    (3,547)       (3,768)
                                              -------       ------- 
         Accrued postretirement benefit cost  $ 4,023       $ 3,246
                                              =======       =======

                The  net  periodic   postretirement   benefit  cost  for  fiscal
         September 30, 1997, 1996 and 1995 consists of the following  components
         (amounts in thousands):


                                              1997     1996     1995
                                             ------   ------   ------
         Service cost                        $  255   $  258   $  326
         Interest cost on APBO                  554      525      599
         Amortization of 
          transition obligation                 222      258      369
         Net amortization                        38       19      (21)
                                             ------   ------   ------
         Net periodic postretirement
          benefit cost                       $1,069   $1,060   $1,273
                                             ======   ======   ======


                As of the 1997  measurement  date,  the assumed health care cost
         trend  rate used in  determining  the APBO was 7.75% in 1997,  8.25% in
         1998,  7.25% in 1999,  6.75% in 2000,  then  decreasing  annually to an
         ultimate trend rate of 5% in 2004. A  one-percentage  point increase in
         the  assumed  health  care cost trend rate would  increase  the APBO by
         approximately  9%. The service and interest cost  components of the net
         periodic  postretirement benefit cost would increase approximately 13%.
         The net periodic  postretirement  benefit cost was  calculated  using a
         weighted  average  discount rate of 7.75%.  The APBO at the measurement
         date was determined using a weighted average discount rate of 7.50%.


5.       SHORT-TERM BORROWING ARRANGEMENTS

                PSNC has committed lines of credit with seven  commercial  banks
         which vary monthly depending upon seasonal requirements and a five-year
         revolving  line of credit with one bank.  For the  twelve-month  period
         beginning  April 1, 1997,  total lines of credit with these banks range
         from  a  minimum  of   $37,000,000  to  a   winter-period   maximum  of
         $81,000,000.  PSNC also has uncommitted annual lines of credit totaling
         $80,000,000.  There  are no  restrictions  on the  withdrawal  of  cash
         balances maintained with these banks. The banks are compensated for the
         committed  lines of credit  through the payment of commitment  fees. At
         September 30, 1997 and 1996,  there were $38,000,000 and $59,500,000 of
         short-term loans outstanding, respectively.

                PSNC  borrows  funds on a  short-term  basis  primarily  for its
         construction  program and for the seasonal financing of stored gas. The
         loans are  generally  arranged  for  periods  of up to 90 days at rates
         below the prime  rate.  Bankers'  acceptance  loans  are  arranged  for
         periods of up to 180 days at rates below the prime rate.  At  September
         30, 1997 and 1996, PSNC had no bankers' acceptance loans outstanding.

                Certain  information  related  to  short-term  borrowings  is as
         follows (dollars in thousands):

                                                        42

<PAGE>



                                                     1997          1996
                                                   -------       ------

         At year end -
                Amount outstanding                 $38,000       $59,500
                Weighted average rate                 5.91%         5.69%

         During the year -
                Maximum amount outstanding         $81,500       $82,500
                Average daily amount outstanding   $36,381       $39,944
                Weighted average rate                 5.75%         5.99%


                The weighted  average rate is  determined  by dividing the total
         short-term  interest  expense for the fiscal year by the average  daily
         amount outstanding during the fiscal year.


6.       INCOME TAXES

                Income tax expense is shown on the  consolidated  statements  of
         income within the captions listed below.  Immediately following are the
         components of income tax expense (amounts in thousands):

<TABLE>
<CAPTION>

                                   1997               1996              1995
                             ---------------    ---------------   ---------------
<S>                          <C>      <C>       <C>      <C>      <C>       <C>

                             Federal   State    Federal   State   Federal   State
                             -------  ------    -------  ------   -------  ------
Income Statement Captions:
 Operating expenses
  and taxes                  $12,535  $3,176    $11,579  $2,917   $10,777  $2,744
 Other income (deductions)       866     226        763     202       162      19
                             -------  ------    -------  ------   -------  ------
                             $13,401  $3,402    $12,342  $3,119   $10,939  $2,763
                             =======  ======    =======  ======   =======  ======

Income Tax Expense:
 Currently payable           $11,246  $2,782    $ 9,892  $2,427   $ 8,320  $2,023
 Deferred                      2,585     620      2,885     692     3,054     740
 Investment tax credits, net    (430)   -          (435)   -         (435)   -
                             -------  ------    -------  ------   -------  ------
                             $13,401  $3,402    $12,342  $3,119   $10,939  $2,763
                             =======  ======    =======  ======   =======  ======



                A reconciliation of the statutory federal income tax rate to the
         effective tax rate is as follows (dollars in thousands):

                                              1997          1996        1995
                                            -------       -------     ------

Statutory federal income tax rate                35%           35%         35%
Expected federal income tax expense
 at federal statutory rate                  $14,720       $13,438     $12,230
Less: State income tax benefit                1,112         1,022         962
      Amortization of ITC                       430           435         435
      Tax on subsidiary income                  587           465         141
      Other                                      56           (63)        (85)
                                            -------       -------     -------
Federal income tax expense                  $12,535       $11,579     $10,777
                                            =======       =======     =======


                The  components  of  the  net  deferred  tax  liabilities  as of
         September 30, 1997 and 1996, are as follows (amounts in thousands):


