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            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, 1998

( ) 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 30, 1998 . . . . . . . . . . . . . . $495,217,957
                            ---------------------
Number of shares of Common Stock, $1 par value, outstanding at November 30, 1998
 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 20,368,862

Documents incorporated by reference:

         Portions of the proxy  statement  dated December 16, 1998,  relating to
the January  29,  1999  annual  meeting of  shareholders,  are  incorporated  by
reference into Part III of this annual report.

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<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, 1998

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

                         TABLE OF CONTENTS

Item                                                                        Page

                                 PART I.

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

                                 PART II.

  5.     Market for the Registrant's Common Stock and
           Related Shareholder Matters........................................14
  6.     Selected Financial Data..............................................15
  7.     Management's Discussion and Analysis of Results
           of Operations and Financial Condition..............................16
  8.     Financial Statements and Supplementary Data..........................29
  9.     Changes in and Disagreements With Accountants on
           Accounting and Financial Disclosure................................52

                                PART III.

10.      Directors and Executive Officers of the Registrant...................52
11.      Executive Compensation...............................................52
12.      Security Ownership of Certain Beneficial Owners
           and Management.....................................................53
13.      Certain Relationships and Related Transactions.......................53

                                PART IV.

14.      Exhibits, Financial Statement Schedules and
           Reports on Form 8-K................................................53
         Signatures...........................................................60
         Exhibit Index........................................................61



                                        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  334,000  residential,  commercial  and industrial
customers in North Carolina.  PSNC was organized as a North Carolina corporation
in 1938,  and its  corporate  office is located at 400 Cox Road, P. O. Box 1398,
Gastonia, North Carolina 28053-1398, telephone (704) 864-6731.

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

         During  fiscal  1998,  1997  and  1996,  no  single  customer   account
contributed more than 2% of PSNC's total operating revenues.

         PSNC has no reportable  industry  segments.  Revenues  attributable  to
natural gas distribution,  merchandise and jobbing,  and gas marketing and other
activities for each of the fiscal years in the three-year period ended September
30, 1998 were as follows (in thousands):

                                     1998       1997       1996
                                   --------   --------   --------
Natural Gas Distribution(1)        $330,672   $337,930   $308,882
Merchandise and Jobbing(2)           10,096     10,053      9,444
Gas Marketing/Other
 Activities(1)                       35,604     19,938     20,179
                                   --------   --------   --------
Total                              $376,372   $367,921   $338,505
                                   ========   ========   ========


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


                                      2

<PAGE>



Service Territory

         PSNC's 31-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 52% of its
throughput (total gas sales and  transportation)  in fiscal 1998. 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
customers  and  33% of  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 2.5 million people reside in PSNC's franchised  territory.  During
the past three fiscal years, PSNC has added  approximately  45,000 new customers
to its natural gas transmission and  distribution  systems.  Of those customers,
39,900 were  residential,  5,000 were commercial,  and 100 were industrial.  The
resulting  5.2% annual  growth rate is nearly three times the national  industry
average.  PSNC's  compounded  annual  customer growth rate since fiscal 1988 has
been 5.1%. PSNC attributes this growth rate to two primary factors:

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

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

Business Strategy

         PSNC is expanding its transmission and distribution  systems to deliver
more natural gas throughout  its service  territory.  Of its total  construction
expenditures  of $65.3 million in fiscal 1998,  $60.3 million in fiscal 1997 and
$60.4 million in fiscal 1996,  approximately  $48.3  million,  $46.5 million and
$45.6 million,  respectively,  were expended on the construction of transmission
and distribution pipelines.

         PSNC is focusing on the following marketing priorities:

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

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

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

                                      3

<PAGE>



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

         PSNC's  internal  focus  has  been  to  streamline  its  organizational
structure and improve the performance of management and employees. PSNC has also
focused on increasing employee efficiency, improving its number of customers per
employee  ratio over the last three years from 245 at September  30, 1995 to 304
at  September  30,  1998.  At November  30,  1998,  PSNC had 320  customers  per
employee.

Gas Supply

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

         As a result  of FERC  Order  636,  which  restructured  the  interstate
natural  gas  transportation  industry,  PSNC's gas  purchasing  practices  have
changed  significantly  during the past few years.  The FERC approved  Transco's
restructuring  settlement effective November 1, 1993, and essentially  preserved
Transco's  existing firm service  settlement with PSNC. PSNC has not experienced
any material  adverse effect on its financial  position or results of operations
as a result of the order.  Furthermore,  management  believes that Order No. 636
and  the  Transco   settlement   order  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  37%, 36% and 26% of
PSNC's total throughput for fiscal 1998, 1997 and 1996, 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
70,000 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 21% and 33%, respectively,  of PSNC's supply
in fiscal 1998 and 1997.

                                Daily                                  Contract
                               Deliver-           Annual              Expiration
  Type of Contract             ability           Quantity                Date
-------------------------      --------         ----------            ----------
Firm Sales Service (1)           33,542         12,242,830              3/31/02
Firm Sales Service (1)           41,928         15,303,720              3/31/02
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              3/16/02

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

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

        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)  to  construct  and  operate  an  intrastate
transmission  pipeline. It was placed into service in December 1994 and provides
additional daily capacity to PSNC's eastern service  territory in and around the
Durham and Raleigh areas. In 1995, PSNC,  Piedmont,  Transco, and North Carolina
Natural Gas Corporation (NCNG) formed Cardinal Extension Company,  LLC (Cardinal
Extension)  to purchase  and extend the  Cardinal  pipeline.  As  proposed,  the
pipeline  will be extended  67.5 miles from the  existing  termination  point of
Cardinal Pipeline at Haw River, North Carolina,  to a point southeast of Raleigh
and will provide 140 million cubic feet per day  (mmcf/day)  of additional  firm
capacity  (100  mmcf/day  for PSNC and 40 mmcf/day for NCNG).  The  extension is
estimated to cost $75 million. Through their respective subsidiaries,  PSNC will
own approximately 33%, Piedmont will own approximately 17%, Transco will own

                                     5

<PAGE>



approximately  45% and NCNG will own  approximately  5% of  Cardinal  Extension.
Construction  began in November  1998,  and the facilities are expected to be in
service on or before November 1, 1999.

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


                                 Daily                                 Contract
                                Deliver-                              Expiration
    Storage Facility            ability            Capacity              Date
------------------------        --------           ---------          ----------
CNG General Storage (1)          39,669            2,476,000            3/31/16
Transco General Storage          33,218            1,923,485            3/31/13
Transco Washington
  Storage (2)                    32,870            2,794,500            3/31/00
Transco LNG Storage               5,175               25,875           10/31/16
Transco Eminence Storage         47,221              475,111           10/31/13
Cove Point LNG Storage           25,000              250,000            4/15/06
PSNC LNG Storage (3)            100,000            1,040,000              N/A
Columbia Gas Transmission (4)    23,556            2,120,040           10/31/13



         (1) 700,000 of this  capacity  expires  3/31/08;  696,000  expires
             3/31/13; and 1,080,000 expires 3/31/16.
         (2) No peak day delivery assured by contract. 
         (3) Amounts shown represent maximum peak day capacity.  
         (4) 50% of this capacity expires 10/31/12; balance expires 10/31/13.

         As discussed further in Note 2 to the financial statements, Pine Needle
LNG Company, LLC (Pine Needle) was formed by subsidiaries of Transco,  Piedmont,
NCNG,  Amerada Hess, and PSNC, and the Municipal Gas Authority of Georgia to own
and operate a  liquefied  natural gas storage  facility.  The  facility  will be
located near Transco's  transmission  pipeline  northwest of  Greensboro,  North
Carolina.  It will have a  storage  capacity  of four  billion  cubic  feet with
vaporization  capability of 400  mmcf/day.  PSNC's  subsidiary,  PSNC Blue Ridge
Corporation,  will own 17% of Pine Needle. PSNC has contracted to use 25% of the
facility's gas storage capacity and withdrawal capabilities.  Construction began
in 1997 at an estimated cost of $107 million.  Liquefaction is expected to begin
in May 1999 in time for  withdrawal  service to begin in the 1999 winter heating
season.

Competition

         Although  PSNC is the sole  distributor  of natural  gas in its service
area, it faces  competition from suppliers of alternate fuels and other types of
energy. Competition is


                                       6

<PAGE>



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  1998,  approximately  37% of gas  delivered by PSNC was
delivered to large-volume  commercial and industrial  customers having alternate
fuel  capability.  The primary  alternate fuels available to these customers are
fuel oil and  propane,  and,  to a lesser  extent,  coal  and  combustible  wood
products.  The NCUC has approved a rate  structure that allows PSNC to negotiate
reduced  rates  in order to match  the  cost of  alternate  fuels to  individual
customers  and recover the lost margin  from other  classes of  customers.  PSNC
anticipates  that the need to negotiate  reduced rates with these customers will
continue.

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

Regulation and Rates

         PSNC's natural gas transmission and distribution business is subject to
regulation by the NCUC,  including  rates,  issuance of securities,  adequacy of
service, safety standards,  extension and abandonment of facilities,  accounting
and  depreciation  rates.  The NCUC has  seven  commissioners  appointed  by the
Governor of North Carolina for staggered eight-year terms. In an order issued in
PSNC's last  general  rate case filed in April 1998,  the NCUC  granted  PSNC an
increase in annual revenue of $12,400,000  effective as of November 1, 1998. The
order  allows  PSNC an  opportunity  to earn a 9.82%  overall  return on its net
utility  investment.  Parties to the rate case have 30 days from the date of the
order to file a notice of appeal and exceptions.  On November 30, 1998, the NCUC
granted a motion filed by the Carolina Utility  Customers  Association,  Inc.
(CUCA), a party to PSNC's  general  rate  case,  to extend the time for filing a
notice of appeal and exceptions until December 21, 1998.  On December 18, 1998,
CUCA formally appealed the general rate case order by filing a notice of appeal
and exceptions with the NCUC.  Management has not had an opportunity to review
this notice and exceptions.  

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

         PSNC also operates under two other rate provisions that serve to reduce
fluctuations in PSNC's  earnings.  First, its Rider D rate mechanism allows PSNC
to recover,  in any manner  authorized by the NCUC,  margin losses on negotiated
gas sales to large  commercial  and  industrial  customers  with  alternate fuel
capability.  The  Rider  D rate  mechanism  also  allows  PSNC to  recover  from
customers all  prudently  incurred gas costs,  including  changes in natural gas
prices. Second, PSNC operates with full margin

                                     7

<PAGE>



transportation  rates.  These  rates  allow PSNC to earn the same  margin on gas
delivered to customers regardless of whether the gas is sold or only transported
by PSNC to the customer.

         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 transporters.
PSNC may file revised  tariffs with the NCUC coincident with these changes or it
may  track  the  changes  in  its   deferred   accounts  for   subsequent   rate
consideration.  The rules of the NCUC allow  recovery of all prudently  incurred
gas costs. Also, the NCUC reviews PSNC's gas purchasing practices annually.

         On November 6, 1997, the NCUC issued an order  permitting  PSNC,  on a
two-year  trial basis, to establish  its  commodity  cost of gas each month for
large commercial  and  industrial  customers on the basis of market  prices for
natural gas. This procedure allows PSNC to better manage its deferred gas costs
balance by ensuring that the amount paid for natural gas to serve these 
customers approximates the amount collected from them. PSNC will  continue  to
establish  a  benchmark  cost of gas for residential and small commercial
customers pursuant to its existing procedures.

         In April 1992,  the NCUC adopted rules to implement the expansion  fund
program  established by the North Carolina  General  Assembly in July 1991. This
act  permits  the  establishment  of  expansion  funds to be used by each  North
Carolina LDC to expand  natural gas service to areas that they are  certificated
to serve that would  otherwise not be economically  feasible to serve.  Separate
funds have been  established for use solely in each LDC's  certificated  service
territory.  Sources for expansion  funds may be each LDC's  respective  supplier
refunds,  special  surcharges or other sources permitted by the NCUC. Subject to
the NCUC's rules and  availability of funds, the LDCs will be allowed to utilize
the expansion funds to the extent necessary to make such projects  feasible on a
net  present  value  basis.  The balance of the  funding  for  projects  will be
supplied by the LDC. Seven counties in PSNC's franchised territory are currently
unserved  as are  certain  areas in other  counties.  On June 3, 1993,  the NCUC
entered an order  creating an expansion fund for PSNC in the Office of the State
Treasurer.  PSNC began  providing  natural gas service in McDowell County during
December 1996.  This was the first project  undertaken by PSNC using monies from
its expansion fund. On April 22, 1997, the NCUC approved  PSNC's  application to
use  expansion  funds to extend  service to western  Haywood  county,  including
Waynesville,  Clyde and Lake Junaluska. This project was completed in July 1998.
On July 6, 1998,  PSNC filed an application  with the NCUC to extend natural gas
service  into  Alexander  County.  Most of Alexander  County lies within  PSNC's
franchised  service territory and is not currently provided natural gas service.
An order is expected during the first quarter of calendar 1999.

