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

FORM 10-Q

| |       |                                                                                        
| | ----- | ---------------------------------------------------------------------------------------
| | [ X ] | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2005

OR

| |      |                                                                                         
| | ---- | ----------------------------------------------------------------------------------------
| | [  ] | 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                                                                          | Exact name of registrants as specified in their charters, state of     
incorporation, address of principal executive offices, and telephone number                                                                                                                                                                                                                                                                                                                                                                                                                                               | I.R.S. Employer
 Identification
     Number
|----------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------
|1-15929
       
       
       
       
 1-3382
       
       
       
       
       
 1-3274 | Progress Energy, Inc.
     410 South Wilmington Street
  Raleigh, North Carolina 27601-1748
      Telephone: (919) 546-6111
State of Incorporation: North Carolina
    Carolina Power & Light Company 
d/b/a Progress Energy Carolinas, Inc.
     410 South Wilmington Street
  Raleigh, North Carolina 27601-1748
      Telephone: (919) 546-6111
State of Incorporation: North Carolina
      Florida Power Corporation 
 d/b/a Progress Energy Florida, Inc.
          100 Central Avenue
    St. Petersburg, Florida 33701
       Telephone (727) 820-5151
   State of Incorporation: Florida | 56-2155481
56-0165465
59-0247770           

| |  |                                                              
| |  | -------------------------------------------------------------
| |  | None                                                         
|
| |  | (Former Name or Former Address, if Changed Since Last Report)

Indicate by check mark whether each 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 registrants were required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes XNo 

Indicate by check mark whether each registrant is an accelerated filer (as defined in Rule 12b-2 of the
Exchange Act).

|                                                                                                                |                                      |                          
|--------------------------------------------------------------------------------------------------------------- | ------------------------------------ | -------------------------
|Progress Energy, Inc. (Progress Energy)
Carolina Power & Light Company (PEC)   
Florida Power Corporation (PEF) | Yes    (X)
Yes    (   )
Yes    (   ) | No  (   )
No  (X)
No  (X)

Indicate
by check mark whether each registrant is a shell company (as defined in Rule 12b-2 of the
Exchange Act). Yes No X

Indicate
the number of shares outstanding of each registrants classes of common stock, as of
the latest practicable date. As of October 31, 2005, each registrant had the following
shares of common stock outstanding:

|Registrant                          | Description                                                                                        | Shares                                                                                                                                             
|----------------------------------- | -------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------
|Progress Energy
PEC            
PEF | Common Stock (Without Par Value)
Common Stock (Without Par Value)
Common Stock (Without par value) | 251,662,294
159,608,055 (all of which
were held directly by Progress
Energy, Inc.)
100 (all of which were held
indirectly by Progress Energy, Inc.)

This  combined  Form  10-Q is  filed  separately  by  three  registrants:  Progress  Energy,  PEC and PEF.
         Information  contained herein relating to any individual  registrant is filed by such registrant solely on
         its own behalf.  Each registrant makes no  representation  as to information  relating  exclusively to the
         other registrants.

         PEF meets the  conditions set forth in General  Instruction  H(1)(a) and (b) of Form 10-Q and is therefore
         filing this form with the reduced disclosure format.

PROGRESS ENERGY, INC., PROGRESS ENERGY CAROLINAS, INC. 
AND PROGRESS ENERGY FLORIDA, INC. FORM 10-Q  For the Quarter Ended September 30, 2005

Glossary of Terms

         Safe Harbor for Forward-Looking Statements

|                                                                                                                                                                                                                                                                                         |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|PART I.  
Item 1.  
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
         
Item 2.  
Item 3.  
Item 4.  
PART II. 
Item 1.  
Item 2.  
Item 6.  
Signatures | FINANCIAL INFORMATION
Financial Statements
   Interim Financial Statements:
   Progress Energy, Inc.
   Consolidated Statements of Income
   Consolidated Balance Sheets
   Consolidated Statements of Cash Flows
   Carolina Power & Light Company
   d/b/a Progress Energy Carolinas, Inc. (PEC)
   Consolidated Statements of Income
   Consolidated Balance Sheets
   Consolidated Statements of Cash Flows
   Florida Power Corporation
   d/b/a Progress Energy Florida, Inc. (PEF)
   Statements of Income
   Balance Sheets
   Statements of Cash Flows
Combined Notes to Interim Financial Statements for Progress Energy, Inc., Carolina Power &
Light Company d/b/a Progress Energy Carolinas, Inc. and Florida Power Corporation d/b/a
Progress Energy Florida, Inc.
Management's Discussion and Analysis of Financial Condition and Results of Operations
Quantitative and Qualitative Disclosures about Market Risk
Controls and Procedures
OTHER INFORMATION
Legal Proceedings
Unregistered Sales of Equity Securities and Use of Proceeds
Exhibits

---

GLOSSARY OF TERMS

We use the words Progress Energy, our, we or
us with respect to certain information to indicate that such information
relates to Progress Energy, Inc. and its subsidiaries on a consolidated basis. When
appropriate, the parent holding company or the subsidiaries of Progress Energy are
identified specifically as we discuss their various business activities. The
following abbreviations or acronyms used in the text of this combined Form 10-Q are
defined below:

|TERM                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   | DEFINITION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|401(k) 
AFUDC 
the Agreement 
APB 
ARO 
the Average Annual Price 
                            
Base Rate Settlement 
                            
Belleair 
Bcf 
Btu 
CAIR 
CAMR 
CCO 
CERCLA or Superfund 
                            
the Code 
Colona 
Corporate 
Corporate and Other 
                            
CR3 
CVO 
DMT 
DOE 
DWM 
                            
Earthco 
ECRC 
EIA 
EITF 
EMCs 
EPA 
EPA of 1992 
EPACT 
FASB 
FDEP 
FERC 
FIN No. 45 
                            
                            
FIN No. 46R 
                            
Florida Progress 
FPSC 
Fuels 
Funding Corp. 
                            
GAAP 
Global 
IRS 
Jackson 
LIBOR 
MACT 
Medicare Act 
MGP 
MW 
MWh 
Moody's 
NCNG 
NSR 
NCUC 
NEIL 
Norfolk Southern 
the Notes Guarantee 
NOx 
NOx SIP Call 
                            
NRC 
Nuclear Waste Act 
NYMEX 
OCI 
O&M 
OPEB 
the Parent 
PEC 
                            
PEC Electric 
                            
PEF 
PESC 
PFA 
the Phase Out Price 
                            
PLR 
Preferred Securities 
                            
the Preferred Securities 
   Guarantee 
Progress Energy 
Progress Registrants 
                            
Progress Fuels 
Progress Fuels 
  Subsidiaries
Progress Rail 
Progress Ventures 
                            
                            
PRP 
PSSP 
PTC 
PT LLC 
PUHCA 
PVI 
                            
Rail Services 
RBCA or Global RBCA 
RCA 
ROE 
SCPSC 
SEC 
Section 29 
S&P 
SFAS 
SFAS No. 5 
                            
SFAS No. 71 
                            
SFAS No. 109 
                            
SFAS No. 123R 
                            
SFAS No. 131 
                            
SFAS No. 133 
                            
SFAS No. 138 
                            
                            
SFAS No. 143 
                            
SFAS No. 148 
                            
                            
Smokestacks Act 
SO2         
SRS 
STB 
Subordinated Notes 
                            
the Threshold Price 
                            
the Trust 
the Utilities 
Winter Park | Progress Energy 401(k) Savings and Stock Ownership Plan
Allowance for funds used during construction
Stipulation and Settlement Agreement related to retail rate matters
Accounting Principles Board
Asset retirement obligation
Average wellhead price per barrel for unregulated domestic crude oil for
the year
Settlement reached with the FPSC on September 7, 2005 on PEF's base rate
proceeding
Town of Belleair, Florida
Billion cubic feet
British thermal unit
Clean Air Interstate Rule
Clean Air Mercury Rule
Competitive Commercial Operations business segment
Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended
Internal Revenue Code
Colona Synfuel Limited Partnership, LLLP
Collectively, the Parent, PESC and consolidation entities
Corporate and Other segment includes Corporate as well as other
nonregulated business areas
Crystal River Unit No. 3
Contingent value obligation
Dynegy Marketing and Trade
United States Department of Energy
North Carolina Department of Environment and Natural Resources, Division of
Waste Management
Four wholly owned synthetic fuel limited liability companies
Environmental Cost Recovery Clause
Energy Information Agency
Emerging Issues Task Force
Electric Membership Cooperatives
United States Environmental Protection Agency
Energy Policy Act of 1992
Energy Policy Act of 2005
Financial Accounting Standards Board
Florida Department of Environment and Protection
Federal Energy Regulatory Commission
Financial Accounting Standards Board (FASB) Interpretation No. 45,
"Guarantor's Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others"
FASB Interpretation No. 46R, "Consolidation of Variable Interest Entities -
an Interpretation of ARB No. 51"
Florida Progress Corporation, one of our wholly owned subsidiaries
Florida Public Service Commission
Fuels business segment
Florida Progress Funding Corporation, a wholly owned subsidiary of Florida
Progress
Accounting principles generally accepted in the United States of America
U.S. Global LLC
Internal Revenue Service
Jackson Electric Membership Corporation
London Inter Bank Offering Rate
Maximum Achievable Control Technology
Medicare Prescription Drug, Improvement and Modernization Act of 2003
Manufactured Gas Plant
Megawatt
Megawatt-hour
Moody's Investor Services
North Carolina Natural Gas Corporation
New Source Review requirements by EPA
North Carolina Utilities Commission
Nuclear Electric Insurance Limited
Norfolk Southern Railway Company
Florida Progress' full and unconditional guarantee of the Subordinated Notes
Nitrogen Oxide
EPA rule which requires 22 states including North Carolina and South
Carolina (but excluding Florida) to further reduce nitrogen oxide emissions.
United States Nuclear Regulatory Commission
Nuclear Waste Policy Act of 1982
New York Mercantile Exchange
Other comprehensive income as defined by GAAP
Operation and maintenance expense
Postretirement benefits other than pensions
Progress Energy, Inc. holding company on an unconsolidated basis
Progress Energy Carolinas, Inc., formerly referred to as Carolina Power &
Light Company
PEC Electric business segment made up of the utility operations and
excludes immaterial operations of PEC's nonregulated subsidiaries
Progress Energy Florida, formerly referred to as Florida Power Corporation
Progress Energy Service Company, LLC
IRS Prefiling Agreement
Price per barrel of unregulated domestic crude oil at which Section 29 tax
credits are fully eliminated
Private Letter Ruling
7.10% Cumulative Quarterly Income Preferred Securities due 2039, Series A
issued by the Trust
Florida Progress' guarantee of all distributions related to the Preferred
Securities
Progress Energy, Inc. and subsidiaries on a consolidated basis
The individual reporting registrants within the Progress Energy
consolidated group. Collectively, Progress Energy, Inc., PEC and PEF
Progress Fuels Corporation, formerly Electric Fuels Corporation
Progress Fuels subsidiaries that purchased Earthco synthetic fuel facilities
Progress Rail Services Corporation
Business unit of Progress Energy primarily made up of nonregulated energy
generation and marketing activities, as well as gas, coal and synthetic
fuel operations
Potentially responsible party, as defined in CERCLA
Performance Share Sub-Plan
Progress Telecommunications Corporation
Progress Telecom, LLC
Public Utility Holding Company Act of 1935, as amended
Progress Energy Ventures, Inc. (formerly referred to as Progress Ventures,
Inc.)
Rail Services business segment
Risk-based corrective action
Revolving credit agreement
Return on Equity
Public Service Commission of South Carolina
United States Securities and Exchange Commission
Section 29 of the Internal Revenue Service Code
Standard & Poor's, a division of The McGraw-Hill Companies, Inc.
Statement of Financial Accounting Standards
Statement of Financial Accounting Standards No. 5, "Accounting for
Contingencies"
Statement of Financial Accounting Standards No. 71, "Accounting for the
Effects of Certain Types of Regulation"
Statement of Financial Accounting Standards No. 109, "Accounting for Income
Taxes"
Statement of Financial Accounting Standards No. 123R, "Accounting for
Stock-Based Compensation"
Statement of Financial Accounting Standards No. 131, "Disclosures about
Segments of an Enterprise and Related Information"
Statement of Financial Accounting Standards No. 133, "Accounting for
Derivative and Hedging Activities"
Statement of Financial Accounting Standards No. 138, "Accounting for
Certain Derivative Instruments and Certain Hedging Activities - An
Amendment of FASB Statement No. 133"
Statement of Financial Accounting Standards No. 143, "Accounting for Asset
Retirement Obligations"
Statement of Financial Accounting Standards No. 148, "Accounting for
Stock-Based Compensation - Transition and Disclosure - An Amendment of FASB
Statement No. 123"
North Carolina Clean Smokestacks Act enacted in June 2002

Sulfur dioxide1Strategic Resource Solutions Corp.
Surface Transportation Board
7.10% Junior Subordinated Deferrable Interest Notes due 2039 issued by
Funding Corp. 
Price per barrel of unregulated domestic crude oil at which Section 29 tax
credits are reduced
FPC Capital I, a wholly owned subsidiary of Florida Progress
Collectively, PEC and PEF
City of Winter Park, Florida

---

SAFE
HARBOR FOR FORWARD-LOOKING STATEMENTS
In this combined report, the Progress Registrants make forward-looking statements within the
meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of
1995. The matters discussed throughout this combined Form 10-Q that are not historical
facts are forward-looking and, accordingly, involve estimates, projections, goals,
forecasts, assumptions, risks and uncertainties that could cause actual results or
outcomes to differ materially from those expressed in the forward-looking statements.

In addition, forward-looking statements are discussed in Managements Discussion
and Analysis of Financial Condition and Results of Operations including, but not
limited to, statements under the sub-heading Results of Operations about
trends and uncertainties, Liquidity and Capital Resources about future
liquidity requirements and Other Matters about our synthetic fuel facilities. 
Any
forward-looking statement is based on information current as of the date of this report
and speaks only as of the date on which such statement is made, and the Progress
Registrants undertake no obligation to update any forward-looking statement or statements
to reflect events or circumstances after the date on which such statement is made. 
Examples
of factors that you should consider with respect to any forward-looking statements made
throughout this document include, but are not limited to, the following: the impact of
fluid and complex laws and regulations, including those relating to the environment and
the recently enacted Energy Policy Act of 2005; deregulation or restructuring in the
electric industry that may result in increased competition and unrecovered or stranded
costs; the uncertainty regarding the timing, creation and structure of GridSouth,
GridFlorida or other transmission organizations; weather conditions that directly
influence the demand for electricity; the timing and recovery of the costs associated with
the four hurricanes that impacted our service territory in 2004 or the ability to recover
through the regulatory process costs associated with other future significant weather events; recurring seasonal
fluctuations in demand for electricity; fluctuations in the price of energy commodities
and purchased power; economic fluctuations and the corresponding impact on our commercial
and industrial customers; the ability of our subsidiaries to pay upstream dividends or
distributions to the Parent; the impact on our facilities and businesses from a terrorist
attack; the inherent risks associated with the operation of nuclear facilities, including
environmental, health, regulatory and financial risks; the future need for additional
baseload generation in our regulated service territories and the accompanying regulatory
and financial risks; the ability to successfully access capital markets on favorable
terms; our ability to maintain our current credit ratings and the impact on our financial
condition and ability to meet our cash and other financial obligations in the event our
credit ratings are downgraded below investment grade; the impact that increases in
leverage may have on each of the Progress Registrants; the impact of derivative contracts
used in the normal course of business; investment performance of pension and benefit
plans; the Progress Registrants ability to control costs, including pension and
benefit expense, and achieve our cost management targets for 2007; the availability and
use of Internal Revenue Code Section 29 (Section 29) tax credits by synthetic fuel
producers and our continued ability to use Section 29 tax credits related to our
coal-based solid synthetic fuel businesses; the impact to our financial condition and
performance in the event it is determined we are not entitled to previously taken Section
29 tax credits; the impact of the proposed accounting pronouncement regarding uncertain
tax positions; the impact that future crude oil prices may have on the value of our
Section 29 tax credits; our ability to manage the risks involved with the operation of
nonregulated plants, including dependence on third parties and related counter-party
risks, and a lack of operating history of such plants; the ability to manage the risks
associated with our energy marketing operations; the outcome of any ongoing or future
litigation or similar disputes and the impact of any such outcome or related settlements;
and unanticipated changes in operating expenses and capital expenditures. Many of these
risks similarly impact our non-reporting subsidiaries. 
These
and other risk factors are detailed from time to time in the Progress Registrants
filings with the United States Securities and Exchange Commission (SEC). Many, but not
all, of the factors that may impact actual results are discussed in the Risk Factors
sections of the Progress Registrants annual reports on Form 10-K for the year ended
December 31, 2004, which were filed with the SEC on March 16, 2005. All such factors are
difficult to predict, contain uncertainties that may materially affect actual results and
may be beyond our control. New factors emerge from time to time, and it is not possible
for management to predict all such factors, nor can it assess the effect of each such
factor on us.

---

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

PROGRESS
ENERGY, INC.CONSOLIDATED INTERIM FINANCIAL STATEMENTSSeptember
30, 2005

UNAUDITED CONSOLIDATED STATEMENTS of INCOME

|                                                                          | Three Months Ended
   September 30 | Nine Months Ended
  September 30
|------------------------------------------------------------------------- | ---------------------------------- | --------------------------------
|(in millions except per share data)                                       | 2004                               | 2004                            
|Operating revenues                                                        |                                    |                                 
|Utility                                                                   |                                    | $ 2,412                         
|Diversified business                                                      |                                    | 685                             
|                                                                         
|Total operating revenues                                                  |                                    | 3,097                           
|                                                                         
|Operating expenses                                                        |                                    |                                 
|Utility                                                                   |                                    |                                 
|Fuel used in electric generation                                          |                                    | 633                             
|Purchased power                                                           |                                    | 424                             
|Operation and maintenance                                                 |                                    | 408                             
|Depreciation and amortization                                             |                                    | 232                             
|Taxes other than on income                                                |                                    | 131                             
|Other                                                                     |                                    | 1                               
|Diversified business                                                      |                                    |                                 
|Cost of sales                                                             |                                    | 662                             
|Depreciation and amortization                                             |                                    | 46                              
|Other                                                                     |                                    | 23                              
|                                                                         
|Total operating expenses                                                  |                                    | 2,560                           
|                                                                         
|Operating income                                                          |                                    | 537                             
|                                                                         
|Other income                                                              |                                    |                                 
|Interest income                                                           |                                    | 3                               
|Other, net                                                                |                                    | 10                              
|                                                                         
|Total other income                                                        |                                    | 13                              
|                                                                         
|Interest charges                                                          |                                    |                                 
|Net interest charges                                                      |                                    | 165                             
|Allowance for borrowed funds used during construction                     |                                    | (3                              
|                                                                         
|Total interest charges, net                                               |                                    | 162                             
|                                                                         
|Income from continuing operations before income tax and minority interest |                                    | 388                             
|Income tax (benefit) expense                                              |                                    | (55                             
|                                                                         
|Income from continuing operations before minority interest                |                                    | 443                             
|Minority interest in subsidiaries' loss, net of tax                       |                                    | 7                               
|                                                                         
|Income from continuing operations                                         |                                    | 450                             
|Discontinued operations, net of tax                                       |                                    | (1                              
|                                                                         
|Income before cumulative effect of change in accounting principle         |                                    | 449                             
|Cumulative effect of change in accounting principle, net of tax           |                                    | 1                               
|                                                                         
|Net income                                                                |                                    | $    450                        
|                                                                         
|Average common shares outstanding - basic                                 |                                    | 248                             
|                                                                         
|Basic earnings per common share                                           |                                    |                                 
|Income from continuing operations                                         |                                    | $   1.82                        
|Discontinued operations, net of tax                                       |                                    |                                
|Net income                                                                |                                    | $   1.82                        
|                                                                         
|Diluted earnings per common share                                         |                                    |                                 
|Income from continuing operations                                         |                                    | $   1.81                        
|Discontinued operations, net of tax                                       |                                    |                                
|Net income                                                                |                                    | $   1.81                        
|                                                                         
|Dividends declared per common share                                       |                                    | $ 0.590                         
|                                                                         

See Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.

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PROGRESS
ENERGY, INC.UNAUDITED CONSOLIDATED BALANCE SHEETS

|September 30
                 2005                                 
|-------------------------------------------------------------------
|Utility Plant                                                      
|Utility plant in service                                           
|Accumulated depreciation                                           
|                                                                   
|Utility plant in service, net                                      
|Held for future use                                                
|Construction work in progress                                      
|Nuclear fuel, net of amortization                                  
|                                                                   
|Total utility plant, net                                           
|                                                                   
|Current assets                                                     
|Cash and cash equivalents                                          
|Short-term investments                                             
|Receivables, net                                                   
|Inventory                                                          
|Deferred fuel cost                                                 
|Deferred income taxes                                              
|Assets of discontinued operations                                  
|Prepayments and other current assets                               
|                                                                   
|Total current assets                                               
|                                                                   
|Deferred debits and other assets                                   
|Regulatory assets                                                  
|Nuclear decommissioning trust funds                                
|Diversified business property, net                                 
|Miscellaneous other property and investments                       
|Goodwill                                                           
|Intangibles, net                                                   
|Other assets and deferred debits                                   
|                                                                   
|Total deferred debits and other assets                             
|                                                                   
|Total assets                                                       
|                                                                   
|CAPITALIZATION AND LIABILITIES                                     
|                                                                   
|Common stock equity                                                
|Common stock without par value, 500 million shares authorized,     
|252 and 247 million shares issued and outstanding, respectively    
|Unearned restricted shares                                         
|Unearned ESOP shares                                               
|Accumulated other comprehensive loss                               
|Retained earnings                                                  
|                                                                   
|Total common stock equity                                          
|                                                                   
|Preferred stock of subsidiaries-not subject to mandatory redemption
|Minority interest                                                  
|Long-term debt, affiliate                                          
|Long-term debt, net                                                
|                                                                   
|Total capitalization                                               
|                                                                   
|Current liabilities                                                
|Current portion of long-term debt                                  
|Accounts payable                                                   
|Interest accrued                                                   
|Dividends declared                                                 
|Short-term obligations                                             
|Customer deposits                                                  
|Liabilities of discontinued operations                             
|Other current liabilities                                          
|                                                                   
|Total current liabilities                                          
|                                                                   
|Deferred credits and other liabilities                             
|Noncurrent income tax liabilities                                  
|Accumulated deferred investment tax credits                        
|Regulatory liabilities                                             
|Asset retirement obligations                                       
|Accrued pension and other benefits                                 
|Other liabilities and deferred credits                             
|                                                                   
|Total deferred credits and other liabilities                       
|                                                                   
|Commitments and contingencies (Note 15)                            
|                                                                   
|Total capitalization and liabilities                               
|                                                                   

See Notes
to Progress Energy, Inc. Consolidated Interim Financial Statements.

---

PROGRESS ENERGY, INC.UNAUDITED CONSOLIDATED STATEMENTS of CASH FLOWS

|2005                                                                             
|---------------------------------------------------------------------------------
|Operating activities                                                             
|Net income                                                                       
|Adjustments to reconcile net income to net cash provided by operating activities:
|Discontinued operations, net of tax                                              
|Cumulative effect of changes in accounting principles                            
|Charges for voluntary enhanced retirement program                                
|Depreciation and amortization                                                    
|Deferred income taxes                                                            
|Investment tax credit                                                            
|Tax levelization                                                                 
|Deferred fuel credit                                                             
|Other adjustments to net income                                                  
|Cash provided (used) by changes in operating assets and liabilities:             
|Receivables                                                                      
|Inventory                                                                        
|Prepayments and other current assets                                             
|Accounts payable                                                                 
|Other current liabilities                                                        
|Regulatory assets and liabilities                                                
|Other                                                                            
|                                                                                 
|Net cash provided by operating activities                                        
|                                                                                 
|Investing activities                                                             
|Gross utility property additions                                                 
|Diversified business property additions                                          
|Nuclear fuel additions                                                           
|Proceeds from sales of subsidiaries and other investments, net of cash divested  
|Purchases of short-term investments                                              
|Proceeds from sales of short-term investments                                    
|Other                                                                            
|                                                                                 
|Net cash used in investing activities                                            
|                                                                                 
|Financing activities                                                             
|Issuance of common stock                                                         
|Issuance of long-term debt                                                       
|Net (decrease) increase in short-term indebtedness                               
|Retirement of long-term debt                                                     
|Dividends paid on common stock                                                   
|Other                                                                            
|                                                                                 
|Net cash used in financing activities                                            
|                                                                                 
|Cash (used) provided by discontinued operations                                  
|Operating activities                                                             
|Investing activities                                                             
|Financing activities                                                             
|Net increase in cash and cash equivalents                                        
|Cash and cash equivalents at beginning of period                                 
|                                                                                 
|Cash and cash equivalents at end of period                                       
|                                                                                 

See
Notes to Progress Energy, Inc. Consolidated Interim Financial Statements.

---

CAROLINA POWER & LIGHT COMPANY d/b/a PROGRESS ENERGY CAROLINAS, INC. 
CONSOLIDATED INTERIM FINANCIAL STATEMENTSSeptember 30, 2005

UNAUDITED CONSOLIDATED STATEMENTS of INCOME

|                                                     
|-----------------------------------------------------
|(in millions)                                        
|Operating revenues                                   
|Electric                                             
|Diversified business                                 
|                                                     
|Total operating revenues                             
|                                                     
|Operating expenses                                   
|Fuel used in electric generation                     
|Purchased power                                      
|Operation and maintenance                            
|Depreciation and amortization                        
|Taxes other than on income                           
|                                                     
|Total operating expenses                             
|                                                     
|Operating income                                     
|                                                     
|Other income (expense)                               
|Interest income                                      
|Other, net                                           
|                                                     
|Total other income                                   
|                                                     
|Interest charges                                     
|Interest charges                                     
|Allowance for borrowed funds used during construction
|                                                     
|Total interest charges, net                          
|                                                     
|Income before income tax                             
|Income tax expense                                   
|                                                     
|Net income                                           
|Preferred stock dividend requirement                 
|                                                     
|Earnings for common stock                            
|                                                     

See
Notes to PEC Consolidated Interim Financial Statements.

