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, 1996

( ) 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. (x)

Estimated aggregate market value of the voting stock held by
nonaffiliates of the registrant at November 29, 1996 . . .. $366,631,106

Number of shares of Common Stock, $1 par value, outstanding at November
29, 1996  . . . . . . . . . . . . . . . . . . . . 19,296,374

Documents incorporated by reference:

     Portions of the proxy  statement  dated  December 9, 1996,  relating to the
January 31, 1997 annual meeting of  shareholders,  are incorporated by reference
into Part III of this annual report.


<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, 1996

                                              -------------

                                            TABLE OF CONTENTS

Item                                                                    Page

                                                 PART I.

  1.     Business................................................         2
         Executive Officers of the Registrant....................        11
  2.     Properties..............................................        12
  3.     Legal Proceedings.......................................        13
  4.     Submission of Matters to a Vote of Security Holders.....        13

                                                  PART II.

  5.     Market for the Registrant's Common Stock and
           Related Shareholder Matters...........................        13
  6.     Selected Financial Data.................................        14
  7.     Management's Discussion and Analysis of Results
           of Operations and Financial Condition.................        15
  8.     Financial Statements and Supplementary Data.............        25
  9.     Changes in and Disagreements With Accountants on
           Accounting and Financial Disclosure...................        44

                                                 PART III.

10.      Directors and Executive Officers of the Registrant......        44
11.      Executive Compensation..................................        44
12.      Security Ownership of Certain Beneficial Owners
           and Management........................................        45
13.      Certain Relationships and Related Transactions..........        45

                                                  PART IV.

14.      Exhibits, Financial Statement Schedules and
           Reports on Form 8-K...................................        45
         Signatures..............................................        52
         Exhibit Index...........................................        53



                                                     1

<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  300,000  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 an unregulated  subsidiary,  provides  conversion and
maintenance  services for natural gas-fueled  vehicles (NGVs) in selected cities
in and beyond its franchised territory.  Through another unregulated subsidiary,
PSNC is  engaged  in the  marketing  of  natural  gas to  large  commercial  and
industrial customers.

         During  fiscal years 1996,  1995 and 1994, 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,   propane   operations,
exploration and  development and gas marketing and other  activities for each of
the fiscal  years in the  three-year  period  ended  September  30, 1996 were as
follows (in thousands):
                               1996       1995       1994
Natural Gas Distribution(1)  $308,882   $247,893   $273,705
Merchandise and Jobbing(2)      9,444      8,675      8,135
Propane Operations(3)            -          -         9,090
Exploration & Development(3)     -          (171)     1,547
Gas Marketing/Other
 Activities(1)                 20,179      8,827      7,654
Total                        $338,505   $265,224   $300,131



         (1)      See "Results of Operations" on page 15 of this annual report.
         (2)      Primarily the sale and installation of gas appliances.
         (3)      Effective June 29, 1994, PSNC sold its propane operations to
                  Empiregas, Inc.  During June 1994, PSNC sold PSNC Production
                  Corporation's exploration and development properties.

                                                     2

<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 1996. 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  39,100 new customers
to its natural gas transmission and  distribution  systems.  Of those customers,
25,900 were  residential,  12,600 were commercial and 600 were  industrial.  The
resulting  5.2%  average  annual  growth rate is nearly three times the national
industry  average.  PSNC's average annual customer growth rate since fiscal 1986
has been 5.2%. PSNC attributes this growth rate to two primary factors:

         -        The  continued  expansion  by  PSNC  of its  transmission  and
                  distribution  systems to enable it to reach new  customers  in
                  its relatively  unsaturated service territory.  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.

         -        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 $60.4 million in fiscal 1996,  $61.1 million in fiscal 1995, and
$45.5 million in fiscal 1994,  approximately  $45.6  million,  $49.7 million and
$39.1 million,  respectively,  were expended on the construction of transmission
and distribution pipelines.

         PSNC is focusing on the following marketing priorities:

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

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

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


                                                     3

<PAGE>



         In  addition,  PSNC is  evaluating  the  introduction  of emerging  gas
technologies as a way 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 224 at September 30, 1993, to 254
at  September  30,  1996.  At  November  30,  1996,  PSNC had 265 winter  period
customers per employee.

Gas Supply

         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.  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
manages its gas supply,  transportation and storage service  requirements rather
than utilizing 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.

         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  26%, 38%, and 26% of
PSNC's total throughput for fiscal 1996, 1995 and 1994, 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

                                                     4

<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 30% and 28%, respectively,  of PSNC's supply
in fiscal 1996 and 1995.
<TABLE>
<CAPTION>
                                                        Daily                                  Contract
                                                       Deliver-           Annual              Expiration
  Type of Contract                                     ability           Quantity                Date
<S>                                                     <C>             <C>                    <C>
Firm Sales Service (1) (3)                               41,928         15,303,720              3/31/97
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              3/16/98
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                                  30,330         11,070,450      (2)
</TABLE>

        (1) These are separate and concurrent contracts.
        (2) These represent multiple contracts which expire on
        dates ranging from 10/31/99 to 3/31/16.
        (3) A portion of this contract for 8,386 daily
            deliverability will expire on 3/31/97.  The remaining
            33,542 will automatically be renewed for a one year
            period.

        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. The Cardinal pipeline 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
a limited liability company (LLC) to purchase and extend the Cardinal  pipeline.
As proposed, the pipeline will be extended 67 miles from Burlington to a point

                                                       5

<PAGE>



southeast of Raleigh,  and will add 140 million cubic feet per day of additional
firm  capacity.  A definitive  agreement was signed on December 6, 1995. The LLC
plans to request appropriate regulatory  authorization in December 1996 or early
calendar  1997 to extend the existing  pipeline,  and 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 LNG facilities owned
by PSNC and used under 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  is  shown  in the  following  table.  All  amounts  are  shown  in
dekatherms.


                                Daily                          Contract
                               Deliver-                            Expiration
    Storage Facility           ability          Capacity              Date

CNG General Storage            29,670           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            3/31/98
Transco LNG Storage            5,175              25,875              (3)
Transco Eminence Storage      29,514             245,297            3/31/13
Cove Point LNG Storage        25,000             250,000            4/15/07
PSNC LNG Storage (2)         100,000           1,040,000              N/A


         (1)  No peak day delivery assured by contract.
         (2)  Amounts shown represent maximum peak day capacity.
         (3)  This contract has expired; however, its renewal is currently
              being  negotiated  with Transco.  In the interim,  this service is
              available to PSNC under the same terms and conditions contained in
              the expired agreement.

         As discussed  further in Note 2 to the financial  statements,  PSNC has
signed an amendment to the  operating  agreement of the Pine Needle LNG Company,
LLC (Pine Needle), to add PSNC's subsidiary,  PSNC Blue Ridge Corporation, as an
owner of Pine Needle effective  October 1, 1995. Pine Needle,  originally formed
by  subsidiaries  of Transco and Piedmont,  has sought approval from the FERC to
construct,  own and operate an LNG peak demand  facility  in North  Carolina.  A
subsidiary of Transco will serve as the  operator.  PSNC 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.  The facility,  estimated to cost
$107 million, will be located near Transco's  transmission pipeline northwest of
Greensboro  and will have a storage  capacity  of four  billion  cubic feet with
vaporization capability of 400 million cubic feet per day. A project application
was  submitted to the FERC in early  November 1995 and,  pending FERC  approval,
construction will begin in early 1997.  Liquefaction is expected to begin in May
1999 in time for withdrawal service to begin in the 1999 winter heating season.

                                                       6

<PAGE>




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

         During  fiscal  1996,  approximately  34% 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.  The NCUC granted
PSNC's most recent  general rate increase of  $2,701,000  of  additional  annual
revenues  on 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 PSNC's  general  rate case order in
November  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

                                                       7

<PAGE>



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 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.

         In April 1992,  the NCUC adopted rules to implement the expansion  fund
program  established by an act passed 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  which would
otherwise  not be  economically  feasible  to serve.  Separate  funds  have been
established for use solely in each LDC's franchised 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. Ten 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
has received  approximately  $22,923,000 of supplier refunds and interest earned
thereon.  The NCUC has approved an expansion  project for McDowell  County which
will require  funding from PSNC's  expansion  fund. The total  estimated cost to
complete this project is  approximately  $14,500,000,  of which up to $8,193,500
can be used from the fund to finance the project.  The project was  initiated in
December 1995 and will serve its first customer during December 1996. PSNC plans
to file with the NCUC for approval of additional expansion projects in two other
counties before January 1,1997.

Franchises

         Effective July 15, 1996, the NCUC granted PSNC  certificates  of public
convenience  and necessity in seven counties in western North Carolina to PSNC's
franchised service  territory.  PSNC's franchised service territory now consists
of all or parts of 33 counties in North  Carolina.  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 64  municipalities  in which it
delivers  natural  gas.  The  expiration  dates of  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.  The other
communities served by PSNC have not required franchises.