         On  November  14,  1996,  PSNC  filed  an  application  with  the  NCUC
requesting  deferral  accounting  treatment for the costs of a project to ensure
that PSNC's computer  operating  systems function  properly in the year 2000. On
April 29, 1997, the NCUC issued an order authorizing the deferral of each year's
costs and requiring a three-year  amortization  of these costs  beginning in the
year  incurred.   PSNC  began   amortizing   these  costs  in  September   1997.
Approximately  $4,000,000  of these costs have been  incurred to date.  The NCUC
allowed recovery of a majority of the unamortized Year 2000 costs in the general
rate case order issued on October 30, 1998.




                                    8

<PAGE>



Franchises

         Effective July 15, 1996, the NCUC granted PSNC  certificates  of public
convenience  and necessity to serve seven  additional  counties in western North
Carolina.  PSNC's certificated service territory now consists of all or parts of
31  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.

         On December  8, 1998,  the NCUC  transferred  the  franchise  for Macon
County to the City of  Toccoa,  Georgia,  and the  Municipal  Gas  Authority  of
Georgia. On March 9, 1998, the NCUC approved a financing plan and authorized the
transfer of the  franchise  for Warren  County to  Frontier  Energy,  LLC.  PSNC
voluntarily  relinquished  these  franchises  and  supports  efforts  to provide
natural gas service to rural areas.

         PSNC has  nonexclusive  franchises from 65  municipalities  in which it
delivers  natural  gas; the other  communities  served by PSNC have not required
franchises.  The expiration dates of those franchises having specific expiration
provisions range from 1999 to 2029. The franchises  contain no restrictions of a
materially  burdensome nature and are adequate for PSNC's business as presently,
and as proposed to be,  conducted.  These franchises have been routinely renewed
by the municipalities when they expire.

Non-utility Businesses

         In December 1996, PSNC  Production  Corporation  (PSNC  Production) and
Sonat  Marketing  Company L.P.  (Sonat  Marketing),  a subsidiary of Sonat Inc.,
created Sonat Public Service Company L.L.C. (Sonat Public Service),  each owning
50% of the new company. PSNC Production transferred its gas brokering activities
to Sonat Public Service, which now serves approximately 500 accounts both on and
off PSNC's system.  Clean Energy  Enterprises,  Inc. continued its activities in
the  refueling  of natural gas vehicles and the  conversion  of  gasoline-fueled
vehicles to natural gas.

Environmental Matters

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







                                   9

<PAGE>



Employees

         At November 30, 1998, PSNC had 1,047 full-time  employees compared with
1,125 at November 30, 1997. 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   300  construction  and  service   employees.   These  three-year
collective bargaining agreements will expire in December 1999.

Seasonality

         Due to the seasonal nature of PSNC's business,  the first six months of
its fiscal year are  generally  the most  profitable.  During  fiscal 1998,  the
quarters ended December 31 and March 31 together accounted for approximately 75%
of PSNC's  natural gas sales revenues and volumes.  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.

                                     10

<PAGE>


<TABLE>

<CAPTION>

OPERATING STATISTICS


                                                        For the Fiscal Years Ended September 30,
                                      -------------------------------------------------------------------------
                                           1998           1997           1996           1995           1994
                                      -------------   ------------   ------------   ------------   ------------
<S>                                    <C>            <C>            <C>            <C>            <C>

OPERATING REVENUES - GAS:
  Residential Sales                    $183,813,279   $183,391,700   $162,967,260   $135,846,213   $137,986,651
  Commercial Sales                       78,956,618     84,120,824     74,444,770     57,783,940     67,679,342
  Industrial Sales                       39,737,329     46,147,690     52,460,676     31,483,864     49,970,780
  Gas Transported for Others             26,802,284     22,695,985     17,737,092     21,746,901     17,031,426
  Miscellaneous                           1,362,259      1,573,982      1,272,281      1,032,096      1,036,857
                                       ------------   ------------   ------------   ------------   ------------
          Total                        $330,671,770   $337,930,181   $308,882,079   $247,893,014   $273,705,056
                                       ============   ============   ============   ============   ============

GAS SUPPLY (DT):
  Natural Gas Purchased                  46,207,910     46,544,234     51,841,058     37,790,467     47,390,194
  Less Increase (Decrease) in Storage     1,686,462      2,055,564        471,720       (257,091)     1,466,236
  Less Unbilled, Unaccounted For,
   Company Use and Other                  2,192,820      2,519,194      2,518,774      1,979,901      2,156,027
                                         ----------     ----------     ----------     ----------     ----------
          Total Gas Sold                 42,328,628     41,969,476     48,850,564     36,067,657     43,767,931
                                         ==========     ==========     ==========     ==========     ==========

GAS DELIVERED (DT):
  Residential Sales                      20,795,108     19,760,537     22,398,288     17,566,948     18,781,482
  Commercial Sales                       12,324,159     12,769,424     13,925,422     10,827,444     12,261,918
  Industrial Sales                        9,209,361      9,439,515     12,526,854      7,673,265     12,724,531
  Gas Transported for Others             25,110,949     23,143,824     16,795,268     22,551,006     15,120,391
                                         ----------     ----------     ----------     ----------     ----------
          Total                          67,439,577     65,113,300     65,645,832     58,618,663     58,888,322
                                         ==========     ==========     ==========     ==========     ==========


NUMBER OF CUSTOMERS (AT YEAR END):
  Residential                               278,760        264,129        248,940        246,877        234,957
  Commercial/small industrial                40,538         39,349         38,624 (2)     29,497         27,806
  Large commercial/industrial                 2,433          2,419 (3)      1,677            389            376
                                            -------        -------        -------        -------        -------
          Total                             321,731        305,897        289,241        276,763        263,139
                                            =======        =======        =======        =======        =======

PER RESIDENTIAL CUSTOMER:
  Average Gas Used (DT)                       74.60          74.82          89.98          71.16          79.94
  Average Revenue                           $659.42        $694.36        $654.67        $550.28        $587.31
  Revenue per DT                              $8.84          $9.28          $7.28          $7.73          $7.35

ANNUAL HEATING DEGREE DAYS (1):
  Actual                                      3,366          3,253          3,856          3,030          3,415
  Normal                                      3,384          3,384          3,402          3,384          3,384
  Percent of Normal                              99%            96%           113%            90%           101%

PEAK DAY DELIVERY (DT)                      416,198        406,742        433,045        403,581        420,597
</TABLE>


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

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

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


                                      11

<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 - 52                              Chief Executive Officer
Jack G. Mason                          Vice President - Finance                            03/01/95
   Age - 41
Boyce C. Morrow, Jr.                   Vice President -                                    03/01/90
   Age - 54                              External Affairs
Jerry W. Richardson                    Vice President - Engineering                        02/23/82
   Age - 53                              and System Logistics
Robert D. Voigt                        Vice President -                                    09/01/81
   Age - 47                              Organizational Development
Franklin H. Yoho                       Vice President - Marketing                          02/01/91
   Age - 39                              and Gas Supply
Sharon D. Boone                        Controller and                                      03/01/95
   Age - 45                            Assistant Secretary
J. Paul Douglas                        Corporate Counsel and                               12/21/94
   Age - 51                              Secretary
</TABLE>

   (1) As of November 30, 1998.

         The present terms of all officers extend to January 29, 1999, 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 J. Paul Douglas, Jack G.
Mason and Sharon D. Boone.

         J. Paul Douglas was  employed by PSNC on December 21, 1994.  Prior to
joining  PSNC,  he was  employed by Conoco  Inc.  as counsel  from March 1991 to
December  1994.  Prior to Conoco,  he was a partner with the law firm of Katten,
Muchin,  Zavis and Dombroff  from February 1990 to March 1991 and a partner with
the law firm of Grove, Jaskiewicz, Gilliam and Cobert from February  1984 to
February 1990.

         Jack G. Mason was  employed  by PSNC on July 5, 1979.  During the past
five years, prior to serving as Vice President - Finance,  Mr. Mason held the
positions of Vice  President-Treasurer and Chief Financial Officer, 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 Manager - Plant Accounting and Tax Services, Manager
- Corporate Accounting, and Director - Corporate Accounting.




                                     12

<PAGE>



Item 2.  Properties

         PSNC  owns 750  miles of  transmission  pipelines  of 2 to 24 inches in
diameter  that  connect  its  distribution  systems  with the  Texas to New York
pipeline transmission system of Transco. Transco delivers natural gas to PSNC at
various  points  on  Transco's  pipeline  in  North  Carolina.  Natural  gas  is
distributed  by PSNC  through  its  6,727  miles of  distribution  mains.  These
transmission   pipelines  and  distribution   mains  are  located  primarily  on
rights-of-ways held under easement,  license or permit on lands owned by others.
PSNC also owns 64.5% of Cardinal Pipeline  Company,  LLC, which owns a 37.5 mile
transmission  pipeline,  as discussed  more fully in Note 2 to the  consolidated
financial statements.

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

         PSNC also owns 18 commercial office buildings, a measurement operations
building,  a building that houses  training and  engineering,  11 service center
buildings, 15 service buildings, and an energy control building; PSNC leases six
commercial  office buildings for its own use. One of the service  buildings also
houses training  facilities.  Another service  building is jointly occupied by a
NGV conversion facility.





                                    13

<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, all or 
portions of sites  at  which  manufactured  gas  plants  were formerly operated
and is cooperating  with the North  Carolina  Department of  Environment 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, 1998.


                                  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, 1998, there were
approximately 12,700 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
1998 and 1997.

                                                                     Cash
         Quarter                                                   Dividends
          Ended                 High                Low            Declared
          Fiscal
           1998
           Sep 30             $23 7/16            $23 1/16          $.2400
           Jun 30              22 1/8              21 3/4            .2400
           Mar 31              20 1/2              20 1/4            .2300
           Dec 31              23 5/16             22 7/8            .2300

          Fiscal
           1997
          Sep 30               21 7/8              18 3/4            .2300
          Jun 30               20                  16 3/4            .2300
          Mar 31               19                  17 3/8            .2200
          Dec 31               19 3/8              17 1/8            .2200

         On  November 18, 1998, the Board of Directors declared a regular
quarterly cash dividend on PSNC's common stock of 24(cent) per share, payable on
January 1, 1999 to shareholders  of record on December 10, 1998.  PSNC has paid
consecutive  quarterly  cash  dividends on its common stock since 1958, and has
increased cash dividends paid to shareholders each calendar year since 1970.



                                    14

<PAGE>



Item 6.  Selected Financial Data
<TABLE>
<CAPTION>

For the Fiscal Years Ended September 30,                1998        1997        1996        1995       1994
----------------------------------------              --------    --------    --------    --------   --------
<S>                                                   <C>         <C>         <C>         <C>        <C>   

Operating revenues (000's)........................    $330,672    $337,930    $308,882    $247,893   $273,705
Gross margin (000's)..............................    $156,371    $155,926    $140,744    $130,828   $118,327
Net income (000's)................................    $ 24,837    $ 26,347    $ 23,898    $ 21,421   $ 19,976 (2)
Basic earnings per average common share ..........    $   1.24    $   1.35    $   1.26    $   1.16   $   1.17 (2)
Diluted earnings per average common share.........    $   1.23    $   1.34    $   1.25    $   1.15   $   1.17 (2)
Cash dividends declared per common share .........    $    .94    $    .90    $   .865    $   .835   $   .805
Average number of common shares
 outstanding (000's) .............................      20,103      19,550      18,995      18,509     17,012
Capital expenditures (000's)......................    $ 65,329    $ 60,310    $ 60,428    $ 61,119   $ 45,469
Total assets (000's)..............................    $618,753    $585,142    $524,889    $456,995   $427,939
Common equity (000's).............................    $222,839    $207,368    $188,635    $173,372   $160,555
Long-term debt (000's) (1)........................    $171,550    $180,850    $140,150    $100,700   $113,680

</TABLE>

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

                                        15

<PAGE>



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


Results of Operations


Net Margin

For the Fiscal Years Ended September 30,             1998      1997      1996
----------------------------------------           --------  --------  --------

(Amounts in thousands except
 degree day and customer data)

Gross margin                                       $156,371  $155,926  $140,744
Less - franchise taxes                               10,589    10,819     9,885
                                                   --------  --------  --------
  Net margin                                       $145,782  $145,107  $130,859
                                                   ========  ========  ========


Total throughput (DT):
  Residential                                        20,795    19,760    22,398
  Commercial/small industrial                        12,618    12,373    14,307
  Large commercial/industrial                        34,027    32,980    28,941
                                                     ------    ------    ------
                                                     67,440    65,113    65,646
                                                     ======    ======    ======

System average degree days: (1)
  Actual                                              3,366     3,253     3,856
  Normal                                              3,384     3,384     3,402
  Percent colder (warmer) than normal                    (1%)      (4%)      13%

Weather normalization adjustment
  income (refund), net of
  franchise taxes                                   $  (113)  $ 5,960   $(8,733)

Customers at end of period: (2)
  Residential                                       278,760   264,129   248,940
  Commercial/small industrial                        40,538    39,349    38,624
  Large commercial/industrial                         2,433     2,419     1,677
                                                    -------   -------   -------
                                                    321,731   305,897   289,241
                                                    =======   =======   =======


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

         Total  throughput  and net margin,  defined as operating  revenues less
cost of gas and franchise taxes, are more meaningful comparative statistics than
gas sales volumes and operating  revenues when analyzing  Public Service Company
of North Carolina,  Incorporated's  (PSNC) utility  operating  results.  This is
because certain large-volume

                                    16

<PAGE>



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 that is equivalent to the margin that
PSNC would earn if it purchased and resold gas to these large-volume  customers.
Also,  various temporary  collection and refund mechanisms affect both operating
revenues and cost of gas equally.