---

CAROLINA POWER & LIGHT COMPANYd/b/a
PROGRESS ENERGY CAROLINAS, INC.UNAUDITED CONSOLIDATED BALANCE SHEETS

|September 30
     2005                               
|-----------------------------------------------------
|Utility plant                                        
|Utility plant in service                             
|Accumulated depreciation                             
|                                                     
|Utility plant in service, net                        
|Held for future use                                  
|Construction work in progress                        
|Nuclear fuel, net of amortization                    
|                                                     
|Total utility plant, net                             
|                                                     
|Current assets                                       
|Cash and cash equivalents                            
|Short-term investments                               
|Receivables, net                                     
|Receivables from affiliated companies                
|Inventory                                            
|Deferred fuel cost                                   
|Prepayments and other current assets                 
|                                                     
|Total current assets                                 
|                                                     
|Deferred debits and other assets                     
|Regulatory assets                                    
|Nuclear decommissioning trust funds                  
|Miscellaneous other property and investments         
|Other assets and deferred debits                     
|                                                     
|Total deferred debits and other assets               
|                                                     
|Total assets                                         
|                                                     
|CAPITALIZATION AND LIABILITIES                       
|                                                     
|Common stock equity                                  
|Common stock without par value                       
|Unearned ESOP common stock                           
|Accumulated other comprehensive loss                 
|Retained earnings                                    
|                                                     
|Total common stock equity                            
|                                                     
|Preferred stock - not subject to mandatory redemption
|Long-term debt, net                                  
|                                                     
|Total capitalization                                 
|                                                     
|Current liabilities                                  
|Current portion of long-term debt                    
|Accounts payable                                     
|Payables to affiliated companies                     
|Notes payable to affiliated companies                
|Short-term obligations                               
|Customer deposits                                    
|Other current liabilities                            
|                                                     
|Total current liabilities                            
|                                                     
|Deferred credits and other liabilities               
|Noncurrent income tax liabilities                    
|Accumulated deferred investment tax credits          
|Regulatory liabilities                               
|Asset retirement obligations                         
|Accrued pension and other benefits                   
|Other liabilities and deferred credits               
|                                                     
|Total deferred credits and other liabilities         
|                                                     
|Commitments and contingencies (Note 15)              
|                                                     
|Total capitalization and liabilities                 
|                                                     

See
Notes to PEC Consolidated Interim Financial Statements.

---

CAROLINA POWER & LIGHT COMPANY
d/b/a PROGRESS ENERGY CAROLINAS, INC.UNAUDITED CONSOLIDATED STATEMENTS of CASH FLOWS

|2005                                                                             
|---------------------------------------------------------------------------------
|Operating activities                                                             
|Net income                                                                       
|Adjustments to reconcile net income to net cash provided by operating activities:
|Charges for voluntary enhanced retirement program                                
|Depreciation and amortization                                                    
|Deferred income taxes                                                            
|Investment tax credit                                                            
|Deferred fuel credit                                                             
|Other adjustments to net income                                                  
|Cash provided (used) by changes in operating assets and liabilities:             
|Receivables                                                                      
|Receivables from affiliated companies                                            
|Inventory                                                                        
|Prepayments and other current assets                                             
|Accounts payable                                                                 
|Payables to affiliated companies                                                 
|Other current liabilities                                                        
|Regulatory assets and liabilities                                                
|Other                                                                            
|                                                                                 
|Net cash provided by operating activities                                        
|                                                                                 
|Investing activities                                                             
|Gross property additions                                                         
|Nuclear fuel additions                                                           
|Contributions to nuclear decommissioning trust                                   
|Purchases of short-term investments                                              
|Proceeds from sales of short-term investments                                    
|Other investing activities                                                       
|                                                                                 
|Net cash used in investing activities                                            
|                                                                                 
|Financing activities                                                             
|Issuance of long-term debt, net                                                  
|Net (decrease) increase in short-term obligations                                
|Net change in intercompany notes                                                 
|Retirement of long-term debt                                                     
|Dividends paid to parent                                                         
|Dividends paid on preferred stock                                                
|Other financing activities                                                       
|                                                                                 
|Net cash used in financing activities                                            
|                                                                                 
|Net increase in cash and cash equivalents                                        
|Cash and cash equivalents at beginning of period                                 
|                                                                                 
|Cash and cash equivalents at end of period                                       
|                                                                                 

See Notes to PEC Consolidated Interim Financial Statements.

---

FLORIDA POWER
CORPORATION d/b/a PROGRESS ENERGY FLORIDA, INC. INTERIM FINANCIAL STATEMENTS September 30, 2005

UNAUDITED STATEMENTS of INCOME

|                                                     
|-----------------------------------------------------
|(in millions)                                        
|Operating revenues                                   
|Operating expenses                                   
|Fuel used in electric generation                     
|Purchased power                                      
|Operation and maintenance                            
|Depreciation and amortization                        
|Taxes other than on income                           
|Other                                                
|                                                     
|Total operating expenses                             
|                                                     
|Operating income                                     
|                                                     
|Other income                                         
|Other, net                                           
|                                                     
|Total other income                                   
|                                                     
|Interest charges                                     
|Interest charges                                     
|Allowance for borrowed funds used during construction
|                                                     
|Total interest charges, net                          
|                                                     
|Income before income taxes                           
|Income tax expense                                   
|                                                     
|Net income                                           
|Preferred stock dividend requirement                 
|                                                     
|Earnings for common stock                            
|                                                     

See
Notes to PEF Interim Financial Statements.

---

FLORIDA POWER CORPORATION
d/b/a PROGRESS ENERGY FLORIDA, INC.UNAUDITED BALANCE SHEETS

|(in millions)ASSETS                                   | September 30
                  2005 | December 31
                  2004
|----------------------------------------------------- | ----------------------------------- | ----------------------------------
|Utility plant                                         |                                     |                                   
|Utility plant in service                              |                                     | $ 8,435                           
|Accumulated depreciation                              |                                     | (3,394                            
|                                                     
|Utility plant in service, net                         |                                     | 5,041                             
|Held for future use                                   |                                     | 9                                 
|Construction work in progress                         |                                     | 595                               
|Nuclear fuel, net of amortization                     |                                     | 72                                
|                                                     
|Total utility plant, net                              |                                     | 5,717                             
|                                                     
|Current Assets                                        |                                     |                                   
|Cash and cash equivalents                             |                                     | 15                                
|Receivables, net                                      |                                     | 402                               
|Receivables from affiliated companies                 |                                     | 6                                 
|Deferred income taxes                                 |                                     |                                  
|Inventory                                             |                                     | 304                               
|Deferred fuel cost                                    |                                     | 278                               
|Prepayments and other current assets                  |                                     | 192                               
|                                                     
|Total current assets                                  |                                     | 1,197                             
|                                                     
|Deferred debits and other assets                      |                                    
|Regulatory assets                                     |                                     | 419                               
|Nuclear decommissioning trust funds                   |                                     | 487                               
|Miscellaneous other property and investments          |                                     | 40                                
|Prepaid pension costs                                 |                                     | 195                               
|Other assets and deferred debits                      |                                     | 75                                
|                                                     
|Total deferred debits and other assets                |                                     | 1,216                             
|                                                     
|Total assets                                          |                                     | $ 8,130                           
|                                                     
|CAPITALIZATION AND LIABILITIES                        |                                    
|                                                     
|Common stock equity                                   |                                     |                                   
|Common stock without par value                        |                                     | $ 1,096                           
|Retained earnings                                     |                                     | 1,444                             
|                                                     
|Total common stock equity                             |                                     | 2,540                             
|                                                     
|Preferred stock - not subject to mandatory redemption |                                     | 34                                
|Long-term debt, net                                   |                                     | 2,108                             
|                                                     
|Total capitalization                                  |                                     | 4,682                             
|                                                     
|Current liabilities                                   |                                    
|Current portion of long-term debt                     |                                     | 48                                
|Accounts payable                                      |                                     | 256                               
|Payables to affiliated companies                      |                                     | 85                                
|Notes payable to affiliated companies                 |                                     | 31                                
|Short-term obligations                                |                                     | 292                               
|Customer deposits                                     |                                     | 145                               
|Other current liabilities                             |                                     | 217                               
|                                                     
|Total current liabilities                             |                                     | 1,074                             
|                                                     
|Deferred credits and other liabilities                |                                     |                                   
|Noncurrent income tax liabilities                     |                                     | 454                               
|Accumulated deferred investment tax credits           |                                     | 31                                
|Regulatory liabilities                                |                                     | 1,231                             
|Asset retirement obligations                          |                                     | 259                               
|Accrued pension and other benefits                    |                                     | 280                               
|Other liabilities and deferred credits                |                                     | 119                               
|                                                     
|Total deferred credits and other liabilities          |                                     | 2,374                             
|                                                     
|Commitments and contingencies (Note 15)               |                                     |                                   
|                                                     
|Total capitalization and liabilities                  |                                     | $ 8,130                           
|                                                     

See Notes to PEF Interim Financial Statements.

---

FLORIDA POWER CORPORATION
d/b/a PROGRESS ENERGY FLORIDA, INC.UNAUDITED STATEMENTS of CASH FLOWS

|2005                                                                             
|---------------------------------------------------------------------------------
|Operating activities                                                             
|Net income                                                                       
|Adjustments to reconcile net income to net cash provided by operating activities:
|Charges for voluntary enhanced retirement program                                
|Depreciation and amortization                                                    
|Deferred income taxes and investment tax credits, net                            
|Deferred fuel credit                                                             
|Other adjustments to net income                                                  
|Cash provided/(used) by changes in operating assets and liabilities:             
|Receivables                                                                      
|Receivables from affiliated companies                                            
|Inventory                                                                        
|Prepayments and other current assets                                             
|Accounts payable                                                                 
|Payables to affiliated companies                                                 
|Other current liabilities                                                        
|Regulatory assets and liabilities                                                
|Other                                                                            
|                                                                                 
|Net cash provided by operating activities                                        
|                                                                                 
|Investing activities                                                             
|Property additions                                                               
|Nuclear fuel additions                                                           
|Proceeds from sales of assets                                                    
|Other                                                                            
|                                                                                 
|Net cash used in investing activities                                            
|                                                                                 
|Financing activities                                                             
|Issuance of long-term debt, net                                                  
|Net (decrease) increase in short-term obligations                                
|Retirement of long-term debt                                                     
|Net change in intercompany notes                                                 
|Dividends paid to parent                                                         
|Dividends paid on preferred stock                                                
|Other                                                                            
|                                                                                 
|Net cash provided by (used in) financing activities                              
|                                                                                 
|Net increase in cash and cash equivalents                                        
|                                                                                 
|Cash and cash equivalents at beginning of period                                 
|                                                                                 
|Cash and cash equivalents at end of period                                       
|                                                                                 

See Notes to PEF Interim Financial
Statements.

---

COMBINED NOTES TO INTERIM FINANCIAL STATEMENTS FOR
PROGRESS ENERGY, INC.
CAROLINA POWER & LIGHT COMPANY d/b/a/ PROGRESS ENERGY CAROLINAS, INC.
FLORIDA POWER CORPORATION d/b/a PROGRESS ENERGY FLORIDA, INC. 
INDEX TO APPLICABLE NOTES TO FINANCIAL STATEMENTS BY REGISTRANT

Each of the following combined notes to interim financial statements of the Progress
Registrants are applicable to us but not to each of PEC and PEF. The following table sets
forth which notes are applicable to each of PEC and PEF.

|Registrant | Applicable Notes                                                
|---------- | ----------------------------------------------------------------
|PEC
PEF    | 1, 2, 5, 6, 7 and 9 through 15
1, 2, 3, 5, 6, 7 and 9 through 15

---

PROGRESS ENERGY, INC.
CAROLINA POWER & LIGHT COMPANY d/b/a/ PROGRESS ENERGY CAROLINAS, INC.
FLORIDA POWER CORPORATION d/b/a PROGRESS ENERGY FLORIDA, INC.

COMBINED NOTES TO INTERIM FINANCIAL STATEMENTS


In this report, Progress Energy (which includes Progress Energy, Inc. holding company (the
Parent) and its regulated and nonregulated subsidiaries on a consolidated basis), is at
times referred to as we, our or us. When discussing
Progress Energys financial information, it necessarily includes the results of PEC
and PEF (collectively, the Utilities). The term Progress Registrants refers to
each of the three separate registrants: Progress Energy, PEC and PEF. The information in
these combined notes relates to each of the Progress Registrants as noted in the Index to
the Combined Notes. However, neither of the Utilities makes any representation as to
information related solely to Progress Energy or the subsidiaries of Progress Energy other
than itself.

|1. | ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
|-- | -----------------------------------------------------------

| | A.     
Organization
| | --------------------

| | The
Parent is a holding company headquartered in Raleigh, North Carolina and is registered
under the Public Utility Holding Company Act of 1935 (PUHCA), as amended. As such, we are
subject to the regulatory provisions of PUHCA. 
Through
our wholly owned subsidiaries, PEC and PEF, our PEC Electric and PEF business segments are
primarily engaged in the generation, transmission, distribution and sale of electricity in
portions of North Carolina, South Carolina and Florida. Our Progress Ventures business
unit consists of the following segments: Fuels, Competitive Commercial Operations (CCO)
and Synthetic Fuels. Our Fuels segment is involved in natural gas drilling and production,
coal terminal services, coal mining and fuel transportation and delivery. Our CCO segment
includes nonregulated electric generation and energy marketing activities. Our Synthetic
Fuels segment is involved in the production and sale of coal-based synthetic fuel as
defined under the Internal Revenue Code (the Code). Synthetic Fuels activities were
reported in the Fuels segment prior to 2005 and now are considered a separate reportable
segment. Prior to its divestiture in 2005, Rail Services was reported as a separate
segment (see Note 3). The operations of Rail Services were reclassified to discontinued
operations in the first quarter of 2005 and therefore are not included in the results from
continuing operations during the periods reported. Through our other business units, we
engage in other nonregulated business areas, including telecommunications and energy
management and related services which are included in our Corporate and Other segment
(Corporate and Other). Our legal structure is not currently aligned with the functional
management and financial reporting of the Progress Ventures business unit. Whether, and
when, the legal and functional structures will converge depends upon legislative and
regulatory action, which cannot currently be anticipated. PECs
subsidiaries are involved in insignificant nonregulated business activities.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B.     Basis of Presentation
These
financial statements have been prepared in accordance with accounting principles generally
accepted in the United States of America (GAAP) for interim financial information and with
the instructions to Form 10-Q and Regulation S-X. Accordingly, they do not include all of
the information and footnotes required by GAAP for annual financial statements. Because
the accompanying interim financial statements do not include all of the information and
footnotes required by GAAP for annual financial statements, they should be read in
conjunction with the audited financial statements and notes thereto included in the annual
reports on Form 10-K for the year ended December 31, 2004 filed by each of the Progress
Registrants. 
These
combined notes accompany and form an integral part of Progress Energys and
PECs consolidated financial statements and PEFs financial statements. The
Utilities are subsidiaries of Progress Energy and as such their financial condition and
results of operations and cash flows are also consolidated, along with our nonregulated
subsidiaries, in our consolidated financial statements. In accordance with the provisions of
Accounting Principles Board Opinion (APB) No. 28, Interim Financial Reporting,
GAAP requires companies to apply a levelized effective tax rate to interim periods that is
consistent with the estimated annual effective tax rate. The intra-period tax allocation,
which will have no impact on total year net income, maintains an effective tax rate
consistent with the estimated annual effective tax rate. The fluctuations in the effective
tax rate for interim periods are primarily due to the recognition of synthetic fuel tax
credits and seasonal fluctuations in energy sales and earnings from the Utilities. Income
tax expense was increased (decreased) for the Progress Registrants for the three and nine
months ended September 30, 2005 and 2004, as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                   
|-------------------
|(in millions)      
|Progress Energy (a)
|PEC                
|PEF                
|                   

| | (a)        
           Amounts for Progress Energy may not equal the sum of PEC and PEF due to amounts
          recorded at non-utility subsidiaries.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Utilities collect from customers certain excise taxes levied by the state or local
government upon the customers. The Utilities account for excise taxes on a gross basis.
The amount of gross receipts tax, franchise taxes and other excise taxes included in
utility revenues and taxes other than on income in the statements of income are as
follows:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                | Three Months Ended
   September 30 | Nine Months Ended
  September 30
|--------------- | ---------------------------------- | --------------------------------
|(in millions)   | 2004                               | 2004                            
|Progress Energy |                                    | $80                             
|PEC             |                                    | $27                             
|PEF             |                                    | $53                             
|               

| | The amounts included in these financial statements are unaudited but, in the opinion of
management, reflect all normal recurring adjustments necessary to fairly present our
financial position and results of operations for the interim periods. Due to seasonal
weather variations and the timing of outages of electric generating units, especially
nuclear-fueled units, the results of operations for interim periods are not necessarily
indicative of amounts expected for the entire year or future periods.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
preparing financial statements that conform with GAAP, management must make estimates and
assumptions that affect the reported amounts of assets and liabilities, disclosure of
contingent assets and liabilities at the date of the financial statements and amounts of
revenues and expenses reflected during the reporting period. Actual results could differ
from those estimates. Certain amounts for 2004 have been reclassified to conform to the
2005 presentation.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C.     Consolidation of Variable Interest Entities

We consolidate all voting interest entities in which we own a majority voting interest and
all variable interest entities for which we are the primary beneficiary in accordance with
FASB Interpretation No. 46R, Consolidation of Variable Interest Entities  An
Interpretation of ARB No. 51 (FIN No. 46R).Progress Energy
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition to the variable interests listed below for PEC and PEF, we have interests through
other subsidiaries in several variable interest entities for which we are not the primary
beneficiary. These arrangements include investments in four limited partnerships and
limited liability corporations. At September 30, 2005, the aggregate additional maximum
loss exposure that we could be required to record in our income statement as a result of
these arrangements was approximately $8 million. The creditors of these variable interest
entities do not have recourse to our general credit in excess of the aggregate maximum
loss exposure.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

| | PEC
PEC
is the primary beneficiary of and consolidates two limited partnerships that qualify for
federal affordable housing and historic tax credits under Section 42 of the Code. At
September 30, 2005, the total assets of the two entities were $38 million, the majority of
which are collateral for the entities obligations and are included in miscellaneous
other property and investments in the Consolidated Balance Sheets.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
has an interest in a limited partnership that invests in 17 low-income housing
partnerships that qualify for federal and state tax credits. PEC also has interests in two
power plants resulting from long-term power purchase contracts. PEC has requested the
necessary information to determine if the 17 partnerships and the two power plant owners
are variable interest entities or to identify the primary beneficiaries; all entities from
which the necessary financial information was requested declined to provide the
information to PEC. Therefore, PEC has applied the information scope exception in FIN No.
46R, paragraph 4(g) to the 17 partnerships and the two power plants. PEC believes that if
it is determined to be the primary beneficiary of any of these entities, the effect of
consolidating the entities would result in increases to total assets, long-term debt and
other liabilities, but would have an insignificant or no impact on PECs common stock
equity, net earnings or cash flows.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
also has interests in several other variable interest entities for which PEC is not the
primary beneficiary. These arrangements include investments in approximately 22 limited
partnerships, limited liability corporations and venture capital funds and two building
leases with special-purpose entities. At September 30, 2005, the aggregate maximum loss
exposure that PEC could be required to record in its income statement as a result of these
arrangements was approximately $23 million. The creditors of these variable interest
entities do not have recourse to the general credit of PEC in excess of the aggregate
maximum loss exposure.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEFPEF
has interests in three variable interest entities for which PEF is not the primary
beneficiary. These arrangements include investments in one limited liability corporation,
one venture capital fund and one building lease with a special-purpose entity. At
September 30, 2005, the aggregate maximum loss exposure that PEF could be required to
record in its income statement as a result of these arrangements was approximately $6
million. The creditors of these variable interest entities do not have recourse to the
general credit of PEF in excess of the aggregate maximum loss exposure.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|2. | IMPACT OF NEW ACCOUNTING STANDARDS
|-- | ----------------------------------

| | Refer to Note 6D for information regarding our third quarter 2005 implementation of a new
stock-based compensation standard.
| | ----------------------------------------------------------------------------------------------------------------------------

| | FASB EXPOSURE DRAFT ON ACCOUNTING FOR UNCERTAIN TAX POSITIONS, AN INTERPRETATION OF SFAS NO. 109,
"ACCOUNTING FOR INCOME TAXES"
| | -------------------------------------------------------------------------------------------------------------------------------

| | On
July 14, 2005, the Financial Accounting Standards Board (FASB) issued an exposure draft of
a proposed interpretation of SFAS No. 109, Accounting for Income Taxes (SFAS
No. 109), that would address the accounting for uncertain tax positions. The proposed
interpretation would require that uncertain tax benefits be probable of being sustained in
order to record such benefits in the consolidated financial statements. We currently
account for uncertain tax benefits in accordance with SFAS No. 5, Accounting for
Contingencies (SFAS No. 5). Under SFAS No. 5, contingent losses are recorded when it
is probable that the tax position will not be sustained and the amount of the disallowance
can be reasonably estimated. As currently drafted, the proposed interpretation would apply
to all uncertain tax positions and be effective for us on December 31, 2005.
However, the FASB has publicly stated that it expects to issue the final interpretation in
the first quarter of 2006, which is expected to delay the effective date of the
interpretation past 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
discussed in Note 15, the Internal Revenue Service (IRS) field auditors have recommended
that the Section 29 tax credits generated by our Earthco facilities, totaling $1.2 billion
through September 30, 2005, be disallowed. We disagree with the field audit teams
findings and have requested that the National Office of the IRS review this issue. We have
not yet determined how the proposed interpretation would impact our various income tax
positions, including the status of the Earthco tax credits.  Depending on the
provisions of the FASBs final interpretation and our facts and circumstances that
exist at the date of implementation, including our assessment of the probability of
sustaining any currently recorded and future tax benefits, the proposed
interpretation could have a material adverse impact on our financial position and results
of operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | FASB INTERPRETATION NO. 47, "ACCOUNTING FOR CONDITIONAL ASSET RETIREMENT OBLIGATIONS"
| | -------------------------------------------------------------------------------------

| | On
March 30, 2005, the FASB issued Interpretation No. 47, Accounting for Conditional
Asset Retirement Obligations, an interpretation of SFAS No. 143, Accounting
for Asset Retirement Obligations (SFAS No. 143). The interpretation clarifies that a
legal obligation to perform an asset retirement activity that is conditional on a future
event is within the scope of SFAS No. 143. Accordingly, an entity is required to recognize
a liability for the fair value of an asset retirement obligation (ARO) that is conditional
on a future event if the liabilitys fair value can be reasonably estimated. The
interpretation also provides additional guidance for evaluating whether sufficient
information is available to make a reasonable estimate of the fair value. The
interpretation is effective no later than December 31, 2005. We have not yet determined
the impact of the interpretation on our financial position, results of operations or
liquidity.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|3. | DIVESTITURESProgress Rail Divestiture
|-- | -------------------------------------

| | On March 24, 2005, we completed the sale of Progress Rail Services Corporation (Progress
Rail) to One Equity Partners LLC, a private equity firm unit of J.P. Morgan Chase &
Co. Gross cash proceeds from the sale were approximately $429 million, consisting of $405
million base proceeds plus a working capital adjustment. Proceeds from the sale were used
to reduce debt.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Based on the gross proceeds associated with the sale of $429 million, we recorded an estimated
after-tax loss on disposal of $25 million during the nine months ended September 30, 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
accompanying consolidated interim financial statements have been restated for all periods
presented to reflect the operations of Progress Rail as discontinued operations. Interest
expense has been allocated to discontinued operations based on the net assets of Progress
Rail, assuming a uniform debt-to-equity ratio across our operations. Interest expense
allocated for the three months ended September 30, 2004 was $4 million. Interest expense
allocated for the nine months ended September 30, 2005 and 2004 was $4 million and $12
million, respectively. We ceased recording depreciation upon classification of the assets
as discontinued operations in February 2005. After-tax depreciation expense recorded by
Progress Rail during the three months ended September 30, 2004 was $3 million. After-tax
depreciation expense during the nine months ended September 30, 2005 and 2004 was $3
million and $8 million, respectively. Results of discontinued operations were as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                       | Three Months Ended
   September 30 | Nine Months Ended
  September 30
|------------------------------------------------------ | ---------------------------------- | --------------------------------
|(in millions)                                          | 2004                               | 2004                            
|Revenues                                               |                                    | $                              
|                                                      
|Earnings before income taxes                           |                                    | $                              
|Income tax expense                                     |                                    |                                
|                                                      
|Net earnings from discontinued operations              |                                    |                                
|                                                      
|Estimated loss on disposal of discontinued operations, |                                   
|including income tax benefit of $0 and $15 for the     |                                   
|three and nine months ended September 30, 2005,        |                                   
|respectively                                           |                                    | (1                              
|                                                      
|(Loss) earnings from discontinued operations           |                                    | $(1                             
|                                                      

| | In connection with the sale, Progress Fuels Corporation (Progress Fuels) and Progress Energy
provided guarantees and indemnifications of certain legal, tax and environmental matters
to One Equity Partners, LLC. See general discussion of guarantees at Note 15B. The
ultimate resolution of these matters could result in adjustments to the loss on sale in
future periods. The major balance sheet classes included in assets and liabilities of
discontinued operations in the Consolidated Balance Sheet as of December 31, 2004 are as
follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                         | 
|---------------------------------------- | 
|(in millions)                            | 
|                                        
|Accounts receivable                      | 
|Inventory                                | 
|Other current assets                     | 
|Total property, plant and equipment, net | 
|Total other assets                       | 
|                                        
|Assets of discontinued operations        | 
|                                        
|Accounts payable                         | 
|Accrued expenses                         | 
|                                        
|Liabilities of discontinued operations   | 
|                                        