                                                        43

<PAGE>



                                                      1997           1996
                                                   --------       -------
Deferred tax assets:
   Regulatory liabilities - income tax amounts     $  4,653       $  4,887
   Pension expense                                    2,775          3,719
   Unamortized ITC                                    1,476          1,648
   Postretirement benefits                            1,311          1,046
   Deferred gain on Sonat joint venture               1,633            679
   Other                                              1,520            842
                                                   --------       --------
                                                   $ 13,368       $ 12,821
                                                   --------       --------
Deferred tax liabilities:
   Depreciation and property related items         $ 61,151       $ 57,512
   Excess deferred taxes due to a change
    in the statutory rate                            10,138         10,591
   Regulatory assets - income tax amounts               594            647
   Year 2000 costs                                      677           -
   Other                                                246            304
                                                   --------       --------
                                                   $ 72,806       $ 69,054
                                                   --------       --------

Net deferred tax liabilities                       $ 59,438       $ 56,233
                                                   ========       ========




7.       ENVIRONMENTAL MATTERS

                PSNC owns or has owned  portions of six sites in North  Carolina
         on  which  manufactured  gas  plants  (MGPs)  were  formerly  operated.
         Intrusive investigation (including drilling, sampling and analysis) has
         begun at only one site and the  remaining  sites  have  been  evaluated
         using  historical  records and  observations of current site conditions
         made during visits to the sites.  These  evaluations have revealed that
         MGP  residuals  are present or suspected  at several of the sites.  The
         North Carolina Department of Environment,  Health and Natural Resources
         (NCDEHNR) has recommended  that no further action be taken with respect
         to one site. In March and April 1994, an environmental  consulting firm
         retained by PSNC estimated that the aggregate cost of investigating and
         monitoring the extent of environmental  degradation and of implementing
         remedial  procedures with respect to the remaining five sites may range
         from $3,705,000 to $50,145,000 over a 30-year period. PSNC is unable to
         determine  the rate at which  costs  may be  incurred  over  this  time
         period.  The  estimated  cost range has not been  discounted to present
         value.  The range  includes costs of  investigating  and monitoring the
         sites at the low end of the range  and  investigating,  monitoring  and
         extensively  remediating the sites at the high end of the range. PSNC's
         associated  actual  costs for these  sites  will  depend on a number of
         factors,  such  as  actual  site  conditions,  third-party  claims  and
         recoveries from other potentially  responsible parties (PRPs).  Another
         North Carolina public utility or its predecessors also operated the MGP
         sites in Raleigh, Durham and Asheville,  and PSNC is in discussion with
         that  utility  regarding   potential  cost  sharing   arrangements  for
         investigation and potential  remediation costs of four of the sites. At
         this time, PSNC has not reached a definitive  agreement  regarding such
         arrangements.

                An order of the NCUC  dated  May 11,  1993  authorized  deferral
         accounting  for  all  costs  associated  with  the   investigation  and
         remediation of MGP sites. As of September 30, 1997, PSNC has recorded a
         liability and associated  regulatory asset of the minimum amount of the
         range, or $3,705,000.


                                                        44

<PAGE>



                The NCUC concluded that it is proper and in the public  interest
         to allow  recovery of prudently  incurred  clean-up  costs from current
         customers as  reasonable  operating  expenses even though the MGP sites
         are not used and useful in providing gas service to current  customers.
         However, the NCUC will not allow recovery of carrying costs on deferred
         amounts. Amounts incurred to date are not material.  Management intends
         to request recovery of additional MGP clean-up costs not recovered from
         other PRPs in future rate case  filings,  and  believes  that all costs
         deemed by the NCUC to be prudently  incurred will be recoverable in gas
         rates.

8.       LONG-TERM DEBT

                  On December 20, 1995,  PSNC filed with the SEC a  registration
         statement  covering  up to  an  aggregate  amount  of  $125,000,000  of
         unsecured debt  securities.  On January 10, 1996, PSNC sold $50,000,000
         of 6.99% Senior  Debentures due 2026 under the registration  statement.
         The net  proceeds of  $49,314,000  were used to pay down a  significant
         portion of the then outstanding short-term bank debt.

                  On December 17, 1996,  PSNC sold  $50,000,000  of 7.45% Senior
         Debentures due 2026 under the registration statement.  The net proceeds
         of $49,404,000 were used to pay down a significant  portion of the then
         outstanding  short-term  bank debt. At September 30, 1997,  $25,000,000
         remained on the shelf registration.

                  Scheduled maturities of long-term debt during each of the next
         five  fiscal  years are as  follows as of  September  30,  1997:  1998,
         $9,300,000; 1999, $9,300,000; 2000, $11,800,000;  2001, $6,800,000; and
         2002, $8,050,000.

                  Under  terms  of  the  debt  agreements,   there  are  various
         provisions  relating to the maintenance of certain financial ratios and
         conditions,  the most  significant of which could  restrict  payment of
         dividends. At September 30, 1997, PSNC is in compliance in all material
         respects with the requirements of its debt agreements.

9.       CONSTRUCTION PROGRAM

                  The  construction   program  for  fiscal  1998,  as  presently
         planned, provides for expenditures of $69,781,000.