                                                       8

<PAGE>



Non-utility Businesses

         During fiscal 1996, PSNC continued its gas brokering activities through
its subsidiary, PSNC Production Corporation. This rapidly expanding activity now
serves  approximately  250 accounts both on and off PSNC's system.  Clean Energy
Enterprises,  Inc.  (formerly Tar Heel Energy  Corporation)  also  continued its
activities  in the  refueling  of natural gas  vehicles  and the  conversion  of
gasoline-fueled vehicles to natural gas.

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 and one site at which a manufactured  gas holder was located.
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, 1996, PSNC had 1,148 full-time  employees compared with
1,121 at November 30, 1995. 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  330 construction  and service  employees.  Collective  bargaining
agreements  that  expired  in  December  1996  have  been  renegotiated.   These
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 1996,  the
quarters ended December 31 and March 31 together accounted for approximately 72%
and 75% 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.

                                                       9

<PAGE>




<TABLE>

<CAPTION>
OPERATING STATISTICS
--------------------
                                                         FOR THE FISCAL YEARS ENDED SEPTEMBER 30,
                                         ----------------------------------------------------------------------
                                            1996          1995           1994           1993           1992
                                         ----------     ----------     ----------     ----------     ----------
<S>                                      <C>            <C>            <C>            <C>            <C>       
OPERATING REVENUES - GAS:
  Residential Sales                      $162,967,260   $135,846,213   $137,986,651   $127,119,020   $109,475,477
  Commercial Sales                         74,444,770     57,783,940     67,679,342     66,124,813     57,890,721
  Industrial Sales                         52,460,676     31,483,864     49,970,780     80,861,975     67,125,621
  Gas Transported for Others               17,737,092     21,746,901     17,031,426      4,848,112      4,982,772
  Miscellaneous                             1,272,281      1,032,096      1,036,857      1,035,221        928,751
                                         ------------   ------------    -----------   ------------   ------------
          Total                          $308,882,079   $247,893,014   $273,705,056   $279,989,141   $240,403,342
                                         ============   ============   ============   ============   ============

GAS SUPPLY (DT):
  Natural Gas Purchased                   51,841,058     37,790,467     47,390,194     54,772,352     51,508,887
  Less Increase (Decrease) in Storage        471,720       (257,091)     1,466,236        104,399        (22,568)
  Less Unbilled, Unaccounted For,
   Company Use and Other                   2,518,774      1,979,901      2,156,027      2,166,864      2,182,555
                                          ----------     ----------     ----------     ----------     ----------
          Total Gas Sold                  48,850,564     36,067,657     43,767,931     52,501,089     49,348,900
                                          ==========     ==========     ==========     ==========     ==========
GAS DELIVERED (DT):
  Residential Sales                       22,398,288     17,566,948     18,781,482     18,058,000     16,092,646
  Commercial Sales                        13,925,422     10,827,444     12,261,918     13,031,684     12,613,272
  Industrial Sales                        12,526,854      7,673,265     12,724,531     21,411,405     20,642,982
  Gas Transported for Others              16,795,268     22,551,006     15,120,391      4,678,292      5,508,225
                                          ----------     ----------     ----------     ----------     ----------
          Total                           65,645,832     58,618,663     58,888,322     57,179,381     54,857,125
                                          ==========     ==========     ==========     ==========     ==========

NUMBER OF CUSTOMERS (AT YEAR END):
  Residential                               248,931        246,868        234,948        222,996        214,153
  Commercial                                 38,285 (2)     27,788         25,942         25,688         25,416
  Industrial                                  2,025          2,107          2,249 (3)      1,469 (3)        938
                                            -------        -------        -------        -------        -------
          Total                             289,241        276,763        263,139        250,153        240,507
                                            =======        =======        =======        =======        =======
PER RESIDENTIAL CUSTOMER:
  Average Gas Used (DT)                       89.98          71.16          79.94          80.98          75.15
  Average Revenue                           $654.67        $550.28        $587.31        $570.05        $487.61
  Revenue per DT                              $7.28          $7.73          $7.35          $7.04          $6.49

ANNUAL HEATING DEGREE DAYS (1):
  Actual                                      3,822          2,954          3,389          3,462          3,181
  Normal                                      3,359          3,341          3,341          3,341          3,359
  Percent of Normal                             114%            88%           101%           104%            95%
PEAK DAY DELIVERY (DT)                      433,045        403,581        420,597        350,131        340,905
</TABLE>


    (1)   Degree day information is based on the Raleigh/Durham area.  
          Fiscal 1996 and 1992 reflect
          an additional day for leap year.

    (2)   Increase is attributable to a  reclassification  of approximately
          8,000 customers from residential to  commercial/small  industrial
          during fiscal 1996.

    (3)   Increase is attributable to a  reclassification  of approximately
          400  commercial  customers to a small  industrial  classification
          during fiscal 1994 and fiscal 1993.


                                                        10

<PAGE>



                                       EXECUTIVE OFFICERS OF THE REGISTRANT


<TABLE>
<CAPTION>
                                                                                         Date Elected
 Name and Age (1)                        Title (1)                                        An Officer
<S>                                      <C>                                              <C>
Charles E. Zeigler, Jr.                  Chairman, President and                            11/01/86
   Age - 50                               Chief Executive Officer
John D. Grawe                            Senior Vice President -                            10/03/94
   Age - 48                               Operations
George F. Kast                           Senior Vice President -                            08/24/87
   Age - 50                               Information Systems
Jerry W. Richardson                      Senior Vice President -                            02/23/82
   Age - 51                              Engineering
Fred L. Schmidt                          Senior Vice President -                            01/04/93
   Age - 55                               Human Resources
Robert D. Voigt                          Senior Vice President -                            09/01/81
   Age - 45                              Corporate Development and
                                         Chief Financial Officer
Franklin H. Yoho                         Senior Vice President -                            02/01/91
   Age - 37                              Marketing and Gas Supply
Herbert B. Cox                           Vice President -                                   05/01/90
   Age - 52                              Operations Services
J. Paul Douglas                          Vice President -                                   12/21/94
   Age - 49                              Corporate Counsel and
                                          Secretary
Boyce C. Morrow, Jr.                     Vice President -                                   03/01/90
   Age - 52                              Governmental Relations
Jack G. Mason                            Treasurer                                          03/01/95
   Age - 39
Sharon D. Boone                          Controller and                                     03/01/95
   Age - 43                              Assistant Secretary
</TABLE>


   (1) As of November 30, 1996.

         The present terms of all officers  extend to January 31, 1997, 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,  was a partner  with the law firm of Katten,  Muchin,  Zavis and
Dombroff from February 1990 to March 1991 and was 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.



                                                    11

<PAGE>



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

         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 Director - Corporate Accounting, Manager - Corporate
Accounting, and Manager - Plant Accounting and Tax Services.

Item 2.  Properties

         PSNC  owns 703  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. PSNC also owns 64% of the 37.5 miles of
transmission  pipeline associated with the Cardinal pipeline,  as discussed more
fully in Note 2 to the financial  statements.  Transco  delivers  natural gas to
PSNC at various points on Transco's  pipeline in North Carolina.  Natural gas is
distributed  by PSNC  through  its  6,044  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'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
center,  eleven service center buildings,  16 service  buildings,  and an energy
control  building;  PSNC leases six commercial office buildings for its own use.
Two of the service  buildings also house training  facilities.  Another  service
building is jointly occupied by a NGV conversion facility.

         PSNC's  gas  utility  plant was  previously  subject to the lien of the
Indenture  securing its outstanding first mortgage bonds. At September 30, 1995,
PSNC had  $3,680,000 of first  mortgage  bonds  outstanding.  PSNC retired these
bonds effective December 1, 1995, and the lien was released during January 1996.



                                                    12

<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, 1996.


                                                 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, 1996, there were
approximately 11,500 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
1996 and 1995.

                                                                     Cash
         Quarter                                                   Dividends
          Ended                High                 Low            Declared
          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

          Fiscal
            1995
           Sep 30              16 3/4              14 7/8               .2125
           Jun 30              16 3/4              14 3/8               .2125
           Mar 31              16 1/2              14                   .2050
           Dec 31              15 1/2              13 3/4               .2050

         On  November  13,  1996  the  Board of  Directors  declared  a  regular
quarterly cash dividend on PSNC's common stock of 22(cent) per share, payable on
January 1, 1997 to  shareholders  of record on December 10, 1996.  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.