| | In February 2004, we sold the majority of the assets of Railcar Ltd., a subsidiary of Progress Rail, to
The Andersons, Inc. for proceeds of approximately $82 million.NCNG Divestiture
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
October 2002, we announced the Board of Directors approval to sell North Carolina
Natural Gas Corporation (NCNG) and our equity investment in Eastern North Carolina Natural
Gas Company to Piedmont Natural Gas Company, Inc. On September 30, 2003, we completed the
sale. During the nine months ended September 30, 2004, we recorded an additional gain
after taxes of approximately $1 million related to deferred taxes on the loss from the
NCNG sale.Winter Park Divestiture
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
discussed in Note 5, PEF sold certain electric distribution assets to the City of Winter
Park, Florida (Winter Park) on June 1, 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------

|4. | ACQUISITIONS

In
May 2005, Winchester Production Company, Ltd., an indirectly wholly owned subsidiary of
Progress Fuels, acquired an interest in approximately 11 natural gas producing wells and
proven reserves of approximately 25 billion cubic feet equivalent from a privately-owned
company headquartered in Texas. In addition to the natural gas reserves, the transaction
also included a 50 percent interest in the gas gathering systems related to these
reserves. The total cash purchase price for the transaction was $46 million.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|5. | REGULATORY MATTERSPEC Retail Rate MattersOn
April 27, 2005, PEC filed for an increase in the fuel rate charged to its South Carolina
retail customers with the Public Service Commission of South Carolina (SCPSC). PEC
requested the increase for underrecovered fuel costs for the previous 15 months and to
meet future expected fuel costs. On June 23, 2005, the SCPSC approved a settlement
agreement filed jointly by PEC and all other parties to the proceeding. The settlement
agreement levelizes the collection of underrecovered fuel costs over a three-year period
ending June 30, 2008, and allows PEC to charge and recover carrying costs on the monthly
unpaid balance, beginning July 1, 2006, at an interest rate of 6% compounded annually. An
annual increase in PECs rates of $55 million, or 12 percent, was effective July 1,
2005.
|-- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 3, 2005, PEC filed for an increase in the fuel rate charged to its North Carolina
retail customers with the North Carolina Utilities Commission (NCUC). PEC asked the NCUC
to approve a $276 million, or 11 percent, increase in rates. PEC requested the increase
for underrecovered fuel costs for the previous 12 months and to meet future expected fuel
costs.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
July 25, 2005, PEC, the NCUC Public Staff and the Carolina Industrial Group for Fair
Utility Rates jointly filed a proposed settlement agreement with the NCUC to resolve
issues concerning PECs 2005 North Carolina fuel adjustment proceeding. The
settlement was approved by order of the NCUC on September 26, 2005. In the settlement, PEC
will collect all of its fuel cost undercollections that occurred during the test year
ended March 31, 2005 over a one-year period beginning October 1, 2005. Additionally, PEC
agreed to reduce its proposed billing increment, designed to collect future fuel costs, in
order to address customer concerns regarding the magnitude of the proposed increase. The
NCUC approved an average increase of approximately 4.4 percent for residential customers,
5.6 percent for commercial customers and 7.4 percent for industrial customers. In
recognition of the likely undercollection that will result during the year ending
September 30, 2006, PEC is allowed to calculate and collect interest at 6% on the
difference between its collection factor in the original request to the NCUC and the
factor included in the settlement agreement until such amounts have been collected. The
increase was effective October 1, 2005.PEF Retail Rate Matters
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
September and October 2005, PEF filed requests with the Florida Public Service Commission
(FPSC) seeking a total increase of $605 million over 2005 to cover rising fuel and other
costs to generate electricity. Fuel costs of $560 million were the largest component of
the total increase. The fuel cost increase includes $17 million from 2004
under-recoveries, $222 million from 2005 under-recoveries and a $321 million increase for
2006. The proposed new charges for all the cost recovery clauses would take effect January
1, 2006. The FPSC is scheduled to hold hearings on the proposals on November 7 through 9,
2005. If the FPSC approves the increases, residential electric bills would increase by
$11.78 to $109.56 per 1,000 kWhs.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
July 14, 2005, the FPSC issued an order authorizing PEF to recover $232 million over a
two-year period, including interest, of the costs it incurred and previously deferred
related to PEFs restoration of power to customers associated with the four
hurricanes in 2004. The ruling allowed PEF to include a charge of approximately $3.27 on
the average residential monthly customer bill beginning August 1, 2005. The ruling by the
FPSC approved the majority of PEFs requests with two exceptions: the
reclassification of $8 million of previously deferred costs to utility plant and the
reclassification of $17 million of previously deferred costs as normal operation and
maintenance (O&M) expense which was expensed in the second quarter of 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amount included in the original petition requesting recovery of $252 million in November
2004 was an estimate, as actual total costs were not known at that time. On September 12,
2005, PEF filed a true-up to the original amount requested. PEF incurred an additional $19
million in costs in excess of the amount requested in the original petition. The recovery
of this difference is still subject to FPSC approval and will be determined during the
hearings to be held on November 7 through 9, 2005. If the FPSC approves the increase, the
impact will be included in customer bills beginning January 1, 2006.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 1, 2005, the Governor of Florida signed into law a bill that would allow utilities to
petition the FPSC to use securitized bonds to recover storm related costs. PEF is
reviewing whether it will seek FPSC approval to issue securitized debt to recover any
outstanding balance of its 2004 storm costs and to replenish its storm reserve fund, or to
seek replenishment of its storm reserve fund through base rates or a surcharge mechanism.
If PEF seeks recovery through securitization and assuming FPSC approval, PEF expects the
process to take six to nine months to complete.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 29, 2005, PEF submitted minimum filing requirements, based on a 2006 projected test
year, to initiate a base rate proceeding regarding its future base rates. In its filing,
PEF requested a $206 million annual increase in base rates effective January 1, 2006. On
September 7, 2005, the FPSC approved an agreement (Base Rate Settlement) that maintains
PEFs base rates at their current level through late 2007. The new base rates will
take effect the first billing cycle of January 2006 and will remain in effect through the
last billing cycle of December 2009 with PEF having sole option to extend through the last
billing cycle of June 2010.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the Base Rate Settlement, PEF will continue to collect a return on and depreciation of the
Hines 2 generation facility through the fuel clause, as was permitted under the terms of
the existing Stipulation and Settlement Agreement (the Agreement), through late 2007 when
it will be transferred into base rates. This transfer will correspond with the in-service
dates of the Hines 4 generation facility, which will also be recovered through base rates.
PEF will recover the cost of its Hines 3 generating facility through existing base rates
when it goes into service in late 2005, similar to other utility property additions.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Base Rate Settlement authorizes PEF to recover certain costs through clauses, such as the
continued recovery of post-9/11 security costs through the capacity clause and the
carrying costs of coal inventory in transit and coal procurement costs through the fuel
clause.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Base Rate Settlement also provides for revenue sharing between PEF and its customers. In
2006, PEF will refund two-thirds of revenues between the $1.499 billion threshold and the
$1.549 billion cap and 100 percent of revenues above the $1.549 billion cap. Both the
threshold and cap will be adjusted annually for rolling average ten-year retail kWh sales
growth.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Base Rate Settlement authorizes PEF to include an adjustment to increase common equity for
the impact of Standard & Poors (S&Ps) imputed off-balance sheet debt
for future capacity payments to qualifying facilities and other entities under long-term
purchase power agreements. This adjusted capital structure will be used for surveillance
reporting with the FPSC and pass-through clause return calculations. PEF will use an
authorized 11.75% return on equity for cost recovery clauses and Allowance for Funds Used
During Construction (AFUDC). In addition, PEFs adjusted equity ratio will be capped
at 57.83%. If PEFs regulatory return on equity falls below 10%, PEF is authorized to
petition the FPSC for a base rate increase.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
FPSC requires that PEF perform a depreciation study no less than every four years. PEF
filed a depreciation study with the FPSC on April 29, 2005, as part of its base rate
filing, which would increase depreciation expense by $14 million beginning in 2006 if
approved by the FPSC. PEF reduced its estimated removal costs to take into account the
estimates used in the depreciation study. This resulted in a downward revision in the PEF
estimated removal costs, a component of regulatory liabilities, and an equal increase in
accumulated depreciation of approximately $401 million. On September 7, 2005, the FPSC
approved a modification to the study which resulted in a decrease to the filed report of
$40 million. Consequently, the impact of the rate changes in the depreciation study will
decrease annual depreciation expense by $26 million beginning in 2006.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
FPSC requires that PEF update its cost estimate for fossil plant dismantlement every four
years. PEF filed an updated fossil dismantlement study with the FPSC on April 29, 2005, as
part of its base rate filing. The new study called for an increase in the annual accrual
of $10 million beginning in 2006. PEFs retail reserve for fossil plant dismantlement
was approximately $133 million at September 30, 2005. Retail accruals on PEFs
reserves for fossil plant dismantlement were previously suspended through December 2005
under the terms of PEFs existing Agreement. The Base Rate Settlement continued the
suspension of PEFs collection from customers of the expenses to dismantle fossil
plants.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
FPSC requires that PEF update its cost estimate for nuclear decommissioning every five
years. PEF filed a new site-specific estimate of decommissioning costs for the Crystal
River Nuclear Plant Unit No. 3 (CR3) with the FPSC on April 29, 2005 as part of PEFs
base rate filing. PEFs estimate is based on prompt decommissioning. The estimate, in
2005 dollars, is $614 million and is subject to change based on a variety of factors
including, but not limited to, cost escalation, changes in technology applicable to
nuclear decommissioning and changes in federal, state or local regulations. The cost
estimate excludes the portion attributable to other co-owners of CR3. The NRC operating
license held by PEF for CR3 currently expires in December 2016. An application to extend
this license 20 years is expected to be submitted in the first quarter of 2009. As part of
this new estimate and assumed license extension, PEF reduced its ARO liability by
approximately $88 million. Retail accruals on PEFs reserves for nuclear
decommissioning were previously suspended through December 2005 under the terms of the
Agreement and the new Base Rate Settlement continues that suspension.PEF Franchise Matters
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 1, 2005, Winter Park acquired PEFs electric distribution system that serves
Winter Park for approximately $42 million. PEF transferred the distribution system to
Winter Park on June 1, 2005 and recognized a pre-tax gain of approximately $25 million on
the transaction, which is included as an offset to other utility expense on the Statements
of Income. This amount was decreased $1 million in the third quarter of 2005 upon
accumulation of the final capital expenditures incurred since arbitration. PEF also
recorded a regulatory liability of $8 million for stranded cost revenues which will be
amortized to revenues over the next six years in accordance with the provisions of the
transfer agreement with Winter Park.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|6. | EQUITY AND COMPREHENSIVE INCOME
|-- | -------------------------------

A.     Earnings Per Common Share
A reconciliation of our weighted-average number of common shares outstanding for basic and
dilutive earnings per share purposes is as follows:

|                                         | Three Months Ended
   September 30 | Nine Months Ended
   September 30
|---------------------------------------- | ---------------------------------- | ---------------------------------
|(in millions)                            | 2004                               | 2004                             
|Weighted-average common shares - basic   |                                    | 248                              
|Restricted stock awards                  |                                    |                                 
|                                        
|Weighted-average shares - fully dilutive |                                    | 248                              
|                                        

B.     Comprehensive IncomeProgress Energy

|                                                     | Three Months Ended
   September 30 | Nine Months Ended
  September 30
|---------------------------------------------------- | ---------------------------------- | --------------------------------
|(in millions)                                        | 2004                               | 2004                            
|Net income                                           |                                    | $ 450                           
|Other comprehensive income (loss):                   |                                   
|Reclassification adjustments included in net income: |                                   
|Change in cash flow hedges (net of tax expense of    |                                   
|$11, $4, $15 and $8, respectively)                   |                                    | 20                              
|Foreign currency translation adjustments included    |                                   
|in discontinued operations                           |                                    |                                
|Minimum pension liability adjustment included in     |                                   
|discontinued operations (net of tax expense of $-,   |                                   
|$-, $1 and $-, respectively)                         |                                    |                                
|Changes in net unrealized losses on cash             |                                   
|flow hedges (net of tax benefit of $28,              |                                   
|$7, $3 and $15, respectively)                        |                                    | (51                             
|Minimum pension liability adjustment (net of tax     |                                   
|benefit of $45, $-, $45 and $-, respectively)        |                                    | (70                             
|Foreign currency translation adjustment and other    |                                    | 2                               
|                                                    
|Other comprehensive loss                             |                                    | $(99                            
|                                                    
|Comprehensive income                                 |                                    | $ 351                           
|                                                    

PEC

|                                                 | Three Months Ended
   September 30 | Nine Months Ended
  September 30
|------------------------------------------------ | ---------------------------------- | --------------------------------
|(in millions)                                    | 2004                               | 2004                            
|Net income                                       |                                    | $ 184                           
|Changes in net unrealized gains (losses) on cash |                                   
|flow hedges (net of tax expense (benefit) of $-, |                                   
|$(2), $1 and $(1), respectively)                 |                                    |                                
|Minimum pension liability adjustment (net of tax |                                   
|benefit of $35, $-, $35 and $-, respectively)    |                                    | (55                             
|Other                                            |                                    | 2                               
|                                                
|Other comprehensive loss                         |                                    | $(53                            
|                                                
|Comprehensive income                             |                                    | $ 131                           

---

| | PEF
Comprehensive
income and net income for PEF for the three months ended September 30, 2005 and 2004 were
$151 million and $140 million, respectively. Comprehensive income and net income for PEF
for the nine months ended September 30, 2005 and 2004 were $205 million and $274 million,
respectively.C.      Common Stock
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
December 31, 2004, we had 500 million shares of common stock authorized under our charter,
of which 247 million were outstanding. At December 31, 2004, we had approximately 63
million shares of common stock authorized by the Board of Directors that remained unissued
and reserved, primarily to satisfy the requirements of our stock plans. In 2002, the Board
of Directors authorized meeting the requirements of the Progress Energy 401(k) Savings and
Stock Ownership Plan and the Investor Plus Stock Purchase Plan with original issue shares.
For the three and nine months ended September 30, 2005, we issued approximately 0.4
million shares and 4.3 million shares, respectively, under these plans for net proceeds of
approximately $18 million and $187 million, respectively. D.      Stock-Based Compensation
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2004, the FASB issued SFAS No. 123R, which revises SFAS No. 123, Accounting
for Stock-Based Compensation, and supersedes APB Opinion No. 25, Accounting
for Stock Issued to Employees. The key requirement of SFAS No. 123R is that the cost
of share-based awards to employees will be measured based on an awards fair value at
the grant date, with such cost to be amortized over the appropriate service period, net of
estimated forfeitures. Previously, entities could elect to continue accounting for such
awards at their grant date intrinsic value under APB Opinion No. 25, and we made that
election. The intrinsic value method resulted in our recording no compensation expense for
stock options granted to employees. Also, as previously allowed, we recognized the expense
effects of forfeitures as they occurred. SFAS No. 123R also changes prospectively the
presentation of certain stock-based compensation excess income tax benefits in the
statement of cash flows, with such excess tax benefits shown as financing cash inflows
rather than operating cash inflows.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
adopted SFAS No. 123R as of July 1, 2005 using the required modified prospective method.
Under that method, we will record compensation expense under SFAS No. 123R for all awards
granted after July 1, 2005 and will record compensation expense (as previous awards
continue to vest) for the unvested portion of previously granted awards that were
outstanding at July 1, 2005. For awards with graded-vesting features, we will recognize
expense using the grading-vesting method alternative in SFAS No. 123R.Progress Energy
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
adoption of SFAS No. 123R resulted in our recognizing approximately $2 million of pre-tax
expense for stock options during the three months ended September 30, 2005, which would
not have been recognized under the prior accounting treatment. Additionally, we recognized
a cumulative pre-tax benefit from the accounting change of approximately $1 million which
reflects the cumulative impact of estimating forfeitures in the determination of period
expense for other stock-based compensation plans, rather than recording the effect of
forfeitures as they occur. As a result of the adoption of SFAS No. 123R, on a prospective
basis we will not show unearned restricted shares as a negative component of common stock
equity; rather, such amounts will be included in the determination of common stock
presented in the Consolidated Balance Sheets. The adoption of SFAS No. 123R did not have a
material impact on our income, earnings per share or our presentation of cash flows for
the three months and nine months ended September 30, 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
disclosures provided below are representative of annual disclosures required by SFAS No.
123R. These disclosures should be read in conjunction with plan descriptions and other
pertinent information in Note 11 of our annual report on Form 10-K for the year ended
December 31, 2004.Stock Option Agreements
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
2004, we made the decision to cease granting stock options. An immaterial number of stock
options were granted in 2004 and no stock options have been granted in 2005. We issue new
shares to satisfy the exercise of currently outstanding stock options.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A
summary of the status of our stock options as of September 30, 2005, and changes during
the periods then ended, is presented below:
| | -------------------------------------------------------------------------------------------------------------------------------------

---

|                                   | Three Months Ended
September 30, 2005 | Nine Months Ended
September 30, 2005
|---------------------------------- | ------------------------------------- | ------------------------------------
|(option quantities in millions)   
|Options outstanding, beginning     |                                       | 7                                   
|Granted                            |                                       |                                    
|Forfeited                          |                                       |                                    
|Canceled                           |                                       |                                    
|Exercised                          |                                       | (0                                  
|                                  
|Options outstanding, ending        |                                       | 7                                   
|Options exercisable, end of period |                                       | 4                                   
|                                  

| | The
options outstanding at September 30, 2005 had a weighted-average remaining contractual
life of 6.8 years and an aggregate intrinsic value of $8 million. The options exercisable
at September 30, 2005 had a weighted-average remaining contractual life of 6.3 years and
an aggregate intrinsic value of $6 million.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
total intrinsic value of options exercised during the three and nine months ended
September 30, 2005 and the three months ended September 30, 2004 was not significant. The
total intrinsic value of options exercised during the nine months ended September 30, 2004
was $1 million.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Stock
option expense totaling $2 million was recognized in income during the three and nine
months ended September 30, 2005, with a recognized tax benefit of $1 million. No
compensation cost related to stock options was capitalized during those periods. No
compensation cost was recognized for stock options prior to the adoption of FAS 123R,
including the three and nine months ended September 30, 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of September 30, 2005, there was $2 million of total unrecognized compensation cost
related to nonvested stock options; that cost will be recognized over one year.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
received from the exercise of stock options totaled $3 million and $6 million during the
three and nine months ended September 30, 2005, respectively. Cash received from the
exercise of stock options totaled $0.1 million and $10 million during the three and nine
months ended September 30, 2004, respectively. The actual tax benefit for tax deductions
from stock option exercises for the three and nine months ended September 30, 2005 and
2004 was not significant.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
previously indicated, we did not record stock option expense prior to the adoption of SFAS
No. 123R as of July 1, 2005. The following table illustrates the effect on our net income
and earnings per share if the fair value method had been applied to all outstanding and
nonvested awards in each period:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                    | Three Months Ended | Nine Months Ended
         September 30
|--------------------------------------------------- | ------------------ | ---------------------------------------
|(in millions except per share data)                 | 2004              
|Net income, as reported                             |                    | $  303                                 
|Deduct: Total stock option expense determined under |                   
|fair value method for all awards, net of related    |                    |                                        
|tax effects                                         |                    | 3                                      
|Pro forma net income                                |                    | $  300                                 
|                                                   
|Earnings per share                                  |                   
|Basic - as reported                                 |                    | $1                                     
|Basic - pro forma                                   |                    | $1                                     
|Diluted - as reported                               |                    | $1                                     
|Diluted - pro forma                                 |                    | $1                                     
|                                                   

---

| | Other Stock-Based Compensation PlanAll
outstanding awards under our Performance Share Sub-Plan (PSSP) will be settled in cash.
Future awards under the PSSP will be settled in our stock. PSSP liabilities totaling $4
million were paid in the nine months ended September 30, 2005. PSSP liabilities paid
during the three months ended September 30, 2005 were not significant. PSSP liabilities
totaling $1 million and $8 million were paid in the three and nine months ended September
30, 2004, respectively.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Restricted
stock shares are issued pursuant to our Restricted Stock Awards program. A summary of the
status of the nonvested restricted stock shares as of September 30, 2005, and changes
during the periods then ended, is presented below:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                  | Three Months Ended September 30,2005 | Weighted-Average
Grant Date Fair 
     Value | Nine Months Ended
September 30,2005 | Weighted-Average
Grant Date Fair
   Value
|----------------- | ------------------------------------ | -------------------------------------------- | ----------------------------------- | -----------------------------------------
|Beginning balance |                                      | 646,347                                      |                                     | $     43                                 
|Granted           |                                      |                                             |                                     |                                         
|Vested            |                                      | (12,699                                      | )                                   | $     32                                 
|Forfeited         |                                      | (4,500                                       | )                                   | $     44                                 
|                 
|Ending balance    |                                      | 629,148                                      |                                     | $     43                                 
|                 

| | The
weighted-average grant date fair value of restricted stock granted during the nine months
ended September 30, 2004 was $46.95. No restricted stock was granted during the three
months ended September 30, 2004. The total fair value of restricted stock vested during
the three and nine months ended September 30, 2005 was $1 million and $5 million,
respectively. The total fair value of restricted stock vested during the three and nine
months ended September 30, 2004 was $1 million and $14 million, respectively. Cash
expended to purchase shares for the restricted stock program totaled $8 million and $7
million during the nine months ended September 30, 2005 and 2004, respectively. There were
no cash expenditures to purchase shares for the restricted stock program during the three
months ended September 30, 2005 or 2004.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
Consolidated Statements of Income included total recognized expense reversal for other
stock-based compensation plans of $2 million and recognized expense of $2 million for the
three and nine months ended September 30, 2005, respectively, with a recognized tax
expense of $1 million and a tax benefit of $1 million, respectively. The total expense
reversal recognized on our Consolidated Statements of Income for other stock-based
compensation plans was $8 million for the three months ended September 30, 2004, with a
recognized tax expense of $3 million. Recognized compensation expense and the related tax
benefit were not significant for the nine months ended September 30, 2004. No compensation
cost related to other stock-based compensation plans was capitalized.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of September 30, 2005, there was $18 million of total unrecognized compensation cost
related to nonvested other stock-based compensation plan awards; that cost is expected to
be recognized over a weighted-average period of 2.6 years.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PECPEC
participates in the Progress Energy stock option and other stock based compensation plans.
The information below should be read in conjunction with the plan descriptions and other
pertinent information in Note 8 of PECs Form 10-K for the year ended December 31,
2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
adoption of SFAS No. 123R resulted in the recognition of approximately $1 million of
pre-tax expense for stock options for PEC, during the three months ended September 30,
2005, which would not have been recognized under the prior accounting treatment.
Additionally, PEC recognized an immaterial amount of cumulative pre-tax benefit from the
accounting change which reflects the cumulative impact of estimating forfeitures in the
determination of period expense for other stock-based compensation plans, rather than
recording the effect of forfeitures as they occur. The adoption of SFAS No. 123R did not
have a material impact on PECs income or PECs presentation of cash flows for
the three months and nine months ended September 30, 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table illustrates the effect on PECs net income if the fair value method
had been applied to all outstanding and nonvested awards in each period:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                    | Three Months Ended | Nine Months Ended 
    September 30
|--------------------------------------------------- | ------------------ | -----------------------------------
|(in millions except per share data)                 | 2004              
|Net income, as reported                             |                    | $175                               
|Deduct: Total stock option expense determined under |                   
|fair value method for all awards, net of related    |                    |                                    
|tax effects                                         |                    | 2                                  
|                                                   
|Pro forma net income                                |                    | $173                               
|                                                   

| | PEF
PEF participates in the Progress Energy stock option and other stock based compensation plans.
The information below should be read in conjunction with the plan descriptions and other
pertinent information in Note 11 of PEFs Form 10-K for the year ended December 31,
2004.
The
adoption of SFAS No. 123R resulted in the recognition of approximately $1 million of
pre-tax expense for stock options for PEF, during the three months ended September 30,
2005, which would not have been recognized under the prior accounting treatment.
Additionally, PEF recognized an immaterial amount of cumulative pre-tax benefit from the
accounting change which reflects the cumulative impact of estimating forfeitures in the
determination of period expense for other stock-based compensation plans, rather than
recording the effect of forfeitures as they occur. The adoption of SFAS No. 123R did not
have a material impact on PEFs income or PEFs presentation of cash flows for
the three months and nine months ended September 30, 2005.
The
following table illustrates the effect on PEFs net income if the fair value method
had been applied to all outstanding and nonvested awards in each period:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                    |      | Nine Months Ended
         September 30
|--------------------------------------------------- | ---- | ---------------------------------------
|(in millions except per share data)                 | 2004
|Net income, as reported                             |      | $140                                   
|Deduct: Total stock option expense determined under |     
|fair value method for all awards, net of related    |      |                                        
|tax effects                                         |      | 1                                      
|                                                   
|Pro forma net income                                |      | $139                                   
|                                                   