10.      CONTINGENT LIABILITIES

                  PSNC  is  party  to  certain  legal  actions.  Although  it is
         impossible  to predict  the  outcomes  with  certainty,  based upon the
         opinions of legal counsel,  management does not expect the dispositions
         of  these  matters  to  have a  materially  adverse  effect  on  PSNC's
         financial position or results of operations.



                                                        45

<PAGE>




11.      SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

                  The following table presents certain financial information for
         each quarter during the fiscal years ended  September 30, 1997 and 1996
         (amounts in thousands, except per share data):

                                                  1997
                                   Fourth     Third     Second    First
                                   -------   -------   --------  ------
     Operating revenues            $34,024   $60,106   $150,146  $93,653

     Gross margin                   17,914    29,391     67,169   41,452

     Operating income (loss)        (1,630)    4,543     25,765   11,038

     Net income (loss)              (5,231)    1,285     22,387    7,906

     Earnings (loss) per share (1)    (.26)      .07       1.15      .41


                                                  1996
                                   Fourth      Third    Second    First
                                   -------    -------   ------   ------
     Operating revenues            $33,100    $58,807  $142,053  $74,922

     Gross margin                   16,303     26,425    61,500   36,516

     Operating income (loss)        (2,165)     3,905    23,177   10,374

     Net income (loss)              (5,250)     1,441    20,577    7,131

     Earnings (loss) per share (1)    (.27)       .08      1.09      .38



        (1)     The sum of the quarterly  earnings (loss) per share amounts does
                not equal the annual earnings per share amount  reflected in the
                consolidated statement of income due to the effect of changes in
                average common shares outstanding during the fiscal year.

                                                               46

<PAGE>



REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


To the Shareholders and the Board of Directors of
 Public Service Company of North Carolina, Incorporated:

         We have  audited  the  accompanying  consolidated  balance  sheets  and
statements  of  capitalization  of Public  Service  Company  of North  Carolina,
Incorporated  (PSNC),  a North  Carolina  corporation,  and  subsidiaries  as of
September 30, 1997 and 1996, and the related consolidated  statements of income,
retained earnings and cash flows for each of the three years in the period ended
September 30, 1997. These financial  statements are the responsibility of PSNC's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

         We conducted our audits in accordance with generally  accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion,  the  financial  statements  referred to above  present
fairly,  in all material  respects,  the  financial  position of Public  Service
Company of North  Carolina,  Incorporated  and  subsidiaries as of September 30,
1997 and 1996, and the results of their operations and their cash flows for each
of the three years in the period ended  September 30, 1997,  in conformity  with
generally accepted accounting principles.





s/Arthur Andersen LLP

Charlotte, North Carolina,
October 30, 1997



                                                        47

<PAGE>



             MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS


         Management  is  responsible  for  the  preparation,   presentation  and
integrity of the financial  statements and other  financial  information in this
report. The accompanying  financial  statements have been prepared in accordance
with  generally  accepted  accounting  principles  applicable to  rate-regulated
public utilities, including estimates and judgments made by management that were
necessary  to  prepare  the  statements  in  accordance   with  such  accounting
principles,  and are not misstated due to material fraud or error. To assure the
integrity  of  the  underlying   financial  records   supporting  the  financial
statements,  management  maintains  a system  of  internal  accounting  controls
sufficient  to provide  reasonable  assurances  that PSNC  assets  are  properly
accounted for, safeguarded and are utilized only in accordance with management's
authorization.  The concept of reasonable assurance recognizes that the costs of
a system of internal  controls  should not exceed the related  benefits  derived
from it.

         The system of  internal  accounting  controls  is  augmented  by PSNC's
internal audit department,  which has unrestricted  access to all levels of PSNC
management.  The internal audit department meets periodically,  with and without
the presence of management,  with the Audit  Committee of the Board of Directors
to discuss,  among other things,  PSNC's system of internal  accounting controls
and the adequacy of the internal audit program. The Audit Committee is comprised
of four directors who are not officers or employees of PSNC.

         The Audit Committee also meets  periodically  with Arthur Andersen LLP,
PSNC's  independent  public  accountants,  with  and  without  the  presence  of
management,  to discuss  the  results of the  annual  audit of PSNC's  financial
statements  and related data. The Audit  Committee and Arthur  Andersen LLP also
discuss internal accounting control matters that come to the attention of Arthur
Andersen LLP during the course of the audit.



s/Charles E. Zeigler, Jr.                            s/Jack G. Mason
-------------------------                            --------------------------
Charles E. Zeigler, Jr.                              Jack G. Mason
Chairman, President and                              Vice President - Treasurer
Chief Executive Officer                              and Chief Financial Officer


                                                        48

<PAGE>



         Supplementary Data

                  The information for this item is contained in Note 11 entitled
         "SUMMARY OF QUARTERLY FINANCIAL INFORMATION  (UNAUDITED)" on page 44 of
         this annual report.



         Item 9.  Changes in and Disagreements With Accountants
                       on Accounting and Financial Disclosure

         None.

                                       PART III


         Item 10.  Directors and Executive Officers of the Registrant

         Directors

                  The  information  for this item is set  forth in the  sections
         entitled  "Election  of  Directors"  and "The  Board of  Directors  and
         Committees of the Board  Compliance with Section 16(a)" in PSNC's proxy
         statement  dated  December 19, 1997,  relating  to the January 30, 1998
         annual meeting of shareholders, which section is incorporated herein by
         reference.