                                                    13

<PAGE>



Item 6.  Selected Financial Data
<TABLE>
<CAPTION>
For the Fiscal Years Ended September 30,                1996        1995        1994         1993       1992

<S>                                                   <C>         <C>         <C>          <C>        <C>     
Operating revenues (000's)........................    $308,882    $247,893    $273,705     $279,989   $240,403
Gross margin (000's)..............................    $140,744    $130,828    $118,327     $112,105   $110,003
Net income (000's)................................    $ 23,898    $ 21,421    $ 19,976 (2) $ 14,219   $ 16,750
Earnings per average common share ................    $   1.26    $   1.16    $   1.17 (2) $    .90   $   1.08
Cash dividends declared per common share .........    $   .865    $   .835    $   .805     $   .775   $   .747
Average number of common shares
 outstanding (000's) .............................      18,995      18,509      17,012       15,812     15,373
Capital expenditures (000's)......................    $ 60,428    $ 61,119    $ 45,469     $ 40,127   $ 31,055
Total assets (000's)..............................    $524,889    $456,995    $427,939     $400,946   $379,770
Common equity (000's).............................    $188,635    $173,372    $160,555     $123,662   $115,069
Long-term debt (000's) (1)........................    $140,150    $100,700    $113,680     $124,518   $130,056

</TABLE>

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

                                                                     14

<PAGE>



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


Results of Operations
<TABLE>
<CAPTION>
Net Margin

<S>                                                 <C>       <C>       <C> 
For the Fiscal Years Ended September 30,              1996      1995      1994

(Amounts in thousands except
 degree day and customer data)

Gross margin                                        $140,744  $130,828  $118,327
Less - Franchise taxes                                 9,885     7,943     8,766
  Net margin                                        $130,859  $122,885  $109,561


Total throughput (DT):
  Residential                                         22,398    17,567    18,781
  Commercial/small industrial                         14,307    11,855    12,450
  Large commercial/industrial                         28,941    29,197    27,657
                                                      65,646    58,619    58,888

Raleigh/Durham area degree days: (1)
  Actual                                               3,822     2,954     3,389
  Normal                                               3,359     3,341     3,341
  Percent of normal                                      114%       88%      101%

Weather normalization adjustment
  income (refund), net of
  franchise taxes                                    $(8,733)  $ 5,800   $  (138)

Customers at end of period: (2)
  Residential                                        248,940   246,877   234,957
  Commercial/small industrial                         38,624    29,497    27,806
  Large commercial/industrial                          1,677       389       376
                                                     289,241   276,763   263,139

</TABLE>

     (1) The increase in normal degree days in 1996 is due to an additional  day
for the leap year.

     (2) 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  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 could 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.

                                                      15

<PAGE>




Fiscal 1996

-        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 29%
         colder as compared to the prior fiscal year.  Both customer bases
         increased 4% and 8%, respectively, as compared to fiscal 1995.
         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 total approximately $6,098,000, including a
         variance of $14,533,000 related to refunds associated with the
         operation of the weather normalization adjustment (WNA) mechanism.
         Net margin for fiscal 1996 also increased due to a $732,000 fiscal
         1995 refund related to income tax 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.

Fiscal 1995

-        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 both
         customer bases of 5% and 6%, respectively.  Net throughput-related
         variances for these customers total 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
         rose 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.


                                                      16

<PAGE>



Fiscal 1994

-        Net margin increased by $6,422,000 or 6% in fiscal 1994 as compared
         to fiscal 1993.  This net increase includes the impact of the
         $1,225,000 write-off of Southern Expansion costs, as discussed in
         Note 2 to the financial statements, during fiscal 1993.  A 5%
         increase in the residential and a 4% increase in the commercial/small
         industrial customer bases, as compared to the previous year,
         generated increases in net margin of $2,937,000 and $1,141,000,
         respectively.  The quantities of gas delivered to residential and
         commercial/small industrial customers both increased 4% due to the
         increased customer bases.  The WNA variance increased net margin by
         $440,000 for fiscal 1994 as compared to fiscal 1993.  Net margin for
         the large commercial/industrial customer base increased $1,119,000.
         Total quantities delivered to large commercial/industrial customers
         increased only 2% due to curtailments of interruptible customers
         during January 1994's record cold weather; however, quantities
         delivered to the general service segment of this customer base
         increased 14%.


Operating Expenses

         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  a  transfer  of a  large  number  of  employees  to a  less  costly  health
maintenance  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 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.

         The 5%  increase in other  operating  expenses  during  fiscal 1994 was
primarily  due  to the  October  1993  wage  increases  granted  under  the  new
performance-based   pay  system  and  rising  health   insurance   costs.   Also
contributing to the increase were postretirement benefit expenses related to the
adoption of Statement of Financial Accounting Standards (SFAS) No.
106 effective October 1, 1993.

         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  during  fiscal 1995.  On a
straight comparison basis without this adjustment, maintenance

                                                      17

<PAGE>



 expenses for fiscal 1996  increased 2%.  Maintenance  expenses  decreased 5% in
fiscal 1994 due to the absence of expenses relating to maintenance of compressor
equipment and the LNG storage tank during fiscal 1993.

         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 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.  General taxes increased during fiscal 1994 due to increased  property
tax expense due to an increase in taxable property and higher tax rates.

Other Income (Deductions)

         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 unregulated  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%,  by order of the NCUC  effective  November  1,  1995.
Secondary market  transactions are any transactions that utilize capacity rights
on  interstate  pipelines.  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 for the sale of PSNC Propane and the
absence of operating income from propane  operations.  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.

         Other  income  (deductions)  increased  $4,836,000  during  fiscal 1994
mainly due to income from subsidiary operations and from merchandise and jobbing
income.  Income from  subsidiary  operations  exceeded fiscal 1993 by $2,845,000
primarily  due  to the  sale  of the  assets  of  PSNC  Propane  Corporation  to
Empiregas,  Inc. of North  Carolina.  The sale resulted in an after-tax  gain of
$1,511,000,  net of expenses,  related to  terminating  the  operations,  and to
after-tax earnings of $810,000 related to gas marketing  activities conducted by
PSNC Production Corporation.  Income from PSNC Propane's operations,  net of tax
and not including the gain from the asset sale, increased approximately $450,000
as compared to the same period  during  fiscal 1993.  This increase was due to a
decreased  cost of propane and higher  weather-related  volumes of propane sold.
The June 1994 sale of PSNC  Production's  remaining  exploration and development
properties  resulted in an after-tax gain of $139,000.  Merchandise  and jobbing
income for fiscal 1994  increased  $1,341,000  over fiscal 1993.  Although total
unit sales decreased, the per unit margin increased due to price changes made in
merchandising programs. The previously mentioned reclassification of income from
pipeline capacity sales also contributed to the increase.


                                                      18

<PAGE>



Interest Deductions

         Interest  deductions for fiscal 1996 increased  $1,885,000  over fiscal
1996.  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 the higher average short-term bank loans outstanding.

         Interest  deductions for fiscal 1995 and fiscal 1994 decreased $391,000
and $642,000,  respectively,  due mainly to lower interest  expense on declining
balances in long-term  debt.  The declining  balance in long-term debt is 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 short-term debt.

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, 1996,
total lines of credit with these banks range from a minimum of  $24,000,000 to a
winter-period maximum of $79,000,000.  At September 30, 1996, committed lines of
credit totaled  $46,000,000.  PSNC also has  uncommitted  annual lines of credit
totaling $80,000,000.  Lines of credit are evaluated  periodically by management
and  renegotiated  to  accommodate   anticipated   short-term  financing  needs.
Management  believes these lines are currently adequate to finance  construction
expenditures, stored gas inventories and other corporate needs. At September 30,
1996 and 1995,  PSNC's total short-term bank loans  outstanding were $59,500,000
and $51,000,000, respectively.

         PSNC sold an  additional  1,725,000  new shares of $1 par common  stock
through an underwritten  public  offering during May 1994. The proceeds,  net of
expenses,  were  $23,406,000.  These proceeds were used to repay all outstanding
short-term debt, to redeem the remaining  $3,098,000 balance of the 9 7/8% First
Mortgage Bonds due 1995, and to finance a portion of fiscal 1994's  construction
expenditures.

         During September 1996, PSNC made the final  additional  payment allowed
on its 10% Senior  Debentures due 2003 of $1,250,000.  During September 1995 and
1994, PSNC paid an additional $2,500,000,  the maximum additional annual payment
permitted pursuant to the terms of this debenture agreement.

         Effective  December 1, 1995,  PSNC  redeemed the  remaining  $3,680,000
balance of its 8% Series I First Mortgage Bonds, due 1998, at a redemption price
of 100.35%.  PSNC financed this  redemption  through the use of short-term  bank
debt. As this retired the balance of first mortgage  bonds,  PSNC has closed the
original  indenture and all  supplemental  indentures which secured these bonds,
and obtained a release of the liens on its property.

         PSNC also generates  equity capital through its dividend  reinvestment,
employee  stock  purchase and stock option plans.  During fiscal 1996,  1995 and
1994,  the dividend  reinvestment  plan  generated  $5,187,000,  $5,069,000  and
$5,020,000,  respectively,  of additional  equity  capital.  The employee  stock
purchase plan generated $1,198,000, $1,174,000 and $1,255,000,

                                                      19

<PAGE>



respectively,  of additional equity capital. The stock option plan generated net
equity  capital of $1,232,000,  $447,000 and $861,000 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 under the
registration statement.  The net proceeds of $49,314,000 received on January 16,
1996,  were  used to pay down a  significant  portion  of the  then  outstanding
short-term  debt. On November 5, 1996, the NCUC issued an order that  authorized
the  issuance  and  sale  of up to  the  remaining  $75,000,000  covered  by the
registration  statement.  PSNC  expects  to issue this debt in the first half of
fiscal 1997, depending upon market conditions and the interest rate environment.
Proceeds  will be used to retire a portion  of the then  outstanding  short-term
bank loans outstanding.