|7. | DEBT AND CREDIT FACILITIES AND FINANCING ACTIVITIESChanges
to Progress Energys, PECs and PEFs debt and credit facilities and
financing activities since December 31, 2004, discussed in Note 13 of our 2004 annual
report on Form 10-K, Note 9 of PECs 2004 annual report on Form 10-K, and Note 12 of
PEFs 2004 annual report on Form 10-K, respectively, are described below.
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
January 2005, Progress Energy used proceeds from the issuance of commercial paper to pay
off $260 million of revolving credit agreement (RCA) loans at the Utilities, which
included $90 million at PEC and $170 million at PEF. PEF subsequently used money pool
borrowings to reduce its outstanding commercial paper balance.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
January 31, 2005, Progress Energy entered into a new $600 million RCA, which was scheduled
to expire on December 30, 2005. This facility was added to provide additional liquidity,
to the extent necessary, during 2005 due in part to the uncertainty of the timing of storm
restoration cost recovery from the hurricanes in Florida during 2004. On February 4, 2005,
$300 million was drawn under the new facility to reduce commercial paper and pay off the
remaining amount of loans outstanding under other RCA facilities, which consisted of $160
million at Progress Energy and, through the money pool, $55 million at PEF. As discussed
below, the maximum size of this RCA was reduced to $300 million on March 22, 2005 and
subsequently terminated on May 16, 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 22, 2005, PEC issued $300 million of First Mortgage Bonds, 5.15% Series due 2015,
and $200 million of First Mortgage Bonds, 5.70% Series due 2035. The net proceeds from the
sale of the bonds were used to pay at maturity $300 million of PECs 7.50% Senior
Notes on April 1, 2005 and reduce the outstanding balance of PECs commercial paper.
Pursuant to the terms of Progress Energys $600 million RCA, commitments were reduced
to $300 million, effective March 22, 2005.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2005, Progress Energys $1.1 billion five-year credit facility was amended to
increase the maximum total debt to total capital ratio from 65% to 68% due to the
potential impacts of a proposed interpretation of SFAS No. 109 regarding accounting rules
for uncertain tax positions (See Note 2).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 28, 2005, PEF entered into a new $450 million five-year RCA with a syndication of
financial institutions. The PEF RCA will be used to provide liquidity support for
PEFs issuances of commercial paper and other short-term obligations. The PEF RCA is
scheduled to expire on March 28, 2010. The new $450 million PEF RCA replaced PEFs
$200 million three-year RCA and $200 million 364-day RCA, which were each terminated
effective March 28, 2005. Fees and interest rates under the new PEF RCA are to be
determined based upon the credit rating of PEFs long-term unsecured senior
non-credit enhanced debt, currently rated as A3 by Moodys Investor Services
(Moodys) and BBB by S&P. The RCA includes a defined maximum total debt to
capital ratio of 65%. The PEF RCA also contains various cross-default and other
acceleration provisions, including a cross-default provision for defaults of indebtedness
in excess of $35 million. The PEF RCA does not include a material adverse change
representation for borrowings or a financial covenant for interest coverage, which had
been provisions in the terminated agreements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 28, 2005, PEC entered into a new $450 million five-year RCA with a syndication of
financial institutions. The PEC RCA will be used to provide liquidity support for
PECs issuances of commercial paper and other short-term obligations. The PEC RCA is
scheduled to expire on June 28, 2010. The new $450 million PEC RCA replaced PECs
$285 million three-year RCA and $165 million 364-day RCA, which were each terminated
effective March 28, 2005. Fees and interest rates under the new PEC RCA are to be
determined based upon the credit rating of PECs long-term unsecured senior
non-credit enhanced debt, currently rated as Baa1 by Moodys and BBB by S&P. The
PEC RCA includes a defined maximum total debt to capital ratio of 65%. The RCA also
contains various cross-default and other acceleration provisions, including a
cross-default provision for defaults of indebtedness in excess of $35 million. The PEC RCA
does not include a material adverse change representation for borrowings, which had been a
provision in the terminated agreements.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2005, Progress Energy used proceeds from the issuance of commercial paper to pay off
$300 million of its $600 million RCA.
| | ---------------------------------------------------------------------------------------------------------------------------------

| | On
May 16, 2005, PEF issued $300 million of First Mortgage Bonds, 4.50% Series due 2010. The
net proceeds from the sale of the bonds were used to reduce the outstanding balance of
commercial paper. Pursuant to the terms of the Progress Energy $600 million RCA,
commitments were completely reduced and the RCA was terminated, effective May 16, 2005.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
July 1, 2005, PEF paid at maturity $45 million of its 6.72% Medium-Term Notes, Series B
with commercial paper proceeds.
| | --------------------------------------------------------------------------------------------------------------------------

| | On
July 28, 2005, PEC filed a shelf registration statement with the SEC to provide an
additional $1.0 billion of capacity in addition to the $400 million remaining on
PECs current shelf registration statement. The shelf registration statement, when
declared effective, will allow PEC to issue various securities, including First Mortgage
Bonds, Senior Notes, Debt Securities and Preferred Stock.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
July 28, 2005, PEF filed a shelf registration statement with the SEC to provide an
additional $1.0 billion of capacity in addition to the $450 million remaining on
PEFs current shelf registration statement. The shelf registration statement, when
declared effective, will allow PEF to issue various securities, including First Mortgage
Bonds, Debt Securities and Preferred Stock.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|8. | CONDENSED CONSOLIDATING STATEMENTS
Presented
below are the condensed consolidating Statements of Income, Balance Sheets and Cash Flows
as required by Rule 3-10 of Regulation S-X. In September 2005, we issued our guarantee of
certain payments of two wholly owned indirect subsidiaries, FPC Capital I (the Trust) and
Florida Progress Funding Corporation (Funding Corp.). Our guarantees are in addition to
the previously issued guarantees of our wholly owned subsidiary, Florida Progress
Corporation (Florida Progress).
|-- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Trust, a finance subsidiary, was established in 1999 for the sole purpose of issuing $300
million of 7.10% Cumulative Quarterly Income Preferred Securities due 2039, Series A
(Preferred Securities) and using the proceeds thereof to purchase from Funding Corp. $300
million of 7.10% Junior Subordinated Deferrable Interest Notes due 2039 (Subordinated
Notes). The Trust has no other operations and its sole assets are the Subordinated Notes
and Notes Guarantee (as discussed below). Funding Corp. is a wholly owned subsidiary of
Florida Progress and was formed for the sole purpose of providing financing to Florida
Progress and its subsidiaries. Funding Corp. does not engage in business activities other
than such financing and has no independent operations. Since 1999, Florida Progress has
fully and unconditionally guaranteed the obligations of Funding Corp. under the
Subordinated Notes (the Notes Guarantee). In addition, Florida Progress guaranteed the
payment of all distributions related to the $300 million Preferred Securities required to
be made by the Trust, but only to the extent that the Trust has funds available for such
distributions (the Preferred Securities Guarantee). The Preferred Securities Guarantee,
considered together with the Notes Guarantee, constitutes a full and unconditional
guarantee by Florida Progress of the Trusts obligations under the Preferred
Securities. The Preferred Securities and Preferred Securities Guarantee are listed on the
New York Stock Exchange.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
have guaranteed the payment of all distributions related to the Trusts Preferred
Securities. As of September 30, 2005, the Trust had outstanding 12 million shares of the
Preferred Securities with a liquidation value of $300 million. Our guarantees are joint
and several, full and unconditional and are in addition to the joint and several, full and
unconditional guarantees previously issued to the Trust and Funding Corp. by Florida
Progress. Our subsidiaries have provisions restricting the payment of dividends to the
Parent in certain limited circumstances and as disclosed in Note 13B of our annual report
on Form 10-K for the year ended December 31, 2004, there were no restrictions on
PECs or PEFs retained earnings.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Trust is a special-purpose entity and in accordance with the provisions of FIN No. 46, we
deconsolidated the Trust on December 31, 2003. The deconsolidation was not material to our
financial statements and resulted in recording an additional equity investment in the
Trust of approximately $9 million, an increase in outstanding debt of approximately $8
million and a gain of approximately $1 million relating to the cumulative effect of a
change in accounting principle. Separate financial statements and other disclosures
concerning the Trust have not been presented because we believe that such information is
not material to investors.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the following tables, the Parent column includes the financial results of the parent
holding company only. The Subsidiary Guarantor column includes the financial results of
Florida Progress. The Other column includes the consolidated financial results of all
other non-guarantor subsidiaries and elimination entries for all intercompany
transactions. All applicable corporate expenses have been allocated appropriately among
the guarantor and non-guarantor subsidiaries.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

Condensed Consolidating Statement of IncomeThree Months Ended September 30, 2005

|Parent                                              | SubsidiaryGuarantor | Other  | Progress
Energy,
  Inc.
|--------------------------------------------------- | ------------------- | ------ | -----------------------
|Operating revenues                                  |                     |        |                        
|Utility                                             |                     | $     |                        
|Diversified business                                |                     |       |                        
|                                                   
|Total operating revenues                            |                     |       |                        
|                                                   
|Operating expenses                                  |                    
|Utility                                             |                    
|Fuel used in electric generation                    |                     |       |                        
|Purchased power                                     |                     |       |                        
|Operation and maintenance                           |                     | 2      |                        
|Depreciation and amortization                       |                     |       |                        
|Taxes other than on income                          |                     |       |                        
|Other                                               |                     |       |                        
|Diversified business                                |                    
|Cost of sales                                       |                     |       |                        
|Other                                               |                     |       |                        
|                                                   
|Total operating expenses                            |                     | 2      |                        
|                                                   
|Equity in earnings of consolidated                  |                    
|subsidiaries                                        |                     | 494    |                        
|Other income (expense), net                         |                     | 15     |                        
|Interest charges, net                               |                     | 70     |                        
|                                                   
|Income (loss) from continuing operations            |                    
|before income tax and minority interest             |                     | 437    |                        
|Income tax benefit                                  |                     | 13     |                        
|Minority interest in subsidiaries' loss, net of tax |                     |       |                        
|                                                   
|Income (loss) from continuing operations            |                     | 450    |                        
|Discontinued operations, net of tax                 |                     |       |                        
|                                                   
|Income (loss) before cumulative effect of           |                    
|change in accounting principle                      |                     | 450    |                        
|Cumulative effect of change in accounting           |                    
|principle, net of tax                               |                     |       |                        
|                                                   
|Net income (loss)                                   |                     | $450   |                        
|                                                   

Condensed Consolidating Statement of IncomeThree Months Ended September 30, 2004

|Parent                                              | SubsidiaryGuarantor | Other   | Progress
Energy,
   Inc.
|--------------------------------------------------- | ------------------- | ------- | ------------------------
|Operating revenues                                  |                     |         |                         
|Utility                                             |                     | $      |                         
|Diversified business                                |                     |        |                         
|                                                   
|Total operating revenues                            |                     |        |                         
|                                                   
|Operating expenses                                  |                    
|Utility                                             |                    
|Fuel used in electric generation                    |                     |        |                         
|Purchased power                                     |                     |        |                         
|Operation and maintenance                           |                     | 2       |                         
|Depreciation and amortization                       |                     |        |                         
|Taxes other than on income                          |                     | (2      | )                       
|Diversified business                                |                    
|Cost of sales                                       |                     |        |                         
|Other                                               |                     |        |                         
|                                                   
|Total operating expenses                            |                     |        |                         
|                                                   
|Equity in earnings of consolidated subsidiaries     |                     | 339     |                         
|Other income (expense), net                         |                     | 33      |                         
|Interest charges, net                               |                     | 73      |                         
|                                                   
|Income (loss) from continuing operations            |                    
|before income tax and minority interest             |                     | 299     |                         
|Income tax (benefit) expense                        |                     | (4      | )                       
|Minority interest in subsidiaries' loss, net of tax |                     |        |                         
|                                                   
|Income (loss) from continuing operations            |                     | 303     |                         
|Discontinued operations, net of tax                 |                     |        |                         
|                                                   
|Net income (loss)                                   |                     | $ 303   |                         
|                                                   

Condensed Consolidating Statement of IncomeNine Months Ended September 30, 2005

|Parent                                              | SubsidiaryGuarantor | Other   | Progress
Energy,
   Inc.
|--------------------------------------------------- | ------------------- | ------- | ------------------------
|Operating revenues                                  |                     |         |                         
|Utility                                             |                     | $      |                         
|Diversified business                                |                     |        |                         
|                                                   
|Total operating revenues                            |                     |        |                         
|                                                   
|Operating expenses                                  |                    
|Utility                                             |                    
|Fuel used in electric generation                    |                     |        |                         
|Purchased power                                     |                     |        |                         
|Operation and maintenance                           |                     | 11      |                         
|Depreciation and amortization                       |                     |        |                         
|Taxes other than on income                          |                     | 4       |                         
|Other                                               |                     |        |                         
|Diversified business                                |                    
|Cost of sales                                       |                     |        |                         
|Other                                               |                     |        |                         
|                                                   
|Total operating expenses                            |                     | 15      |                         
|                                                   
|Equity in earnings of consolidated subsidiaries     |                     | 682     |                         
|Other income (expense), net                         |                     | 49      |                         
|Interest charges, net                               |                     | 225     |                         
|                                                   
|Income (loss) from continuing operations            |                    
|before income tax and minority interest             |                     | 491     |                         
|Income tax (benefit) expense                        |                     | (51     | )                       
|Minority interest in subsidiaries' loss, net of tax |                     |        |                         
|                                                   
|Income (loss) from continuing operations            |                     | 542     |                         
|Discontinued operations, net of tax                 |                     |        |                         
|                                                   
|Income (loss) before cumulative effect of           |                    
|change in accounting principle                      |                     | 542     |                         
|Cumulative effect of change in accounting           |                    
|principle, net of tax                               |                     |        |                         
|                                                   
|Net income (loss)                                   |                     | $ 542   |                         
|                                                   

Condensed Consolidating Statement of IncomeNine Months Ended September 30, 2004

|Parent                                              | SubsidiaryGuarantor | Other   | Progress
Energy,
 Inc.
|--------------------------------------------------- | ------------------- | ------- | ----------------------
|Operating revenues                                  |                     |         |                       
|Utility                                             |                     | $      |                       
|Diversified business                                |                     |        |                       
|                                                   
|Total operating revenues                            |                     |        |                       
|                                                   
|Operating expenses                                  |                    
|Utility                                             |                    
|Fuel used in electric generation                    |                     |        |                       
|Purchased power                                     |                     |        |                       
|Operation and maintenance                           |                     | 8       |                       
|Depreciation and amortization                       |                     |        |                       
|Taxes other than on income                          |                     | (2      | )                     
|Diversified business                                |                    
|Cost of sales                                       |                     |        |                       
|Other                                               |                     |        |                       
|                                                   
|Total operating expenses                            |                     | 6       |                       
|                                                   
|Equity in earnings of consolidated subsidiaries     |                     | 710     |                       
|Other income (expense), net                         |                     | 44      |                       
|Interest charges, net                               |                     | 221     |                       
|                                                   
|Income (loss) from continuing operations            |                    
|before income tax and minority interest             |                     | 527     |                       
|Income tax (benefit) expense                        |                     | (38     | )                     
|Minority interest in subsidiaries' loss, net of tax |                     |        |                       
|                                                   
|Income (loss) from continuing operations            |                     | 565     |                       
|Discontinued operations, net of tax                 |                     |        |                       
|                                                   
|Net income (loss)                                   |                     | $ 565   |                       
|                                                   

Condensed Consolidating Balance SheetSeptember 30, 2005

|Parent                                       | Subsidiary
 Guarantor | Other       | Progress
Energy,
  Inc.
|-------------------------------------------- | --------------------- | ----------- | -----------------------
|Utility plant, net                           |                       | $          |                        
|Current assets                               |                      
|Cash and cash equivalents                    |                       | 115         |                        
|Receivables, net                             |                       |            |                        
|Deferred fuel cost                           |                       |            |                        
|Other current assets                         |                       | 939         |                        
|                                            
|Total current assets                         |                       | 1,054       |                        
|                                            
|Deferred debits and other assets             |                      
|Investment in consolidated subsidiaries      |                       | 11,391      |                        
|Miscellaneous other property and investments |                       |            |                        
|Goodwill                                     |                       |            |                        
|Other assets and deferred debits             |                       | 13          |                        
|                                            
|Total deferred debits and other assets       |                       | 11,404      |                        
|                                            
|Total assets                                 |                       | $12,458     |                        
|                                            
|Capitalization                               |                      
|Common stock equity                          |                       | $  7,903    |                        
|Preferred stock of subsidiaries-not          |                      
|subject to mandatory redemption              |                       |            |                        
|Minority interest                            |                       |            |                        
|Long-term debt, affiliate                    |                       |            |                        
|Long-term debt, net                          |                       | 3,477       |                        
|                                            
|Total capitalization                         |                       | 11,380      |                        
|                                            
|Current liabilities                          |                      
|Current portion of long-term debt            |                       | 803         |                        
|Short-term obligations                       |                       | 38          |                        
|Other current liabilities                    |                       | 215         |                        
|                                            
|Total current liabilities                    |                       | 1,056       |                        
|                                            
|Deferred credits and other liabilities       |                      
|Noncurrent income tax liabilities            |                       |            |                        
|Regulatory liabilities                       |                       |            |                        
|Accrued pension and other benefits           |                       | 12          |                        
|Other liabilities and deferred credits       |                       | 10          |                        
|                                            
|Total deferred credits and other liabilities |                       | 22          |                        
|                                            
|Total capitalization and liabilities         |                       | $12,458     |                        
|                                            

---

Condensed Consolidating Balance SheetDecember 31, 2004

|Parent                                       | SubsidiaryGuarantor | Other     | Progress
Energy,
  Inc.
|-------------------------------------------- | ------------------- | --------- | -----------------------
|Utility plant, net                           |                     | $        |                        
|Current assets                               |                    
|Cash and cash equivalents                    |                     | 5         |                        
|Receivables, net                             |                     |          |                        
|Deferred fuel cost                           |                     |          |                        
|Assets of discontinued operations            |                     |          |                        
|Other current assets                         |                     | 1,438     |                        
|                                            
|Total current assets                         |                     | 1,443     |                        
|                                            
|Deferred debits and other assets             |                    
|Investment in consolidated subsidiaries      |                     | 11,061    |                        
|Miscellaneous other property and investments |                     |          |                        
|Goodwill                                     |                     |          |                        
|Other assets and deferred debits             |                     | 16        |                        
|                                            
|Total deferred debits and other assets       |                     | 11,077    |                        
|                                            
|Total assets                                 |                     | $12,520   |                        
|                                            
|Capitalization                               |                    
|Common stock equity                          |                     | $  7,633  |                        
|Preferred stock of subsidiaries-not          |                    
|subject to mandatory redemption              |                     |          |                        
|Minority interest                            |                     |          |                        
|Long-term debt, affiliate                    |                     |          |                        
|Long-term debt, net                          |                     | 4,449     |                        
|                                            
|Total capitalization                         |                     | 12,082    |                        
|                                            
|Current liabilities                          |                    
|Current portion of long-term debt            |                     |          |                        
|Short-term obligations                       |                     | 170       |                        
|Liabilities of discontinued operations       |                     |          |                        
|Other current liabilities                    |                     | 245       |                        
|                                            
|Total current liabilities                    |                     | 415       |                        
|                                            
|Deferred credits and other liabilities       |                    
|Noncurrent income tax liabilities            |                     |          |                        
|Regulatory liabilities                       |                     |          |                        
|Accrued pension and other benefits           |                     | 10        |                        
|Other liabilities and deferred credits       |                     | 13        |                        
|                                            
|Total deferred credits and other liabilities |                     | 23        |                        
|                                            
|Total capitalization and liabilities         |                     | $12,520   |                        
|                                            

---

Condensed Consolidating Statement of Cash FlowsNine Months Ended September 30, 2005

|Parent                                              | Subsidiary
 Guarantor | Other    | Progress
Energy,
   Inc.
|--------------------------------------------------- | --------------------- | -------- | ------------------------
|Net cash provided by operating activities           |                       | $    168 |                         
|                                                   
|Investing activities                                |                      
|Gross utility property additions                    |                       |         |                         
|Diversified business property additions             |                       |         |                         
|Nuclear fuel additions                              |                       |         |                         
|Proceeds from sales of subsidiaries and             |                      
|other investment, net of cash divested              |                       |         |                         
|Purchases of short-term investments                 |                       | (1,705   | )                       
|Proceeds from sales of short-term investments       |                       | 1,705    |                         
|Changes in advances to affiliates                   |                       | 496      |                         
|Other                                               |                       | (11      | )                       
|                                                   
|Net cash provided by (used in) investing activities |                       | 485      |                         
|                                                   
|Financing activities                                |                      
|Issuance of common stock                            |                       | 193      |                         
|Issuance of long-term debt                          |                       |         |                         
|Net decrease in short-term indebtedness             |                       | (132     | )                       
|Retirement of long-term debt                        |                       | (160     | )                       
|Dividends paid on common stock                      |                       | (435     | )                       
|Changes in advances from affiliates                 |                       |         |                         
|Other                                               |                       | (9       | )                       
|                                                   
|Net cash (used in) provided by financing activities |                       | (543     | )                       
|Cash used by discontinued operations                |                      
|Operating activities                                |                       |         |                         
|Investing activities                                |                       |         |                         
|Financing activities                                |                       |         |                         
|Net increase in cash and cash equivalents           |                       | 110      |                         
|Cash and cash equivalents at beginning of period    |                       | 5        |                         
|                                                   
|Cash and cash equivalents at end of period          |                       | $    115 |                         
|                                                   

Condensed Consolidating Statement of Cash FlowsNine Months Ended September 30, 2004

|Parent                                              | Subsidiary
 Guarantor | Other   | Progress
Energy,
   Inc.
|--------------------------------------------------- | --------------------- | ------- | ------------------------
|Net cash provided by operating activities           |                       | $ 305   |                         
|                                                   
|Investing activities                                |                      
|Gross utility property additions                    |                       |        |                         
|Diversified business property additions             |                       |        |                         
|Nuclear fuel additions                              |                       |        |                         
|Proceeds from sales of subsidiaries and             |                      
|other investment, net of cash divested              |                       |        |                         
|Purchases of short-term investments                 |                       |        |                         
|Proceeds from sales of short-term investments       |                       |        |                         
|Changes in advances to affiliates                   |                       | 382     |                         
|Other                                               |                       | (15     | )                       
|                                                   
|Net cash provided by (used in) investing activities |                       | 367     |                         
|                                                   
|Financing activities                                |                      
|Issuance of common stock                            |                       | 59      |                         
|Issuance of long-term debt                          |                       |        |                         
|Net increase in short-term indebtedness             |                       | 199     |                         
|Retirement of long-term debt                        |                       | (500    | )                       
|Dividends paid on common stock                      |                       | (418    | )                       
|Dividends paid to parent                            |                       |        |                         
|Changes in advances from affiliates                 |                       |        |                         
|Other                                               |                       | (8      | )                       
|                                                   
|Net cash (used in) provided by financing activities |                       | (668    | )                       
|                                                   
|Cash provided (used) by discontinued operations     |                      
|Operating activities                                |                       |        |                         
|Investing activities                                |                       |        |                         
|Financing activities                                |                       |        |                         
|Net increase in cash and cash equivalents           |                       | 4       |                         
|Cash and cash equivalents at beginning of period    |                       |        |                         
|                                                   
|Cash and cash equivalents at end of period          |                       | $     4 |                         
|                                                   

---

|9. | BENEFIT PLANS
We
have a noncontributory defined benefit retirement plan for substantially all full-time
employees that provides pension benefits. We also have supplementary defined benefit
pension plans that provide benefits to higher-level employees. In addition to pension
benefits, we provide contributory other postretirement benefits (OPEB), including certain
health care and life insurance benefits, for retired employees who meet specified
criteria. The components of the net periodic benefit cost for the respective Progress
Registrants for the three and nine months ended September 30 are:
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Progress Energy

|                                             | Pension Benefits | Other Postretirement
      Benefits
|-------------------------------------------- | ---------------- | -----------------------------------
|Three Months Ended September 30(in millions) | 2004             | 2004                               
|Service cost                                 |                  | $   5                              
|Interest cost                                |                  | 31                                 
|Expected return on plan assets               |                  | (34                                
|Amortization of actuarial loss               |                  | 14                                 
|Other amortization, net                      |                  |                                   
|                                            
|Net periodic cost                            |                  | $ 16                               
|Additional cost / (benefit) recognition (a)  |                  | (3                                 
|                                            
|Net periodic cost recognized                 |                  | $ 13                               

|                                            | Pension Benefits | Other Postretirement
      Benefits
|------------------------------------------- | ---------------- | -----------------------------------
|Nine Months Ended September 30(in millions) | 2004             | 2004                               
|Service cost                                |                  | $   35                             
|Interest cost                               |                  | 88                                 
|Expected return on plan assets              |                  | (107                               
|Amortization of actuarial loss              |                  | 26                                 
|Other amortization, net                     |                  | 1                                  
|                                           
|Net periodic cost                           |                  | $   43                             
|Additional cost / (benefit) recognition (a) |                  | (11                                
|                                           
|Net periodic cost recognized                |                  | $   32                             

| | (a)       
                    Relates to the acquisition of Florida Progress. See Note 17B of Progress
          Energys annual report on Form 10-K for year ended December 31, 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Additionally,
in the second quarter of 2005, we recorded costs for special termination benefits related
to the voluntary enhanced retirement program (see Note 11) of approximately $122 million
for pension benefits and $19 million for other postretirement benefits. In the third
quarter of 2005, we recorded an additional $1 million in special termination charges for
pension benefits.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Due
to the effects of the voluntary enhanced retirement program and related remeasurement of
pension assets and liabilities, in the third quarter of 2005, we recorded an additional
minimum pension liability adjustment of $259 million. This adjustment resulted in a $143
million charge to a regulatory asset pursuant to a FPSC order and a pre-tax charge of $116
million to accumulated other comprehensive loss, a component of common stock equity. At
September 30, 2005, pension and OPEB liabilities are included in other liabilities and
deferred credits in the Consolidated Balance Sheets, and there is no prepaid pension cost
recognized.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