Fiscal 1998

o Net margin  increased  by $675,000 in fiscal 1998 as compared to fiscal  1997.
The volumes of gas  delivered to  residential  and  commercial/small  industrial
customers  increased  5% and 2%,  respectively,  due  primarily  to an increased
customer base and to weather that was 3% colder than the prior fiscal year. Off-
setting these  increases was a decrease in  consumption  per degree day by these
customers.  Natural gas usage by  residential  and small  commercial  customers,
excluding the impact of weather, decreased 5% and 3%, respectively,  as compared
to the same period last year.  Throughput for lower-margin  large commercial and
industrial  customers  increased  3% as compared to fiscal 1997.  This  reflects
decreased  weather-related  service  curtailments to these customers  during the
year,  along with an increase in the  customer  base.  Net  throughput-related
increases for all customer classes totaled approximately  $407,000,  including a
reduction of $6,073,000  related to the  operation of the weather  normalization
adjustment (WNA) mechanism. The WNA accounts only for differences in consumption
caused by temperature variations from normal. It does not adjust PSNC's earnings
for any  non-temperature  related changes in consumption.  Also impacting margin
growth was the effect of warmer  weather,  as compared to last year,  during the
months of October and May which are not included in the WNA mechanism period.


Fiscal 1997

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

                                    17

<PAGE>



Fiscal 1996

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

Operating Expenses

         Other operating expenses decreased approximately 1% during fiscal 1998.
This decrease  includes a reduction in net expenses  related to the nonrecurring
charges  associated with the voluntary early retirement  program incurred during
the first  quarter of fiscal 1997. On a straight  comparison  basis without this
reduction,  other  operating  expenses  increased 1% as compared to fiscal 1997.
Health insurance costs,  outside consulting expenses and expenses related to the
adoption of a  retirement  plan for the Board of Directors  contributed  to this
increase.  The outside consulting  services are associated with PSNC's Year 2000
compliance  program,  discussed later.  Partially  offsetting the increases were
lower  uncollectible  provision  expenses,  lower  liquefied  natural  gas (LNG)
facility power usage and no incentive  compensation  costs  recognized in fiscal
1998.

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

         Other operating expenses increased 7% during fiscal 1996. This increase
reflects higher salary expenses and employee benefits and increased expenses for
uncollectibles,

                                     18

<PAGE>



which are based on revenues.  These  increases were partially  offset by reduced
outside  consulting   expenses  related  to  information  systems  and  employee
benefits. Fiscal 1995 expenses were reduced by adjustments related to group life
and health  insurance  due to favorable  experience  and the transfer of a large
number of employees to a less costly health maintenance  organization  provider.
On a straight  comparison basis without these insurance  adjustments,  operating
expenses for fiscal 1996 increased 5%.

         Maintenance  expenses  decreased  13% in  fiscal  1998.  This  decrease
includes a decrease in net expenses  related to the voluntary  early  retirement
program  incurred  during  the first  quarter  of  fiscal  1997.  On a  straight
comparison  basis  without  the  voluntary  early  retirement  program  expense,
maintenance  expenses  decreased  11%.  This  decrease is due primarily to lower
telecommunications  expenses, lower LNG equipment replacement expenses and other
general operational improvements.

         Maintenance  expenses  increased  17% in fiscal 1997 due  primarily  to
higher  telecommunications  expenses  and  salaries.  Also  contributing  to the
increase  were charges of $143,000  related to the  voluntary  early  retirement
program.  On a straight  comparison  basis  without  this  expense,  maintenance
expenses increased 14% as compared to fiscal 1996.

         Maintenance  expenses  increased 20% in fiscal 1996 due to the $750,000
reversal  in fiscal  1995 of  expenses  related to the  investigation  of former
manufactured  gas plant (MGP) sites,  originally  recorded in fiscal  1992.  The
reversing  entry was recorded in fiscal  1995.  On a straight  comparison  basis
without this adjustment, maintenance expenses for fiscal 1996 increased 2%.

         Depreciation  expense for all three fiscal years increased due to plant
additions.  General taxes increased during fiscal 1998 reflecting an increase in
PSNC's  property  taxes,  offset  somewhat by lower  franchise tax expense.  The
increase during fiscal 1997 and 1996 was due to increased franchise tax expense,
reflecting  an increase in revenues.  Any increase or decrease in franchise  tax
expense is offset by a corresponding amount in operating revenues.


Other Income (Deductions)

         Other income  (deductions)  decreased $366,000 during fiscal 1998. This
is primarily the result of a $975,000  decrease in interest  income  compared to
fiscal 1997 on amounts due from  customers  through the operation of the Rider D
rate mechanism,  defined later in Management's  Discussion and Analysis.  During
fiscal  1998,  through an  increment  in its rates,  PSNC  collected  previously
undercollected  gas  costs  and was able to match  its  benchmark  gas cost more
closely to market prices. This resulted in a lower Rider D receivable balance of
$12,860,000 at September 30, 1998. Partially offsetting the decrease in interest
income was a $673,000 increase in merchandise and jobbing income.  This increase
reflects a  decrease  in  expenses  related to the  voluntary  early  retirement
program  incurred  during  the first  quarter  of  fiscal  1997.  On a  straight
comparison  basis  without  the  voluntary  early  retirement  program  expense,
merchandise and jobbing  operations  increased by approximately  $442,000.  This
improvement


                                    19

<PAGE>



continues to reflect management's emphasis on profitable merchandise and jobbing
activities.

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

         Other income  (deductions)  increased  $3,132,000  during  fiscal 1996.
Other interest income  increased  $1,133,000 over fiscal 1995 due to interest on
amounts due from customers  through the operation of the Rider D rate mechanism.
Winter-period  increases  in the market  price of natural  gas  resulted in PSNC
recording  uncollected  gas costs,  along with  increased  demand  costs,  which
totaled  $17,925,000 at September 30, 1996. Income from nonregulated  subsidiary
operations  exceeded  fiscal 1995 by $925,000 due largely to gains realized from
natural gas brokering  activities.  Income from  secondary  market  transactions
increased  $582,000  over the prior year.  PSNC  realized  increases in both the
amount of margin  generated and an increase in the shareholder  portion of these
margins from 10% to 25%,  pursuant to an order of the North  Carolina  Utilities
Commission (NCUC) effective November 1, 1995. PSNC also realized a $265,000 gain
from the sale of property and a $250,000  improvement in merchandise and jobbing
income.


Interest Deductions

         Interest  deductions for fiscal 1998 increased  approximately  $524,000
over fiscal 1997.  This reflects the increase in interest  expense on short-term
debt resulting from higher average  short-term bank loans outstanding during the
period.  Also  contributing to the net increase is the December 1996 issuance of
$50,000,000 of long-term debt.

         Interest  deductions for fiscal 1997 increased  $2,512,000  over fiscal
1996.  This increase was due mainly to increased  interest  expense on long-term
debt of $2,887,000  resulting from the December 17, 1996 issuance of $50,000,000
of 7.45% Senior

                                       20

<PAGE>



Debentures due 2026.  Interest expense on short-term debt decreased $299,000 due
to lower average short-term bank loans outstanding during the period.

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


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 six 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, 1998, total
lines of credit  with  these  banks  range from a minimum  of  $39,000,000  to a
winter-period maximum of $85,000,000.  At September 30, 1998, committed lines of
credit  totaled  $70,000,000  and  uncommitted  annual  lines of credit  totaled
$35,000,000.  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  budgeted  construction
expenditures, stored gas inventories and other corporate needs. At September 30,
1998 and 1997,  PSNC's total short-term bank loans  outstanding were $70,500,000
and $38,000,000, respectively.

         In  December  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. In January 1996, PSNC sold $50,000,000 of
6.99% Senior  Debentures due 2026 in a public  offering.  In December 1996, PSNC
sold $50,000,000 of 7.45% Senior  Debentures due 2026 in a public offering.  The
net proceeds of both issues were used to pay down a  significant  portion of the
then  outstanding  short-term  bank debt. PSNC has not issued any long-term debt
since  December  1996,  resulting  in  an  increase  in  short-term  bank  loans
outstanding.   At  September  30,  1998,   $25,000,000  remained  on  the  shelf
registration.

         During September 1996, PSNC made the final  additional  payment allowed
on its 10% Senior Debentures due 2003 of $1,250,000.

         PSNC also generates  equity capital through its dividend  reinvestment,
employee stock purchase and nonqualified stock option plans. During fiscal 1998,
1997 and 1996, the dividend reinvestment plan generated  $6,799,000,  $7,277,000
and $5,187,000,  respectively, of additional equity capital. In August 1996, the
dividend  reinvestment  plan was amended to allow the initial purchase of shares
directly  from  PSNC  and  also  to  increase  the  amount  of  cash  individual
shareholders can invest. The employee stock purchase plan generated  $1,359,000,
$1,318,000 and  $1,198,000,  respectively,  of additional  equity  capital.  The
nonqualified stock option plans generated

                                    21

<PAGE>



net equity capital of $1,639,000, $1,215,000 and $1,290,000 for the three fiscal
years, respectively.

         The  ratio of  long-term  debt to  total  capitalization  was  43.5% at
September 30, 1998, 46.6% at September 30, 1997 and 42.6% at September 30, 1996.
PSNC's goal is to maintain a capital structure with a ratio of long-term debt to
total capitalization in the 45% range with periodic moderate fluctuations.

         For  fiscal  1998,  1997  and  1996,  construction   expenditures  were
$65,329,000, $60,310,000 and $60,428,000,  respectively. For fiscal 1999, PSNC's
Board  of  Directors  approved  a  budget  of  $45,000,000  for  PSNC's  ongoing
construction  program.  PSNC  anticipates  spending  $45,000,000  to $50,000,000
annually on its construction program for the next several years.

         As  discussed  more  fully  in  Note  4 to the  consolidated  financial
statements,  PSNC and its subsidiaries sponsor a noncontributory defined benefit
pension plan covering substantially all employees.  During fiscal 1998 and 1997,
cash contributions were $4,213,000 and $3,306,000, respectively.

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

         Restricted  cash and  temporary  investments  and  restricted  supplier
refunds  relate  to  refunds  of  $10,247,000   received  from  PSNC's  pipeline
transporters  that have not yet been deposited into PSNC's expansion fund in the
Office of the State  Treasurer.  This fund was  created by an order of the NCUC,
dated  June 3, 1993,  to  finance  the  construction  of natural  gas lines into
unserved  areas  of  PSNC's  service  territory  that  otherwise  would  not  be
economically feasible to serve.

         On  April  22,  1997,  the  NCUC  approved  PSNC's  application  to use
expansion  funds  to  extend  service  to  western  Haywood  County,   including
Waynesville,  Clyde and Lake Junaluska. This project was completed in July 1998.
PSNC spent  $5,653,000 on the project,  of which  $4,127,000 was reimbursed from
its expansion fund. On July 6, 1998, PSNC filed an application  with the NCUC to
extend natural gas service into Alexander County.  Most of Alexander County lies
within PSNC's franchised service territory and is not currently provided natural
gas service.  The cost of the project is estimated  to be  $6,188,000.  PSNC has
requested  the NCUC to approve a  $4,918,000  reimbursement  from its  expansion
fund.  Hearings on this matter were held during November 1998. An order from the
NCUC is expected during the first quarter of calendar 1999.

         Net accounts receivable  decreased  $5,781,000 as compared to September
30,  1997.  This  decrease  was due  primarily  to  reduced  gas  brokering  and
transportation pooling activities and lower gas sales revenues.


                                    22

<PAGE>



         Stored gas  inventories  increased  $3,515,000 as compared to September
30, 1997.  This increase was due to additional  quantities of natural gas stored
as a result of a warm winter in fiscal 1998.

         Net deferred gas costs fluctuate in response to the operation of PSNC's
Rider D rate  mechanism.  This  mechanism  allows PSNC to recover all  prudently
incurred gas costs from customers.  It also allows PSNC to recover margin losses
on negotiated sales to large commercial and industrial  customers with alternate
fuel  capability.  On a  monthly  basis,  any  difference  in  amounts  paid and
collected  is  recorded  for  subsequent  refund to or  collection  from  PSNC's
customers.  The decrease in deferred gas costs at  September  30, 1998  resulted
from PSNC's  partial  collection  through  rates of the balance at September 30,
1997. The large balance at September 30, 1997 was due to an unanticipated  surge
in natural gas prices during the 1996-1997  winter period.  PSNC's  deferred gas
costs  balances  are  approved  by the NCUC in annual gas cost  reviews  and are
refunded to or collected from customers over a subsequent  twelve-month  period.
Amounts that have not been refunded to or collected from customers bear interest
at an  annual  rate of 10% as  required  by the  NCUC.  Deferred  gas  costs  at
September  30,  1998  and  September  30,  1997  reflect  undercollections  from
customers.  PSNC's  strategy is to manage the balance of deferred gas costs to a
minimal level over a twelve-month  period.  On November 6, 1997, the NCUC issued
an order  permitting PSNC, on a two-year trial basis, to establish its commodity
cost of gas for large commercial and industrial customers on the basis of market
prices for natural gas. This procedure allows PSNC to better manage its deferred
gas costs  balance by  ensuring  that the amount  paid for  natural gas to serve
these customers  approximates the amount collected from them. PSNC will continue
to  establish  a  benchmark  cost of gas for  residential  and small  commercial
customers pursuant to its existing procedures.