         The  ratio of  long-term  debt to  total  capitalization  was  42.6% at
September 30, 1996, 36.7% at September 30, 1995 and 41.5% at September 30, 1994.
PSNC's goal is to maintain a capital structure with a ratio of long-term debt to
total capitalization in the 40%-45% range with periodic moderate fluctuations.

         Construction expenditures were $60,428,000, $61,119,000 and $45,469,000
for fiscal 1996,  1995 and 1994,  respectively.  The fiscal 1995 increase is due
mainly to construction  costs of $7,332,000  associated with the construction of
the Cardinal Pipeline  project,  and  approximately  $4,000,000  associated with
another  transmission  project.  For  fiscal  1997,  PSNC's  Board of  Directors
approved a budget of $64,233,000 for PSNC's ongoing construction  program.  PSNC
anticipates  spending  approximately  $65,000,000  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  non-contributory  defined  benefit  pension  plan
covering  substantially all employees.  There were no contributions  made to the
plan  during  fiscal  1994.  During  fiscal  1995 and 1996,  contributions  were
$4,659,000   and   $2,855,000,   respectively.   Projected   fiscal   1997  plan
contributions total $2,801,000.

         As  discussed  further  in Note 11 to the  financial  statements,  PSNC
currently estimates paying from its assets,  approximately $3,600,000 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,  which will be expensed during the first quarter of fiscal 1997, is
in addition to regular  pension  benefits paid from plan assets.  As a result of
the early retirement program, PSNC

                                                      20

<PAGE>



anticipates  recognizing a pension gain of approximately  $1,300,000  during the
first quarter of fiscal 1997.  PSNC  anticipates  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 are attributable to refunds of $21,480,000 received from PSNC's pipeline
transporters  since  fiscal 1992 and  accumulated  interest of  $1,443,000.  The
investment and use of these funds have been  restricted by an order of the NCUC.
These funds are to remain segregated from general funds and may be used only for
expansion of PSNC's  facilities into unserved  territories which would otherwise
be  uneconomical  to serve.  In an order dated June 3, 1993, the NCUC created an
expansion  fund for PSNC in the Office of the State  Treasurer.  Pursuant to the
order,  approximately  $16,528,000 of the  restricted  funds have been deposited
into the  expansion  fund.  The NCUC has  approved  an  expansion  project  into
McDowell  County  to be funded  from  PSNC's  expansion  fund in an amount up to
$8,193,500.  PSNC's construction  expenditures as of September 30, 1996 relating
to this project  were  approximately  $4,900,000,  of which  $3,700,000  will be
refunded  from the expansion  fund during the first quarter of fiscal 1997.  The
project  was  initiated  in  December  1995 and is  expected to be in service by
December  1996.  PSNC  plans to file with the NCUC for  approval  of  additional
expansion projects in two other counties before January 1, 1997.

         Net accounts receivable  increased  $4,295,000 as compared to September
1995. This increase was due primarily to increased  revenues billed in September
1996 compared to September 1995.

         Stored gas inventories  increased  $3,722,000 due to an increase in the
average  cost of natural gas as compared to September  30, 1995,  along with the
addition of another storage service during fiscal 1996.

         Net deferred gas costs fluctuate in response to the operation of PSNC's
Rider D rate mechanism.  This mechanism  allows PSNC to recover margin losses on
negotiated  sales to large  commercial and  industrial  customers with alternate
fuel capability. It also allows PSNC to recover all prudently incurred gas costs
from customers. 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,  1996,  reflect  undercollections  from
customers  primarily  related to the  unanticipated  surge in natural gas prices
during January 1996, when PSNC experienced record throughput. Deferred gas costs
at September 30, 1995, reflect undercollections of demand costs from customers.

         The $534,000 increase in the asset for debt expense relates to expenses
associated with the 6.99% Senior Debentures due 2026 sold on January 10, 1996.

         Other assets  increased  $1,509,000  in fiscal 1996  primarily due to a
$1,347,000  increase in the  investment  in Pine Needle LNG  Company,  LLC and a
$367,000 investment in Cardinal Extension Company, LLC.



                                                      21

<PAGE>



         The increase in accrued  interest  reflects  interest on the additional
6.99%  Senior  Debentures  due 2026 sold on January 10,  1996,  and  interest on
increased short-term borrowings as compared to September 30, 1995.

         The $8,500,000  increase in interim bank loans at September 30, 1996 as
compared  to  September  30,  1995  relates  to  deficiencies   associated  with
uncollected  gas  costs  that have been  deferred  pursuant  to the Rider D rate
mechanism.  PSNC's deferred gas cost balances are approved by the NCUC in annual
gas cost prudence reviews and are collected from or refunded to customers over a
subsequent twelve-month period.

         Deferred credits and other liabilities  increased $3,329,000 due mainly
to an increase of $3,627,000 related to net deferred income taxes.

         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  manufactured
gas plants  (MGPs) were formerly  operated and one site at which a  manufactured
gas holder was  located.  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  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
six 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,  1996,  PSNC had
recorded a total liability of the minimum amount of the range, or $3,705,000.

         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 and extends 37.5 miles to provide  additional  daily  capacity to
PSNC's eastern service  territory in and around the Durham and Raleigh areas. On
December 6, 1995,  subsidiaries of  Transcontinental  Gas Pipe Line  Corporation
(Transco),  PSNC,  Piedmont,  and North Carolina Natural Gas Corporation  (NCNG)
formed  Cardinal  Extension  Company,  LLC, to purchase  and extend the existing
Cardinal  Pipeline.  The  extension  will  span  approximately  67  miles  at an
estimated  cost  of  $75  million.   PSNC,   through  a  subsidiary,   will  own
approximately  33% of the  new  pipeline,  and  will  contribute  its  net  book
investment  in  the  existing   pipeline  plus  additional   equity  capital  of
approximately $1 million.

         As discussed  more fully in Note 2 to the  financial  statements,  Pine
Needle LNG Company,  LLC (Pine Needle),  a limited  liability  company formed by
subsidiaries  of Transco and  Piedmont,  signed an  amendment  to its  operating
agreement to add PSNC's subsidiary,  PSNC Blue Ridge Corporation, as an owner of
Pine Needle effective October 1, 1995. Pine Needle will own, build and operate a
four  billion  cubic foot  liquefied  natural gas (LNG)  storage  facility  near
Transco's  pipeline in northwest Guilford County. On April 30, 1996, the Federal
Energy Regulatory Commission (FERC), made a preliminary determination to grant a
certificate  authorizing the construction and operation of Pine Needle. The FERC
has 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

                                                      22

<PAGE>



 NCUC filed an application  for rehearing of the preliminary  determination.  In
its request,  the NCUC  contested  the approved rate of return on equity and the
proposed  capital  structure.  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 of
the rate of return and capital  structure issues.  Construction  should begin in
early 1997 at an estimated cost of $107 million.  The facility is expected to be
operational  by May 1999.  PSNC,  through  its  subsidiary,  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, 1996, PSNC's investment
in Pine Needle totaled $2,055,000.

         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 and Sonat Marketing will each own 50% of the new company.
Sonat Marketing will contribute $4,944,000 for its 50% ownership in the company.
PSNC  Production  will  contribute gas contracts with a net book value of $0 for
its 50%  ownership  in the new company  and will be the  operator  and  managing
partner.  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.  Therefore,  PSNC  Production  will  recognize  that
contribution  as  earned  over  five  years,  the  economic  period  used in the
determination  of the  contribution  amount.  Sonat Public Service  Company will
market natural gas and related services to small industrial and large commercial
customers  throughout  the  Mid-Atlantic  region,  including the states of North
Carolina, South Carolina,  Maryland, and Virginia, and the District of Columbia.
The  new  company   will  also  provide  gas  supply   management   services  to
municipalities in the Mid-Atlantic region.

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
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 Accounting Statements

         In March 1995, the Financial  Accounting  Standards Board (FASB) issued
its SFAS No.  121,  "Accounting  for the  Impairment  of  Long-Lived  Assets and
Long-Lived  Assets to be Disposed Of." This statement  imposes stricter criteria
for  regulatory  assets by  requiring  that such  assets be  probable  of future
recovery at each balance  sheet date.  PSNC adopted this  standard on October 1,
1995. Based on the current regulatory  structure in which PSNC operates,  PSNC's
financial position and results of operations were not materially affected.

         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
will be effective for PSNC beginning October 1, 1996.


                                                      23

<PAGE>



         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.  Currently  PSNC has
two  stock-based  compensation  plans  which  are  described  in  Note  3 to the
financial statements. PSNC expects to continue to apply current accounting rules
and  adopt  only the  disclosure  requirements  for  these  plans.  As a result,
adoption of the new statement will not directly impact PSNC's financial position
or results of operations.

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 such 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 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.