PEC

|                                             |      | Pension Benefits | Other Postretirement
      Benefits
|-------------------------------------------- | ---- | ---------------- | -----------------------------------
|Three Months Ended September 30(in millions) | 2004 | 2004            
|Service cost                                 |      | $   3            |                                    
|Interest cost                                |      | 13               |                                    
|Expected return on plan assets               |      | (14              | )                                  
|Amortization of actuarial loss               |      | 5                |                                    
|Other amortization, net                      |      |                 |                                    
|                                            
|Net periodic cost                            |      | $   7            |                                    
|                                            

|                                            |      | Pension Benefits | Other Postretirement
      Benefits
|------------------------------------------- | ---- | ---------------- | -----------------------------------
|Nine Months Ended September 30(in millions) | 2004 | 2004            
|Service cost                                |      | $ 17             |                                    
|Interest cost                               |      | 40               |                                    
|Expected return on plan assets              |      | (46              | )                                  
|Amortization of actuarial loss              |      | 7                |                                    
|Other amortization, net                     |      | 1                |                                    
|                                           
|Net periodic cost                           |      | $ 19             |                                    
|                                           

| | Additionally,
in the second quarter of 2005, PEC recorded costs for special termination benefits related
to the voluntary enhanced retirement program (see Note 11) of approximately $21 million
for pension benefits and $8 million for other postretirement benefits. These charges
resulted in a $29 million increase in pension and OPEB liabilities, which are included in
other liabilities and deferred credits on the Consolidated Balance Sheets.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Due
to the effects of the voluntary enhanced retirement program and related remeasurement of
pension assets and liabilities, in the third quarter of 2005, PEC recorded an additional
minimum pension liability adjustment of $89 million. This adjustment resulted in a
corresponding pre-tax charge to accumulated other comprehensive loss, a component of
common stock equity.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

PEF

|                                             |      | Pension Benefits | Other Postretirement
      Benefits
|-------------------------------------------- | ---- | ---------------- | -----------------------------------
|Three Months Ended September 30(in millions) | 2004 | 2004            
|Service cost                                 |      | $   1            |                                    
|Interest cost                                |      | 13               |                                    
|Expected return on plan assets               |      | (17              | )                                  
|Amortization of actuarial loss               |      | 4                |                                    
|Other amortization, net                      |      |                 |                                    
|                                            
|Net periodic cost                            |      | $   1            |                                    
|                                            

---

|                                            |      | Pension Benefits | Other Postretirement
      Benefits
|------------------------------------------- | ---- | ---------------- | -----------------------------------
|Nine Months Ended September 30(in millions) | 2004 | 2004            
|Service cost                                |      | $ 12             |                                    
|Interest cost                               |      | 36               |                                    
|Expected return on plan assets              |      | (53              | )                                  
|Amortization of actuarial loss              |      | 6                |                                    
|Other amortization, net                     |      | (1               | )                                  
|                                           
|Net periodic cost                           |      | $               |                                    
|                                           

| | Additionally,
in the second quarter of 2005, PEF recorded costs for special termination benefits related
to the voluntary enhanced retirement program (see Note 11) of approximately $83 million
for pension benefits and $7 million for other postretirement benefits. In the third
quarter of 2005, PEF recorded an additional $1 million in special termination charges for
pension benefits.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Due
to the effects of the voluntary enhanced retirement program and related remeasurement of
pension assets and liabilities, in the third quarter of 2005, PEF recorded an additional
minimum pension liability adjustment of $26 million. This adjustment resulted in $25
million charge to a regulatory asset pursuant to a FPSC order and a $1 million charge to
intangible assets, included in other assets and deferred debits. At September 30, 2005,
PEF recognized prepaid pension costs in the Balance Sheets related to the nonbargaining
plan; pension and OPEB liabilities are included in other liabilities and deferred credits.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|10. | RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONSWe
are exposed to various risks related to changes in market conditions. We have a risk
management committee that includes senior executives from various business groups. The
risk management committee is responsible for administering risk management policies and
monitoring compliance with those policies by all subsidiaries. Under our risk policy, we
may use a variety of instruments, including swaps, options and forward contracts, to
manage exposure to fluctuations in commodity prices and interest rates. Such instruments
contain credit risk if the counterparty fails to perform under the contract. We minimize
such risk by performing credit reviews using, among other things, publicly available
credit ratings of such counterparties. Potential nonperformance by counterparties is not
expected to have a material effect on our financial position or results of operations. See
Note 18 to our annual report on Form 10-K, Note 13 to PECs annual report on Form
10-K and Note 16 to PEFs annual report on Form 10-K, respectively, for the year
ended December 31, 2004. A.     Commodity DerivativesGeneral
|--- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Most
of our commodity contracts are not derivatives pursuant to SFAS No. 133, Accounting
for Derivative and Hedging Activities (SFAS No. 133) or qualify as normal purchases
or sales pursuant to SFAS No. 133. Therefore, such contracts are not recorded at fair
value.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2003, PEC recorded a $38 million pre-tax ($23 million after-tax) fair value loss
transition adjustment pursuant to the provisions of DIG Issue C20, Scope Exceptions:
Interpretation of the Meaning of Not Clearly and Closely Related in Paragraph 10(b)
regarding Contracts with a Price Adjustment Feature. The related liability is being
amortized to earnings over the term of the related contract (See Note 13). As of September
30, 2005 and December 31, 2004, the remaining liability was $20 million and $26 million,
respectively.Economic Derivatives
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Derivative
products, primarily electricity and natural gas contracts, may be entered into from time
to time for economic hedging purposes. While management believes the economic hedges
mitigate exposures to fluctuations in commodity prices, these instruments are not
designated as hedges for accounting purposes and are monitored consistent with trading
positions. We manage open positions with strict policies that limit our exposure to market
risk and require daily reporting to management of potential financial exposures. We
recorded a pre-tax loss of $7 million and a pre-tax gain of $13 million on such contracts
for the three months ended September 30, 2005 and 2004, respectively. We recorded pre-tax
losses of $5 and $1 million on such contracts for the nine months ended September 30, 2005
and 2004, respectively. Gains and losses from such contracts at the Utilities were not
material to results of operations during the three and nine months ended September 30,
2005. PEC did not have material outstanding positions in such contracts as of September
30, 2005 and December 31, 2004. We and PEF did not have material outstanding positions in
such contracts as of September 30, 2005 and December 31, 2004, other than those receiving
regulatory accounting treatment at PEF, as discussed below.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEF
has derivative instruments related to its exposure to price fluctuations on fuel oil and
natural gas purchases. These instruments receive regulatory accounting treatment.
Unrealized gains and losses are recorded in regulatory liabilities and regulatory assets,
respectively, until the contracts are settled. Once settled, any realized gains or losses
are passed through the fuel clause. As of September 30, 2005, the fair values of these
instruments were a $105 million short-term derivative asset position included in other
current assets, a $45 million long-term derivative asset position included in other assets
and deferred debits and a $2 million long-term derivative liability position included in
other liabilities and deferred credits. As of December 31, 2004, the fair values of these
instruments were a $2 million long-term derivative asset position included in other assets
and deferred debits and a $5 million short-term derivative liability position included in
other current liabilities.Cash Flow Hedges
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
subsidiaries designate a portion of commodity derivative instruments as cash flow hedges
under SFAS No. 133. The objective for holding these instruments is to hedge exposure to
market risk associated with fluctuations in the price of natural gas and power for our
forecasted purchases and sales. Realized gains and losses are recorded net in operating
revenues or operating expenses, as appropriate. The ineffective portion of commodity cash
flow hedges for the three and nine months ending September 30, 2005 and 2004, was not
material to our results of operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair values of our commodity cash flow hedges as of September 30, 2005 and December 31,
2004, were as follows:
| | ------------------------------------------------------------------------------------------------------------------

|                          | September 30, 2005
|------------------------- | ------------------
|(in millions)            
|Fair value of assets      |                   
|                         
|Fair value of liabilities |                   
|                         
|Fair value, net           |                   

| | The following  table presents  selected  information  related to our commodity cash flow hedges as of
                  September 30, 2005:
| | -------------------------------------------------------------------------------------------------------------------------------------------

|                                     | Maximum Term (a) | Accumulated Other 
    Comprehensive Income/(Loss), net of tax | Portion Expected to be
   Reclassified to
 Earnings during the
  Next 12 Months(b)
|------------------------------------ | ---------------- | -------------------------------------------------------------- | ----------------------------------------------------------------------------------
|(term in years/ millions of dollars)
|Commodity cash flow                  |                  |                                                                |                                                                                   
|hedges                               |                  | 10                                                             |                                                                                   

| |             |                                                                                                                                                                                                                                                                                                                                                                                                         
| | ----------- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a)
   
(b) | Hedges  in fair  value  liability  positions  primarily  have a  maximum  term of less  than two
years and  hedges in fair value asset positions primarily have a maximum term of 10 years.
Due  to  the  volatility  of  the   commodities   markets,   the  value  in  accumulated   other
comprehensive  income/(loss)  (OCI) is  subject  to  change  prior to its  reclassification  into
earnings.

| | As
of September 30, 2005, PEC had an immaterial amount of open commodity cash flow hedges and
an immaterial amount recorded in OCI related to commodity cash flow hedges. As of December
31, 2004, the Utilities had no open commodity cash flow hedges or amounts recorded in OCI
related to commodity cash flow hedges.B.            Interest Rate Derivatives - Fair Value or Cash Flow Hedges
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
use cash flow hedging strategies to reduce exposure to changes in cash flow due to
fluctuating interest rates. We use fair value hedging strategies to reduce exposure to
changes in fair value due to interest rate changes. The notional amounts of interest rate
derivatives are not exchanged and do not represent exposure to credit loss. In the event
of default by the counterparty, the risk in these transactions is the cost of replacing
the agreements at current market rates.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair values of interest rate hedges as of September 30, 2005 and December 31, 2004, were
as follows:
| | --------------------------------------------------------------------------------------------------------

|                                | September 30, 2005
|------------------------------- | ------------------
|(in millions)                  
|Interest rate cash flow hedges  |                   
|                               
|Interest rate fair value hedges |                   
|                               

| | Cash Flow Hedges Gains
and losses from cash flow hedges are recorded in OCI and amounts reclassified to earnings
are included in net interest charges as the hedged transactions occur. Amounts in OCI
related to terminated hedges are reclassified to earnings as the interest expense is
recorded. The ineffective portion of interest rate cash flow hedges for the three and nine
months ending September 30, 2005 and 2004, was not material to results of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
following table presents selected information related to interest rate cash flow hedges
included in OCI as of September 30, 2005:
| | -------------------------------------------------------------------------------------------------------------------------------------

|                                     | Maximum Term | Accumulated Other 
    Comprehensive Income/(Loss), net of tax(a) | Portion Expected to be
   Reclassified to
 Earnings during the
  Next 12 Months(b)
|------------------------------------ | ------------ | ----------------------------------------------------------------- | ----------------------------------------------------------------------------------
|(term in years/ millions of dollars)
|Interest rate cash                   |              |                                                                   |                                                                                   
|flow hedges                          |              | 1                                                                 |                                                                                   

| |         |                                                                                                                                                                                                          
| | ------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
| | (a)
(b) | Includes amounts related to terminated hedges.
Actual  amounts  that  will be  reclassified  to  earnings  may vary from the  expected  amounts
presented above as a result of changes in interest rates.

| | As
of September 30, 2005 and December 31, 2004, we had $300 million notional and $331 million
notional, respectively, of interest rate cash flow hedges. The Utilities had no open
interest rate cash flow hedges at September 30, 2005. As of December 31, 2004, PEC had
$131 million notional of open interest rate cash flow hedges and PEF had no open interest
rate cash flow hedges.Fair Value Hedges
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
interest rate fair value hedges, the change in the fair value of the hedging derivative is
recorded in net interest charges and is offset by the change in the fair value of the
hedged item. As of September 30, 2005 and December 31, 2004, we had $150 million notional
of interest rate fair value hedges. As of September 30, 2005 and December 31, 2004, the
Utilities had no open interest rate fair value hedges.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

|11. | SEVERANCE COSTSOn
February 28, 2005, as part of a previously announced cost management initiative, we
approved a workforce restructuring which resulted in a reduction of approximately 450
positions. The cost management initiative is designed to permanently reduce by $75 million
to $100 million our projected growth in annual O&M expenses by the end of 2007. In
addition to the workforce restructuring, the cost management initiative included a
voluntary enhanced retirement program. In connection with this initiative, we incurred
approximately $177 million of pre-tax charges for severance and postretirement benefits
during the nine months ended September 30, 2005, as described below.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
cost management initiative charges are subject to revision in future quarters based on
completion of the workforce restructuring and the potential additional impacts that the
early retirements and outplacements may have on our postretirement plans. Such revisions
may be significant and may adversely impact our results of operations in future periods.
In addition, we expect to incur certain incremental costs for recruiting and staff
augmentation activities that cannot be quantified at this time.Progress Energy
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
recorded $31 million of severance expense during the first quarter of 2005 for the
workforce restructuring and implementation of an automated meter reading initiative at PEF
based on the approximate number of positions to be eliminated. During the second quarter
of 2005, 1,447 employees eligible for participation in the voluntary enhanced retirement
program elected to participate. Consequently, in the second quarter of 2005, we decreased
our estimated severance costs by $13 million due to the impact of the employees electing
participation in the voluntary enhanced retirement program. The severance expenses are
primarily included in O&M expense on the Consolidated Statements of Income.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
accrued severance expense will be paid over time. The activity in the severance liability
is as follows:
| | ------------------------------------------------------------------------------------------------------------

|                                
|--------------------------------
|Balance as of January 1, 2005   
|Severance costs accrued         
|Adjustments                     
|Payments                        
|                                
|Balance as of September 30, 2005
|                                

| | During
2005, we recorded a $141 million charge in the second quarter and a $1 million charge in
the third quarter related to postretirement benefits that will be paid over time to
eligible employees who elected to participate in the voluntary enhanced retirement program
(see Note 9). In addition, we recorded a $17 million charge for early retirement
incentives to be paid over time to certain employees.PEC
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with the cost management initiative, PEC incurred approximately $60 million of
pre-tax charges for severance and postretirement benefits during the nine months ended
September 30, 2005, as described below.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
recorded $14 million of severance expense during the first quarter of 2005 for the
workforce restructuring based on the approximate number of positions to be eliminated.
This amount included approximately $4 million of severance costs allocated from Progress
Energy Service Company (PESC). During the second quarter of 2005, 553 PEC employees
eligible for participation in the voluntary enhanced retirement program elected to
participate. Consequently, in the second quarter of 2005, PEC decreased its estimated
severance costs by $6 million due to the impact of the employees electing participation in
the voluntary enhanced retirement program. This amount included approximately $2 million
of decreased severance costs allocated from PESC. The severance expenses are primarily
included in O&M expense on the Consolidated Statements of Income.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

| | The
accrued severance expense will be paid over time. The activity in the severance liability
is as follows:
| | ------------------------------------------------------------------------------------------------------------

|                                
|--------------------------------
|Balance as of January 1, 2005   
|Severance costs accrued         
|Adjustments                     
|Payments                        
|                                
|Balance as of September 30, 2005
|                                

| | PEC
recorded a $29 million charge in the second quarter of 2005 related to postretirement
benefits that will be paid over time to eligible employees who elected to participate in
the voluntary enhanced retirement program (see Note 9). PEC also recorded a $13 million
charge for early retirement incentives which will be paid over time to certain employees.
In addition, PEC recorded approximately $10 million of postretirement benefits and early
retirement incentives allocated from PESC during the nine months ended September 30, 2005.PEF
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with the cost management initiative, PEF incurred approximately $108 million of
pre-tax charges for severance and postretirement benefits during the nine months ended
September 30, 2005, as described below.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEF
recorded $14 million of severance expense during the first quarter of 2005 for the
workforce restructuring and implementation of an automated meter reading initiative at PEF
based on the approximate number of positions to be eliminated. This amount included
approximately $3 million of severance costs allocated from PESC. During the second quarter
of 2005, 680 of PEFs employees eligible for participation in the voluntary enhanced
retirement program elected to participate. Consequently, in the second quarter of 2005,
PEF decreased its estimated severance costs by $5 million due to the impact of the
employees electing participation in the voluntary enhanced retirement program. This amount
included approximately $1 million of decreased severance costs allocated from PESC. The
severance expenses are primarily included in O&M expense on the Statements of Income.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
accrued severance expense will be paid over time. The activity in the severance liability
is as follows:
| | ------------------------------------------------------------------------------------------------------------

|                                
|--------------------------------
|Balance as of January 1, 2005   
|Severance costs accrued         
|Adjustments                     
|Payments                        
|                                
|Balance as of September 30, 2005
|                                

| | During
2005, PEF recorded a $90 million charge in the second quarter and a $1 million charge in
the third quarter related to postretirement benefits that will be paid over time to
eligible employees who elected to participate in the voluntary enhanced retirement program
(see Note 9). In addition, PEF recorded approximately $8 million of charges for
postretirement benefits and early retirement incentives allocated from PESC during the
nine months ended September 30, 2005.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|12. | FINANCIAL INFORMATION BY BUSINESS SEGMENTOur
reportable segments are: PEC Electric, PEF, CCO, Fuels and Synthetic Fuels.PEC
Electric and PEF are primarily engaged in the generation, transmission, distribution and
sale of electric energy in portions of (i) North Carolina and South Carolina and (ii)
Florida, respectively. These electric operations are subject to the rules and regulations
of the Federal Energy Regulatory Commission (FERC), the NCUC, the SCPSC, the FPSC and the
NRC. These electric operations also distribute and sell electricity to other utilities,
primarily on the east coast of the United States.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | CCO
is primarily engaged in nonregulated electric generation operations and marketing
activities in Georgia, North Carolina and Florida.
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | Fuels
is engaged in natural gas drilling and production in Texas and Louisiana, coal mining,
coal terminal services and fuel transportation and delivery in Kentucky, West Virginia and
Virginia. This segment also has an operating fee agreement with our Synthetic Fuel
operations for the procuring and processing of coal and the transloading and marketing of
synthetic fuel.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Synthetic
Fuel operations include the production and sale of coal-based solid synthetic fuel (as
defined under the Code) and the operation of synthetic fuel facilities for outside parties
in West Virginia, Virginia and Kentucky. See Note 15 for more information.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition to the reportable operating segments, the Corporate and Other segment includes
the operations of the Parent and PESC as well as other nonregulated business areas. These
nonregulated business areas include telecommunications and energy service operations and
other nonregulated subsidiaries that do not separately meet the disclosure requirements of
SFAS No. 131, Disclosures about Segments of an Enterprise and Related
Information (SFAS No. 131). The profit or loss of the identified segments plus the
profit or loss of Corporate and Other represents our total income from continuing
operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Prior
to 2005, Rail Services was reported as a separate segment. In connection with the
divestiture of Progress Rail (see Note 3), the operations of Rail Services were
reclassified to discontinued operations in the first quarter of 2005 and therefore are not
included in the results from continuing operations during the periods reported. In
addition, Synthetic Fuel activities were reported in the Fuels segment prior to 2005 and
now are considered a separate reportable segment. These reportable segment changes reflect
the current reporting structure. For comparative purposes, the prior year results have
been restated to conform to the current presentation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                   | Revenues |        |  |      
|-------------------------------------------------- | -------- | ------ |  | -----
|(in millions)
Three Months EndedSeptember 30, 2005
|PEC Electric                                       |          | $1,185 |  | $   
|PEF                                                |          | 1,227  |  |     
|Fuels                                              |          | 149    |  | 393  
|CCO                                                |          | 267    |  |     
|Synthetic Fuels                                    |          | 251    |  |     
|Corporate and Other                                |          | 18     |  | 105  
|Eliminations                                       |          |       |  | (498 
|                                                  
|Consolidated totals                                |          | $3,097 |  | $   
|                                                  

|                                                   | Revenues |        |  |      
|-------------------------------------------------- | -------- | ------ |  | -----
|(in millions)
Three Months EndedSeptember 30, 2004
|PEC Electric                                       |          | $1,014 |  | $   
|PEF                                                |          | 1,029  |  |     
|Fuels                                              |          | 132    |  | 260  
|CCO                                                |          | 90     |  |     
|Synthetic Fuels                                    |          | 187    |  |     
|Corporate and Other                                |          | 18     |  | 112  
|Eliminations                                       |          |       |  | (372 
|                                                  
|Consolidated totals                                |          | $2,470 |  | $   
|                                                  

|                                                  | Revenues |        |  |         
|------------------------------------------------- | -------- | ------ |  | --------
|(in millions)
Nine Months EndedSeptember 30, 2005
|PEC Electric                                      |          | $2,980 |  | $      
|PEF                                               |          | 2,983  |  |        
|Fuels                                             |          | 464    |  | 1,034   
|CCO                                               |          | 490    |  |        
|Synthetic Fuels                                   |          | 662    |  |        
|Corporate and Other                               |          | 49     |  | 334     
|Eliminations                                      |          |       |  | (1,368  
|                                                 
|Consolidated totals                               |          | $7,628 |  | $      

|                                                  | Revenues |        | 
|------------------------------------------------- | -------- | ------ | 
|(in millions)
Nine Months EndedSeptember 30, 2004
|PEC Electric                                      |          | $2,776 | 
|PEF                                               |          | 2,673  | 
|Fuels                                             |          | 387    | 
|CCO                                               |          | 196    | 
|Synthetic Fuels                                   |          | 512    | 
|Corporate and Other                               |          | 55     | 
|Eliminations                                      |          |       | 
|                                                 
|Consolidated totals                               |          | $6,599 | 

| | PECs
segments consist almost exclusively of PEC Electric and the results of operations for the
PEC Electric segment presented herein are substantially identical to the results of
operations for PEC on a consolidated basis. The results of PECs nonutility
subsidiaries do not meet the disclosure requirements of SFAS No. 131 for the three and
nine months ended September 30, 2005 and 2004, are not material to PECs consolidated
financial statements and are not presented herein.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|13. | OTHER INCOME AND OTHER EXPENSEOther
income and expense includes interest income and other income and expense items as
discussed below. Nonregulated energy and delivery services include power protection
services and mass market programs such as surge protection, appliance services and area
light sales, and delivery, transmission and substation work for other utilities. AFUDC
equity represents the estimated equity costs of capital funds necessary to finance the
construction of new regulated assets. The components of other, net as shown on the
accompanying Statements of Income are as follows:
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

Progress Energy

|                                                 | Three Months Ended
   September 30 | Nine Months Ended
  September 30
|------------------------------------------------ | ---------------------------------- | --------------------------------
|(in millions)                                    | 2004                               | 2004                            
|Other income                                     |                                    |                                 
|Nonregulated energy and delivery services income |                                    | $  3                            
|DIG Issue C20 Amortization (see Note 10)         |                                    | 3                               
|Contingent value obligations unrealized gain     |                                    | 4                               
|Investment gains                                 |                                    | 1                               
|Income from equity investments                   |                                    | 4                               
|AFUDC equity                                     |                                    | 5                               
|Other                                            |                                    | 13                              
|                                                
|Total other income                               |                                    | $33                             
|                                                
|Other expense                                    |                                   
|Nonregulated energy and delivery services        |                                   
|expenses                                         |                                    | $  7                            
|Donations                                        |                                    | 3                               
|Investment losses                                |                                    |                                
|Loss from equity investments                     |                                    | 5                               
|Write-off of non-trade receivables               |                                    |                                
|FERC audit settlement                            |                                    |                                
|Other                                            |                                    | 8                               
|                                                
|Total other expense                              |                                    | $23                             
|                                                
|Other, net - Progress Energy                     |                                    | $10                             
|                                                

PEC

|                                                 | Three Months Ended
   September 30 | Nine Months Ended
   September 30
|------------------------------------------------ | ---------------------------------- | ---------------------------------
|(in millions)                                    | 2004                               | 2004                             
|Other income                                     |                                    |                                  
|Nonregulated energy and delivery services income |                                    | $(2                              
|DIG Issue C20 Amortization (see Note 10)         |                                    | 3                                
|Income from equity investments                   |                                    | 1                                
|AFUDC equity                                     |                                    | 1                                
|Other                                            |                                    | 9                                
|                                                
|Total other income                               |                                    | $ 12                             
|                                                
|Other expense                                    |                                   
|Nonregulated energy and delivery services        |                                   
|expenses                                         |                                    | $   3                            
|Donations                                        |                                    | 1                                
|Write-off of non-trade receivables               |                                    |                                 
|FERC audit settlement                            |                                    |                                 
|Other                                            |                                    | 3                                
|                                                
|Total other expense                              |                                    | $   7                            
|                                                
|Other, net - PEC                                 |                                    | $   5                            
|                                                