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

         Other assets  increased  $2,133,000  primarily due to deferred  charges
related to costs of a project to ensure that PSNC's computer  operating  systems
function  properly  in year  2000.  These  charges  are  being  expensed  over a
three-year period beginning September 1997 pursuant to an NCUC order dated April
29, 1997.

         The decrease in accounts  payable of $7,784,000 from September 30, 1997
is due to reduced secondary market activity and natural gas purchased at a lower
cost.

         Accrued  taxes  decreased  from  September  30, 1997  primarily  due to
reduced net income in fiscal 1998.

         The decrease in other current  liabilities  from  September 30, 1997 is
due to no cash incentive compensation being accrued in fiscal 1998.


                                   23

<PAGE>



         Deferred  credits  and other  liabilities  increased  primarily  due to
additional   deferred   income  taxes  of  $7,088,000  and  increased   deferred
compensation due to the adoption of a Board of Directors' retirement plan. These
increases  were  partially  offset by a decrease in accrued  pension costs and a
reduction  in the  noncurrent  portion of  deferred  revenue  received  from the
creation of Sonat Public Service.

         As  discussed  more  fully  in  Note  7 to the  consolidated  financial
statements,  PSNC owns,  or has  owned,  all or  portions  of six sites in North
Carolina  on which  manufactured  gas  plants  (MGPs)  were  formerly  operated.
Evaluations of these sites have revealed that residuals from MGPs are present or
suspected at several of the sites. The North Carolina  Department of Environment
and Natural  Resources  (NCDENR) 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  five sites may range from  $3,705,000 to  $50,145,000  over a
30-year  period.  PSNC is unable  to  determine  the rate at which  costs may be
incurred  over  this  time  period.  In  October  1994,  PSNC  entered  into  an
administrative  order of consent with NCDENR to  investigate  the Durham,  North
Carolina,  site in accordance with standards and methods approved by NCDENR.  At
September  30, 1998,  PSNC had recorded a total  liability  and a  corresponding
regulatory  asset of the minimum  amount of the range,  or  $3,705,000.  Amounts
incurred to date are not  material.  Management  intends to request  recovery of
additional MGP clean-up costs not recovered from other  potentially  responsible
parties in future rate case  filings,  and believes that all costs deemed by the
NCUC to be prudently incurred will be recoverable in gas rates.

         As  discussed  more  fully  in  Note  2 to the  consolidated  financial
statements,  PSNC  and a  subsidiary  of  Piedmont  Natural  Gas  Company,  Inc.
(Piedmont)  formed Cardinal  Pipeline  Company,  LLC (Cardinal) in March 1994 to
construct  an  intrastate  transmission  pipeline.  The pipeline was placed into
service in December 1994 at a cost of approximately $26,000,000. PSNC owns 64.5%
of the pipeline,  which extends 37.5 miles to provide  additional daily capacity
to PSNC's eastern service  territory in and around the Durham and Raleigh areas.
In December 1995,  PSNC,  Piedmont,  Transcontinental  Gas Pipe Line Corporation
(Transco) and North  Carolina  Natural Gas  Corporation  (NCNG) formed  Cardinal
Extension Company,  LLC (Cardinal Extension) to purchase and extend the existing
Cardinal  Pipeline.  As proposed,  the pipeline will be extended 67.5 miles from
the existing termination point of Cardinal Pipeline at Haw River, NC, to a point
southeast  of Raleigh.  This project is  estimated  to cost  $75,000,000.  PSNC,
through a subsidiary,  will own approximately 33% of the 105-mile pipeline,  and
will contribute its net book investment in the existing pipeline plus additional
equity capital of approximately  $1,000,000 for its ownership share. On November
6, 1997, the NCUC issued an order approving the proposed  project and the merger
of Cardinal  Pipeline and  Cardinal  Extension.  Construction  began in November
1998, and the facilities are expected to be in service on or before  November 1,
1999.

         As  discussed  more  fully  in  Note  2 to the  consolidated  financial
statements,   Pine  Needle  LNG  Company,   LLC  (Pine  Needle)  was  formed  by
subsidiaries  of  Transco,  Piedmont,  NCNG,  Amerada  Hess,  and PSNC,  and the
Municipal  Gas  Authority  of  Georgia.  Pine  Needle  will  own and  operate  a
four-billion-cubic-foot liquefied natural gas

                                                        24

<PAGE>



storage facility in North Carolina.  Construction  began in 1997 at an estimated
cost of  $107,000,000.  The facility is expected to be  operational by May 1999.
PSNC, through its subsidiary, PSNC Blue Ridge Corporation (Blue Ridge), will own
17% of the facility,  and PSNC has  contracted to use 25% of the  facility's gas
storage  capacity  and  withdrawal  capabilities.  Blue Ridge will make  capital
contributions approximating $9,000,000 at the end of the construction period.


Year 2000 Readiness

         The  Year  2000  issue  exists   because  many  computer   systems  and
applications,  including  those with embedded  chips in equipment or facilities,
use two digit date fields  rather than four digit date fields to  designate  the
applicable year. As a result, these date-sensitive applications may not properly
recognize the year 2000 or years  thereafter,  or process data containing  them,
potentially causing critical systems including, but not limited to, business and
operational systems to function improperly or not at all.

         PSNC's overall goal is to address Year 2000 compliance  requirements by
mid- 1999 and to continue developing and testing its contingency plan throughout
1999. PSNC began its Year 2000 efforts in 1995 interviewing  vendors and gaining
awareness.  An assessment of PSNC's Year 2000 impact was performed in 1996,  and
PSNC began addressing its major business computer  systems.  A decision was made
to renovate the customer information system and to replace the financial and the
materials  management  systems.  The renovation of PSNC's  customer  information
system was completed in September  1998, and Year 2000  compliant  financial and
materials management systems are to be implemented early calendar 1999.

         During 1998, PSNC established a centrally  managed,  company-wide  Year
2000 compliancy  program  office.  PSNC's project scope was expanded to include:
business  continuity  planning;  "embedded" systems containing  microprocessors,
i.e., automated meter reading and process control equipment;  end-user computing
hardware and software,  i.e.,  personal computers;  facility equipment,  such as
heating and cooling systems and facsimile  devices;  and business  relationships
with PSNC's customers and key suppliers.

         The assessment of critical  supplier and third-party  vendor  progress,
although external to PSNC, will continue  throughout  calendar 1999. PSNC cannot
quantify the impact of any failure by a critical supplier or third-party  vendor
at this time. PSNC is presently developing a contingency plan which will address
the mitigation of risks and  continuance of operations if critical  suppliers or
third-party vendors have a failure.

         While PSNC believes  that it has  minimized  the risks of  encountering
serious  problems  associated  with the Year 2000 issue, it still faces the risk
that some systems and processes that are not Year 2000 compliant either will not
be identified or will not be corrected  before 2000.  Additionally,  PSNC has no
assurance  that the Year 2000 issues of other  entities will not have a material
impact on PSNC's systems or results of operations.



                                    25

<PAGE>



Year 2000 Costs

         The estimated cost of completion,  including costs incurred to date, is
$17,000,000.  This  estimated  cost includes  external  contractors  and service
providers,  the  purchase of  computer  hardware  and  software,  and  dedicated
internal resources. A portion of PSNC's costs will not be incremental costs, but
a redeployment of existing  resources.  PSNC does not track the cost and time of
internal employees who are not fully dedicated to the Year 2000 effort.

         The project  completion dates and costs are estimates based on numerous
assumptions.  These assumptions include the continued  availability of personnel
resources and third-party vendor compliance.

         Approximately   $12,500,000  to  replace   existing  systems  is  being
capitalized  as plant.  Approximately  $4,500,000  to modify  existing  computer
systems is being  expensed over a three-year  period in accordance  with an NCUC
order  discussed  further in Note 2 to the  consolidated  financial  statements.
These costs are  estimates  based on PSNC's  analysis to date and are subject to
change after the modifications of its systems are completed.

Risk Assessment

         At this time,  PSNC  believes  its most  "reasonably  likely worst case
scenario" is that its customers could  experience some temporary  disruptions in
their gas service.  The natural gas that PSNC distributes and sells to its sales
customers,  and  the  natural  gas  that  it  transports  and  delivers  to  its
transportation  customers,  comes principally from the producing areas along the
Gulf of Mexico  (including the states of Alabama,  Louisiana,  Mississippi,  and
Texas,  and adjacent  offshore  areas).  Prior to PSNC's receipt of that gas, it
must be  extracted  and  processed  to be useable.  It is then  delivered  to an
interstate  pipeline  company (or  companies) for  transportation  to PSNC or to
storage for PSNC's account;  the gas that is stored for PSNC's account must then
be withdrawn and delivered to PSNC by an interstate  pipeline,  generally in the
winter.  A disruption in PSNC's  service to its  customers  could be caused by a
disruption in the extraction or processing of this gas, the transmission  and/or
storage of such gas or finally the distribution of such gas by PSNC.

         Even if the flow of gas is not disrupted,  customers may not be able to
use the available gas if electrical  service is disrupted and certain electronic
controls do not work.

         Although PSNC does not believe that these  disruptions  will occur,  it
has no assurance that such disruptions will not occur, and PSNC has assessed the
impact of such a scenario and continues to evaluate this scenario. PSNC believes
that its contingency plans will lessen the impact of any disruption.

         If such disruption does occur,  PSNC does not believe that it will have
a material  adverse impact on its financial  position,  cash flows or results of
operations.




                                       26

<PAGE>



Contingency Plans

         PSNC is preparing  contingency  plans so that its critical  operational
and  business  processes  can be  expected to continue to function on January 1,
2000 and  thereafter.  These plans are intended to lessen both internal risks as
well as potential  risks in the supply chain of PSNC's  suppliers and customers.
PSNC is currently  assessing  critical  suppliers and vendors to determine their
Year 2000  readiness.  While  PSNC  continues  to  monitor  supplier  and vendor
progress on this issue, PSNC does not control  third-party Year 2000 remediation
plans and cannot  guarantee  that all third parties will be Year 2000  compliant
and able to provide  their  products and services to PSNC on January 1, 2000 and
thereafter.  PSNC  cannot  quantify  at this  time the  financial  impact of the
failure  of one or  more  of its  suppliers  to  deliver  critical  supplies  or
services.  PSNC expects to have its  contingency  plans  completed by the end of
fiscal 1999.

         The above information is based on PSNC's current best estimates,  which
were  derived  using  numerous  assumptions  of  future  events,  including  the
availability  and future  costs of certain  technological  and other  resources,
third-party  modifications and remediation actions and other factors.  Given the
complexity of the issues and possible as yet unidentified  risks, actual results
may vary from those anticipated and discussed above. Specific factors that might
cause such  differences  include,  among others,  the  availability  and cost of
personnel  trained in this area,  the ability to locate and correct all affected
computer  code,  the  timing  and  success of  remedial  efforts of  third-party
suppliers and similar uncertainties.


Effects of Inflation

         The margin charged to PSNC's 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   improvements  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.  Management continually reviews operations
and economic  conditions  to assess the need for filing for general rate relief.
PSNC's last general rate case was filed April 2, 1998, and new rates approved by
the NCUC became  effective  November  1, 1998.  Parties to the rate case have 30
days from the date of the order to file a notice of appeal  and  exceptions.  On
November  30, 1998,  the NCUC  granted a motion  filed by the  Carolina  Utility
Customers Association,  Inc., a party to PSNC's general rate case, to extend the
time for filing a notice of appeal and exceptions until December 21, 1998.


Recently Issued but Not Yet Effective Accounting Statements

         In June 1997, the Financial  Accounting  Standards  Board (FASB) issued
Statement  of  Financial   Accounting   Standards  (SFAS)  No.  130,  "Reporting
Comprehensive  Income." This statement  establishes  standards for reporting and
display  of  comprehensive  income and its  components  in a full set of general
purpose financial statements.

                                      27

<PAGE>



"Comprehensive  Income"  is the  total of net  income  and all  other  non-owner
changes in equity.  This statement will be adopted by PSNC effective  October 1,
1998. PSNC does not anticipate the adoption of this statement to have a material
impact.