                                                      24

<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,       1996           1995           1994


<S>                                        <C>            <C>            <C>         
Operating revenues                         $308,882,079   $247,893,014   $273,705,056
Cost of gas                                 168,137,830    117,065,047    155,377,642
Gross margin                                140,744,249    130,827,967    118,327,414

Operating Expenses and Taxes:
  Other operating expenses                   50,074,438     47,006,721     45,123,338
  Maintenance                                 5,128,699      4,261,832      4,645,045
  Provision for depreciation                 19,748,947     18,156,134     15,197,428
  General taxes                              16,005,669     13,823,123     14,566,009
  Income taxes -
    Federal                                  11,579,200     10,776,500      8,031,000
    State                                     2,917,300      2,743,800      2,109,000
     Total operating expenses and taxes     105,454,253     96,768,110     89,671,820
Operating income                             35,289,996     34,059,857     28,655,594

Other Income (Deductions):
  Allowance for equity funds used
   during construction                             -            18,244         10,431
  Merchandise and jobbing                       (83,582)      (333,914)       478,848
  Subsidiary operations, net of
   income taxes                               1,327,561        402,344      3,130,113
  Interest income and other                   2,106,868        132,543        950,177
     Total other income (deductions)          3,350,847        219,217      4,569,569
Gross income                                 38,640,843     34,279,074     33,225,163

Interest Deductions:
  Interest on long-term debt                 12,252,379     11,115,979     12,060,285
  Amortization of debt expense                  151,978        137,122        146,983
  Other interest                              2,589,033      1,974,268      1,187,878
  Allowance for borrowed funds used
   during construction                         (250,765)      (369,522)      (146,389)
     Total interest deductions               14,742,625     12,857,847     13,248,757
Net income                                 $ 23,898,218   $ 21,421,227   $ 19,976,406


Average common shares outstanding            18,995,035     18,509,049     17,012,261

Earnings per average common share                 $1.26          $1.16          $1.17


Cash dividends declared per common share          $.865          $.835          $.805
</TABLE>

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

                                                                     25

<PAGE>


<TABLE>

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


<CAPTION>
September 30,                                                                         1996               1995
<S>                                                                               <C>                   <C>
Assets
Gas Utility Plant:
 In service                                                                       $619,831,020          $566,460,339
 Less - Accumulated depreciation                                                   183,529,378           166,506,014
 Net plant in service                                                              436,301,642           399,954,325
 Construction work in progress                                                       9,386,643             7,484,772
                                                                                   445,688,285           407,439,097

Non-utility Property, net of
 accumulated depreciation (1996 -
 $134,789 and 1995 - $148,864)                                                         691,145               801,118

Current Assets:
 Cash and temporary investments                                                      3,360,640               993,086
 Restricted cash and temporary investments                                           6,394,634             4,215,146
 Receivables, less allowance for
  doubtful accounts (1996 - $2,481,943
  and 1995 - $2,037,855)                                                            17,899,381            13,604,584
 Inventories, at average cost -
  Materials, supplies and merchandise                                                6,704,622             5,576,801
  Stored gas                                                                        15,862,819            12,141,033
 Deferred gas costs, net                                                            17,525,347             3,692,135
 Prepayments                                                                         2,275,674             2,088,850
                                                                                    70,023,117            42,311,635

Deferred Charges and Other Assets:
 Debt expense                                                                        1,418,463               884,392
 Other                                                                               7,067,699             5,558,331
                                                                                     8,486,162             6,442,723
                                                                                  $524,888,709          $456,994,573


Capitalization and Liabilities Capitalization (see statements):
 Common equity                                                                    $188,635,405          $173,372,370
 Long-term debt                                                                    140,150,000           100,700,000
                                                                                   328,785,405           274,072,370

Current Liabilities:
 Current maturities of long-term debt                                                6,800,000            10,480,000
 Accounts payable                                                                   20,300,451            20,411,512
 Accrued taxes                                                                       3,074,823             1,823,638
 Customer prepayments and deposits                                                   6,013,886             5,741,647
 Accrued interest                                                                    3,096,993             2,451,520
 Cash dividends declared                                                             4,222,283             3,971,802
 Restricted supplier refunds                                                         6,394,634             4,215,146
 Other                                                                               3,960,098             3,416,056
                                                                                    53,863,168            52,511,321
 Interim bank loans, due within one year                                            59,500,000            51,000,000
                                                                                   113,363,168           103,511,321

Deferred Credits and Other Liabilities:
 Income taxes, net                                                                  56,232,845            52,605,635
 Investment tax credits                                                              4,210,269             4,645,425
 Accrued pension cost                                                               12,213,788            12,930,801
 Other                                                                              10,083,234             9,229,021
                                                                                    82,740,136            79,410,882
                                                                                  $524,888,709          $456,994,573

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

                                                               26

<PAGE>

<TABLE>

                              Public Service Company of North Carolina, Incorporated and Subsidiaries

                                             Consolidated Statements of Capitalization
<CAPTION>
September 30,                                          1996             1995
<S>                                                <C>              <C>

Common Equity:
  Common stock, $1 par, 30,000,000
   shares authorized; shares outstanding
   1996 - 19,204,385 and 1995 - 18,689,346         $ 19,204,385     $ 18,689,346
  Capital in excess of par value                    114,007,859      106,655,316
  Retained earnings                                  55,423,161       48,027,708
                                                    188,635,405      173,372,370

Long-term Debt:
 First mortgage bonds (An equivalent
 portion of gas utility plant pledged
 as collateral) -
  8% Series I, due 1998                                    -           3,680,000

  Senior debentures (unsecured) -
    8.65% due 2002                                   15,000,000       17,500,000
    10% due 2003                                     11,250,000       15,000,000
    10% due 2004                                     38,700,000       43,000,000
    8.75% due 2012                                   32,000,000       32,000,000
    6.99% due 2026                                   50,000,000             -
                                                    146,950,000      111,180,000
   Less - Current maturities                          6,800,000       10,480,000
                                                    140,150,000      100,700,000
                                                   $328,785,405     $274,072,370


</TABLE>

<TABLE>
                                           Consolidated Statements of Retained Earnings

<CAPTION>
For the Fiscal Years Ended September 30,     1996          1995         1994
<S>                                       <C>           <C>          <C>

Balance, beginning of year                $48,027,708   $42,142,636  $36,164,769

Add - Net income                           23,898,218    21,421,227   19,976,406
                                           71,925,926    63,563,863   56,141,175

Deduct - Cash dividends declared
          on common stock and other        16,502,765    15,536,155   13,998,539

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

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


                                                                27

<PAGE>

<TABLE>

                                   Public Service Company of North Carolina, Incorporated and Subsidiaries

                                                    Consolidated Statements of Cash Flows

<CAPTION>
For the Fiscal Years Ended September 30,            1996          1995          1994
Cash Flows from Operating Activities:
<S>                                              <C>           <C>           <C>
  Net income                                     $23,898,218   $21,421,227   $19,976,406
   Adjustments to reconcile net income to net
    cash provided by operating activities:
     Depreciation charged to operating expenses   19,748,947    18,156,134    15,197,428
     Depreciation charged to other accounts        2,821,518     2,350,489     2,440,130
     Amortization of debt expense and other          151,978       137,122       161,896
     Provision for doubtful accounts               1,706,466     1,404,268     1,493,028
     Amortization of investment tax credits, net    (435,156)     (435,154)     (440,313)
     Deferred income taxes, net                    3,627,210     4,136,329     1,876,372
     Gain on sale of propane assets                     -             -       (3,127,970)
                                                  51,519,181    47,170,415    37,576,977

     Change in assets and liabilities:
      Receivables                                 (6,001,263)    1,639,855    (3,521,320)
      Inventories                                 (4,849,607)    2,690,078    (1,404,041)
      Deferred gas costs, net                    (13,833,212)   (2,958,509)    5,348,373
      Prepayments                                   (186,824)      482,864      (745,459)
      Accounts payable                              (111,061)    4,755,558    (1,848,648)
      Accrued taxes                                1,251,185    (3,963,760)    2,634,559
      Customer prepayments and deposits              272,239       171,656       100,649
      Accrued interest                               645,473       138,428    (1,382,050)
      Other                                        1,602,404       268,917     1,445,207
      Accrued pension cost                          (717,013)   (2,600,758)    2,008,302
Net cash provided by operating activities         29,591,502    47,794,744    40,212,549

Cash Flows from Investing Activities:
  Construction expenditures                      (60,428,321)  (61,118,541)  (45,469,230)
  Non-utility property and other                  (1,801,879)   (1,015,502)   (1,535,728)
  Proceeds from sale of propane assets                  -             -       12,800,126
Net cash used in investing activities            (62,230,200)  (62,134,043)  (34,204,832)

Cash Flows from Financing Activities:
  Issuance of common stock through public
   offering, net of expenses                            -             -       23,406,260
  Issuance of common stock through dividend
   reinvestment, stock purchase and stock
   option plans                                    7,674,585     6,762,526     7,297,969
  Increase (decrease) in interim bank loans, net   8,500,000    28,000,000   (10,500,000)
  Sale of senior debentures, net of expenses      49,313,951          -             -
  Retirement of long-term debt                   (14,230,000)   (7,740,000)  (11,136,000)
  Retirement of common stock                         (58,056)      (71,811)     (162,420)
  Cash dividends                                 (16,194,228)  (14,152,550)  (14,297,880)
Net cash provided by (used in)
   financing activities                           35,006,252    12,798,165    (5,392,071)


Net increase (decrease) in cash and
 temporary investments                             2,367,554    (1,541,134)      615,646
Cash and temporary investments at beginning
 of year                                             993,086     2,534,220     1,918,574
Cash and temporary investments at end of year    $ 3,360,640   $   993,086   $ 2,534,220
Cash paid during the year for:
  Interest (net of amount capitalized)           $13,787,781   $12,137,583   $14,134,527
  Income taxes                                   $11,480,000   $13,486,095   $ 8,927,800

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

                                                                     28

<PAGE>



                     Public Service Company of North Carolina, Incorporated

                                         and Subsidiaries

                               Notes to Consolidated Financial Statements

                 For the Fiscal Years Ended September 30, 1996, 1995 and 1994


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. (previously Tar Heel Energy
       Corporation),  PSNC Blue Ridge Corporation,  PSNC Production Corporation,
       PSNC Propane  Corporation,  PSNC Cardinal  Pipeline  Company,  and PSNC's
       interest in Cardinal  Pipeline  Company,  LLC. Through its  subsidiaries,
       PSNC also owns an interest in Cardinal  Extension  Company,  LLC and Pine
       Needle LNG Company, LLC. All significant  intercompany  transactions have
       been eliminated in consolidation.