---

PEF

|                                                 | Three Months Ended
   September 30 | Nine Months Ended
   September 30
|------------------------------------------------ | ---------------------------------- | ---------------------------------
|(in millions)                                    | 2004                               | 2004                             
|Other income                                     |                                    |                                  
|Nonregulated energy and delivery services income |                                    | $  5                             
|Investment gains                                 |                                    | 1                                
|AFUDC equity                                     |                                    | 4                                
|Other                                            |                                    |                                 
|                                                
|Total other income                               |                                    | $10                              
|                                                
|Other expense                                    |                                   
|Nonregulated energy and delivery services        |                                   
|expenses                                         |                                    | $  4                             
|Donations                                        |                                    | 2                                
|FERC audit settlement                            |                                    |                                 
|Other                                            |                                    |                                 
|                                                
|Total other expense                              |                                    | $  6                             
|                                                
|Other, net - PEF                                 |                                    | $  4                             
|                                                

| | FERC
audit settlement includes amounts approved by the FERC on May 25, 2005, to settle the FERC
Staffs audit of the Utilities compliance with the FERCs Standards of
Conduct and Code of Conduct. In the settlement, PEC and PEF agreed to make certain
operational and organizational changes and to provide their retail and wholesale customers
a one-time credit of approximately $4 million and $3 million, respectively, which was
recorded as other expense in the second quarter of 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|14. | ENVIRONMENTAL MATTERSWe
are subject to federal, state and local regulations addressing hazardous and solid waste
management, air and water quality and other environmental matters. See Note 22 of our 2004
annual report on Form 10-K, Note 17 of PECs 2004 annual report on Form 10-K, and
Note 20 of PEFs 2004 annual report on Form 10-K, respectively, for a more detailed,
historical discussion of these federal, state, and local regulations.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | HAZARDOUS AND SOLID WASTE MANAGEMENTThe
provisions of the Comprehensive Environmental Response, Compensation and Liability Act of
1980, as amended (CERCLA), authorize the Environmental Protection Agency (EPA) to require
the cleanup of hazardous waste sites. This statute imposes retroactive joint and several
liabilities. Some states, including North Carolina, South Carolina and Florida, have
similar types of legislation. We are periodically notified by regulators, including the
EPA and various state agencies, of our involvement or potential involvement in sites that
may require investigation and/or remediation. There are presently several sites with
respect to which we have been notified by the EPA, the State of North Carolina or the
State of Florida of our potential liability, as described below in greater detail. Various
organic materials associated with the production of manufactured gas, generally referred
to as coal tar, are regulated under federal and state laws. PEC and PEF are each
potentially responsible parties (PRPs) at several manufactured gas plant (MGP) sites. We
are also currently in the process of assessing potential costs and exposures at other
sites. A discussion of sites by legal entity follows below.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
record accruals for probable and estimable costs related to environmental sites on an
undiscounted basis. We measure our liability for these sites based on available evidence
including our experience in investigating and remediating environmentally impaired sites.
The process often involves assessing and developing cost-sharing arrangements with other
PRPs. For all sites, as assessments are developed and analyzed, we will accrue costs for
the sites to the extent our liability is probable and the costs can be reasonably
estimated. Because the extent of environmental impact, allocation among PRPs for all
sites, remediation alternatives (which could involve either minimal or significant
efforts), and concurrence of the regulatory authorities have not yet reached the stage
where a reasonable estimate of the remediation costs can be made, we cannot determine the
total costs that may be incurred in connection with the remediation of all sites at this
time.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
and PEF have filed claims with general liability insurance carriers to recover costs
arising from actual or potential environmental liabilities. Almost all claims have been
settled and a few are still pending. While the outcome of this matter cannot be predicted,
the outcome is not expected to have a material effect on our or PEFs financial
position or results of operations. PECs previous claims have been settled other than
with insolvent carriers and those settlements did not have a material effect on PECs
financial position or results of operations. PEC may file claims with respect to
liabilities from sites described below. The outcome of these matters cannot be predicted.Progress Energy
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition to the Utilities sites, discussed under PEC and PEF
below, our environmental sites include the following related to our nonregulated
operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2001, we, through our Progress Fuels subsidiary, established an accrual to address
indemnities and retained an environmental liability associated with the sale of our Inland
Marine Transportation business. In 2003, the accrual was reduced to $4 million based on a
change in estimate. As of September 30, 2005 and December 31, 2004, the remaining accrual
balance was approximately $3 million. Expenditures related to this liability were not
material to our financial condition for the three and nine months ended September 30,
2005.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
are voluntarily addressing certain historical sites. An immaterial accrual has been
established to address investigation expenses related to these sites. At this time, the
total costs that may be incurred in connection with these sites cannot be determined.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 24, 2005, we completed the sale of our Progress Rail subsidiary. In connection with
the sale, we incurred indemnity obligations related to certain pre-closing liabilities,
including certain environmental matters (see discussion under Guarantees in Note 15B).PEC
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | There
are nine former MGP sites and a number of other sites associated with PEC that have
required or are anticipated to require investigation and/or remediation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
September 2005, the EPA advised PEC that it had been identified as a PRP at the Carolina
Transformer site located in Fayetteville, North Carolina. The EPA offered PEC and a number
of other PRPs the opportunity to share the reimbursement of approximately $36 million to
the EPA for past expenditures in addressing conditions at the site. Although a loss
is considered probable, an agreement among PRPs has not been reached; consequently,
it is not possible at this time to reasonably estimate the total amount of PECs
obligation for remediation of the Carolina Transformer site.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the fourth quarter of 2004, the EPA advised PEC that it had been identified as a PRP at
the Ward Transformer site located in Raleigh, North Carolina. The EPA offered PEC and a
number of other PRPs the opportunity to negotiate cleanup of the site and reimbursement to
the EPA for EPAs past expenditures in addressing conditions at the site. In
September 2005, PEC and several other PRPs signed a settlement agreement, which requires
the participating PRPs to provide approximately $5 million to cover the cleanup cost and
repay less than $1 million of EPAs past costs.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of September 30, 2005 and December 31, 2004, PECs accruals for probable and
estimable costs related to various environmental sites, which are included in other
liabilities and deferred credits and are expected to be paid out over one to five years,
were:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|September 30, 2005                           
|---------------------------------------------
|MGP and other sites, including insurance fund
|Transferred from NCNG at time of sale        
|                                             
|Total accrual for environmental sites        
|                                             

| | The
amounts for MGP and other sites, in the table above, relate to nine former MGP sites and
other sites associated with PEC that have required or are anticipated to require
investigation and/or remediation. The amount includes insurance fund proceeds which PEC
received to address costs associated with environmental liabilities related to its
involvement with some sites. All eligible expenses related to these sites are charged
against a specific fund containing these proceeds. For the three and nine months ended
September 30, 2005, PEC accrued approximately $3 million, received no insurance proceeds,
and spent approximately $1 million and $4 million, respectively, related to environmental
remediation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 30, 2005, the North Carolina Division of Water Quality renewed a PEC permit for the
continued use of coal combustion products generated at any of its coal-fired plants
located in the state. Following review of the permit conditions, which could significantly
restrict the reuse of coal ash and result in higher ash management costs, the permit was
adjudicated. The outcome of this matter cannot be predicted.PEF
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of September 30, 2005 and December 31, 2004, PEFs accruals for probable and
estimable costs related to various environmental sites, which are included in other
liabilities and deferred credits and are expected to be paid out over one to fifteen
years, were:
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|September 30, 2005                        
|------------------------------------------
|Remediation of distribution and substation
|transformers                              
|MGP and other sites                       
|                                          
|Total accrual for environmental sites     
|                                          

| | PEF
has received approval from the FPSC for recovery of costs associated with the remediation
of distribution and substation transformers through the Environmental Cost Recovery Clause
(ECRC). Under agreements with the Florida Department of Environmental Protection (FDEP),
PEF is in the process of examining distribution transformer sites and substation sites for
potential equipment integrity issues that could result in the need for mineral oil
impacted soil remediation. PEF has reviewed a number of distribution transformer sites and
all substation sites. Based on changes to the estimated timeframe for review of distribution transformer
sites, PEF currently expects to have completed its review by the end of 2008. As of December 31, 2004
, PEF expected to have completed its review of distribution transformer
sites by the end of 2007. Should further sites be identified, PEF believes that any
estimated costs would also be recovered through the ECRC. For the three and nine months
ended September 30, 2005, PEF accrued approximately $1 million and spent approximately $2
million and $7 million, respectively, related to the remediation of transformers. PEF has
recorded a regulatory asset for the probable recovery of these costs through the ECRC.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amounts for MGP and other sites, in the table above, relate to two former MGP sites and
other sites associated with PEF that have required or are anticipated to require
investigation and/or remediation. In 2004, PEF received approximately $12 million in
insurance claim settlement proceeds and recorded a related accrual for associated
environmental expenses, as these insurance proceeds are restricted for use in addressing
costs associated with environmental liabilities. For the three and nine months ended
September 30, 2005, PEF made no additional accruals or material expenditures and received
approximately $1 million of additional insurance proceeds.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
Florida, a risk-based corrective action (RBCA, known as Global RBCA) rule was developed by
the FDEP and adopted at the February 2, 2005, Environmental Review Commission hearing.
Risk-based corrective action generally means that the corrective action prescribed for
contaminated sites can correlate to the level of human health risk imposed by the
contamination at the property. The Global RBCA rule expands the use of the risk-based
corrective action to all contaminated sites in the state that are not currently in one of
the states waste cleanup programs and has the potential for making future cleanups
in Florida more costly to complete. The effective date of the Global RBCA rule was April
17, 2005. We are in the process of assessing the impact of this rule.AIR QUALITY
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
are subject to various current and proposed federal, state, and local environmental
compliance laws and regulations, which may result in increased planned capital
expenditures and O&M expenses. Significant updates to these laws and
regulations and related impacts to us since December 31, 2004, are discussed below.
Additionally, Congress is considering legislation that would require reductions in air
emissions of nitrogen oxides (NOx), sulfur dioxide (SO2), carbon dioxide and mercury. Some
of these proposals establish nationwide caps and emission rates over an extended period of
time. This national multi-pollutant approach to air pollution control could involve
significant capital costs that could be material to our financial position or results of
operations. Control equipment that will be installed on North Carolina fossil generating
facilities as part of the North Carolina Clean Smokestacks Act (Smokestacks Act), enacted
in 2002 and discussed below, may address some of the issues outlined above as they relate
to PEC. However, the outcome of the matter cannot be predicted.New Source Review (NSR)
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
EPA is conducting an enforcement initiative related to a number of coal-fired utility
power plants in an effort to determine whether changes at those facilities were subject to
NSR requirements or New Source Performance Standards under the Clean Air Act. We were
asked to provide information to the EPA as part of this initiative and cooperated in
supplying the requested information. The EPA initiated civil enforcement actions against
other unaffiliated utilities as part of this initiative. Some of these actions resulted in
settlement agreements calling for expenditures by these unaffiliated utilities in excess
of $1.0 billion. These settlement agreements have generally called for expenditures to be
made over extended time periods, and some of the companies may seek recovery of the
related cost through rate adjustments or similar mechanisms.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 24, 2005, the Court of Appeals for the District of Columbia Circuit rendered a
decision in a suit regarding EPAs NSR rules. As part of the decision, the court
struck down a provision excluding pollution control projects from NSR requirements. As a
result of this decision, additional regulatory review of our pollution control equipment
proposals will be required adding time and cost to the overall project.NOx SIP Call Rule under Section 110 of the Clean Air Act (NOx SIP Call)
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
NOx SIP Call is an EPA rule that requires 22 states, including North Carolina, South
Carolina and Georgia, to further reduce nitrogen oxide emissions. The NOx SIP Call is not
applicable to Florida. Total capital expenditures to meet the requirements of the final
rule under the NOx SIP Call in North Carolina and South Carolina could reach approximately
$370 million at PEC. This amount also includes the cost to install NOx controls under
North Carolinas and South Carolinas programs to comply with the federal 8-hour
ozone standard. However, further technical analysis and rulemaking may result in
requirements for additional controls at some units. To date, we have spent approximately
$330 million at PEC related to these projected amounts. Increased O&M expenses relating to the NOx SIP Call are not expected to be material to our or
PECs results of operations. Further controls are anticipated as electricity demand
increases.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Parties
unrelated to us have undertaken efforts to have Georgia excluded from the rule and its
requirements. Georgia has not yet submitted a state implementation plan to comply with the
Section 110 NOx SIP Call. The outcome of this matter and the impact to our non-regulated
operations in Georgia cannot be predicted.Smokestacks Act
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
April 2005, PEC filed its annual estimate with the NCUC for the total capital costs to
meet emission targets for NOx and SO2  from coal-fired power plants under the Smokestacks
Act of approximately $895 million. PEC is scheduled to file its next annual estimate in
April 2006. PEC anticipates that the estimated project cost will increase above the April
2005 estimate based on scope modifications and other factors involved with the project.
PEC has expended approximately $237 million of these capital costs through September 30,
2005. The Smokestacks Act requires PEC to amortize 70 percent of the original cost
estimate of $813 million, during a five-year rate freeze period. PEC recognized
amortization of $26 million and $80 million, respectively, for the three and nine months
ended September 30, 2005, and has recognized $328 million in cumulative amortization
through September 30, 2005. The remaining amortization requirement will be recorded over
the future period ending December 31, 2007. The Smokestacks Act permits PEC the
flexibility to vary the amortization schedule for recording the compliance costs from zero
up to $174 million of amortization expense per year. The NCUC will hold a hearing prior to
December 31, 2007, to determine cost recovery amounts for 2008 and future periods. O&M
expenses will significantly increase due to the additional materials, personnel and general
maintenance associated with the equipment. O&M expenses are recoverable through base
rates, rather than as part of this program. The future regulatory interpretation,
implementation or impact of the Smokestacks Act cannot be predicted.Clean Air Interstate Rule (CAIR) and Mercury Rules
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 10, 2005, the EPA issued the final CAIR. The EPAs rule requires 28 states,
including North Carolina, South Carolina, Georgia and Florida, and the District of
Columbia to reduce NOx and SO2emissions in order to reduce levels of fine particulate
matter and impacts to visibility. Installation of additional air quality controls is
likely to be needed to meet the CAIR requirements. We are in the process of determining
compliance plans and the cost to comply with the rule. The air quality controls already
installed for compliance with the NOx SIP Call and currently planned by us to comply with
the Smokestacks Act will reduce the costs required to meet the CAIR requirements for our
North Carolina units at PEC. We currently estimate compliance costs for PEF could be
approximately $1.3 billion over the next ten years. The current estimate has increased
above the previous cost of approximately $1.0 billion based on scope modifications and
other factors involved with the project. We will continue to review these estimates as our
compliance plans are further developed. PEF has joined a coalition of Florida utilities
that has filed a challenge to CAIR as it applies to Florida. A petition for
reconsideration and stay and a petition for judicial review of CAIR were filed on July 11,
2005. On October 27, 2005, the DC Circuit Court issued an order granting the motion for
stay of the proceedings. The outcome of this matter cannot be predicted.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 15, 2005, the EPA finalized two separate but related rules: the Clean Air Mercury
Rule (CAMR) that sets emissions limits to be met in two phases and encourages a cap and
trade approach to achieving those caps, and a de-listing rule that eliminated any
requirement to pursue a maximum achievable control technology (MACT) approach for limiting
mercury emissions from coal-fired power plants. NOx and SO2controls also are effective in
reducing mercury emissions. However, according to the EPA the second phase cap reflects a
level of mercury emissions reduction that exceeds the level that would be achieved solely
as a co-benefit of controlling NOx and SO2under CAIR. We are in the process of
determining compliance plans and the cost to comply with the CAMR. Installation of
additional air quality controls is likely to be needed to meet the CAMRs
requirements. The de-listing rule has been challenged by a number of parties; the
resolution of the challenges could impact our final compliance plans and costs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
conjunction with the proposed mercury rule, the EPA proposed a MACT standard to regulate
nickel emissions from residual oil-fired units. The EPA withdrew the proposed nickel rule
in March 2005.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 6, 2005, PEF filed a petition with the FPSC through the ECRC program for recovery of
costs associated with the development and implementation of an integrated strategy to
comply with the CAIR and CAMR. PEF is developing an integrated compliance strategy for the
CAIR and CAMR rules because NOx and SO2controls also are effective in reducing mercury
emissions. PEF estimates the program costs for 2005 to be approximately $2 million for
preliminary engineering activities and strategy development work necessary to determine
our integrated compliance strategy. PEF currently projects approximately $54 million in
program costs for 2006. These costs may increase or decrease depending upon the results of
the engineering and strategy development work. Among other things; subsequent rule
interpretations, equipment availability, or the unexpected acceleration of the initial NOx
or other compliance dates could require acceleration of some projects and therefore result
in additional costs in 2005 and 2006. PEF expects to incur significant additional capital
and O&M expenses to achieve compliance with the CAIR and CAMR through 2015 and beyond.
The timing and extent of the costs for future projects will depend upon the final
compliance strategy.North Carolina Attorney General Petition under Section 126 of the Clean Air Act
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2004, the North Carolina Attorney General filed a petition with the EPA under
Section 126 of the Clean Air Act, asking the federal government to force coal-fired power
plants in 13 other states, including South Carolina, to reduce their NOx and SO2emissions. The state of North Carolina contends these out-of-state emissions interfere
with North Carolinas ability to meet national air quality standards for ozone and
particulate matter. On August 1, 2005, the EPA issued a proposed response denying the
petition. The EPAs rationale for denial is that compliance with CAIR will reduce the
emissions from surrounding states sufficiently to address North Carolinas concerns.
The EPA must take final action by March 15, 2006. The outcome of this matter cannot be
predicted.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

| | WATER QUALITY
As
a result of the operation of certain control equipment needed to address the air quality
issues outlined above, new wastewater streams may be generated at the affected facilities.
Integration of these new wastewater streams into the existing wastewater treatment
processes may result in permitting, construction and treatment requirements imposed on the
Utilities in the immediate and extended future.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Based
on new cost information and changes to the engineering strategy and estimated time frame
of expenditures since December 31, 2004, we have revised the estimated amounts and time
period for expenditures to meet Section 316(b) requirements of the Clean Water Act. We
currently estimate that from 2006 through 2010 the range of expenditures will be
approximately $70 million to $95 million. The range includes approximately $5 million to
$10 million at PEC and approximately $65 million to $85 million at PEF.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | OTHER ENVIRONMENTAL MATTERSThe
Kyoto Protocol was adopted in 1997 by the United Nations to address global climate change
by reducing emissions of carbon dioxide and other greenhouse gases. The treaty went into
effect on February 16, 2005. The United States has not adopted the Kyoto Protocol, and the
Bush administration has stated it favors voluntary programs. A number of carbon dioxide
emissions control proposals have been advanced in Congress. Reductions in carbon dioxide
emissions to the levels specified by the Kyoto Protocol and some legislative proposals
could be materially adverse to our financial position or results of operations if
associated costs of control or limitation cannot be recovered from customers. We favor the
voluntary program approach recommended by the Bush administration and continually evaluate
options for the reduction, avoidance and sequestration of greenhouse gases. However, the
outcome of this matter cannot be predicted.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
a decision issued July 15, 2005, a three-judge panel of the U.S. Court of Appeals for the
District of Columbia Circuit denied petitions for review filed by several states, cities
and organizations seeking the regulation by the EPA of carbon dioxide emissions under the
Clean Air Act. In a 2-1 decision, the court held that the EPA Administrator properly
exercised his discretion in denying the request for regulation. Officials from five states
and the District of Columbia have asked the full U.S. Court of Appeals for the D.C.
Circuit to review the decision made by the three-judge panel. The outcome of this matter cannot be
predicted.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
have announced our plan to issue a report on our activities associated with current and
future environmental requirements. The report will include a discussion of the
environmental requirements that we currently face and expect to face in the future with
respect to our air emissions. The report is expected to be issued by March 31, 2006.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|15. | COMMITMENTS AND CONTINGENCIES
Contingencies
and significant changes to the commitments discussed in Note 23 of our 2004 annual report
on Form 10-K, Note 18 of PECs Annual Report on Form 10-K, and Note 21 of PEFs
Annual Report on Form 10-K, respectively, are described below.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A.     Purchase ObligationsProgress Energy
As
part of our ordinary course of business, we enter into various long and short term
contracts for fuel requirements at our generating plants. Through September 30, 2005,
contracts procured through the Utilities and other businesses have increased our aggregate
purchase obligations for fuel and purchased power by approximately $1.83 billion as
compared to the amount stated in our annual report on Form 10-K for the year ended
December 31, 2004. The increase primarily relates to the period ranging from 2005 through
2009. A majority of the contracts related to this increase are for future coal purchases
primarily with fixed prices and future gas purchases primarily with variable prices.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

| | PEC
As
part of PECs ordinary course of business, it enters into various long and short term
contracts for fuel requirements at our generating plants. Through September 30, 2005,
contracts procured at PEC have increased its aggregate purchase obligations for fuel and
purchased power by approximately $1.15 billion as compared to the amount stated in
PECs annual report on Form 10-K for the year ended December 31, 2004. The increase
primarily relates to the period ranging from 2005 through 2009. A majority of the
contracts related to this increase are for future coal purchases primarily with fixed
prices.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEF
As
part of PEFs ordinary course of business, it enters into various long and short term
contracts for fuel requirements at its generating plants. Through September 30, 2005,
contracts procured at PEF have increased its aggregate purchase obligations for fuel and
purchased power by approximately $360 million as compared to the amount stated in
PEFs annual report on Form 10-K for the year ended December 31, 2004. The increase
primarily relates to the period ranging from 2005 through 2009. A majority of the
contracts related to this increase are for future gas purchases primarily with variable
prices.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B.     Guarantees
As
a part of normal business, we enter into various agreements providing future financial or
performance assurances to third parties, which are outside the scope of FASB
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN No. 45).
Such agreements include guarantees, standby letters of credit and surety bonds. As of
September 30, 2005, we do not believe conditions are likely for significant performance
under these guarantees. To the extent liabilities are incurred as a result of the
activities covered by the guarantees, such liabilities are included in the accompanying
Balance Sheets.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of September 30, 2005, we have issued guarantees and indemnifications of certain legal,
tax and environmental matters to third parties in connection with sales of businesses and
for timely payment of obligations in support of our non-wholly owned synthetic fuel
operations. Related to the sales of businesses, the notice period extends until 2012 for
the majority of matters provided for in the indemnification provisions. For matters for
which we receive timely notice, our indemnity obligations may extend beyond the notice
period. Certain environmental indemnifications related to the sale of synthetic fuel
operations have no limitations as to time or maximum potential future payments. Other
guarantees and indemnifications have an estimated maximum exposure of approximately $152
million. As of September 30, 2005, we have recorded liabilities related to guarantees and
indemnifications to third-parties of approximately $26 million. Management does not
believe conditions are likely for significant performance under these agreements in excess
of the recorded liabilities. As of September 30, 2005, the Utilities had no guarantees
issued on behalf of unconsolidated subsidiaries or other third parties.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition, the Parent has issued $300 million of guarantees of certain payments of two
wholly owned indirect subsidiaries. See Note 8 for additional information.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C.     Insurance
The
Utilities are members of Nuclear Electric Insurance Limited (NEIL), which provides primary
and excess insurance coverage against property damage to members nuclear generating
facilities. Under the primary program, each company is insured for $500 million at each of
its respective nuclear plants. In addition to primary coverage, NEIL also provides
decontamination, premature decommissioning and excess property insurance with limits of
$1.75 billion on each plant.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D.     Other Commitments
As
discussed in Note 23B of our annual report on Form 10-K for the year ended December 31,
2004, we have certain future commitments related to four synthetic fuel facilities
purchased that provide for contingent payments (royalties). We have exercised our right in
the related agreements to escrow those payments if certain conditions in the agreements
were met. We previously accrued and retained 2004 and 2003 royalty payments of
approximately $41 million and $49 million, respectively. In May 2005, these funds were
placed into escrow upon establishment of the necessary escrow accounts.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 15, 2005, the original owners of the Earthco synthetic fuel facilities filed suit in
New York state court alleging breach of contract against the Progress Fuels subsidiaries
that purchased the Earthco facilities (Progress Fuels Subsidiaries). The plaintiffs also
named us as a defendant. The plaintiffs complaint is that
periodic payments otherwise due to them under the sales arrangement with the Progress
Fuels Subsidiaries are, contrary to the sales agreement, being escrowed pending the
outcome of the ongoing IRS audit of the Earthco facilities. The Progress Fuels
Subsidiaries believe that the parties agreements allow for the payments to be
escrowed in such event and also allow for the use of such escrowed amounts to satisfy any
potential disallowance of tax credits that arises out of such an event. Currently, the
escrowed amount in question is $87 million, which reflects periodic payments that would
have been paid to the plaintiffs beginning April 30, 2003 through September 30, 2005. This
amount will increase as future periodic payments are made to the escrow which would
otherwise have been payable to the plaintiffs. We intend to vigorously defend their
actions, but cannot predict the outcome of this matter.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E.     Other Contingencies1.      

           Pursuant to the Nuclear Waste Policy Act of 1982, the predecessors to the
          Utilities entered into contracts with the U.S. Department of Energy (DOE) under
          which the DOE agreed to begin taking spent nuclear fuel by no later than January
          31, 1998. All similarly situated utilities were required to sign the same
          standard contract.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
DOE failed to begin taking spent nuclear fuel by January 31, 1998. In January 2004, the
Utilities filed a complaint in the United States Court of Federal Claims against the DOE,
claiming that the DOE breached the Standard Contract for Disposal of Spent Nuclear Fuel by
failing to accept spent nuclear fuel from various of our facilities on or before January
31, 1998. Our damages due to the DOEs breach will be significant, but have yet to be
determined. Approximately 60 cases involving the Governments actions in connection
with spent nuclear fuel are currently pending in the Court of Federal Claims.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
DOE and the Utilities have agreed to a stay of the lawsuit, including discovery. The
parties agreed to, and the trial court entered, a stay of proceedings, in order to allow
for possible efficiencies due to the resolution of legal and factual issues in previously
filed cases in which similar claims are being pursued by other plaintiffs. These issues
may include, among others, so-called rate issues, or the minimum mandatory
schedule for the acceptance of spent nuclear fuel and high level waste by which the
Government was contractually obligated to accept contract holders spent nuclear fuel
and/or high level waste, and issues regarding recovery of damages under a partial breach
of contract theory that will be alleged to occur in the future. These issues have been or
are expected to be presented in the trials or appeals that are currently scheduled to
occur during 2005. Resolution of these issues in other cases could facilitate agreements
by the parties in the Utilities lawsuit, or at a minimum, inform the Court of
decisions reached by other courts if they remain contested and require resolution in this
case. In July 2005, the parties jointly requested a continuance of the stay through
December 15, 2005, which the trial court granted.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
July 2002, Congress passed an override resolution to Nevadas veto of the DOEs
proposal to locate a permanent underground nuclear waste storage facility at Yucca
Mountain, Nevada. In January 2003, the State of Nevada, Clark County, Nevada, and the City
of Las Vegas petitioned the U.S. Court of Appeals for the District of Columbia Circuit for
review of the Congressional override resolution. These same parties also challenged the
EPAs radiation standards for Yucca Mountain. On July 9, 2004, the Court rejected the
challenge to the constitutionality of the resolution approving Yucca Mountain, but ruled
that the EPA was wrong to set a 10,000-year compliance period in the radiation protection
standard. In August 2005, the EPA issued new proposed standards. The proposed standards
include a 1,000,000-year compliance period in the radiation protection standard. Comments
are due November 21, 2005. The DOE originally planned to submit a license application to
the NRC to construct the Yucca Mountain facility by the end of 2004. However, in November
2004, the DOE announced it would not submit the license application until mid-2005 or
later. Also in November 2004, Congressional negotiators approved $577 million for fiscal
year 2005 for the Yucca Mountain project, approximately $300 million less than requested
by the DOE but approximately the same as approved in 2004. The DOE has acknowledged that a
working repository will not be operational until sometime after 2010, but the DOE has not
identified a new target date. The Utilities cannot predict the outcome of this matter.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
February 27, 2004, PEC requested to have its license for the Independent Spent Fuel
Storage Installation at the Robinson Plant extended by 20 years with an exemption request
for an additional 20-year extension. Its current license is due to expire in August 2006.
On March 30, 2005, the NRC issued the 40-year license renewal.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
certain modifications and additional approval by the NRC, including the installation of
onsite dry storage facilities at Robinson and Brunswick, PECs spent nuclear fuel
storage facilities will be sufficient to provide storage space for spent fuel generated on
PECs system through the expiration of the operating licenses for all of PECs
nuclear generating units.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
certain modifications and additional approval by the NRC, including the installation of
onsite dry storage facilities at PEFs nuclear unit, CR3, PEFs spent nuclear
fuel storage facilities will be sufficient to provide storage space for spent fuel
generated on PEFs system through the expiration of the operating license for CR3.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.     