         Executive Officers

                  The  information for this item is set forth on page 12 of this
         annual report.



         Item 11.  Executive Compensation

                  The  information  for this item is set  forth in the  sections
         entitled  "Executive   Compensation,"   "Employee   Retirement  Plans,"
         "Performance  Graph" and "The Board of Directors and  Committees of the
         Board" in PSNC's proxy  statement dated December 19, 1997,  relating to
         the January 30, 1998 annual meeting of shareholders,  which section is
         incorporated herein by reference (specifically excluding disclosures in
         such sections relating to Items 402(k) and (l) of Regulation S-K).


                                                        49

<PAGE>



        Item 12.  Security Ownership of Certain Beneficial Owners and Management

                  The  information  for this  item is set  forth in the  section
         entitled  "Common Stock Ownership By Directors and Executive  Officers"
         in PSNC's  proxy  statement  dated  December  19, 1997,  relating to the
         January 30,  1998  annual  meeting of  shareholders,  which  section is
         incorporated herein by reference.


         Item 13.  Certain Relationships and Related Transactions

                  The  information  for this item is set  forth in the  sections
         entitled "Election of Directors" and "Compensation Committee Interlocks
         and Insider Participation" in PSNC's proxy statement dated December 19,
         1997,  relating to the January 30, 1998 annual meeting of shareholders,
         which sections are incorporated herein by reference.

                                        PART IV


       Item 14.  Exhibits, Financial Statement Schedules and Reports on Form 8-K


                                                                          Page

         (a)  1.  Financial statements -

                  Consolidated Statements of Income for the
                     Fiscal Years Ended September 30, 1997,
                      1996 and 1995                                         27
                  Consolidated Balance Sheets at
                     September 30, 1997 and 1996                            28
                  Consolidated Statements of Capitalization
                     at September 30, 1997 and 1996                         29
                  Consolidated Statements of Retained
                     Earnings for the Fiscal Years Ended
                     September 30, 1997, 1996 and 1995                      29
                  Consolidated Statements of Cash Flows for
                     the Fiscal Years Ended September 30, 1997,
                     1996 and 1995                                          30
                  Notes to Consolidated Financial Statements
                     for the Fiscal Years Ended September 30,
                     1997, 1996 and 1995                                   31-44
                  Report of Independent Public Accountants                  45
                  Management's Responsibility for Financial Statements      46


                                                        50

<PAGE>






                                                                         Page
              2.  Financial statement schedules -

                  The  following  financial  statement  schedules
                   are  included herein:

                  Supplemental Schedules:
                  Report of Independent Public Accountants                  51
                  Schedule II - Reserves for the Fiscal Years Ended
                    September 30, 1997, 1996 and 1995                      52-54


              All  other  financial  statement  schedules  are  omitted  as  not
       applicable,  not required, or the required information is included in the
       consolidated financial statements and notes thereto.

              3.  Exhibits -

                  See Exhibit Index on page 56 of this annual report.

         (b)      Reports on Form 8-K -

              There were no reports  on Form 8-K filed  during the three  months
              ended September 30, 1997.


                                                        51

<PAGE>



                  CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS



       As independent public accountants, we hereby consent to the incorporation
of our  reports  included  in this  Form  10-K,  into  PSNC's  previously  filed
Registration  Statements on Form S-3 (File Nos.  33-65205 and 33-10637) and Form
S-8 (File Nos. 33-49153, 33-48909 and 333-34845).



s/Arthur Andersen LLP

Charlotte, North Carolina,
December 22, 1997


                                                        52

<PAGE>



                      REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


       We have audited in accordance with generally accepted auditing standards,
the  consolidated  financial  statements  of  Public  Service  Company  of North
Carolina,  Incorporated  included in this Form 10-K,  and have issued our report
thereon dated October 30, 1997. Our audit was made for the purpose of forming an
opinion  on those  statements  taken as a whole.  The  schedules  listed  in the
accompanying index are the responsibility of the Registrant's management and are
presented  for  purposes  of  complying   with  the   Securities   and  Exchange
Commission's  rules and are not part of the basic  financial  statements.  These
schedules have been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly state in all material
respects the financial  data required to be set forth therein in relation to the
basic financial statements taken as a whole.

s/Arthur Andersen LLP
Charlotte, North Carolina,
October 30, 1997


                                                        53

<PAGE>



</TABLE>
<TABLE>
                PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED AND SUBSIDIARIES

                                    SCHEDULE II - RESERVES

                         FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997
<CAPTION>

           Column A                Column B           Column C          Column D      Column E
------------------------------    ----------    --------------------   ----------    ----------
                                                     Additions
                                                    Charged To
                                  Balance At    --------------------                  Balance
                                  Beginning     Operating    Other                     At End
          Description             Of Period      Expenses    Income    Deductions(1) Of Period
------------------------------    ----------    ----------  --------   ----------    ----------
<S>                               <C>           <C>         <C>        <C>           <C>       

DEDUCTED IN BALANCE SHEET FROM
 ASSET TO WHICH IT APPLIES:

  Allowance for doubtful
   accounts                       $2,481,943    $1,320,162   $76,474   $1,356,596    $2,521,983
                                  ==========    ==========   =======   ==========    ==========

(1) Deductions represent uncollectible accounts written off, net of
     recoveries, as follows -