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

         In February 1998, the FASB issued SFAS No. 132, "Employers' Disclosures
about  Pensions  and Other  Postretirement  Benefits."  This  statement  revises
certain  footnote  disclosures and adds new disclosures  related to pensions and
other  postretirement  benefit  plans.  It does not change the  measurement  and
recognition  requirements  for those plans.  Therefore,  this statement will not
have any impact on PSNC's consolidated financial position, results of operations
or cash flows. This statement will be adopted by PSNC effective October 1, 1998.

         In June 1998, the FASB issued SFAS No. 133,  "Accounting for Derivative
Instruments and Hedging Activities." This statement  establishes  accounting and
reporting  standards  requiring  that  every  derivative  instrument  (including
certain derivative  instruments  embedded in other contracts) be recorded in the
balance  sheet as either  an asset or  liability  measured  at fair  value.  The
statement  requires  that changes in the  derivative's  fair value be recognized
currently in earnings unless specific hedge accounting criteria are met. Special
accounting  for  qualifying  hedges  allows a  derivative's  gains and losses to
offset related results on the hedged item in the income statement,  and requires
that a company must formally document, designate and assess the effectiveness of
transactions  that receive hedge  accounting.  This statement will be adopted by
PSNC  effective  October  1,  1999.  PSNC has not yet  quantified  the impact of
adopting SFAS No. 133 on its financial  statements  and has not  determined  the
method of adoption.

Forward-looking Statements

         Statements contained in this document and the notes to the consolidated
financial  statements  which are not  historical  in nature are  forward-looking
statements within the meaning of the Private Securities Litigation Reform Act of
1995. Forward-looking statements are subject to risks and uncertainties that may
cause  future  results  to  differ  materially  from  those  set  forth  in such
forward-looking   statements.   PSNC   undertakes   no   obligation   to  update
forward-looking  statements to reflect  events or  circumstances  after the date
hereof.  Such risks and uncertainties with respect to PSNC include,  but are not
limited to, its ability to implement  successfully  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.

                                      28

<PAGE>





Item 8.  Financial Statements and Supplementary Data
<TABLE>

        Public Service Company of North Carolina, Incorporated and Subsidiaries

                           Consolidated Statements of Income

<CAPTION>

For the Fiscal Years Ended September 30,       1998           1997           1996
----------------------------------------   ------------   ------------   ------------

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

Operating revenues                         $330,671,770   $337,930,181   $308,882,079
Cost of gas                                 174,300,672    182,003,740    168,137,830
                                           ------------   ------------   ------------
Gross margin                                156,371,098    155,926,441    140,744,249
                                           ------------   ------------   ------------

Operating Expenses and Taxes:
  Other operating expenses                   54,686,569     55,180,279     50,074,438
  Maintenance                                 5,230,133      6,007,234      5,128,699
  Provision for depreciation                 25,049,337     22,387,370     19,748,947
  General taxes                              17,183,052     16,924,868     16,005,669
  Income taxes -
    Federal                                  12,209,518     12,535,400     11,579,200
    State                                     2,917,294      3,175,800      2,917,300
                                           ------------   ------------   ------------
     Total operating expenses and taxes     117,275,903    116,210,951    105,454,253
                                           ------------   ------------   ------------
Operating income                             39,095,195     39,715,490     35,289,996
                                           ------------   ------------   ------------

Other Income (Deductions):
  Merchandise and jobbing                       795,024        121,554        (83,582)
  Subsidiary operations, net of
   income taxes                               1,692,527      1,677,391      1,327,561
  Interest income and other                   1,032,563      2,086,826      2,106,868
                                           ------------   ------------   ------------
     Total other income (deductions)          3,520,114      3,885,771      3,350,847
                                           ------------   ------------   ------------
Gross income                                 42,615,309     43,601,261     38,640,843
                                           ------------   ------------   ------------

Interest Deductions:
  Interest on long-term debt                 15,039,896     15,139,409     12,252,379
  Amortization of debt expense                  162,068        163,173        151,978
  Other interest                              3,145,329      2,293,555      2,589,033
  Allowance for borrowed funds used
   during construction                         (568,986)      (341,429)      (250,765)
                                           ------------   ------------   ------------
     Total interest deductions               17,778,307     17,254,708     14,742,625
                                           ------------   ------------   ------------
Net income                                 $ 24,837,002   $ 26,346,553   $ 23,898,218
                                           ============   ============   ============

Average common shares outstanding            20,103,103     19,549,656     18,995,035
Basic earnings per share                          $1.24          $1.35          $1.26

Diluted common shares outstanding            20,220,580     19,649,925     19,065,261
Diluted earnings per share                        $1.23          $1.34          $1.25

Cash dividends declared per common share          $ .94          $ .90          $.865
</TABLE>

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

                                          29

<PAGE>

 Public Service Company of North Carolina, Incorporated and Subsidiaries

                         Consolidated Balance Sheets


September 30,                                          1998           1997
-------------------------------------------        ------------   ------------
Assets
------
Gas Utility Plant:
 In service                                        $736,504,603   $679,488,467
 Less - Accumulated depreciation                    224,204,295    203,224,735
                                                   ------------   ------------
 Net plant in service                               512,300,308    476,263,732
 Construction work in progress                        7,216,568      4,738,227
                                                   ------------   ------------
                                                    519,516,876    481,001,959

Non-utility Property, net of
 accumulated depreciation (1998 -
 $178,066 and 1997 - $143,128)                          594,650        641,666
                                                   ------------   ------------

Current Assets:
 Cash and temporary investments                       3,277,211      1,641,371
 Restricted cash and temporary investments           10,247,060      9,887,844
 Receivables, less allowance for
  doubtful accounts (1998 - $2,086,128
  and 1997 - $2,521,983)                             20,836,080     26,616,667
 Inventories, at average cost -
  Materials, supplies and merchandise                 6,992,053      7,644,432
  Stored gas                                         24,405,529     20,890,195
 Deferred gas costs, net                             13,576,225     19,337,797
 Prepayments                                          2,260,204      2,403,445
                                                   ------------   ------------
                                                     81,594,362     88,421,751

Deferred Charges and Other Assets:
 Long-term restricted cash                            4,845,120      4,845,120
 Debt expense                                         1,676,747      1,838,815
 Other                                               10,524,858      8,392,229
                                                   ------------   ------------
                                                     17,046,725     15,076,164
                                                   $618,752,613   $585,141,540

Capitalization and Liabilities 
Capitalization (see statements):
 Common equity                                     $222,839,331   $207,367,763
 Long-term debt                                     171,550,000    180,850,000
                                                   ------------   ------------
                                                    394,389,331    388,217,763

Current Liabilities:
 Current maturities of long-term debt                 9,300,000      9,300,000
 Accounts payable                                    20,015,220     27,799,188
 Accrued taxes                                        1,180,306      4,303,522
 Customer prepayments and deposits                    7,020,931      6,978,565
 Accrued interest                                     4,346,204      4,447,660
 Cash dividends declared                              4,864,161      4,534,095
 Restricted supplier refunds                         10,247,060      9,887,844
 Other                                                4,183,535      5,149,824
                                                   ------------   ------------
                                                     61,157,417     72,400,698
 Interim bank loans, due within one year             70,500,000     38,000,000
                                                   ------------   ------------
                                                    131,657,417    110,400,698

Deferred Credits and Other Liabilities:
 Income taxes, net                                   66,526,252     59,437,911
 Deferred revenue                                     2,120,976      3,099,888
 Investment tax credits                               3,410,949      3,780,581
 Accrued pension cost                                 7,984,530      9,531,887
 Other                                               12,663,158     10,672,812
                                                   ------------   ------------
                                                     92,705,865     86,523,079
                                                   $618,752,613   $585,141,540

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

                                      30

<PAGE>



   Public Service Company of North Carolina, Incorporated and Subsidiaries

                  Consolidated Statements of Capitalization

September 30,                                          1998             1997
------------------------------------------         ------------     ------------

Common Equity:
  Common stock, $1 par, 30,000,000
   shares authorized; shares outstanding
   1998 - 20,274,332 and 1997 - 19,770,843         $ 20,274,332     $ 19,770,843
  Capital in excess of par value                    132,787,058      123,474,119
  Retained earnings                                  69,777,941       64,122,801
                                                   ------------     ------------
                                                    222,839,331      207,367,763
                                                    -----------      -----------
Long-term Debt:
  Senior debentures (unsecured) -
    8.65% due 2002                                   10,000,000       12,500,000
    10% due 2003                                      8,750,000       11,250,000
    10% due 2004                                     30,100,000       34,400,000
    8.75% due 2012                                   32,000,000       32,000,000
    6.99% due 2026                                   50,000,000       50,000,000
    7.45% due 2026                                   50,000,000       50,000,000
                                                   ------------     ------------
                                                    180,850,000      190,150,000
  Less - Current maturities                           9,300,000        9,300,000
                                                   ------------     ------------
                                                    171,550,000      180,850,000
                                                   ------------     ------------
                                                   $394,389,331     $388,217,763
                                                   ============     ============



                   Consolidated Statements of Retained Earnings

For the Fiscal Years Ended September 30,     1998          1997         1996
----------------------------------------  -----------   -----------  -----------

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

Add - Net income                           24,837,002    26,346,553   23,898,218
                                          -----------   -----------  -----------
                                           88,959,803    81,769,714   71,925,926

Deduct - Cash dividends declared
          on common stock and other        19,181,862    17,646,913   16,502,765
                                          -----------   -----------  -----------

Balance, end of year                      $69,777,941   $64,122,801  $55,423,161
                                          ===========   ===========  ===========


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


                                        31

<PAGE>


<TABLE>

      Public Service Company of North Carolina, Incorporated and Subsidiaries

                        Consolidated Statements of Cash Flows

<CAPTION>
For the Fiscal Years Ended September 30,            1998          1997          1996
----------------------------------------         -----------   -----------   -----------
Cash Flows from Operating Activities:
<S>                                              <C>           <C>           <C>   

  Net income                                     $24,837,002   $26,346,553   $23,898,218
   Adjustments to reconcile net income to net
    cash provided by operating activities:
     Depreciation charged to operating expenses   25,049,496    22,387,370    19,748,947
     Depreciation charged to other accounts        2,786,873     2,528,055     2,821,518
     Amortization of debt expense and other          162,068       175,592       151,978
     Provision for doubtful accounts                 866,786     1,396,636     1,706,466
     Amortization of investment tax credits, net    (369,632)     (429,688)     (435,156)
     Deferred income taxes, net                    7,088,341     3,205,066     3,627,210
                                                 -----------   -----------   -----------
                                                  60,420,934    55,609,584    51,519,181

     Change in assets and liabilities:
      Receivables                                  4,913,801   (10,113,922)   (6,001,263)
      Inventories                                 (2,862,815)   (5,967,186)   (4,849,607)
      Deferred gas costs, net                      5,761,572    (1,812,450)  (13,833,212)
      Deferred revenues                             (978,912)    3,099,888          -
      Prepayments                                    143,426      (127,771)     (186,824)
      Accounts payable                            (7,783,968)    7,498,737      (111,061)
      Accrued taxes                               (3,123,216)    1,228,699     1,251,185
      Customer prepayments and deposits               42,366       964,679       272,239
      Accrued interest                              (101,456)    1,350,667       645,473
      Accrued pension cost                        (1,547,357)   (2,681,901)     (717,013)
      Other                                         (538,331)   (4,911,920)    1,602,404
                                                 -----------   -----------   -----------
Net cash provided by operating activities         54,346,044    44,137,104    29,591,502
                                                 -----------   -----------   -----------

Cash Flows from Investing Activities:
  Construction expenditures                      (65,328,731)  (60,310,383)  (60,428,321)
  Non-utility property and other                  (1,525,824)      875,413    (1,801,879)
                                                 -----------   -----------   -----------
Net cash used in investing activities            (66,854,555)  (59,434,970)  (62,230,200)
                                                 -----------   -----------   -----------

Cash Flows from Financing Activities:
  Issuance of common stock through dividend
   reinvestment, stock purchase and stock
   option plans                                    9,796,147     9,809,642     7,674,585
  Increase (decrease) in interim bank loans, net  32,500,000   (21,500,000)    8,500,000
  Sale of senior debentures, net                        -       49,404,056    49,313,951
  Retirement of long-term debt                    (9,300,000)   (6,800,000)  (14,230,000)
  Retirement of common stock                        (269,299)      (33,670)      (58,056)
  Cash dividends                                 (18,582,497)  (17,301,431)  (16,194,228)
                                                 -----------   -----------   -----------
Net cash provided by financing activities         14,144,351    13,578,597    35,006,252
                                                 -----------   -----------   -----------

Net increase (decrease) in cash and
 temporary investments                             1,635,840    (1,719,269)    2,367,554
Cash and temporary investments at beginning
 of year                                           1,641,371     3,360,640       993,086
                                                 -----------   -----------   -----------
Cash and temporary investments at end of year    $ 3,277,211   $ 1,641,371   $ 3,360,640
                                                 ===========   ===========   ===========

Cash paid during the year for:
  Interest (net of amount capitalized)           $17,900,642   $15,514,606   $13,787,781
  Income taxes                                   $12,102,000   $12,935,000   $11,480,000

</TABLE>

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





                                      32

<PAGE>


   Public Service Company of North Carolina, Incorporated and Subsidiaries

                  Notes to Consolidated Financial Statements

       For the Fiscal Years Ended September 30, 1998, 1997 and 1996


1.       SIGNIFICANT ACCOUNTING POLICIES

         Principles of Consolidation and Segment Data

                The accompanying  consolidated  financial statements include the
         accounts  of Public  Service  Company of North  Carolina,  Incorporated
         (PSNC) and its subsidiary  companies,  Clean Energy Enterprises,  Inc.,
         PSNC Blue Ridge  Corporation,  PSNC  Production  Corporation,  Cardinal
         Pipeline Company,  LLC, PSNC Propane  Corporation  (dissolved in fiscal
         1997) and PSNC Cardinal Pipeline Company (collectively, the "Company").
         Investments  in other  affiliates in which the Company has a 20% to 50%
         interest  and/or the ability to  exercise  significant  influence  over
         operating  and  financial  policies are  accounted for under the equity
         method. Equity investees of Company include Cardinal Extension Company,
         LLC (Note 2), Pine Needle LNG  Company,  LLC (Note 2) and Sonat  Public
         Service Company L.L.C. (Sonat Public Service).  Sonat Public Service is
         a 50%-50% joint venture between PSNC  Production  Corporation and Sonat
         Marketing  Company  L.P.  All material  intercompany  transactions  and
         balances among PSNC and its subsidiary  companies have been  eliminated
         in the accompanying consolidated financial statements.