           In 2001, PEC entered into a contract to purchase coal from Dynegy Marketing and
          Trade (DMT). After DMT experienced financial difficulties, including credit
          ratings downgrades by certain credit reporting agencies, PEC requested credit
          enhancements in accordance with the terms of the coal purchase agreement in July
          2002. When DMT did not offer credit enhancements, as required by a provision in
          the contract, PEC terminated the contract in July 2002.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
initiated a lawsuit seeking a declaratory judgment that the termination was lawful. DMT
counterclaimed, stating the termination was a breach of contract and an unfair and
deceptive trade practice. On March 23, 2004, the United States District Court for the
Eastern District of North Carolina ruled that PEC was liable for breach of contract, but
ruled against DMT on its unfair and deceptive trade practices claim. On April 6, 2004, the
Court entered a judgment against PEC in the amount of approximately $10 million. The Court
did not rule on DMTs request under the contract for pending legal costs.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
May 4, 2004, PEC authorized its outside counsel to file a notice of appeal of the April 6,
2004 judgment, and on May 7, 2004, the notice of appeal was filed with the United States
Court of Appeals for the Fourth Circuit. On June 8, 2004, DMT filed a motion to dismiss
PECs appeal on the ground that it was untimely. On July 20, 2005, the appellate
court denied DMTs motion to dismiss and ruled that the time for PEC to appeal had
not yet expired. The appellate court remanded the case to the trial court for further
proceedings.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
the first quarter of 2004, PEC recorded a liability for the judgment of approximately $10
million and a regulatory asset for the probable recovery through its fuel adjustment
clause. PEC cannot predict the outcome of this matter.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.      

           On February 1, 2002, PEC filed a complaint with the Surface Transportation
          Board (STB) challenging the rates charged by Norfolk Southern Railway Company
          (Norfolk Southern) for coal transportation to certain generating plants. In a
          decision served in December, 2003, the STB found that the challenged rates
          exceeded maximum reasonable rate levels and prescribed lower rates. In a
          subsequent decision on reconsideration the STB concluded that the rates had not
          been shown to be unreasonable, following which PEC requested the STB to consider
          requiring that the rates be phased in over a period of time. During the course
          of the complaint process, PEC accrued a liability of $42 million. The liability
          was comprised of $23 million of reparations remitted to PEC by Norfolk Southern
          that were subject to refund and an additional $19 million, of which $17 million
          was recorded as deferred fuel cost on the Consolidated Balance Sheet. This
          matter has now been settled by mutual agreement, and the STB has issued an order
          dismissing the case. As a result of the settlement, PEC reversed the previously
          recorded deferred fuel cost and settled the remaining obligations for the
          approximate amount previously accrued. The settlement did not have a material
          impact on PECs results of operations.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.      

           PEF has resolved all but one of its outstanding franchise matters. On August
          25, 2005, the City Council of Edgewood, Florida approved a new 30-year electric
          utility franchise agreement with PEF, which resolved all outstanding litigation
          with the City of Edgewood (1,400 customers). On August 22, 2005, the
          7,000-customer City of Maitland also entered into a new 30-year franchise
          agreement with PEF. As previously noted, in accordance with the terms of an
          arbitration panels award issued in May 2003 and after satisfying
          regulatory and operational requirements, Winter Park acquired from PEF the
          electric distribution system that serves Winter Park (13,000 customers) and PEF
          transferred the distribution system to Winter Park on June 1, 2005. In addition,
          Winter Park executed a wholesale power supply contract with PEF with a five-year
          term from the date service begins and a renewal option. See Note 5.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
2,500 customer Town of Belleair (Belleair) is the last municipality with pending
litigation against PEF. Arbitration with Belleair to determine the value of PEFs
electric distribution system within Belleair was completed in June 2003. In September
2003, the arbitration panel issued an award in that case setting the value of the electric
distribution system within Belleair at approximately $6 million. The panel further
required Belleair to pay to PEF its requested $1 million in separation and reintegration
costs and $2 million in stranded costs. Belleair has not yet decided whether it will
attempt to acquire the system; however, on January 18, 2005, it issued a request for
proposals for wholesale power supply and to operate and maintain the distribution system.
In March 2005, PEF submitted a bid to supply wholesale power to Belleair. Belleair
received several other proposals for wholesale power and distribution services. In
February 2005, the Town Commission also voted to put the issue of whether to acquire the
distribution system to a voter referendum. A referendum is scheduled to occur on November
8, 2005. At this time, whether and when there will be further proceedings regarding
Belleair cannot be determined.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5.     

           Through our subsidiaries, we are a majority owner in five entities and a
          minority owner in one entity that own facilities that produce coal-based solid
          synthetic fuel as defined under the Code. The production and sale of the
          synthetic fuel from these facilities qualify for tax credits under Section 29 if
          certain requirements are satisfied, including a requirement that the synthetic
          fuel differs significantly in chemical composition from the coal used to produce
          such synthetic fuel and that the fuel was produced from a facility that was
          placed in service before July 1, 1998. Qualifying synthetic fuel facilities
          entitle their owners to federal income tax credits based on the barrel of oil
          equivalent of the synthetic fuel produced and sold by these plants. The amount
          of Section 29 tax credits that we are allowed to claim in any calendar year is
          currently limited by the amount of our regular federal income tax liability.
          Synthetic fuel tax credit amounts allowed but not utilized are carried forward
          indefinitely as deferred alternative minimum tax credits. See Energy
          Policy Act discussion below regarding the redesignation of Section 29 tax
          credits effective January 1, 2006. Total Section 29 credits generated to date
          (including those generated by Florida Progress prior to our acquisition) are
          approximately $1.7 billion, of which $783 million have been used to offset
          regular federal income tax liability and $885 million are being carried forward
          as deferred alternative minimum tax credits. The current Section 29 tax credit
          program expires at the end of 2007.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the third quarter of 2005, we recorded $27 million of tax credits that had previously not
been recognized as part of finalizing our 2004 regular federal income tax liability. These
credits were not previously recognized due to the decrease in tax liability resulting from
expenses incurred for the 2004 hurricanes and loss on sale of Progress Rail.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | IRS PROCEEDINGS
In
September 2002, all of our majority-owned synthetic fuel entities were accepted into the
IRSs Pre-Filing Agreement (PFA) program in lieu of the ordinary IRS audit process.
The PFA program allows taxpayers to voluntarily accelerate the IRS exam process in order
to seek resolution of specific issues.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2004, our subsidiaries finalized execution of the Colona Closing Agreement with
the IRS concerning their Colona synthetic fuel facilities (Colona). The Colona Closing
Agreement provided that the Colona facilities were placed in service before July 1, 1998,
which is one of the qualification requirements for tax credits under Section 29. The
Colona Closing Agreement further provides that the fuel produced by the Colona facilities
in 2001 is a qualified fuel for purposes of the Section 29 tax credits. This
action concluded the PFA program with respect to Colona.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
July 2004, we were notified that the IRS field auditors anticipated taking an adverse
position regarding the placed-in-service date of the Earthco facilities. Due to the IRS
auditors position, the IRS exercised its right to withdraw from the PFA program.
With the IRSs withdrawal from the PFA program, the review of our Earthco facilities
is back on the normal procedural audit path of our tax returns.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 29, 2004, we received the IRS field auditors preliminary report concluding
that the Earthco facilities had not been placed in service before July 1, 1998, and
proposing that the tax credits generated by those facilities should be disallowed. We
disagree with the field audit teams factual findings and believe that the Earthco
facilities were placed in service before July 1, 1998. We also believe that the report
applies an inappropriate legal standard concerning what constitutes placed in
service. We are currently contesting the field auditors findings and the field
audit teams proposed disallowance of the tax credits.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Because
of the disagreement with the field auditors as to the proper legal standard to apply, we
believe that it is appropriate and helpful to have this issue reviewed by the National
Office of the IRS. Therefore, we have asked the National Office to review the issue and
clarify the legal standard to be applied. We believe that the appeals process, including
proceedings before the National Office, could take up to two years to complete; however,
we cannot control the actual timing of resolution and cannot predict the outcome of this
matter.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
October 2005, we and the IRS Examination Staff filed briefs with the National Office for
the purpose of receiving technical advice on whether our Earthco facilities were placed in
service prior to July 1, 1998 for purposes of determining if our synthetic fuel tax
credits are allowable under Section 29 of the Internal Revenue Code. IRS procedures do not
provide a specific timeframe for rendering the requested decision following the filing of
such briefs. As such, we cannot predict when the National Office will provide technical
guidance on this matter.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Through
September 30, 2005, on a consolidated basis we have used or carried forward approximately
$1.2 billion of tax credits generated by Earthco facilities. If these credits were
disallowed, our one-time exposure for cash tax payments would be $311 million (excluding
interest), and earnings and equity would be reduced by approximately $1.2 billion,
excluding interest. These amounts have not been reduced for the use of any escrowed
amounts to satisfy a potential disallowance of these tax credits (see Note 15D). Our
amended $1.13 billion credit facility includes a covenant that limits the maximum
debt-to-total capital ratio to 68%. This ratio includes other forms of indebtedness such
as guarantees we issued, letters of credit and capital leases. As of September 30, 2005,
our debt-to-total capital ratio was 60.0% based on the credit agreement definition for
this ratio. The impact on this ratio of reversing approximately $1.2 billion of tax
credits and paying $311 million for taxes would be an increase of the ratio to 64.4%.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
believe that we are complying with all the necessary requirements to qualify for Section
29 tax credits, and, although we cannot provide certainty, we believe that we will prevail
in these matters. We have no current plans to alter our synthetic fuel production schedule
for 2005 or future years as a result of the IRS field auditors report. However,
should we fail to prevail in these matters, there could be material impact for previously
used or carried forward Section 29 tax credits, with a material adverse impact on earnings
and cash flows.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
discussed in Note 8F of our annual report on Form 10-K for the year ended December 31,
2004, we implemented changes in our capitalization policies for our Energy Delivery
business units in the Utilities effective January 1, 2005. As a result of the changes in
accounting estimates for the outage and emergency work and indirect costs, a lesser
proportion of the Utilities costs will be capitalized on a prospective basis. We
have requested a method change from the IRS that was granted in October 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PROPOSED ACCOUNTING RULES FOR UNCERTAIN TAX POSITIONSOn
July 14, 2005, the FASB issued an exposure draft of a proposed interpretation of SFAS No.
109 that would address the accounting for uncertain tax positions. The proposed
interpretation would require that uncertain tax benefits be probable of being sustained in
order to record such benefits in the consolidated financial statements. We currently
account for uncertain tax benefits in accordance with SFAS No. 5. Under SFAS No. 5,
contingent losses are recorded when it is probable that the tax position will not be
sustained and the amount of the disallowance can be reasonably estimated. As currently
drafted, the proposed interpretation would apply to all uncertain tax positions and be
effective for us on December 31, 2005. However, the FASB has publicly stated that
it expects to issue the final interpretation in the first quarter of 2006, which is
expected to delay the effective date of the interpretation past 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
discussed above, the IRS field auditors have recommended that the Section 29 tax credits
generated by our Earthco facilities, totaling $1.2 billion through September 30, 2005, be
disallowed. We disagree with the field audit teams findings and have requested that
the National Office of the IRS review this issue. We have not yet determined how the
proposed interpretation would impact our various income tax positions, including the
status of the Earthco tax credits. Depending on the provisions of the FASBs final
interpretation and our facts and circumstances that exist at the date of
implementation, including our assessment of the probability of sustaining any
currently recorded and future tax benefits, the proposed interpretation could have a
material adverse impact on our financial position and results of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PERMANENT SUBCOMMITTEE
In
October 2003, the United States Senate Permanent Subcommittee on Investigations began a
general investigation concerning synthetic fuel tax credits claimed under Section 29. The
investigation is examining the utilization of the credits, the nature of the technologies
and fuels created, the use of the synthetic fuel and other aspects of Section 29 and is
not specific to our synthetic fuel operations. Progress Energy provided information in
connection with this investigation. We cannot predict the outcome of this matter.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | IMPACT OF CRUDE OIL PRICES
Although
the Section 29 tax credit program is expected to continue through 2007, recent market
conditions and catastrophic weather events have increased the volatility and level of oil
prices that could limit the amount of those credits or eliminate them entirely for one or
more of the years following 2004. This possibility is due to a provision of Section 29
that provides that if the average wellhead price per barrel for unregulated domestic crude
oil for the year (the Annual Average Price) exceeds a certain threshold price (the
Threshold Price), the amount of Section 29 tax credits are reduced for that year. Also, if
the Annual Average Price increases high enough (the Phase Out Price), the Section 29 tax
credits are eliminated for that year. For 2004, the Threshold Price was $51.35 per barrel
and the Phase Out Price was $64.47 per barrel. The Threshold Price and the Phase Out Price
are adjusted annually for inflation.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | If
the Annual Average Price falls between the Threshold Price and the Phase Out Price for a
year, the amount by which Section 29 tax credits are reduced will depend on where the
Annual Average Price falls in that continuum. For example, for 2004, if the Annual Average
Price had been $57.91 per barrel, there would have been a 50 percent reduction in the
amount of Section 29 tax credits for that year.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Secretary of the Treasury calculates the Annual Average Price based on the Domestic Crude
Oil First Purchases Prices published by the Energy Information Agency (EIA). Because the
EIA publishes its information on a three-month lag, the Secretary of the Treasury
finalizes its calculations three months after the year in question ends. Thus, the Annual
Average Price for calendar year 2004 was published on April 6, 2005, and the Annual
Average Price for 2004 did not reach the Threshold Price for 2004. Consequently, the
amount of our 2004 Section 29 tax credits was not adversely affected by oil prices.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
estimate that the 2005 Threshold Price will be approximately $52 per barrel and the Phase
Out Price will be approximately $65 per barrel, based on an estimated 2005 inflation
adjustment. The monthly Domestic Crude Oil First Purchases Price published by the EIA has
recently averaged approximately $5 lower than the corresponding monthly New York
Mercantile Exchange (NYMEX) settlement price for light sweet crude oil. Through October
17, 2005, the average NYMEX contract settlement price for light sweet crude oil was $55
per barrel and the average futures price for the remainder of 2005 was $64 per barrel. We
estimate that NYMEX settlement price would have to average approximately $70 per barrel
for the remainder of 2005 for the Threshold Price to be reached.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
cannot predict with any certainty the Annual Average Price of oil for 2005 or beyond.
However, we do not currently believe that the 2005 Average Annual Price will trigger a
phase out of the Section 29 tax credits in 2005.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | We
estimate that the 2006 Threshold Price will be approximately $52 per barrel and the Phase
Out Price will be approximately $66 per barrel, based on estimated inflation adjustments
for 2005 and 2006. The monthly Domestic Crude Oil First Purchases Price published by the
EIA has recently averaged approximately $5 lower than the corresponding monthly NYMEX
settlement price for light sweet crude oil. As of October 17, 2005, the average NYMEX
futures price for light sweet crude oil for calendar year 2006 was $63 per barrel. Based
upon the estimated 2006 Threshold Price and Phase Out Price, if oil prices for 2006
remained at the October 17, 2005 average futures price level of $63 per barrel for the
entire year in 2006, we currently estimate that the Section 29 tax credit amount for 2006
would be reduced by approximately 35 percent to 40 percent.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Our
future synthetic fuel production levels for 2006 and beyond remain uncertain because we
cannot predict with any certainty the Annual Average Price of oil for 2005 or beyond. If
oil prices for 2006 remained at the October 17, 2005 average futures price level of $63
per barrel for the entire year in 2006, it is unlikely that we would produce any synthetic
fuel in 2006. This could have a material adverse impact on our results of operations. We
will continue to monitor the level of oil prices and retain the ability to adjust
production based on future oil price levels.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Due
to the significant uncertainty surrounding our synthetic fuel production in 2006 and
beyond based on the current level of oil prices, we evaluated our synthetic fuel and other
related operating long-lived assets for impairment during the third quarter of 2005. We
determined that no impairment of these assets was required this quarter, partly due to the
estimated future cash flows from tax credits generated in the fourth quarter of 2005 from
synthetic fuel production. However, a decrease in future synthetic fuel production and
cash flows could require additional impairment evaluations in the fourth quarter of 2005,
which could result in a future impairment of these assets which have total carrying values
of approximately $115 million. The majority of these assets will be fully depreciated by
the end of 2007, the scheduled end of the Section 29 tax credit program. The outcome of
this matter cannot be determined.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | SALE OF PARTNERSHIP INTEREST
In
June 2004, through our subsidiary Progress Fuels, we sold in two transactions a combined
49.8 percent partnership interest in Colona, one of our synthetic fuel facilities.
Substantially all proceeds from the sales will be received over time, which is typical of
such sales in the industry. Gain from the sales will be recognized on a cost recovery
basis as the facility produces and sells synthetic fuel and when there is persuasive
evidence that the sales proceeds have become fixed or determinable and collectability is
reasonably assured. Based on projected production and tax credit levels, we anticipate
receiving total gross proceeds of approximately $22 million in 2005, approximately $32
million in 2006, approximately $34 million in 2007 and approximately $10 million through
the second quarter of 2008. Gain recognition is dependent on the synthetic fuel production
qualifying for Section 29 tax credits and the value of such tax credits as discussed
above. Until the gain recognition criteria are met, gains from selling interests in Colona
will be deferred. It is possible that gains will be deferred in the first, second and/or
third quarters of each year until there is persuasive evidence that no tax credit phase
out will occur for the applicable calendar year. This could result in shifting earnings
from earlier quarters to later quarters in a calendar year. In the event that the
synthetic fuel tax credits from the Colona facility are reduced, including an increase in
the price of oil that could limit or eliminate synthetic fuel tax credits, the amount of
proceeds realized from the sale could be significantly impacted. As of September 30, 2005,
a pre-tax gain on monetization of $17 million has been deferred. If oil prices remain at
current levels as of October 17, 2005, we anticipate that this gain would be recognized in
the fourth quarter of this year.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | ENERGY POLICY ACT
On
August 8, 2005, the Energy Policy Act of 2005 (EPACT) was signed into law. This new
federal law contains key provisions affecting the electric power industry, including the
redesignation of the Section 29 tax credit as a Section 45K general business credit. The
amount of Section 29 tax credits that we are currently allowed to claim in any calendar
year is limited by the amount of our regular federal income tax liability. Synthetic fuel
tax credit amounts allowed but not utilized are currently carried forward indefinitely as
deferred alternative minimum tax credits. The redesignation is effective on January 1,
2006 and removes the regular federal income tax liability limit on synthetic fuel
production and subjects the credits to a 20-year carry forward period. This provision
would allow us to produce synthetic fuel at a higher level should we choose to do so. We
cannot currently predict what impact the new law will have on our future synthetic
fuel production.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6.      

           We and our subsidiaries are involved in various litigation matters in the
          ordinary course of business, some of which involve substantial amounts. Where
          appropriate, we have made accruals and disclosures in accordance with SFAS No. 5
          to provide for such matters. In the opinion of management, the final disposition
          of pending litigation would not have a material adverse effect on our
          consolidated results of operations or financial position.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The
following Managements Discussion and Analysis is presented on a combined basis for
Progress Energy, Inc. (Progress Energy), Carolina Power & Light Company d/b/a Progress
Energy Carolinas, Inc. (PEC) and Florida Power Corporation d/b/a Progress Energy Florida,
Inc. (PEF). As used in this report, Progress Energy (which includes Progress Energy, Inc.
holding company (the Parent) and its regulated and nonregulated subsidiaries on a
consolidated basis), is at times referred to as we our or
us. When discussing Progress Energys financial information, it
necessarily includes the results of PEC and PEF (collectively, the Utilities). The term
Progress Registrants refers to each of the three separate registrants:
Progress Energy, PEC and PEF. 
The
following Managements Discussion and Analysis contains forward-looking statements
that involve estimates, projections, goals, forecasts, assumptions, risks and
uncertainties that could cause actual results or outcomes to differ materially from those
expressed in the forward-looking statements. Please review SAFE HARBOR FOR
FORWARD-LOOKING STATEMENTS for a discussion of the factors that may impact any such
forward-looking statements made herein and the Risk Factors sections of each of the
Progress Registrants respective annual reports on Form 10-K for the year ended
December 31, 2004. 
Amounts
reported in the interim Consolidated Statements of Income are not necessarily indicative
of amounts expected for the respective annual or future periods due to the effects of
seasonal temperature variations on energy consumption and the timing of maintenance on
electric generating units, among other factors. 
This
discussion should be read in conjunction with the accompanying financial statements found
elsewhere in this report and in conjunction with the Progress Registrants respective
2004 annual reports on Form 10-K.

RESULTS OF OPERATIONS

Our
reportable business segments and their primary operations include:

|                                                                                            |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         
|------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|o       
        
o       
        
o       
        
o       
        
        
        
o | Progress  Energy  Carolinas  Electric  (PEC  Electric)  -  primarily  engaged  in  the  generation,  transmission,
distribution and sale of electricity in portions of North Carolina and South Carolina;
PEF - primarily  engaged in the  generation,  transmission,  distribution  and sale of  electricity in portions of
Florida;
Competitive  Commercial  Operations  (CCO) - engaged in  nonregulated  electric  generation  operations and energy
marketing activities primarily in Georgia, North Carolina and Florida;
Fuels - primarily  engaged in natural gas drilling  and  production  in Texas and  Louisiana,  coal  mining,  coal
terminal services and fuel transportation and delivery primarily in Kentucky,  West Virginia and Virginia.
This  segment  also has an  operating  fee  agreement  with our  Synthetic  Fuel  operations  for the
procuring and processing of coal and the transloading and marketing of synthetic fuel; and
Synthetic  Fuels - engaged in the production  and sale of coal-based  solid  synthetic  fuels and the operation of
synthetic fuel facilities for outside parties in Kentucky, West Virginia and Virginia.

The
Corporate and Other segment includes businesses which do not meet the requirements for
separate segment reporting disclosure. These businesses are engaged in other nonregulated
business areas, including telecommunications, primarily in the eastern United States,
energy services operations, holding company operations and Progress Energy Service
Company, LLC (PESC) operations. 
Prior
to 2005, Rail Services was reported as a separate segment. In connection with the
divestiture of Progress Rail (see Note 3 to the Combined Notes to Interim Financial
Statements), the operations of Rail Services were reclassified to discontinued operations
in the first quarter of 2005 and therefore are no longer a reportable segment. In
addition, synthetic fuel activities were reported in the Fuels segment prior to 2005 and
now are considered a separate reportable segment. These reportable segment changes reflect
the current reporting structure. For comparative purposes, the prior year results have
been restated to conform to the current presentation. 
In
this section, earnings and the factors affecting earnings for the three and nine months
ended September 30, 2005 as compared to the same periods in 2004 are discussed. The
discussion begins with a summarized overview of our consolidated earnings, which is
followed by a more detailed discussion and analysis by business segment.

---

OVERVIEW
For
the quarter ended September 30, 2005, our net income was $450 million, or $1.82 per share,
compared to net income of $303 million, or $1.25 per share, for the same period in 2004.
The increase in net income as compared to prior year was due primarily to:

|              |                                                                                                                                                                                                                                                                         
|------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|o 
o 
o 
o 
o | Increased earnings from synthetic fuel operations.
Favorable weather at the Utilities.
The impact of tax levelization.
Non-recurring prior year income tax expenses and adjustments of certain tax matters.
Favorable customer growth and retail usage at the Utilities.

Partially offsetting these items were:

|                    |                                                                                                                                                                                                                                                                                                                                                                                                           
|------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|o 
o 
o 
o 
o 
o 
o | Decreased nonregulated generation earnings.
The change in accounting estimates for certain Energy Delivery capital costs. 
Increased outage costs and prior year project delays from storm restoration.
Increased employee pension and benefits expenses. 
A reduction in unrealized gains recorded on contingent value obligations.
Discontinued operations at Progress Rail.
Increased interest expense.

For
the nine months ended September 30, 2005, our net income was $542 million, or $2.20 per
share, compared to $565 million, or $2.33 per share for the same period in 2004. The
decrease in net income as compared to prior year was due primarily to:

|              |                                                                                                                                                                                                                                                                                                            
|------------- | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|o 
o 
o 
o 
o | Postretirement and severance charges related to the cost management initiative.
Discontinued operations at Progress Rail.
Decreased nonregulated generation earnings.
The write-off of unrecoverable storm costs in Florida. 
The change in accounting estimates for certain Energy Delivery capital costs.

Partially offsetting these items were:

|                 |                                                                                                                                                                                                                                                                                              
|---------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|o 
o 
o 
o 
o 
o | Increased synthetic fuel earnings.
Customer growth at the Utilities.
Favorable wholesale sales in Florida.
Gain recorded on the sale of distribution assets in Florida. 
Non-recurring prior year income tax expenses and adjustments of certain tax matters.
The impact of tax levelization.