              PSNC  and  its  subsidiaries  operate  in  one  dominant  business
       segment,  distribution  of natural gas. PSNC Production  Corporation,  an
       unregulated  subsidiary,  is engaged in the  marketing  of natural gas to
       large commercial and industrial  customers.  Through another  unregulated
       subsidiary,  Clean Energy  Enterprises,  Inc., PSNC provides  conversion,
       maintenance  and fueling  services  for natural gas  vehicles in selected
       cities in and beyond its franchised  territory.  During fiscal 1994, PSNC
       divested  its  remaining  oil  and gas  properties,  which  ended  PSNC's
       participation  in exploration and  development  activities and, PSNC sold
       its propane subsidiary assets to Empiregas, Inc. of North Carolina.

       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%, 3.9% and 3.5% of the cost
       of depreciable property for fiscal 1996, 1995 and 1994, respectively,  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.



                                                      29

<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  of 45 days or less.
       Investments may include repurchase  agreements,  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.

       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.

       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, 1996, is $146,950,000 as
       compared to a fair market value of $158,369,000. 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 materially differ from those estimates.


2.     REGULATORY MATTERS

             In PSNC's 1986 general rate case order, a rate mechanism  (Rider-D)
       was authorized. As currently approved by the NCUC, Rider D allows PSNC to
       record for recovery from its customers all prudently incurred

                                                      30

<PAGE>



       gas  costs  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, 1996,
       the balance of net gas costs to be collected from  customers  pursuant to
       Rider D was approximately $17,925,000.

              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.

              Effective November 1, 1990, PSNC obtained additional firm capacity
       from  Transcontinental  Gas Pipe Line  Corporation's  (Transco)  Southern
       Expansion  project.  The  demand  costs  associated  with this  increased
       capacity  were  recorded  as a  reduction  of refunds  due  customers  in
       accordance with PSNC's  interpretation  of its tariffs as approved by the
       NCUC in Docket No.  G-5,  Sub 246.  The Public  Staff of the NCUC filed a
       petition with the NCUC  claiming that these amounts were not  recoverable
       from  customers  under  tariffs  and laws  existing  at the time,  except
       through a general  rate case.  In an order dated April 5, 1991,  the NCUC
       ordered that PSNC's prior treatment of these costs not be disturbed.  The
       NCUC also  ordered,  prospectively,  that these demand costs be collected
       through all rates on a provisional  basis pending  further order. In view
       of this NCUC  order,  PSNC  deferred  both the  associated  costs and the
       revenue for the period April 5, 1991,  through  October 31, 1991.  In the
       November  1,  1991,  general  rate  case  order,  the NCUC  approved  the
       prospective  collection of these demand costs through all rates. On April
       29, 1993, the Public Staff filed a motion with the NCUC  requesting  that
       PSNC be ordered to refund to its  customers the revenues  collected  from
       April 5, 1991, through October 31, 1991 for such costs. On July 27, 1993,
       the NCUC issued an order  requiring  the refund as proposed by the Public
       Staff. As a result of the order, PSNC charged to gas cost expenses during
       the fourth  quarter of fiscal 1993  approximately  $1,225,000  of related
       deferred gas costs and incurred approximately $199,000 of interest on the
       deferred  revenue.  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. PSNC believes the October 16, 1995,  order
       to be the final order regarding Southern Expansion charges incurred prior
       to November 1, 1991, and anticipates no further exposure from this issue.

              On September 25, 1996,  the NCUC issued an order in PSNC's general
       rate case filed during 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 rate mechanisms.

              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  natural gas  pipeline.  It was
       placed into service on December  31, 1994,  and extends 37.5 miles from a
       connection with Transco near Reidsville to Burlington,  where it connects
       with  existing  pipelines  of PSNC and  Piedmont.  An  increase in annual
       revenues  of  $3,063,000  was  granted by the NCUC to PSNC to recover the
       cost of the investment, effective January 26, 1995.

              On December 6, 1995, subsidiaries of PSNC, Piedmont, Transco, and

                                                      31

<PAGE>



       North Carolina Natural Gas Corporation  (NCNG) formed Cardinal  Extension
       Company,  LLC  (Cardinal  Extension)  to purchase and extend the Cardinal
       pipeline.  The pipeline  will extend 67 miles from  Burlington to a point
       southeast  of  Raleigh  and will add 140  million  cubic  feet per day of
       additional firm capacity for North Carolina consumers. The extension will
       be  project-financed  at an estimated cost of $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.  PSNC, through a subsidiary,
       will  contribute  to Cardinal  Extension  its net book  investment in the
       existing  pipeline plus  additional  equity capital of  approximately  $1
       million.  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.

              PSNC signed an amendment to the operating agreement of Pine Needle
       LNG Company, LLC (Pine Needle), to add PSNC's subsidiary, PSNC Blue Ridge
       Corporation,  as an owner of Pine Needle effective  October 1, 1995. Pine
       Needle,  originally formed by subsidiaries of Transco and Piedmont,  will
       own and  operate a liquefied  natural  gas (LNG) peak demand  facility in
       North Carolina. A subsidiary of Transco will serve as the operator.  PSNC
       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.  The  facility,  estimated  to cost $107  million,  will be
       located near Transco's  pipeline  northwest of Greensboro and will have a
       storage capacity of four billion cubic feet with vaporization  capability
       of 400 million cubic feet per day. Pine Needle plans to seek non-recourse
       project  financing for the facility  investment.  On April 30, 1996,  the
       FERC made a preliminary  determination to grant a certificate authorizing
       the  construction  and operation of Pine Needle.  The FERC has 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.  In July  1996,  the FERC  staff  completed  its
       environmental  assessment of Pine Needle and  concluded  that the project
       would have no significant  environmental  impact.  Pending FERC approval,
       construction  will begin in early 1997.  Through September 30, 1996, PSNC
       Blue  Ridge has  invested  $2,055,000  in the  project.  Liquefaction  is
       expected to begin in May 1999 in time for withdrawal  service to begin in
       the 1999  winter  heating  season.  PSNC Blue  Ridge  will  make  capital
       contributions  totaling  approximately $9 million during the construction
       period.

                                                      32

<PAGE>



3.     COMMON STOCK

              The changes in common stock and capital in excess of par value for
       the three years ended September 30, 1996 were as follows:
<TABLE>
                                                 Common Stock
                                             $1 Par, Authorized
                                              30,000,000 Shares       Capital in
                                             Shares                    Excess of
                                           Outstanding     Amount      Par Value
<CAPTION>
        <S>                                 <C>         <C>          <C>
        September 30, 1993                  15,991,776  $15,991,776  $ 71,505,794

          Issuance through dividend
           reinvestment plan (DRP)             325,434      325,434     4,694,165

          Issuance through employee
           stock purchase plan (ESPP)           86,892       86,892     1,168,261

          Issuance through nonqualified
           stock option plan (NSOP) - net       82,945       82,945       940,272

          Compensation expense - NSOP             -            -           14,154

          Recognition of permanent tax
           differences related to stock
           options exercised                      -            -          196,800

          Issuance through public offering -
           net of expenses                   1,725,000    1,725,000    21,681,260

          September 30, 1994                18,212,047   18,212,047   100,200,706

          Issuance through DRP                 349,315      349,315     4,720,158

          Issuance through ESPP                 90,574       90,574     1,083,265

          Issuance through 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
</TABLE>

              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

                                                      33

<PAGE>



       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.

              On January 4, 1993,  PSNC effected a 3-for-2 common stock split in
       the form of a 50% common  stock  dividend.  The  following  common  stock
       options and shares have been restated.

              Options granted,  exercised and canceled for the three years ended
       September 30, 1996 were as follows:

                               Options      Exercise Price
                              Outstanding       Per Share

    September 30, 1993          338,931
     Granted                    120,000     $13.23
     Exercised                  (98,928)    $ 8.77 to $15.57
     Canceled                   (11,572)    $ 8.77 to $15.57
    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


              PSNC also  offers an  Employee  Stock  Purchase  Plan under  which
       eligible  employees may purchase  PSNC's  common stock through  voluntary
       payroll  deductions  at a 10%  discount  from  the fair  market  value as
       defined in the plan.