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

         Utility Plant

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

         Depreciation

                PSNC provides for  depreciation on a straight-line  basis by the
         application  of specific  rates to the various  classes of  depreciable
         property.  These rates,  which have been approved by the North Carolina
         Utilities   Commission   (NCUC),   approximate  4.0%  of  the  cost  of
         depreciable  property for each of the fiscal years 1998, 1997 and 1996,
         on a composite basis.

         Revenues

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

                                         33

<PAGE>



         Income Taxes

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

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

         Cash and Temporary Investments

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

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

         Long-term Restricted Cash and Deferred Revenue

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

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

         Debt Expense

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

                                        34

<PAGE>



         Fair Value of Financial Instruments

                Financial instruments include cash and temporary investments and
         long-term debt. The amount reported for cash and temporary  investments
         are considered to be reasonable approximations of their fair values due
         to their  short-term  nature.  The carrying  amount of long-term  debt,
         including current  maturities,  at September 30, 1998 and September 30,
         1997, is $180,850,000 and $190,150,000,  respectively, as compared to a
         fair market value of $195,044,000 and $207,729,000,  respectively.  The
         fair  market  value of these  instruments  is based on  current  market
         prices and yields for similar issues.

         Stock-Based Compensation

                PSNC has elected to follow  Accounting  Principles Board Opinion
         No.  25,  "Accounting  for Stock  Issued to  Employees"  (APB 25),  and
         related  interpretations  in accounting for its employee stock options.
         PSNC has  adopted the  disclosure-only  provisions  of  Statement  of
         Financial   Accounting   Standards  (SFAS)  No.  123,  "Accounting  for
         Stock-Based  Compensation."  This statement defines a fair value method
         of accounting for stock options or similar equity instruments. SFAS No.
         123  permits   companies   to  continue  to  account  for   stock-based
         compensation  awards under APB 25, 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.

         Use of Estimates in the Preparation of Financial Statements

                The  preparation  of financial  statements  in  conformity  with
         generally accepted  accounting  principles  requires management to make
         certain estimates and assumptions. These affect the reported amounts of
         assets  and  liabilities  and  disclosure  of  contingent   assets  and
         liabilities at the date of the financial  statements,  and the reported
         amounts of revenues and expenses  during the reporting  period.  Actual
         results could differ from those estimates.


2.       REGULATORY MATTERS

                PSNC's  Rider D rate  mechanism  authorizes  the recovery of all
         prudently  incurred gas costs from  customers on a monthly  basis.  Any
         difference  in amounts paid and  collected  for these costs is deferred
         for subsequent  refund to or collection from  customers.  Additionally,
         PSNC can recover its margin losses on  negotiated  gas sales to certain
         large commercial and industrial  customers in any manner  authorized by
         the NCUC.  At September  30,  1998,  the balance of net gas costs to be
         collected  from  customers  pursuant  to  Rider  D was  $12,860,000  as
         compared to $18,385,000 at September 30, 1997. On November 6, 1997, the
         NCUC issued an order  permitting  PSNC, on a two-year  trial basis,  to
         establish its commodity cost of gas for large commercial and industrial
         customers each month on the basis of market prices for natural gas. 
         This procedure allows PSNC to better manage its deferred gas costs 
         balance by ensuring that  the  amount  paid  for natural gas  to  serve
         these  customers approximates  the amount  collected  from them.  PSNC 
         will  continue to establish a benchmark cost of gas for residential and
         small  commercial customers pursuant to its existing procedures.

                In PSNC's 1991  general rate case order,  the NCUC  authorized a
         weather  normalization  adjustment (WNA). This mechanism allows PSNC to
         adjust its

                                           35

<PAGE>



         winter-period   gas  sales   rates  to  certain   customers   to  avoid
         undercollections or overcollections of its non-gas costs due to weather
         fluctuations from normal.

                On October 30, 1998,  the NCUC issued an order in PSNC's general
         rate case filed in April 1998. That order,  effective November 1, 1998,
         granted PSNC  additional  annual revenue of  $12,400,000  and allowed a
         9.82% overall rate of return on PSNC's net utility investment.  It also
         approved the  continuation of the previously  mentioned WNA and Rider D
         mechanisms and full margin  transportation  rates.  Parties to the rate
         case have 30 days from the date of the order to file a notice of appeal
         and exceptions.

                Effective  November  1,  1990,  PSNC  obtained  additional  firm
         capacity from  Transcontinental  Gas Pipe Line Corporation's  (Transco)
         Southern  Expansion  project.  On October 16, 1995,  the Federal Energy
         Regulatory Commission (FERC) issued an order on remand, from the United
         States Court of Appeals for the District of Columbia Circuit, requiring
         Transco to file revised  tariff sheets for Southern  Expansion  service
         provided from November 1, 1990 through October 31, 1991. As a result of
         this order,  PSNC received  additional  charges for the period April 5,
         1991,  through  October 31, 1991,  and recorded  additional  expense of
         $734,000  during the fourth quarter of fiscal 1996.  Based upon a prior
         NCUC order,  PSNC could not collect  these  charges from its  customers
         through the Rider D  mechanism.  PSNC  believes  the October 16,  1995,
         order  to be the  final  order  regarding  Southern  Expansion  charges
         incurred prior to November 1, 1991, and anticipates no further exposure
         from this matter.

                On April 22, 1997, the NCUC approved  PSNC's  application to use
         expansion funds to extend service to western Haywood County,  including
         Waynesville,  Clyde and Lake  Junaluska.  This project was completed in
         July 1998. PSNC spent  $5,653,000 on the project,  of which  $4,127,000
         was reimbursed from the expansion fund.

                On July 6,  1998,  PSNC  filed an  application  with the NCUC to
         extend  natural gas service into  Alexander  County.  Most of Alexander
         County lies  within  PSNC's  franchised  service  territory  and is not
         currently provided natural gas service. PSNC estimates that the cost of
         the project will be  $6,188,000  and has  requested the NCUC to approve
         the use of $4,918,000  from PSNC's  expansion fund to make this project
         economically  feasible.  Hearings  were  held  on  this  matter  during
         November  1998.  An order  from the NCUC is  expected  during the first
         quarter of calendar 1999.

                PSNC and a  subsidiary  of Piedmont  Natural Gas  Company,  Inc.
         (Piedmont) formed Cardinal  Pipeline  Company,  LLC (Cardinal) in March
         1994,  to  construct  and  operate a  24-inch,  37.5-mile  natural  gas
         pipeline,  extending from Wentworth to near Haw River,  North Carolina,
         where it  interconnects  with PSNC and  Piedmont.  It was  placed  into
         service on December 31, 1994,  and provides 130 million  cubic feet per
         day (mmcf/day) of additional firm capacity (70 mmcf/day for PSNC and 60
         mmcf/day for  Piedmont).  In 1995,  PSNC,  Piedmont,  Transco and North
         Carolina  Natural Gas  Corporation  (NCNG)  formed  Cardinal  Extension
         Company,  LLC (Cardinal  Extension) to purchase and extend the Cardinal
         pipeline.  As proposed,  the pipeline  will be extended 67.5 miles from
         the existing  termination  point of Cardinal Pipeline at Haw River to a
         point  southeast of Raleigh and will provide 140 mmcf/day of additional
         firm  capacity  (100  mmcf/day for PSNC and 40 mmcf/day for NCNG).  The
         extension will be project-financed at an estimated cost of $75,000,000.
         Through their respective subsidiaries, PSNC will

                                       36

<PAGE>



         own approximately  33%,  Piedmont will own  approximately  17%, Transco
         will own  approximately  45% and  NCNG  will  own  approximately  5% of
         Cardinal  Extension.  PSNC,  through a subsidiary,  will  contribute to
         Cardinal  Extension its net book  investment  in the existing  pipeline
         plus additional equity capital of approximately $1,000,000. On November
         6, 1997, the NCUC issued an order approving this project and the merger
         of Cardinal Pipeline and Cardinal Extension,  with the surviving entity
         being named  Cardinal  Pipeline  Company,  LLC.  Construction  began in
         November  1998.  The  facilities  are  expected  to be in service on or
         before November 1, 1999.

                Pine  Needle  LNG  Company,  LLC  (Pine  Needle)  was  formed by
         subsidiaries of Transco,  Piedmont,  NCNG,  Amerada Hess, and PSNC, and
         the  Municipal  Gas Authority of Georgia to own and operate a liquefied
         natural gas storage  facility,  with an estimated cost of $107,000,000.
         Pursuant to a final FERC order, this facility is being constructed on a
         site near Transco's pipeline  northwest of Greensboro,  North Carolina,
         and will  have a  storage  capacity  of four  billion  cubic  feet with
         vaporization  capability of 400 mmcf/day.  Liquefaction  is expected to
         begin in May 1999 in time for  withdrawal  service to begin in the 1999
         winter heating season. PSNC's subsidiary,  PSNC Blue Ridge Corporation,
         will make an equity capital contribution of approximately $9,000,000 at
         the end of the construction period.

                On April 29, 1997, the NCUC issued an order authorizing deferral
         accounting for contract labor costs for a project to ensure that PSNC's
         computer  operating  systems  function  properly in year 2000. PSNC has
         incurred  approximately  $4,000,000  of these costs to date.  The order
         required a three-year amortization of these costs beginning in the year
         incurred. PSNC began amortizing these costs in September 1997. The NCUC
         allowed  recovery of a majority of the  unamortized  Year 2000 costs in
         the general rate case order issued on October 30, 1998.

                                        37

<PAGE>



3.       COMMON STOCK

                The  changes in common  stock and capital in excess of par value
         for the three years ended September 30, 1998 were as follows:

                                                 Common Stock
                                             $1 Par, Authorized
                                              30,000,000 Shares       Capital in
                                             Shares                    Excess of
                                           Outstanding     Amount      Par Value
                                           -----------  -----------  -----------
        September 30, 1995                 18,689,346  $18,689,346  $106,655,316

          Issuance through dividend
           reinvestment plan (DRP)            326,618      326,618     4,860,612

          Issuance through employee
           stock purchase plan (ESPP)          92,405       92,405     1,105,164

          Issuance through nonqualified
           stock option plan (NSOP) - net      96,016       96,016     1,222,967

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

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

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

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

          Issuance through NSOP - net          78,721       78,721     1,232,121

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

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

          Issuance through DRP                330,808      330,808     6,468,023

          Issuance through ESPP                82,203       82,203     1,276,613

          Issuance through NSOP - net          90,478       90,478     1,359,703

          Recognition of permanent tax
           differences related to stock
           options exercised                     -            -          208,600
                                          -----------  -----------  ------------

        September 30, 1998                 20,274,332  $20,274,332  $132,787,058
                                          ===========  ===========  ============



                                         38

<PAGE>



Stock Compensation Plans

         In October 1995, the Financial Accounting Standards Board (FASB) issued
SFAS No. 123, "Accounting for Awards of Stock-Based  Compensation to Employees."
This  statement  defines a fair value method of accounting  for stock options or
similar equity  instruments  and was adopted by PSNC effective  October 1, 1996.
SFAS  No.  123  permits   companies  to  continue  to  account  for  stock-based
compensation  awards under existing accounting rules, but requires disclosure in
a note to the financial  statements of the pro forma net income and earnings per
share as if PSNC had adopted the new method of accounting.

         At September 30, 1998, PSNC had three stock-based  compensation  plans.
PSNC applies APB 25 and related  interpretations  in  accounting  for its plans.
Accordingly,  no  compensation  cost has been  recognized for its Employee Stock
Purchase Plan or its 1997  Nonqualified  Stock Option Plan.  For fiscal 1997 and
1996, the  compensation  cost that had been charged  against income for the 1992
Nonqualified  Stock  Option Plan was $187,397 and  $167,904,  respectively.  Had
compensation cost for PSNC's three stock-based plans been determined  consistent
with the fair value method for  compensation  expense  encouraged under SFAS No.
123,  PSNC's net income and  earnings per share (EPS) would have been reduced to
the pro forma amounts shown below.  For purposes of pro forma  disclosures,  the
estimated fair value of options is recorded in its entirety in the year granted.