      Write-off of accounts considered to be uncollectible             $2,156,932
      Less - Recoveries on accounts previously written off                800,336
                                                                       ----------
                                                                       $1,356,596
                                                                       ==========

</TABLE>

                                                            54

<PAGE>



<TABLE>

            PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED AND SUBSIDIARIES

                                    SCHEDULE II - RESERVES

                         FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1996

<CAPTION>

           Column A                Column B           Column C          Column D      Column E
------------------------------    ----------    --------------------   ----------    ----------
                                                     Additions
                                                    Charged To
                                  Balance At    --------------------                  Balance
                                  Beginning     Operating    Other                     At End
          Description              Of Period     Expenses    Income    Deductions(1)  Of Period
------------------------------    ----------    ----------  --------   ----------    ----------
<S>                               <C>           <C>         <C>        <C>           <C>   

DEDUCTED IN BALANCE SHEET FROM
 ASSET TO WHICH IT APPLIES:

  Allowance for doubtful
   accounts                       $2,037,855    $1,635,210   $71,256   $1,262,378    $2,481,943
                                  ==========    ==========   =======   ==========    ==========

(1) Deductions represent uncollectible accounts written off, net of
     recoveries, as follows -

      Write-off of accounts considered to be uncollectible             $1,969,469
      Less - Recoveries on accounts previously written off                707,091
                                                                       ----------
                                                                       $1,262,378
                                                                       ==========

</TABLE>

                                                            55

<PAGE>


<TABLE>

               PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED AND SUBSIDIARIES

                                    SCHEDULE II - RESERVES

                         FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1995

<CAPTION>

           Column A                Column B           Column C          Column D      Column E
------------------------------    ----------    --------------------   ----------    ----------
                                                     Additions
                                                    Charged To
                                  Balance At    --------------------                  Balance
                                  Beginning     Operating    Other                     At End
          Description             Of Period      Expenses    Income    Deductions(1) Of Period
------------------------------    ----------    ----------  --------   ----------    ----------
<S>                               <C>           <C>         <C>        <C>           <C>   

DEDUCTED IN BALANCE SHEET FROM
 ASSET TO WHICH IT APPLIES:

  Allowance for doubtful
   accounts                       $1,467,887    $1,335,441   $68,827     $834,300    $2,037,855
                                  ==========    ==========   =======     ========    ==========

(1) Deductions represent uncollectible accounts written off, net of
     recoveries, as follows -

      Write-off of accounts considered to be uncollectible             $1,496,453
      Less - Recoveries on accounts previously written off                662,153
                                                                       ----------
                                                                       $  834,300
                                                                       ==========
</TABLE>
                                                                       

                                                            56


<PAGE>




                                   SIGNATURES

       Pursuant  to the  requirements  of Section 13 or 15(d) 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.

                                          PUBLIC SERVICE COMPANY
                                          OF NORTH CAROLINA, INCORPORATED
                                          (Registrant)

                                          s/Charles E. Zeigler, Jr.
                                          Charles E. Zeigler, Jr.
                                          Chairman, President and
December 22, 1997                         Chief Executive Officer



       Pursuant to the requirements of the Securities Exchange Act of 1934, this
report  has  been  signed  below  by the  following  persons  on  behalf  of the
registrant and in the capacities indicated on December 22, 1997.


s/Charles E. Zeigler, Jr.                     s/Jack G. Mason
Charles E. Zeigler, Jr.                       Jack G. Mason
Chairman, President and                       Vice President - Treasurer
Chief Executive Officer                       and Chief Financial Officer
(Principal executive officer)                 (Principal financial and
                                              accounting officer)


s/William C. Burkhardt                        s/William L. O'Brien, Jr.
William C. Burkhardt - Director               William L. O'Brien, Jr. - Director

s/William A. V. Cecil                         s/D. Wayne Peterson  
William A. V. Cecil - Director                D. Wayne Peterson - Director

s/Bert Collins                                s/Ben R. Rudisill, II
Bert Collins - Director                       Ben R. Rudisill, II - Director

s/John W. Copeland                            s/G. Smedes York
John W. Copeland - Director                   G. Smedes York - Director

s/Van E. Eure
Van E. Eure - Director





                                                            57

<PAGE>



                                  EXHIBIT INDEX

         The  following  documents  are filed as a part of this annual report on
Form  10-K  for the  fiscal  year  ended  September  30,  1997.  Those  exhibits
previously filed and incorporated  herein by reference are identified below with
an asterisk and with a reference to the previous filing.

Exhibit
Number

*3-A-4     -   Amended and Restated Charter, dated February 1, 1991. 
               (File No. 0-1218, 10-K--1992, Exhibit 3-A-4).

*3-I       -   By-laws, as amended to date.  (File No. 0-1218, 10-Q--March 31,
               1994, Exhibit 3-I).

*4-A       -   Debenture Purchase Agreement, dated as of June 15, 1987, for
               $25,000,000 of 8.65% Senior Debentures due August 31, 2002. 
               (File No. 0-1218, 10-K--1987, Exhibit 4-A).

*4-B       -   Debenture Purchase Agreement, dated as of September 15, 1988, for
               $25,000,000 of 10% Senior Debentures due October 1, 2003.  (File
               No. 0-1218, 10-K--1988, Exhibit 4-B).