              On August 13, 1996, PSNC received authority from the NCUC to amend
       its dividend  reinvestment  plan. The amended plan,  effective October 1,
       1996, is called the Stock  Purchase and Automatic  Dividend  Reinvestment
       Plan.  At September 30, 1996,  1,668,616  common shares were reserved for
       issuance  under  this plan,  141,896  common  shares  were  reserved  for
       granting under the 1992 Nonqualified Stock Option Plan and 369,218 common
       shares were reserved for issuance under the Employee Stock Purchase Plan.


                                                      34

<PAGE>




4.     PENSION AND POSTRETIREMENT PLANS

              PSNC  and its  subsidiaries  sponsor  a  non-contributory  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 1996,  1995 and 1994  consisted of the
       following components (amounts in thousands):


                                            1996    1995    1994
       Service cost                        $2,034  $1,977  $2,026
       Interest cost                        2,972   3,173   3,040
       Actual return on assets             (2,845) (3,320)   (814)
       Net amortization                       (23)    228  (2,244)
       Net pension cost                    $2,138  $2,058  $2,008



              The  table  below  sets  forth  the  amount  recognized  on PSNC's
       consolidated  balance  sheets at September  30, 1996 and 1995 (amounts in
       thousands):


                                                          1996      1995
    Actuarial present value of benefit obligations:
    Accumulated benefit obligation,
      including vested benefits in
     1996 of $29,405 and 1995 of $32,049                 $30,434   $33,382


     Projected benefit obligation                        $44,458   $45,315
     Plan assets at fair value                            38,503    37,011

     Plan assets under projected
      benefit obligation                                   5,955     8,304
     Unrecognized transition amount                        2,539     2,849
     Unrecognized net gain                                 8,444     7,074
     Unrecognized prior service cost                      (4,724)   (5,296)
     Accrued pension cost                                $12,214   $12,931

     Actuarial assumptions:

     Weighted average discount rate                      7.75%        7%
     Rate of increase in future
      compensation levels                               3.75%-7%   3%-6.25%
    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  1996  and  1995
       measurement dates was approximately $2,710,000 and $2,629,000.

              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.

                                                      35

<PAGE>



       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, 1996 and 1995  (amounts in
       thousands):

                                              1996          1995
       Fair value of plan assets            $  -          $  -

       Accumulated postretirement benefit obligation (APBO):
         Retirees and dependents            $ 2,507       $ 2,163
         Other fully eligible participants    1,445         1,651
         Other active participants            3,380         4,466
                                              7,332         8,280

       Unrecognized prior service cost         (574)         -
       Unrecognized net gain                    256           721
       Unrecognized transition obligation    (3,768)       (6,639)
       Accrued postretirement benefit cost  $ 3,246       $ 2,362


              The net periodic postretirement benefit cost for the twelve months
       ended  September  30,  1996,  1995 and  1994  consists  of the  following
       components (amounts in thousands):


                                       1996     1995     1994
  Service cost                       $  258   $  326   $  366
  Interest cost on APBO                 525      599      533
  Amortization of
   transition obligation                258      369      368
  Net amortization                       19      (21)     -
       Net periodic postretirement
        benefit cost                    $1,060   $1,273   $1,267


              As of the 1996  measurement  date,  the  assumed  health care cost
       trend rate used in determining the APBO was 6% in 1996, 9% in 1997, 8% in
       1998, 7% in 1999, then  decreasing  annually to an ultimate trend rate of
       5.25% in 2005. A one-percentage point increase in the assumed health care
       cost trend rate would increase the APBO by approximately 12%. The service
       and interest cost components of the net periodic  postretirement  benefit
       cost would  increase  approximately  6%. The net periodic  postretirement
       benefit cost was calculated using a weighted average discount rate of 7%.

                                                      36

<PAGE>



       The APBO at the measurement  date was determined using a weighted average
       discount rate of 7.75%.

              PSNC  requested  recovery of SFAS No. 106  expenses in its general
       rate case filed with the NCUC on March 9, 1994. In an order dated October
       7, 1994,  the NCUC granted  recovery of these  expenses on a  prospective
       basis.

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, 1996,  total  lines of credit  with these banks range
       from a minimum of $24,000,000 to a winter-period  maximum of $79,000,000.
       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, 1996 and
       1995,   there  were  $59,500,000  and  $51,000,000  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, 1996 and
       1995, PSNC had no bankers' acceptance loans outstanding.

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

                                                   1996          1995

       At year end -
              Amount outstanding                 $59,500       $51,000
              Weighted average rate                 5.69%         6.42%

       During the year -
              Maximum amount outstanding         $82,500       $51,000
              Average daily amount outstanding   $39,944       $25,362
              Weighted average rate                 5.99%         6.10%


              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):

                                                      37

<PAGE>


<TABLE>
<CAPTION>
                                   1996               1995              1994
                             Federal   State    Federal   State   Federal   State
<S>                          <C>      <C>      <C>       <C>     <C>       <C>
Income Statement Captions:
 Operating expenses
  and taxes                  $11,579  $2,917    $10,777  $2,744   $ 8,031  $2,109
 Other income (deductions)       763     202        162      19     1,532     528
                             $12,342  $3,119    $10,939  $2,763   $ 9,563  $2,637

Income Tax Expense:
 Currently payable           $ 9,892  $2,427    $ 8,320  $2,023   $ 9,569  $2,550
 Deferred                      2,885     692      3,054     740       434      87
 Investment tax credits, net    (435)   -          (435)   -         (440)   -
                             $12,342  $3,119    $10,939  $2,763   $ 9,563  $2,637

</TABLE>

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

                                            1996          1995        1994

Statutory federal income tax rate              35%           35%         35%
Expected federal income tax expense
  at federal statutory rate               $13,438       $12,230     $10,541
Less: State income tax benefit              1,022           962         757
      Amortization of ITC                     435           435         439
      Tax on subsidiary income                465           141       1,096
      Other                                   (63)          (85)        218
Federal income tax expense                $11,579       $10,777     $ 8,031

              The components of the net deferred tax liabilities as of September
       30, 1996 and 1995, are as follows (amounts in thousands):

                                                      1996           1995

Deferred tax assets:
   Regulatory liabilities - income tax amounts     $  4,887       $  5,100
   Pension expense                                    3,719          3,903
   Unamortized ITC                                    1,648          1,767
   Postretirement benefits                            1,046            819
   Insurance reserves                                   679            735
   Other                                                842            778
                                                   $ 12,821       $ 13,102

Deferred tax liabilities:
   Depreciation and property related items         $ 57,512       $ 53,723
   Excess deferred taxes due to
    a change in the statutory rate                   10,591         10,914
   Regulatory assets - income tax amounts               647            701
   Other                                                304            370
                                                   $ 69,054       $ 65,708

Net deferred tax liabilities                       $ 56,233       $ 52,606




                                                         38

<PAGE>



7.     ENVIRONMENTAL ISSUES

              PSNC owns or has owned  portions of six sites in North Carolina on
       which MGPs were  formerly  operated and one site at which a  manufactured
       gas holder was  located.  Of the seven sites with which PSNC is involved,
       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  six 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 MGPs 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, 1996,  PSNC has recorded a
       liability and  associated  regulatory  asset of the minimum amount of the
       range, or $3,705,000.

              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

              Effective December 1, 1995, PSNC redeemed the remaining $3,680,000
       balance  of  its 8%  Series  I  First  Mortgage  Bonds,  due  1998,  at a
       redemption  price of 100.35%.  PSNC financed this redemption  through the
       use of short-term  bank debt. As this  redemption  retired the balance of
       first  mortgage  bonds,  PSNC has closed the original  indenture  and all
       supplemental indentures which secured these bonds, and obtained a release
       of the liens on its property.


                                                     39

<PAGE>



              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 unsecured debt securities. On January 10, 1996, PSNC sold
       $50,000,000  of 6.99%  Senior  Debentures  due 2026 in a public  offering
       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.

              Maturities  of long-term  debt during each of the next five fiscal
       years will be as  follows:  1997,  $6,800,000;  1998,  $9,300,000;  1999,
       $9,300,000; 2000, $11,800,000; and 2001, $6,800,000.

              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, 1996,  PSNC is in compliance in all material  respects with
       the requirements of its debt agreements.

9.     CONSTRUCTION PROGRAM

              The  construction  program for fiscal 1997, as presently  planned,
       provides for expenditures of $64,233,000.

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.

11.    EVENTS SUBSEQUENT TO DATE OF REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


              PSNC offered special benefits to eligible  employees in connection
       with a voluntary  early  retirement  program.  This  special  termination
       benefit,  which is payable in addition  to the  employee's  regular  plan
       benefits,  was available  until  November 27, 1996.  Special  termination
       benefits totaling approximately $3,600,000 will be paid to employees upon
       their  retirement  from PSNC's  assets  rather than from the pension plan
       assets.  PSNC  anticipates  accelerating the recognition of approximately
       $1,300,000 of the  unrecognized  net gain and  unrecognized  net asset as
       allowed  in SFAS No.  88,  "Employers'  Accounting  for  Settlements  and
       Curtailments  of  Defined  Benefit  Pension  Plans  and  for  Termination
       Benefits."  The net effect of these two  transactions  will be recognized
       during the first quarter of fiscal 1997.