                                    1998           1997            1996
                                -----------    -----------     -----------
Net Income        As reported   $24,837,002    $26,346,553     $23,898,218
                  Pro forma     $23,584,100    $25,971,801     $23,469,513

Basic EPS         As reported         $1.24          $1.35           $1.26
                  Pro forma           $1.17          $1.33           $1.24

Diluted EPS       As reported         $1.23          $1.34           $1.25
                  Pro forma           $1.17          $1.32           $1.23



Nonqualified Stock Option Plans

         PSNC has two nonqualified stock option plans, a 1992 Nonqualified Stock
Option Plan and a 1997 Nonqualified Stock Option Plan. 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. Options are granted at 90% of the fair market value of PSNC's
common stock determined on the date of the grant, are exercisable  beginning two
years  from the date of the grant and  expire  five  years  from the date of the
grant.  An  exception  to  the  two-year  exercise  date  is  allowed  upon  the
retirement,  disability or death of a participant;  an exception is also allowed
upon a change in control as defined in the plan. Under PSNC's 1997  Nonqualified
Stock Option Plan, options to purchase an aggregate of up to 1,560,000 shares of
PSNC's  common  stock can be  granted to  officers  and key  employees  of PSNC.
Options are granted at the fair market value of PSNC's  common stock  determined
on the date of the grant,  are exercisable  beginning two years from the date of
the grant and expire  five years from the date of the grant.  As a result of the
options  being  granted at the fair market  value,  no  compensation  expense is
recorded.  An  exception  to the  two-year  exercise  date is  allowed  upon the
retirement,  disability or death of a participant;  an exception is also allowed
upon a change in control as defined in the plan.

                                     39

<PAGE>



         Options granted,  exercised and canceled under both plans for the three
years ended September 30, 1998 were as follows:

                                Options     Weighted-Average
                              Outstanding    Exercise Price

    September 30, 1995          420,857          $13.17
     Granted                    120,000          $14.29
     Exercised                 (101,624)         $11.65
     Canceled                   (11,994)         $14.61
                                -------
    September 30, 1996          427,239          $13.81
     Granted                    118,967          $16.59
     Exercised                  (81,532)         $13.72
     Canceled                      (736)         $14.29
                                -------
    September 30, 1997          463,938          $14.54
     Granted                    624,000          $20.64
     Exercised                 (111,375)         $14.60
     Canceled                   (20,879)         $16.88
                                -------
    September 30, 1998          955,684          $18.46
                                =======


         For  purposes  of pro forma  disclosure,  the fair value of each option
grant was estimated on the date of grant using the Black-Scholes  option pricing
model with the following  assumptions used for nonqualified  stock option grants
in fiscal 1998, 1997 and 1996, respectively:

                                    1998            1997           1996
                               --------------   -----------    ----------
Risk free interest rate(s)     5.5% and 5.8%       6.00%           5.80%
Volatility factor                  15.30%         22.70%          34.12%
Dividend yield                      4.53%          5.10%           5.10%
Expected life                    4.5 years       4.5 years      4.5 years


         The weighted  average fair value of nonqualified  stock options granted
during 1998, 1997 and 1996 was $2.54, $3.66 and $4.20, respectively.  The number
of shares and weighted  average price of those shares  exercisable at the end of
the fiscal year were 231,403 shares at $13.49 for 1998, 231,612 shares at $13.61
for 1997 and 198,176  shares at $14.06 for 1996. As of September  30, 1998,  the
955,684 outstanding options had a weighted average remaining contractual life of
3.6 years and exercise prices ranging from $12.86 to $21.25.


Employee Stock Purchase Plan

         Under the 1992 Employee  Stock  Purchase  Plan, as amended and restated
effective January 1, 1998, PSNC is authorized to issue up to 1,266,000 shares to
its full-time employees,  nearly all of whom are eligible to participate.  Under
the terms of the plan,  employees may choose each year to have from 2% to 10% of
their base  salary or wages  withheld  to  purchase  PSNC's  common  stock.  The
purchase  price  of  stock  is 90%  of the  lower  of its  beginning-of-year  or
end-of-year  fair market  value as defined in the plan.  Seventy-two  percent of
eligible employees  participated in the plan during fiscal 1998. In fiscal 1998,
1997 and 1996,  PSNC  issued to  employees  82,203,  81,349 and  92,405  shares,
respectively.




                                      40

<PAGE>



         For purposes of pro forma  disclosure,  the fair value of each employee
stock  purchase  plan  grant  was  estimated  on the  date of  grant  using  the
Black-Scholes  option  pricing  model with the  following  assumptions  used for
grants in fiscal 1998, 1997 and 1996, respectively:

                                    1998           1997           1996
                                 ----------     ----------     --------
Risk free interest rate             5.43%          5.55%          5.18%
Volatility factor                  15.30%         22.18%         23.56%
Dividend yield                      4.53%          5.10%          5.10%
Expected life                      1 year         1 year         1 year

         The weighted  average fair value of each employee  stock  purchase plan
grant during 1998, 1997 and 1996 was $6.10, $2.32 and $2.28, respectively.

         At September 30, 1998,  there were 931,420  common shares  reserved for
issuance under PSNC's Stock Purchase and Automatic  Dividend  Reinvestment Plan,
1,936,231   common  shares  reserved  for  granting  under  the  1992  and  1997
Nonqualified  Stock Option Plans and 205,666 common shares reserved for issuance
under the Employee Stock Purchase Plan.


4.       PENSION AND POSTRETIREMENT PLANS

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

                Net pension cost in fiscal 1998, 1997 and 1996 consisted of the
         following components (amounts in thousands):


                                              1998    1997    1996
                                             ------  ------  ------
         Service cost                        $2,073  $2,156  $2,034
         Interest cost                        3,050   3,282   2,972
         Actual return on assets             (3,154) (8,328) (2,845)
         Net amortization                       697   5,253     (23)
                                             ------  ------  ------
         Net pension cost                    $2,666  $2,363  $2,138
                                             ======  ======  ======




                                                        41

<PAGE>



         The table below sets forth the amount recognized on PSNC's consolidated
balance sheets at September 30, 1998 and 1997 (amounts in thousands):


                                                 1998         1997
                                               --------      -------       
         Actuarial present value of benefit 
          obligations:
         Accumulated benefit obligation,
          including vested benefits in
          1998 of $32,525 and 1997 of $28,692   $33,910      $29,852
                                                =======      =======


         Projected benefit obligation           $46,609      $42,920
         Plan assets at fair value               43,711       39,253
                                                -------      -------

         Plan assets under projected
          benefit obligation                      2,898        3,667
         Unrecognized transition amount           1,406        1,716
         Unrecognized net gain                    7,261        8,301
         Unrecognized prior service cost         (3,580)      (4,152)
                                                -------      -------
         Accrued pension cost                   $ 7,985      $ 9,532
                                                =======      =======

         Actuarial assumptions:
         Weighted average discount rate            6.75%        7.50%
         Rate of increase in future
          compensation levels                2.75%-5.75%  3.50%-6.50%
         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  1998 and 1997
         measurement dates was approximately $2,453,000 and $3,251,000.

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



                                       42

<PAGE>



         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, 1998 and 1997 (amounts in thousands):


                                                1998          1997
                                              -------       -------
         Fair value of plan assets            $  -          $  -

         Accumulated postretirement benefit 
          obligation (APBO):
           Retirees and dependents            $ 4,271       $ 3,853
           Other fully eligible participants    1,209           917
           Other active participants            3,502         2,833
                                              -------       -------
                                                8,982         7,603

         Unrecognized prior service cost         (488)         (531)
         Unrecognized net gain                   (480)          498
         Unrecognized transition obligation    (3,326)       (3,547)
                                              -------       -------
         Accrued postretirement benefit cost  $ 4,688       $ 4,023
                                              =======       =======


                The  net  periodic   postretirement   benefit  cost  for  fiscal
         September 30, 1998, 1997 and 1996 consists of the following  components
         (amounts in thousands):


                                              1998     1997     1996
                                             ------   ------   ------
         Service cost                       $  247   $  255   $  258
         Interest cost on APBO                 554      554      525
         Amortization of
          transition obligation                222      222      258
         Net amortization                       34       38       19
                                            ------   ------    -----
         Net periodic postretirement
          benefit cost                      $1,057   $1,069   $1,060
                                            ======   ======   ======


                As of the 1998  measurement  date,  the assumed health care cost
         trend  rate used in  determining  the APBO was 8.25% in 1998,  7.75% in
         1999,  7.25% in 2000,  6.75% in 2001,  then  decreasing  annually to an
         ultimate trend rate of 4.25% in 2008. A one  percentage  point increase
         in the assumed  health care cost trend rate would  increase the APBO by
         approximately  3%. The service and interest cost  components of the net
         periodic  postretirement  benefit cost would increase approximately 5%.
         The net periodic  postretirement  benefit cost was  calculated  using a
         weighted  average  discount rate of 7.50%.  The APBO at the measurement
         date was determined using a weighted average discount rate of 6.75%.


5.       SHORT-TERM BORROWING ARRANGEMENTS

                PSNC has  committed  lines of credit with six  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, 1998,  total lines of credit with these banks range
         from  a  minimum  of   $39,000,000  to  a   winter-period   maximum  of
         $85,000,000.  PSNC also has uncommitted annual lines of credit totaling
         $35,000,000.  There  are no  restrictions  on the  withdrawal  of  cash
         balances maintained with these banks. The banks are compensated for

                                         43

<PAGE>



         the committed  lines of credit through the payment of commitment  fees.
         At September 30, 1998 and 1997,  there were $70,500,000 and $38,000,000
         of short-term bank 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, 1998 and 1997, PSNC had no bankers' acceptance loans outstanding.

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

                                                     1998          1997
                                                   -------       -------

         At year end -
                Amount outstanding                 $70,500       $38,000
                Weighted average rate                 5.96%         5.91%

         During the year -
                Maximum amount outstanding         $73,500       $81,500
                Average daily amount outstanding   $49,914       $36,381
                Weighted average rate                 5.95%         5.75%


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


6.       INCOME TAXES

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

<TABLE>
<CAPTION>

                                   1998               1997              1996
                             ---------------    ---------------   ---------------
                             Federal   State    Federal   State   Federal   State
<S>                          <C>      <C>       <C>      <C>      <C>      <C>

Income Statement Captions:
 Operating expenses
  and taxes                  $12,210  $2,917    $12,535  $3,176   $11,579  $2,917
 Other income (deductions)       917     211        866     226       763     202
                             -------  ------    -------  ------   -------  ------
                             $13,127  $3,128    $13,401  $3,402   $12,342  $3,119
                             =======  ======    =======  ======   =======  ======

Income Tax Expense:
 Currently payable           $ 7,681  $1,781    $11,246  $2,782   $ 9,892  $2,427
 Deferred                      5,816   1,347      2,585     620     2,885     692
 Investment tax credits, net    (370)   -          (430)   -         (435)   -
                             -------  ------    -------  ------   -------  ------
                             $13,127  $3,128    $13,401  $3,402   $12,342  $3,119
                             =======  ======    =======  ======   =======  ======

</TABLE>








                                       44

<PAGE>



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

                                              1998          1997        1996
                                            -------       -------     -------

Statutory federal income tax rate                35%           35%         35%
Expected federal income tax expense
 at federal statutory rate                  $13,987       $14,720     $13,438
Less: State income tax benefit                1,022         1,112       1,022
      Amortization of ITC                       370           430         435
      Tax on subsidiary income                  592           587         465
      Other                                    (207)           56         (63)
                                            -------       -------     -------
Federal income tax expense                  $12,210       $12,535     $11,579
                                            =======       =======     =======


                The  components  of  the  net  deferred  tax  liabilities  as of
         September 30, 1998 and 1997, are as follows (amounts in thousands):

                                                     1998          1997
                                                   -------       -------
Deferred tax assets:
   Regulatory liabilities - income tax amounts     $ 4,510       $ 4,653
   Pension expense                                   2,503         2,775
   Unamortized ITC                                   1,323         1,476
   Postretirement benefits                           1,545         1,311
   Deferred gain on Sonat joint venture              1,243         1,633
   Other                                             1,897         1,520
                                                   -------       -------
                                                   $13,021       $13,368
Deferred tax liabilities:
   Depreciation and property related items         $67,280       $61,151
   Excess deferred taxes due to a change
    in the statutory rate                            9,963        10,138
   Regulatory assets - income tax amounts              537           594
   Year 2000 costs                                   1,314           677
   Other                                               453           246
                                                   -------       -------
                                                   $79,547       $72,806

Net deferred tax liabilities                       $66,526       $59,438
                                                   =======       =======



7.       ENVIRONMENTAL MATTERS

                PSNC owns,  or has owned,  all or portions of six sites in North
         Carolina  on  which   manufactured  gas  plants  (MGPs)  were  formerly
         operated.  Intrusive  investigation  (including drilling,  sampling and
         analysis) has begun at only one site and the remaining  sites have been
         evaluated  using  historical  records and  observations of current site
         conditions  made during  visits to the sites.  These  evaluations  have
         revealed  that MGP residuals are present or suspected at several of the
         sites.  The  North  Carolina  Department  of  Environment  and  Natural
         Resources has recommended  that no further action be taken with respect
         to one site. In March and April 1994, an environmental  consulting firm
         retained by PSNC estimated that the aggregate cost of investigating and
         monitoring the extent of environmental  degradation and of implementing
         remedial  procedures with respect to the remaining five sites may range
         from $3,705,000 to $50,145,000 over a 30-year period. PSNC is unable to
         determine  the rate at which  costs  may be  incurred  over  this  time
         period.  The  estimated  cost range has not been  discounted to present
         value.  The range  includes costs of  investigating  and monitoring the
         sites at the low end of the range and investigating, monitoring

                                          45

<PAGE>



         and  extensively  remediating  the sites at the high end of the  range.
         PSNC's  associated actual costs for these sites will depend on a number
         of factors,  such as actual  site  conditions,  third-party  claims and
         recoveries from other potentially  responsible parties (PRPs).  Another
         North Carolina public utility or its predecessors also operated the MGP
         sites in Raleigh, Durham and Asheville,  and PSNC is in discussion with
         that  utility  regarding   potential  cost  sharing   arrangements  for
         investigation and potential  remediation costs of four of the sites. At
         this time, PSNC has not reached a definitive  agreement  regarding such
         arrangements.