*4-C       -   Debenture Purchase Agreement, dated as of December 5, 1989, for
               $43,000,000 of 10% Senior Debentures due December 1, 2004.  (File
               No. 0-1218, 10-K--1989, Exhibit 4-C).

*4-D       -   Debenture Purchase Agreement, dated as of June 25, 1992, for
               $32,000,000 of 8.75% Senior Debentures due June 30, 2012.  (File
               No. 0-1218, 10-Q--June 30, 1992, Exhibit 4-D).

*4-E-1     -   Indenture dated as of January 1, 1996, as supplemented by a First
               Supplemental Indenture dated as of January 1, 1996, between
               PSNC and First Union National Bank of North Carolina, as trustee.
               (File No. 1-11429, 10-Q--December 31, 1995, Exhibit 4-E-1).

*4-E-2     -   Specimen of the certificate representing the $50,000,000
               aggregate principal amount of 6.99% Senior Debentures Due 2026
               issued by PSNC on January 16, 1996.  (File No. 1-11429, 10-Q--
               December 31, 1995, Exhibit 4-E-2).

*4-E-3     -   Second Supplemental Indenture dated as of December 15, 1996 to
               Indenture dated as of January 1, 1996, between PSNC and First
               Union National Bank of North Carolina, as trustee.  (File No.
               1-11429, 10-Q--December 31, 1996, Exhibit 4-E-3).



                                                        58

<PAGE>



Exhibit
Number

*4-E-4     -   Specimen of the certificate representing the $50,000,000
               aggregate principal amount of 7.45% Senior Debentures Due 2026
               issued by PSNC on December 15, 1996 is included in Exhibit 4-E-3.
               (File No. 1-11429, 10-Q--December 31, 1996, Exhibit 4-E-4).

*10-A-9    -   Firm Sales Service Agreement under Rate Schedule FS, dated 
               August 1, 1991, between PSNC and Transcontinental Gas Pipe Line
               Corporation. (File No. 0-1218, 10-Q--March 31, 1992, Exhibit 
               10-A-9).

*10-A-10   -   Firm Sales Service Agreement under Rate Schedule FS, dated August
               1, 1991, between PSNC and Transcontinental Gas Pipe Line 
               Corporation.    (File No. 0-1218, 10-Q--March 31, 1992, 
               Exhibit 10-A-10).

*10-A-11   -   Firm Sales Service Agreement under Rate Schedule FS, dated August
               1, 1991, between PSNC and Transcontinental Gas Pipe Line 
               Corporation.  (File No. 0-1218, 10-Q--March 31, 1992, Exhibit
               10-A-11).

*10-A-13   -   Firm Transportation Service Agreement under Rate Schedule FT,
               dated August 1, 1991, between PSNC and Transcontinental Gas Pipe
               Line Corporation. (File No. 0-1218, 10-K--1992, Exhibit 10-A-13).

*10-A-15   -   Firm Transportation Service Agreement under Rate Schedule FT, 
               dated February 1, 1992, between PSNC and Transcontinental Gas 
               Pipe Line Corporation.  (File No. 0-1218, 10-K--1993, Exhibit
               10-A-15).

*10-A-16   -   Firm Transportation Service Agreement under Rate Schedule FT-NN,
               dated October 8, 1993, between PSNC and CNG Transmission
               Corporation.  (File No. 0-1218, 10-K--1993, Exhibit 10-A-16).

*10-A-17   -   Firm Transportation Service Agreement under Rate Schedule FT-NN-
               GSS, dated October 8, 1993, between PSNC and CNG Transmission
               Corporation.  (File No. 0-1218, 10-K--1993, Exhibit 10-A-17).

*10-A-18   -   Firm Transportation Service Agreement under Rate Schedule FT-A,
               dated November 1, 1993, between PSNC and Tennessee Gas Pipeline
               Company.  (File No. 0-1218, 10-K--1993, Exhibit 10-A-18).

*10-A-19   -   Firm Transportation Service Agreement under Rate Schedule FT-1, 
               dated November 1, 1993, between PSNC and Texas Eastern 
               Transmission Corporation.  (File No. 0-1218, 10-K--1993, Exhibit
               10-A-19).

*10-A-20   -   Firm Transportation Service Agreement under Rate Schedule FT,
               dated November 1, 1993, between PSNC and Texas Gas Transmission
               Corporation.  (File No. 0-1218, 10-K--1993, Exhibit 10-A-20).



                                                        59

<PAGE>



Exhibit
Number

*10-A-21  -   Firm Transportation Service Agreement under Rate Schedule FT, 
              dated October 1, 1993, between PSNC and Transcontinental Gas Pipe
              Line Corporation.  (File No. 0-1218, 10-K--1993, Exhibit 10-A-21).

*10-A-22  -   Firm Transportation Service Agreement under Rate Schedule FT, 
              dated June 6, 1994, between PSNC and Transcontinental Gas Pipe
              Line Corporation.  (File No. 1-11429, 10-K--September 30, 1995,
              Exhibit 10-A-22).

*10-A-23  -   Firm Transportation Service Agreement under Rate Schedule FT, 
              dated April 30, 1995, between PSNC and Transcontinental Gas Pipe
              Line Corporation.  (File No. 1-11429, 10-K--September 30, 1995,
              Exhibit 10-A-23).