              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 and Sonat Marketing will each own
       50% of the new company.  Sonat Marketing will  contribute  $4,944,000 for
       its 50% ownership in the company.  PSNC  Production  will  contribute gas
       contracts  with a net book value of $0 for its 50%  ownership  in the new
       company and will be the operator and managing partner. 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.   Therefore,   PSNC  Production  will  recognize  that
       contribution  as earned over five years,  the economic period used in the
       determination  of the contribution  amount.  Sonat Public Service Company
       will  market  natural gas and related  services to small  industrial  and
       large commercial customers throughout the Mid-Atlantic region,  including
       the states of North Carolina, South Carolina, Maryland, and Virginia, and
       the  District of  Columbia.  The new company will also provide gas supply
       management services to municipalities in the Mid-Atlantic region.

                                                     40

<PAGE>



12.    SUMMARY OF QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

              The following  table presents  certain  financial  information for
       each quarter  during the fiscal years ended  September  30, 1996 and 1995
       (amounts in thousands, except per share data):


                                                     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


                                                    1995
                                  Fourth       Third     Second    First

Operating revenues               $26,718     $41,650   $112,690  $66,835

Gross margin                      16,042      24,236     57,452   33,099

Operating income (loss)           (1,222)      3,595     21,849    9,838

Net income (loss)                 (4,350)        605     18,503    6,663

Earnings (loss) per share           (.23)        .03       1.00      .36


(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.

                                                     41

<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, 1996 and 1995, and the related consolidated  statements of income,
retained earnings and cash flows for each of the three years in the period ended
September 30, 1996. 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,
1996 and 1995, and the results of their operations and their cash flows for each
of the three years in the period ended  September 30, 1996,  in conformity  with
generally accepted accounting principles.





s/Arthur Andersen LLP

Charlotte, North Carolina,
October 29, 1996
(except with respect to the matters
discussed in Note 11 as to which
the date is December 3, 1996)


                                                      42

<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 six 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/Robert D. Voigt
----------------------------              -------------------------
Charles E. Zeigler, Jr.                   Robert D. Voigt
Chairman, President and                   Senior Vice President - Corporate
Chief Executive Officer                   Development & Chief Financial
Officer


                                                      43

<PAGE>



         Supplementary Data

                 The  information for this item is contained in Note 12 entitled
         "SUMMARY OF QUARTERLY FINANCIAL INFORMATION  (UNAUDITED)" on page 41 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 9, 1996,  relating to the January 31,
         1997 annual  meeting of  shareholders,  which  section is  incorporated
         herein by reference.

         Executive Officers

                  The  information for this item is set forth on page 11 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 9, 1996,  relating to
         the January 31, 1997 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).

                                                      44

<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  9, 1996,  relating to the
         January 31,  1997  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 9,
         1996,  relating to the January 31, 1997 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, 1996,
               1995 and 1994                                             25
                  Consolidated Balance Sheets at
                     September 30, 1996 and 1995                         26
                  Consolidated Statements of Capitalization
                     at September 30, 1996 and 1995                      27
                  Consolidated Statements of Retained
                     Earnings for the Fiscal Years Ended
                     September 30, 1996, 1995 and 1994                   27
            Consolidated Statements of Cash Flows for
                     the Fiscal Years Ended September 30, 1996,
                     1995 and 1994                                       28
            Notes to Consolidated Financial Statements
                     for the Fiscal Years Ended September 30,
                     1996, 1995 and 1994                               29-41
                  Report of Independent Public Accountants                42
                  Management's Responsibility for Financial Statements    43

                                                      45

<PAGE>




                                                                       Page
              2.  Financial statement schedules -

                  The  following  financial  statement  schedules  are  included
                    herein:

                  Supplemental Schedules:
                  Report of Independent Public Accountants                48
                  Schedule II - Reserves for the Fiscal Years Ended
                    September 30, 1996, 1995 and 1994                  49-51



              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 53 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, 1996.


                                                      46

<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. 33-17996, 33-49153 and 33-48909).



s/Arthur Andersen LLP

Charlotte, North Carolina,
December 10, 1996

                                                      47

<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 29, 1996 (except with respect to the matters  discussed in
Note 11 as to which the date is December  3,  1996).  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 29, 1996

                                                      48

<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>
                                                                     49

<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>
                                                                     50

<PAGE>


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

                             SCHEDULE II - RESERVES

           FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1994
<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
----------------                            ------------       -----------------   --------------   ----------

DEDUCTED IN BALANCE SHEET FROM
 ASSET TO WHICH IT APPLIES:
 <S>                                          <C>               <C>        <C>        <C>           <C>

  Allowance for doubtful
   accounts                                   $1,303,171        $1,430,708 $101,166   $1,367,158    $1,467,887

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

      Write-off of accounts considered to be uncollectible             $2,049,726
      Less - Recoveries on accounts previously written off                682,568
                                                                       $1,367,158
</TABLE>
                                                                     51

<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 10, 1996                              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 10, 1996.


s/Charles E. Zeigler, Jr.             s/Robert D. Voigt
Charles E. Zeigler, Jr.               Robert D. Voigt
Chairman, President and               Senior Vice President -
Chief Executive Officer               Corporate Development
(Principal executive officer)         and Chief Financial Officer
                                      (Principal financial and
                                      accounting officer)

s/William C. Burkhardt                s/B. Frank Matthews, II
William C. Burkhardt - Director       B. Frank Matthews, II - Director

s/William A. V. Cecil                 s/William L. O'Brien, Jr.
William A. V. Cecil - Director        William L. O'Brien Jr. - Director

s/Bert Collins                        s/D. Wayne Peterson
Bert Collins - Director               D. Wayne Peterson - Director

s/John W. Copeland                    s/Ben R. Rudisill, II
John W. Copeland - Director           Ben R. Rudisill, II - Director

s/H. Max Craig, Jr.                   s/G. Smedes York
H. Max Craig, Jr. - Director          G. Smedes York - Director

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

                                                          52

<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,  1996.  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).

*10-A-5      -   Natural Gas Sales Agreement - TEMCO/PSNC FT-1 between PSNC
                 and Transco Energy Marketing Company dated January 1, 1989.
                 (File No. 0-1218, 10-Q--March 31, 1989, Exhibit 19-A).

*10-A-7      -   Firm Seasonal Transportation Agreement dated June 29, 1990,
                 between PSNC and Transcontinental Gas Pipe Line Corporation.
                 (File No. 0-1218, 10-K--1990, Exhibit 10-A-7).

                                                      53

<PAGE>



Exhibit
Number

*10-A-8      -   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-8).

*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).

*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).

                                                      54

<PAGE>



Exhibit
Number

*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).

*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).

                                                      55

<PAGE>



Exhibit
Number

*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-B-2     -   General Storage Service Agreement under Rate Schedule GSS,
                dated May 2, 1972, between PSNC and Transcontinental Gas
                Pipe Line Corporation. (Registration No. 2-53708, Exhibit
                5.4).

*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-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-C-1     -   1987 Nonqualified Stock Option Plan.  (Registration No.
                33-17996, Exhibit 4.1).

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

*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. 0-12-18, 10-Q--March 31, 1994, Exhibit 10-D-3).

*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).

 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.

                                                      56

<PAGE>



Exhibit
Number

 23         -   Consent of Independent Public Accountants.  (Set forth on
                page 47 of this annual report).

 27         -   Financial Data Schedule.

*99         -   Revised Item 21 of Part II to the Registration Statement on
                Form S-8, Registration No. 33-27903.  (File No. 0-1218, 10-
                K--1990, Exhibit 28-C).



                                                      57

<PAGE>




                                                                   EXHIBIT 11

                       PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED
                                         AND SUBSIDIARIES

                                COMPUTATION OF EARNINGS PER SHARE

                 FOR THE FISCAL YEARS ENDED SEPTEMBER 30, 1996, 1995 AND 1994




                                           1996         1995         1994
                                       -----------  -----------  -----------

Earnings available for common          $23,898,218  $21,421,227  $19,976,406
                                       -----------  -----------  -----------

Average common shares outstanding       18,995,035   18,509,049   17,012,261

Additional dilutive effect of
 outstanding options (as determined
 by the application of the treasury
 stock method)                              72,358       54,281       60,520
                                       -----------  -----------  -----------
Average common shares outstanding as
 adjusted                               19,067,393   18,563,330   17,072,781
                                       -----------  -----------  -----------

Earnings per share, as adjusted              $1.25        $1.15        $1.17
                                             =====        =====        =====

------------
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 indilution of less than 3%.

                                                                58

<PAGE>




                                                                   EXHIBIT 21

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



              Clean Energy Enterprises, Inc.
              Cardinal Pipeline Company, LLC (2)
              PSNC Blue Ridge Corporation
              PSNC Cardinal Pipeline Company
              PSNC Production Corporation
              PSNC Propane Corporation
              Sonat Public Service Company L.L.C. (3)



           (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.

           (2)  64% ownership by PSNC.

           (3)  50% ownership by PSNC Production Corporation.
                                                       59