                An order of the NCUC  dated  May 11,  1993  authorized  deferral
         accounting  for  all  costs  associated  with  the   investigation  and
         remediation of MGP sites. As of September 30, 1998, 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

                  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 under the registration statement.  The net proceeds of $49,314,000
         were used to pay down a  significant  portion  of the then  outstanding
         short-term bank debt.

                  On December 17, 1996,  PSNC sold  $50,000,000  of 7.45% Senior
         Debentures due 2026 under the registration statement.  The net proceeds
         of $49,404,000 were used to pay down a significant  portion of the then
         outstanding  short-term  bank debt. At September 30, 1998,  $25,000,000
         remained on the shelf registration.

                  Scheduled maturities of long-term debt during each of the next
         five  fiscal  years are as  follows as of  September  30,  1998:  1999,
         $9,300,000; 2000, $11,800,000;  2001, $6,800,000; 2002, $8,050,000; and
         2003, $7,500,000.

                  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, 1998, PSNC is in compliance in all material
         respects with the requirements of its debt agreements.





                                        46

<PAGE>



 9.      CONSTRUCTION PROGRAM

                  The  construction   program  for  fiscal  1999,  as  presently
         planned, provides for expenditures of approximately $45,000,000.


10.      CONTINGENT LIABILITIES

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

                  PSNC  is also a  party  to  certain  legal  actions  involving
         potential environmental liability as more fully discussed in Note 7.



                                        47

<PAGE>




11.  EARNINGS PER SHARE

         In February 1997,  the FASB issued SFAS No. 128,  "Earnings Per Share."
This  statement  establishes  standards  for computing  and  presenting  EPS. It
requires  presentation  of  basic  and  diluted  EPS on the  face of the  income
statement  for  all  entities  with  complex  capital  structures  and  requires
reconciliation  of the  computation  of basic EPS to diluted  EPS.  Basic EPS is
computed by dividing income  available to  shareholders by the weighted  average
number of shares  outstanding  for the period.  Diluted EPS gives  effect to all
dilutive potential common shares that were outstanding during the period.  Prior
period EPS has been restated to conform to the new statement. This statement was
adopted by PSNC beginning October 1, 1997.





                                             Twelve Months Ended
                                             September  30, 1998

                                         Income         Shares         Per Share
                                       (Numerator)   (Denominator)       Amount

Basic EPS
Net income                           $ 24,837,002     20,103,103         $ 1.24

Effect of dilutive securities (Options)                  117,477
                                                      ----------
Diluted EPS
Net income                           $ 24,837,002     20,220,580         $ 1.23
                                                      ==========



                                            Twelve Months Ended
                                            September 30, 1997

                                        Income        Shares           Per Share
                                     (Numerator)   (Denominator)         Amount

Basic EPS
Net income                           $26,346,553   19,549,656             $1.35

Effect of dilutive securities (Options)               100,269
                                                   ----------
Diluted EPS
Net income                           $26,346,553   19,649,925             $1.34
                                                   ==========



                                            Twelve Months Ended
                                            September 30, 1996

                                        Income        Shares           Per Share
                                     (Numerator)   (Denominator)         Amount

Basic EPS
Net income                           $23,898,218    18,995,035            $1.26

Effect of dilutive securities (Options)                 70,226
                                                    ----------
Diluted EPS
Net income                           $23,898,218    19,065,261            $1.25
                                                    ==========







                                        48

<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, 1998 and 1997
         (amounts in thousands, except per share data):

<TABLE>
<CAPTION>
                                                              1998
                                               Fourth     Third     Second     First

<S>                                            <C>       <C>       <C>       <C>         
     Operating revenues                        $32,151   $54,532   $140,205  $103,784

     Gross margin                               18,520    28,642     68,486    40,724

     Operating income (loss)                    (2,042)    4,123     26,226    10,790

     Net income (loss)                          (5,682)      802     22,524     7,193

     Basic earnings (loss) per share              (.28)      .04       1.12       .36

     Diluted earnings (loss) per share            (.28)      .04       1.11       .36
</TABLE>

<TABLE>
<CAPTION>
                                                              1997
                                               Fourth     Third     Second     First

<S>                                            <C>       <C>       <C>        <C>    
     Operating revenues                        $34,024   $60,106   $150,146   $93,653

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

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

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

     Basic earnings (loss) per share (1)          (.26)      .07       1.15       .41

     Diluted earnings (loss) per share (1)        (.26)      .07       1.14       .41
</TABLE>

     (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.



















                                        49

<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, 1998 and 1997, and the related consolidated  statements of income,
retained earnings and cash flows for each of the three years in the period ended
September 30, 1998. 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,
1998 and 1997, and the results of their operations and their cash flows for each
of the three years in the period ended  September 30, 1998,  in conformity  with
generally accepted accounting principles.





s/Arthur Andersen LLP

Charlotte, North Carolina,
October 30, 1998



                                      50

<PAGE>



          MANAGEMENT'S RESPONSIBILITY FOR FINANCIAL STATEMENTS


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

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

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



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


                                         51

<PAGE>



         Supplementary Data

                  The information for this item is contained in Note 12 entitled
         "SUMMARY OF QUARTERLY  FINANCIAL  INFORMATION  (UNAUDITED)"  on page 49
         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 16,  1998,  relating to the January 29, 1999
         annual meeting of shareholders, which section is incorporated herein by
         reference.

         Executive Officers

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


         Item 11.  Executive Compensation

                  The  information  for this item is set  forth in the  sections
         entitled  "Executive   Compensation,"   "Employee   Retirement  Plans,"
         "Performance  Graph" and "The Board of Directors and  Committees of the
         Board" in PSNC's proxy statement  dated December 16, 1998,  relating to
         the January 29, 1999 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).

                                        52

<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  16, 1998,  relating to the
         January 29,  1999  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 16,
         1998,  relating to the January 29, 1999 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, 1998,
                      1997 and 1996                                           29
                  Consolidated Balance Sheets at
                     September 30, 1998 and 1997                              30
                  Consolidated Statements of Capitalization
                     at September 30, 1998 and 1997                           31
                  Consolidated Statements of Retained
                     Earnings for the Fiscal Years Ended
                     September 30, 1998, 1997 and 1996                        31
                  Consolidated Statements of Cash Flows for
                     the Fiscal Years Ended September 30, 1998,
                     1997 and 1996                                            32
                  Notes to Consolidated Financial Statements
                     for the Fiscal Years Ended September 30,
                     1998, 1997 and 1996                                   33-49
                  Report of Independent Public Accountants                    50
                  Management's Responsibility for Financial Statements        51





                                        53

<PAGE>




                                                                            Page
              2.  Financial statement schedules -

                  The  following  financial  statement  schedules 
                   are  included herein:

                  Supplemental Schedules:
                  Report of Independent Public Accountants                    56
                  Schedule II - Reserves for the Fiscal Years Ended
                    September 30, 1998, 1997 and 1996                      57-59


              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 61 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, 1998.


                                       54

<PAGE>



                 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS



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



s/Arthur Andersen LLP

Charlotte, North Carolina,
December 21, 1998

                                        55

<PAGE>



                      REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS


       We have audited in accordance with generally accepted auditing standards,
the  consolidated  financial  statements  of  Public  Service  Company  of North
Carolina,  Incorporated  included in this Form 10-K,  and have issued our report
thereon dated October 30, 1998. Our audit was made for the purpose of forming an
opinion  on those  statements  taken as a whole.  The  schedules  listed  in the
accompanying index are the responsibility of the Registrant's management and are
presented  for  purposes  of  complying   with  the   Securities   and  Exchange
Commission's  rules and are not part of the basic  financial  statements.  These
schedules have been subjected to the auditing procedures applied in the audit of
the basic financial statements and, in our opinion, fairly state in all material
respects the financial  data required to be set forth therein in relation to the
basic financial statements taken as a whole.

s/Arthur Andersen LLP

Charlotte, North Carolina,
October 30, 1998


                                          56

<PAGE>

<TABLE>


   PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED AND SUBSIDIARIES

                             SCHEDULE II - RESERVES

                  FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1998

<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                       $2,521,983    $786,480    $80,306    $1,302,641    $2,086,128
                                  ==========    ========    =======    ==========    ==========
</TABLE>

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

      Write-off of accounts considered to be uncollectible            $2,039,104
      Less - Recoveries on accounts previously written off               736,463
                                                                      ----------
                                                                      $1,302,641
                                                                      ==========


                                          57

<PAGE>


<TABLE>

   PUBLIC SERVICE COMPANY OF NORTH CAROLINA, INCORPORATED AND SUBSIDIARIES

                           SCHEDULE II - RESERVES

                FOR THE FISCAL YEAR ENDED SEPTEMBER 30, 1997

<CAPTION>

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

DEDUCTED IN BALANCE SHEET FROM
 ASSET TO WHICH IT APPLIES:

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

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

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


                                                            58

<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
                                  ==========    ==========   =======   ==========   ==========
</TABLE>

(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
                                                                      ==========

                                        59

<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 21, 1998        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 21, 1998.


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



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

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

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

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

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





                                      60

<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,  1998.  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-A-4.1 -  Amendment to Amended and Restated Charter, dated April 10, 1997. 
            (8-K/A--April 14, 1997, Exhibit A).

*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).





                                     61

<PAGE>
    


Exhibit
Number

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

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

*10-A-9   -  Firm Sales Service Agreement under Rate Schedule FS, dated August
             1, 1991, between PSNC and Transcontinental Gas Pipe Line Corpora-
             tion.  (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 Corpora-
             tion.  (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).

                                       62

<PAGE>



Exhibit
Number

*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).

*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).


                                        63

<PAGE>



Exhibit
Number

*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).

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

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

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

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

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

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

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

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

                                          64

<PAGE>



Exhibit
Number

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

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

*10-B-4.1  - Amendment dated May 16, 1996 to the Liquefied Natural Gas Storage
             Service Agreement under Rate Schedule LG-A, between PSNC and
             Transcontinental Gas Pipe Line Corporation.  (File No. 1-11429, 
             10-K--1997, Exhibit 10-B-4.1).

*10-B-5    - Eminence Storage Service Agreement under Rate Schedule ESS, dated
             November 1, 1993, and Amendment, dated December 1, 1993,
             between PSNC and Transcontinental Gas Pipe Line Corporation.  (File
             No. 0-1218, 10-K--1993, Exhibit 10-B-5).

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

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

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

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

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

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

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



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<PAGE>



Exhibit
Number

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

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

*10-D-6     - Service Agreement under Rate Schedule LNG-1 between Pine Needle
              LNG Company, LLC and Public Service Company of North Carolina, 
              Inc. dated January 29, 1997.  (File No. 1-11429, 10-K--1997,
              Exhibit 10-D-6).

*10-D-7     - Amended Operating Agreement of Cardinal Extension Company,
              LLC, dated December 19, 1996.  (File No. 1-11429, 10-Q--
              December 31, 1997, Exhibit 10-D-7).

*10-D-8     - Amended Construction, Operation and Maintenance Agreement by
              and between Cardinal Operating Company and Cardinal Extension
              Company, LLC, dated December 19, 1996.  (File No. 1-11429,
              10-Q--December 31, 1997, Exhibit 10-D-8).

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

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

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

  21        - Subsidiaries of Registrant.


  23        - Consent of Independent Public Accountants.  (Set forth on page 55
              of this annual report).


  27        - Financial Data Schedule.




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<PAGE>




                                                                     EXHIBIT 21

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



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



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

                  (2)      64.5% ownership by PSNC.

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

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

                  (5) 50% ownership by PSNC Production Corporation.

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