*10-A-24  -   Firm Transportation Service Agreement under Rate Schedule FT,
              dated January 24, 1996, between PSNC and Transcontinental Gas
              Pipe Line Corporation.  (File No. 1-11429, 10-Q--June 30, 1996,
              Exhibit 10-A-24).

*10-A-25  -   General Storage Service Agreement under Rate Schedule GSS,
              dated October 17, 1995, between PSNC and CNG Transmission
              Corporation.  (File No. 1-11429, 10-Q--June 30, 1996, Exhibit 10-
              A-25).

*10-A-26  -   Firm Transportation Service Agreement under Rate Schedule FT-
              NN-GSS, dated October 17, 1995, between PSNC and CNG
              Transmission Corporation.  (File No. 1-11429, 10-Q--June 30,
              1996, Exhibit 10-A-26).

*10-A-27  -   Firm Transportation Service Agreement under Rate Schedule FT,
              dated  January 24, 1996, between PSNC and CNG Transmission
              Corporation.  (File No. 1-11429, 10-Q--June 30, 1996, Exhibit 10-
              A-27).

*10-A-28  -   Firm Transportation Service Agreement under Rate Schedule FT-
              NN, dated  October 17, 1995, between PSNC and CNG
              Transmission Corporation.  (File No. 1-11429, 10-Q--June 30,
              1996, Exhibit 10-A-28).

*10-A-29  -   Firm Transportation Service Agreement under Rate Schedule FT,
              dated January 19, 1996, between PSNC and Texas Gas
              Transmission Corporation.  (File No. 1-11429, 10-Q--June 30,
              1996, Exhibit 10-A-29).


                                                        60

<PAGE>



Exhibit
Number

*10-A-30 -   Firm Transportation Service Agreement under Rate Schedule FT-1,
             dated October 30, 1995, between PSNC and Texas Eastern
             Transmission Corporation.  (File No. 1-11429, 10-Q--June 30,
             1996, Exhibit 10-A-30).

*10-A-31 -   Interruptible Transportation Service Agreement under Rate
             Schedule IT, dated January 23, 1996, between PSNC and
             Transcontinental Gas Pipe Line Corporation.  (File No. 1-11429, 10-
             Q--June 30, 1996, Exhibit 10-A-31).

*10-A-32 -   Firm Transportation Agreement dated November 1, 1995, between
             PSNC and Transcontinental Gas Pipe Line Corporation.  (File No.
             1-11429, 10-Q--December 31, 1996, Exhibit 10-A-32).

*10-A-33 -   Amended and Restated Natural Gas Sales Agreement between PSNC
             and Transco Energy Marketing Company dated November 1, 1990.
             (File No. 1-11429, 10-Q--June 30, 1997, Exhibit 10-A-33).

*10-A-33.1 - Amendment of Amended and Restated Natural Gas Sales Agreement
             between PSNC and Transco Energy Marketing Company dated
             November 1, 1990.  (File No. 1-11429, 10-Q--June 30, 1997, Exhibit
             10-A-33.1).

*10-A-34 -   Firm Transportation Service Agreement under Rate Schedule FT, dated
             August 1, 1991, between PSNC and Transcontinental Gas Pipe Line
             Corporation.  (File No. 1-11429, 10-Q--June 30, 1997, Exhibit 10-A-
             34).

*10-A-35 -   Firm Storage Service Agreement under Rate Schedule FSS, dated
             November 7, 1995, between PSNC and Columbia Gas Transmission
             Corporation.  (File No. 1-11429, 10-Q--June 30, 1997, Exhibit 10-A-
             35).

*10-A-36 -   Storage Service Transportation Agreement under Rate Schedule SST,
             dated November 7, 1995, between PSNC and Columbia Gas
             Transmission Corporation.  (File No. 1-11429, 10-Q--June 30, 1997,
             Exhibit 10-A-36).

*10-A-37 -   Interruptible Transportation Service Agreement under Rate Schedule
             ITS, dated March 31, 1997, between PSNC and Columbia Transmission
             Corporation.  (File No. 1-11429, 10-Q--June 30, 1997, Exhibit 10-A-
             37).

*10-A-38 -   Gas Sales Agreement (Southern Expansion) dated November 1, 1990
             between PSNC and Transco Energy Marketing Company.  (File No.
             1-11429, 10-Q--June 30, 1997, Exhibit 10-A-38).

                                                        61

<PAGE>



Exhibit
Number

*10-B-4  -   Liquefied Natural Gas Storage Service Agreement under Rate Schedule
             LG-A, dated August 5, 1974, between PSNC and Transcontinental Gas
             Pipe Line Corporation.  (Registration No. 2-53708, Exhibit 5.6).

 10-B-4.1 -  Amendment dated May 16, 1996 to the  Liquefied  Natural Gas
             Storage  Service  Agreement  under Rate Schedule LG-A, between
             PSNC and Transcontinental Gas Pipe Line Corporation.
 
*10-B-5  -   Eminence Storage Service Agreement under Rate Schedule ESS, dated
             November 1, 1993, and Amendment, dated December 1, 1993,
             between PSNC and Transcontinental Gas Pipe Line Corporation.  (File
             No. 0-1218, 10-K--1993, Exhibit 10-B-5).

*10-B-6  -   Washington Storage Service Agreement under Rate Schedule WSS,
             dated August 1, 1991, between PSNC and Transcontinental Gas Pipe
             Line Corporation.  (File No. 0-1218, 10-Q--March 31, 1994, Exhibit
             10-B-6).

*10-B-7  -   Amendment dated December 1, 1994 to the Eminence Storage Service
             Agreement under Rate Schedule ESS, between PSNC and
             Transcontinental Gas Pipe Line Corporation.  (File No. 1-11429,
             10-Q--December 31, 1996, Exhibit 10-B-7).

*10-B-8  -   General Storage Service Agreement under Rate Schedule GSS, dated
             July 1, 1996, between PSNC and Transcontinental Gas Pipe Line 
             Corporation.  (File No. 1-11429, 10-Q--December 31, 1996, Exhibit
             10-B-8).

*10-C-2  -   1992 Nonqualified Stock Option Plan.  (Registration No. 33-48909,
             Exhibit 4).

*10-C-3  -   1997 Nonqualified Stock Option Plan.  (Registration No. 333-34845).

*10-D-3  -   Construction, Operating and Management Agreement by and between
             Public Service Company of North Carolina, Inc. and Cardinal
             Pipeline Company, LLC, dated March 23, 1994.  (File No. 0-1218, 
             10-Q--March 31, 1994, Exhibit 10-D-3).

*10-D-4  -   Construction, Operation and Maintenance Agreement by and between
             Pine Needle Operating Company and Pine Needle LNG Company, LLC
             dated August 8, 1995.  (File No. 1-11429, 10-Q--December 31, 1996,
             Exhibit 10-D-4).

*10-D-5  -   Operating Agreement of Pine Needle LNG Company, LLC dated August
             8, 1995.  (File No. 1-11429, 10-Q--December 31, 1996, Exhibit
             10-D-5).


                                                        62

<PAGE>



*10-D-5.1 -  Amendment to Operating Agreement of Pine Needle LNG Company, LLC
             dated October 1, 1995.  (File No. 1-11429, 10-Q--December 31, 1996,
             Exhibit 10-D-5.1).

 10-D-6  -   Service Agreement under Rate Schedule LNG-1 between Pine Needle
             LNG Company,  LLC and Public Service Company of North Carolina,
             Inc. dated January 29, 1997.

*10-E    -   Underwriting Agreement, dated January 10, 1996, between PSNC
             and Morgan Stanley & Co. Incorporated.  (File No. 1-11429, 10-Q--
             December 31, 1995, Exhibit 10-E).

*10-F    -   Form of Severance Agreement between the Company and its Executive
             Officers.  (File No. 1-11429, 10-Q--June 1997, Exhibit 10-F).

 11      -   Statement re computation of per share earnings.

*19      -   Letter regarding change in method of accounting for the commodity 
             cost of gas purchased and delivered to customers but not billed and
             recorded as revenue during the current period.  (File No. 0-1218, 
             10-Q--March 31, 1981, Exhibit 19).

 21      -   Subsidiaries of Registrant.

 23      -   Consent of Independent Public Accountants.  (Set forth on page 50
             of this annual report).

 27      -   Financial Data Schedule.




                                                        63

<PAGE>




                                                                   EXHIBIT 11

             PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED

                                AND SUBSIDIARIES

                        COMPUTATION OF EARNINGS PER SHARE

          FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1997, 1996 AND 1995




                                           1997         1996         1995
                                       -----------  -----------  -----------

Earnings available for common          $26,346,553  $23,898,218  $21,421,227
                                       -----------  -----------  -----------


Average common shares outstanding       19,549,656   18,995,035   18,509,049

Additional dilutive effect of
 outstanding options (as determined
 by the application of the treasury
 stock method)                             101,829       72,358       54,281
                                       -----------  -----------  -----------

Average common shares outstanding as
 adjusted                               19,651,485   19,067,393   18,563,330
                                       -----------  -----------  -----------

Earnings per share, as adjusted              $1.34        $1.25        $1.15
                                             =====        =====        =====


This  calculation is submitted in accordance with Regulation S-K item 601(b)(11)
although  not  required  by  footnote 2 to  paragraph  14 of APB  Opinion No. 15
because it results in dilution of less than 3%.

                                                          64

<PAGE>




                                                                EXHIBIT 21

             PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED
                         SUBSIDIARIES OF REGISTRANT (1)



               Cardinal Pipeline Company, LLC (2)
               Cardinal Extension Company, LLC  (3)
               Clean Energy Enterprises,  Inc.
               PSNC  Blue  Ridge Corporation
               PSNC Cardinal  Pipeline  Company
               PSNC Production Corporation 
               Pine  Needle  LNG  Company  LLC (4)
               Sonat  Public Service Company L.L.C. (5)



                 (1)      The above  subsidiaries are incorporated or organized
                          in the State of North Carolina, with the exception of
                          Sonat  Public  Service  Company  L.L.C.,  which  is a
                          Delaware  LLC.  PSNC   Exploration   Corporation  was
                          dissolved  August 1996. PSNC Propane  Corporation was
                          dissolved September 1997.

                 (2)      64% ownership by PSNC.

                 (3)      Estimated 33% ownership by PSNC Cardinal Pipeline 
                          Company at end of construction.

                 (4)      17% ownership by PSNC Blue Ridge Corporation.

                 (5)      50% ownership by PSNC Production Corporation.



                                                          65
<PAGE>