Basic
earnings per share decreased in 2005 due in part to the factors outlined above. Dilution
related to the issuances of an aggregate of approximately 4 million and 1 million shares
of common stock under our Investor Plus Stock Purchase Plan and employee benefit programs
for the year to date in 2005 and the year ended December 31, 2004, respectively, also
reduced basic earnings per share by $0.04 for both the three and nine months ended
September 30, 2005.

---

Our
segments contributed the following profits or losses for the three and nine months ended
September 30, 2005 and 2004:

|                                                     | Three Months Ended
  September 30, | Nine Months Ended
  September 30,
|---------------------------------------------------- | ---------------------------------- | ---------------------------------
|(in millions)                                        | 2004                               | 2004                             
|Business Segment:                                    |                                    |                                  
|PEC Electric                                         |                                    | $ 184                            
|PEF                                                  |                                    | 151                              
|Fuels                                                |                                    | 18                               
|CCO                                                  |                                    | (13                              
|Synthetic Fuel                                       |                                    | 71                               
|                                                    
|Total Segment Profit                                 |                                    | 411                              
|Corporate and Other                                  |                                    | 39                               
|                                                    
|Income from continuing operations                    |                                    | 450                              
|Discontinued operations, net of tax                  |                                    | (1                               
|Cumulative effect of change in accounting principles |                                    | 1                                
|                                                    
|Net income                                           |                                    | $ 450                            
|                                                    

COST MANAGEMENT INITIATIVE 
On
February 28, 2005, as part of a previously announced cost management initiative, we
approved a workforce restructuring which resulted in a reduction of approximately 450
positions. The cost management initiative is designed to permanently reduce by $75 million
to $100 million our projected growth in annual operation and maintenance (O&M)
expenses by the end of 2007. In addition to the workforce restructuring, the cost
management initiative included a voluntary enhanced retirement program. In connection with
this initiative, we incurred approximately $177 million of pre-tax charges for severance
and postretirement benefits during the nine months ended September 30, 2005, as described
below. 
We
recorded $31 million of severance expense during the first quarter of 2005 for the
workforce restructuring and implementation of an automated meter reading initiative at PEF
based on the approximate number of positions to be eliminated. During the second quarter
of 2005, 1,447 employees eligible for participation in the voluntary enhanced retirement
program elected to participate. Consequently, in the second quarter of 2005, we decreased
our estimated severance costs by $13 million due to the impact of the employees electing
participation in the voluntary enhanced retirement program. The severance expenses are
primarily included in O&M expense on the Consolidated Statements of Income and will be
paid over time. 

During
2005, we recorded a $141 million charge in the second quarter and a $1 million charge in
the third quarter related to postretirement benefits that will be paid over time to
eligible employees who elected to participate in the voluntary enhanced retirement
program. See Note 9 of the Combined Notes to Interim Financial Statements for additional
information on postretirement benefits. In addition, we recorded a $17 million charge for
early retirement incentives to be paid over time to certain employees. 
The
cost management initiative charges are subject to revision in future quarters based on
completion of the workforce restructuring and the potential additional impacts that the
early retirements and outplacements may have on our postretirement plans. Such revisions
may be significant and may adversely impact our results of operations in future periods.
In addition, we expect to incur certain incremental costs for recruiting and staff
augmentation activities that cannot be quantified at this time.

PROGRESS ENERGY CAROLINAS ELECTRIC 
PEC
Electrics operations are identical to PECs consolidated operations as
PECs nonregulated activities are not material. PEC Electric contributed segment
profits of $184 million and $175 million for the three months ended September 30, 2005 and
2004, respectively. Results for 2005 were impacted by favorable weather, customer growth
and increased usage. These favorable items were partially offset by higher O&M
expenses and higher interest expense. 
PEC
Electric contributed segment profits of $368 million and $388 million for the nine months
ended September 30, 2005 and 2004, respectively. Results for 2005 were unfavorably
impacted by higher O&M costs primarily due to postretirement and severance costs
associated with the cost management initiative, the change in accounting estimates for
certain Energy Delivery capital costs and higher interest expense. These unfavorable items
were partially offset by favorable customer growth and usage, the impact of current year
income tax adjustments and favorable weather.

Three months ended September 30, 2005 compared to the three months ended September 30, 2004

Revenues
PEC
Electrics revenues for the three months ended September 30, 2005 and 2004, and the
percentage change by customer class are as follows:

|                           | Three Months Ended September 30,
|-------------------------- | --------------------------------
|(in millions of $)        
|Customer Class:            |                                 
|Residential                |                                 
|Commercial                 |                                 
|Industrial                 |                                 
|Governmental               |                                 
|Total retail revenues      |                                 
|Wholesale                  |                                 
|Unbilled                   |                                 
|Miscellaneous              |                                 
|Total electric revenues    |                                 
|Less:                      |                                 
|Pass-through fuel revenues |                                 
|Revenues excluding fuel    |                                 
|                          

PEC
Electrics energy sales for the three months ended September 30, 2005 and 2004, and
the amount and percentage change by customer class are as follows:

|                          | Three Months Ended September 30,
|------------------------- | --------------------------------
|(in millions of kWh)     
|Customer Class:           |                                 
|Residential               |                                 
|Commercial                |                                 
|Industrial                |                                 
|Governmental              |                                 
|Total retail energy sales |                                 
|Wholesale                 |                                 
|Unbilled                  |                                 
|Total kWh sales           |                                 
|                         

PEC
Electrics revenues, excluding recoverable fuel revenues of $367 million and $252
million for the three months ended September 30, 2005 and 2004, respectively, increased
$56 million. The increase in revenues is attributable primarily to favorable weather and
favorable retail growth and usage, partially offset by decreased wholesale revenues less
fuel. The impact of weather was $51 million favorable with cooling degree days 33 percent
above prior year. Favorable growth and usage of $11 million was driven by an increase in
the average number of customers as of September 30, 2005, compared to September 30, 2004,
of 27,000. The decrease in wholesale revenues less fuel of $4 million was driven primarily
by the impact of higher fuel costs resulting from higher fuel prices, some of which
related to Hurricanes Katrina and Rita, and changes in fuel mix related to outages. These
unfavorable impacts to wholesale sales were partially offset by increased capacity under
contract.

Expenses

Fuel and Purchased Power

PEC
Electrics fuel and purchased power costs represent the costs of generation, which
include fuel purchases for generation, as well as energy purchased in the market to meet
customer load. Fuel and purchased power expenses are recovered primarily through cost
recovery clauses, and as such changes in these expenses do not have a material impact on
earnings. The difference between fuel and purchased power costs incurred and associated
fuel revenues that are subject to recovery is deferred for future collection from or
refund to customers. 
PEC
Electrics fuel and purchased power expenses were $436 million for the three months
ended September 30, 2005, which represents a $120 million increase compared to the same
period in the prior year. Fuel used in electric generation increased $62 million to $282
million compared to the prior year. This increase is due to an increase in fuel used in
generation of $146 million due primarily to higher fuel costs which are being driven
primarily by rising coal, oil and natural gas prices. This increase in fuel used in
generation was partially offset by a reduction in deferred fuel expense of $82 million due
to the under-recovery of current year fuel costs (see Note 5 of the Combined Notes to
Interim Financial Statements). Purchased power expense increased $58 million to $154
million compared to the prior year. Current year purchased power costs were higher due to
price increases and changes in volume during the third quarter of 2005.

O&M
PEC
Electrics O&M expenses were $235 million for the three months ended September
30, 2005, which represents a $38 million increase compared to the same period in 2004.
O&M expenses increased $13 million due to outages at the nuclear facilities; $11
million related to pension and benefit expense; $7 million due to higher emission
allowance expense; and $7 million related to the change in accounting estimates for
certain Energy Delivery capital costs. See discussion of change in Energy Delivery
capitalization practice in Note 6E of PECs annual report on Form 10-K for the year
ended December 31, 2004. In addition, expenses increased $6 million due to storm
restoration costs associated with Hurricane Ophelia. These unfavorable items were
partially offset by lower storm costs associated with Hurricanes Charley and Ivan, which
were included in the prior quarter O&M expenses.

Depreciation and Amortization
PEC
Electrics depreciation and amortization expense was $130 million for the three
months ended September 30, 2005, which represents a $9 million decrease compared to the
same period in 2004. Depreciation expense decreased $13 million due to the impact of
reduced depreciation rates from the 2004 depreciation study. This was partially offset by
higher NC Clean Air amortization of $7 million.

Total interest charges, net
PEC
Electrics interest expense has increased $9 million for the three months ending
September 30, 2005, as compared to the same period in the prior year. This fluctuation is
due primarily to interest expense related to adjustments of certain tax matters, the
impact of higher variable interest rates on pollution control bonds and the impact of
increased short term borrowings.

Income tax expense
GAAP
requires companies to apply a levelized effective tax rate to interim periods that is
consistent with the estimated annual effective tax rate. PEC Electrics income tax
expense was increased by $3 million for the three months ended September 30, 2005, in
order to maintain an effective tax rate consistent with the estimated annual rate.
Fluctuations in estimated annual earnings and the timing of various permanent and
temporary deductions can also cause fluctuations in the effective tax rate for interim periods.
Therefore, this adjustment will vary each quarter, but will have no effect on net income
for the year. The remaining fluctuation in income tax expense is attributable to favorable
adjustments of certain tax matters partially offset by the impact of higher earnings
compared to prior year.

---

Nine months ended September 30, 2005 compared to the nine months ended September 30, 2004

Revenues
PEC
Electrics revenues for the nine months ended September 30, 2005 and 2004, and the
percentage change by customer class are as follows:

|                           | Nine Months Ended September 30,
|-------------------------- | -------------------------------
|(in millions of $)        
|Customer Class:            |                                
|Residential                |                                
|Commercial                 |                                
|Industrial                 |                                
|Governmental               |                                
|Total retail revenues      |                                
|Wholesale                  |                                
|Unbilled                   |                                
|Miscellaneous              |                                
|Total electric revenues    |                                
|Less:                      |                                
|Pass-through fuel revenues |                                
|Revenues excluding fuel    |                                
|                          

PEC Electric's energy sales for the nine months ended September 30, 2005 and 2004, and the amount and percentage
         change by customer class are as follows:

|                          | Nine Months Ended September 30,
|------------------------- | -------------------------------
|(in millions of kWh)     
|Customer Class:           |                                
|Residential               |                                
|Commercial                |                                
|Industrial                |                                
|Governmental              |                                
|Total retail energy sales |                                
|Wholesale                 |                                
|Unbilled                  |                                
|Total kWh sales           |                                
|                         

PEC
Electrics revenues, excluding recoverable fuel revenues of $877 million and $712
million for the nine months ended September 30, 2005 and 2004, respectively, increased $39
million. The increase in revenues is attributable primarily to favorable retail growth and
usage and favorable weather. Favorable growth and usage of $36 million was driven by an
increase in the average number of customers as of September 30, 2005, compared to
September 30, 2004, of 27,000. The impact of weather is $4 million favorable with cooling
degree days five percent above prior year. Wholesale revenues less fuel was approximately
the same as 2004 primarily due to higher fuel costs during the current period partially
offset by increased capacity under contract.

Expenses

Fuel
and Purchased Power
Fuel
and purchased power costs represent the costs of generation, which include fuel purchases
for generation, as well as energy purchased in the market to meet customer load. Fuel and
purchased power expenses are recovered primarily through cost recovery clauses, and as
such, changes in these expenses do not have a material impact on earnings. The difference
between fuel and purchased power costs incurred and associated fuel revenues that are
subject to recovery is deferred for future collection from or refund to customers. 
PEC
Electrics fuel and purchased power expenses were $1.04 billion for the nine months
ended September 30, 2005, which represents a $165 million increase compared to the same
period in the prior year. Fuel used in electric generation increased $109 million to $746
million compared to September 30, 2004. This increase is due to an increase in fuel used
in generation of $216 million due primarily to higher coal costs and higher natural gas
volumes and costs. The increase in fuel used in generation was offset by a reduction in
deferred fuel expense of $106 million as a result of the under-recovery of current period
fuel costs offset partially by the write-off of $5 million in deferred fuel costs as a
result of the South Carolina annual fuel hearing. Purchased power expense increased $56
million to $294 million compared to prior year primarily due to a change in volumes in the
current period.

O&M
PEC
Electrics O&M expenses were $719 million for the nine months ended September 30,
2005, which represents an $87 million increase compared to the same period in 2004.
Postretirement and severance expenses related to the cost management initiative increased
O&M expenses by $60 million during 2005. This is an increase of $57 million compared
to the same period in 2004 as prior year expenses included $3 million related to a
separate initiative. In addition, O&M expenses increased $20 million related to the
change in accounting estimates for certain Energy Delivery capital costs, $19 million
related to pension and benefit expenses, $15 million for higher emission allowance
expenses and $6 million related to Hurricane Ophelia storm restoration costs. See
discussion of change in Energy Delivery capitalization practice in Note 8F of Progress
Energys annual report on Form 10-K for the year ended December 31, 2004. These
unfavorable items were partially offset by decreased plant outage costs of $9 million
compared to 2004, which included an additional nuclear plant outage. In addition, results
for 2004 included $19 million of costs associated with an ice storm that impacted the
Carolinas service territory in the first quarter of 2004 and Hurricanes Charley and Ivan
that impacted the Carolinas service territory in the third quarter of 2004.

Depreciation
and Amortization
PEC
Electrics depreciation and amortization expense was $389 million for the nine months
ended September 30, 2005, which represents a $4 million decrease compared to the same
period in 2004. The decrease is attributable to a reduction in depreciation expense of $42
million related to the depreciation studies filed in 2004 which reduced depreciation
rates. Depreciation rates are the same for 2005 and 2004; however, the 2004 year to date
retroactive adjustment for the new rates adopted related to the expanded lives of the
nuclear units was made in November 2004. These decreases were partially offset by higher
NC Clean Air amortization of $30 million and higher depreciation for assets placed in
service of $8 million.

Other
income, net
PEC
Electrics other income, net has increased $8 million for the nine months ending
September 30, 2005 as compared to the same period in the prior year. This increase is due
primarily to a write-off of $7 million of non-trade receivables in the prior year.

Total
interest charges, net
PEC
Electrics interest expense has increased $13 million to $157 million for the nine
months ending September 30, 2005, as compared to the same period in the prior year. This
fluctuation is due primarily to interest expense related to adjustments of certain tax
matters, the impact of higher variable interest rates on pollution control bonds and the
impact of increased short term borrowings.

Income
tax expense
GAAP
requires companies to apply a levelized effective tax rate to interim periods that is
consistent with the estimated annual effective tax rate. PEC Electrics income tax
expense was increased by $6 million for the nine months ended September 30, 2005, in order
to maintain an effective tax rate consistent with the estimated annual rate. Fluctuations
in estimated annual earnings and the timing of various permanent and temporary deductions
can also cause fluctuations in the effective tax rate for interim periods. Therefore, this
adjustment will vary each quarter, but will have no effect on net income for the year. The
remaining fluctuation in income tax expense is attributable primarily to reduced earnings
compared to prior year, favorable adjustments of certain tax matters and current year tax
reserve credits.

PROGRESS ENERGY FLORIDA 
PEF
contributed segment profits of $151 million and $140 million for the three months ended
September 30, 2005 and 2004, respectively. The increase in profits for the three months
ended September 30, 2005, when compared to 2004, is primarily due to the favorable impact
of weather, favorable retail customer growth and usage and higher wholesale sales,
partially offset by higher O&M expenses (as a result of certain planned O&M
projects deferred during the third quarter of 2004 as result of hurricane restoration
efforts, the change in accounting estimates for certain Energy Delivery capital costs and
increased pension and benefit costs), and an increase in the provision for rate refund. 
PEF
contributed segment profits of $204 million and $273 million for the nine months ended
September 30, 2005 and 2004, respectively. The decrease in profits for the nine months
ended September 30, 2005, when compared to 2004, is primarily due to higher O&M
expenses (as a result of postretirement and severance costs, the write-off of unrecovered
storm costs and the change in accounting estimates for certain Energy Delivery capital
costs) and lower average usage per retail customer partially offset by the favorable
impact of weather, higher wholesale sales, favorable retail customer growth and the gain
on the sale of the City of Winter Park, Florida (Winter Park) distribution system.

Three
months ended September 30, 2005 as compared to the three months ended September 30, 2004

Revenues
PEFs
revenues for the three months ended September 30, 2005 and 2004, and the amount and
percentage change by customer class are as follows:

|                         | Three Months Ended September 30,
|------------------------ | --------------------------------
|(in millions of $)      
|Customer Class:          |                                 
|Residential              |                                 
|Commercial               |                                 
|Industrial               |                                 
|Governmental             |                                 
|Retail revenue sharing   |                                 
|Total retail revenues    |                                 
|Wholesale                |                                 
|Unbilled                 |                                 
|Miscellaneous            |                                 
|Total electric revenues  |                                 
|Less:                    |                                 
|Pass-through revenues    |                                 
|Revenues excluding pass- |                                 
|through revenues         |                                 
|                        

PEF's  electric  energy  sales for the three  months  ended  September  30, 2005 and 2004,  and the amount and
         percentage change by customer class are as follows:

|                          | Three Months Ended September 30,
|------------------------- | --------------------------------
|(in millions of kWh)     
|Customer Class:           |                                 
|Residential               |                                 
|Commercial                |                                 
|Industrial                |                                 
|Governmental              |                                 
|Total retail energy sales |                                 
|Wholesale                 |                                 
|Unbilled                  |                                 
|Total kWh sales           |                                 
|                         

PEFs
revenues, excluding recoverable fuel and other pass-through revenues of $779 million and
$623 million for the three months ended September 30, 2005 and 2004, respectively,
increased $42 million. The increase in revenues is due to the favorable impact of weather
of $22 million with cooling degree days 19 percent above prior year, favorable growth and
usage of $20 million driven by a 30,000 average net increase in the number of customers as
of September 30, 2005, compared to September 30, 2004, and favorable wholesale revenues,
net of fuel, of $6 million. In addition to customer growth, the retail revenue increase
related to growth and usage was impacted by a reduction in revenues of approximately $12 million in
the third quarter of 2004 related to customer outages caused by Hurricanes Charley,
Frances and Jeanne. Wholesale revenue favorability is attributable primarily to new
contracts. These increases were partially offset by an unfavorable provision for rate
refund of $7 million due to higher base revenues as indicated above.

---

ExpensesFuel
and Purchased Power
Fuel
and purchased power costs represent the costs of generation, which include fuel purchases
for generation, as well as energy purchased in the market to meet customer load. Fuel and
purchased power expenses are recovered primarily through cost recovery clauses, and, as
such changes in these expenses do not have a material impact on earnings. The difference
between fuel and purchased power costs incurred and associated fuel revenues that are
subject to recovery is deferred for future collection from or refund to customers. 
PEFs
fuel and purchased power expenses were $621 million for the three months ended September
30, 2005, which represents a $113 million increase compared to prior year. This increase
is due to increases in fuel used in electric generation and purchased power expenses of
$16 million and $97 million, respectively. Increased fuel costs in the current year
account for $143 million of the increase in fuel used in electric generation. This was
partially offset by a decrease of $129 million in deferred fuel expense as fuel expenses in the current
year have been under-recovered. In December 2004, the FPSC approved PEFs request for
a cost recovery adjustment in its annual filing due to the rising cost of fuel. Fuel
recovery rates increased effective January 1, 2005 (see Note 5 of the Combined Notes to
Interim Financial Statements). The increase in purchased power expense was primarily due
to higher prices of purchases in the current year as a result of increased fuel costs.

O&M
PEFs O&M expenses were $181 million for the three months ended September 30, 2005, which
represents an increase of $43 million, when compared to the $138 million incurred during
the three months ended September 30, 2004. O&M expenses increased $11 million for
increased pension and benefit expenses, $7 million primarily for certain planned O&M
projects deferred during the third quarter of last year as a result of hurricane
restoration efforts and $7 million primarily due to the timing of outages and maintenance
projects. O&M expenses also increased $9 million primarily related to the change in
accounting estimates for certain Energy Delivery capital costs. See discussion of change
in Energy Delivery capitalization practice in Note 8F of Progress Energys annual
report on Form 10-K for the year ended December 31, 2004. The remaining increase in
O&M expense is attributable to higher environmental cost recovery expenses (primarily
emission allowances) of $9 million. The environmental cost recovery expenses are
pass-through expenses and have no impact on earnings.

Depreciation
and Amortization
PEFs
depreciation and amortization expense increased $27 million to $95 million for the three
months ended September 30, 2005. The increase is primarily due to the amortization of $24
million in storm costs which began in August 2005 (see Note 5 of the Combined Notes to the
Interim Financial Statements). Storm cost amortization is a pass-through expense and has
no impact on earnings.

Income
tax expense
GAAP
requires companies to apply a levelized effective tax rate to interim periods that is
consistent with the estimated annual effective tax rate. PEFs income tax expense was
decreased by $9 million for the three months ended September 30, 2005, in order to
maintain an effective tax rate consistent with the estimated annual rate. Fluctuations in
estimated annual earnings and the timing of various permanent and temporary deductions can
also cause fluctuations in the effective tax rate for interim periods. Therefore, this
adjustment will vary each quarter, but will have no effect on net income for the year. The
remaining fluctuation in income tax expense is attributable to higher earnings compared to
prior period and adjustments of certain tax matters.

---

Nine
months ended September 30, 2005 as compared to nine months ended September 30, 2004

Revenues 
PEFs
revenues for the nine months ended September 30, 2005 and 2004, and the amount and
percentage change by customer class are as follows:

|                         | Nine Months Ended September 30,
|------------------------ | -------------------------------
|(in millions of $)      
|Customer Class:          |                                
|Residential              |                                
|Commercial               |                                
|Industrial               |                                
|Governmental             |                                
|Retail revenue sharing   |                                
|Total retail revenues    |                                
|Wholesale                |                                
|Unbilled                 |                                
|Miscellaneous            |                                
|Total electric revenues  |                                
|Less:                    |                                
|Pass-through revenues    |                                
|Revenues excluding pass- |                                
|through revenues         |                                
|                        

PEF's  electric  energy  sales for the nine  months  ended  September  30,  2005 and 2004,  and the amount and
         percentage change by customer class are as follows:

|                          | Nine Months Ended September 30,
|------------------------- | -------------------------------
|(in millions of kWh)     
|Customer Class:           |                                
|Residential               |                                
|Commercial                |                                
|Industrial                |                                
|Governmental              |                                
|Total retail energy sales |                                
|Wholesale                 |                                
|Unbilled                  |                                
|Total kWh sales           |                                
|                         

PEFs
revenues, excluding recoverable fuel and other pass-through revenues of $1.876 billion and
$1.617 billion for the nine months ended September 30, 2005 and 2004, respectively,
increased $51 million. The increase in revenues is due to favorable current year weather
of $15 million with cooling degree days 12 percent higher than prior year, favorable
retail customer growth of $18 million driven by an net average increase in the number of
customers as of September 30, 2005, compared to September 30, 2004, of 30,000 and $17
million of increased wholesale revenues net of fuel. In addition to customer growth, the
retail revenue increase related to growth was impacted by a reduction in revenues of approximately $12
million in the third quarter of 2004 related to customer outages caused by Hurricanes
Charley, Frances and Jeanne. Wholesale revenue improvement is attributable primarily to
new contracts. These increases were partially offset by lower average usage per retail
customer of $9 million.

ExpensesFuel
and Purchased Power
Fuel
and purchased power costs represent the costs of generation, which include fuel purchases
for generation, as well as energy purchased in the market to meet customer load. Fuel and
purchased power expenses are recovered primarily through cost recovery clauses, and, as
such changes in these expenses do not have a material impact on earnings. The difference
between fuel and purchased power costs incurred and associated fuel revenues that are
subject to recovery is deferred for future collection from or refund to customers.


PEFs fuel and purchased power expenses were $1.511 billion for the nine months ended September
30, 2005, which represents an $198 million increase compared to prior year. This increase
is due to increases in fuel used in electric generation and purchased power expenses of
$86 million and $112 million, respectively. Higher system requirements and increased fuel
costs in the current year account for $196 million of the increase in fuel used in
electric generation. This was offset by a decrease of $107 million in deferred fuel
expense due to an under-recovery of fuel expenses in the current year. In December 2004,
the FPSC approved PEFs request for a cost recovery adjustment in its annual filing
due to the rising cost of fuel. Fuel recovery rates increased effective January 1, 2005
(see Note 5 of the Combined Notes to Interim Financial Statements). The increase in
purchased power expense was primarily due to higher prices of purchases in the current
year as a result of increased fuel costs. O&M
PEFs
O&M expenses were $658 million for the nine months ended September 30, 2005, which
represents an increase of $208 million, when compared to the $450 million incurred during
the nine months ended September 30, 2004. Postretirement and severance costs associated
with the cost management initiative increased O&M costs by $108 million during 2005.
In addition, PEF wrote-off $17 million of unrecoverable storm costs associated with the
2004 hurricanes (see Note 5 of the Combined Notes to Interim Financial Statements).
O&M expense also increased $25 million primarily related to the change in accounting
estimates for certain Energy Delivery capital costs. See discussion of change in Energy
Delivery capitalization practice in Note 8F of Progress Energys annual report on
Form 10-K for the year ended December 31, 2004. O&M expense increased $20 million due
to higher environmental cost recovery expenses (primarily emission allowances). The
environmental cost recovery expenses are pass-through expense and have no impact on
earnings. The remaining increase in O&M expense is attributable to an $8 million
workers compensation benefit adjustment recorded in 2005 as a result of an actuarial study
and $9 million of increased pension and benefit expense. Depreciation
and AmortizationPEFs
depreciation and amortization expense increased $27 million to $236 million for the nine
months ended September 30, 2005. The increase is primarily due to the amortization of $24
million in storm costs which began in August 2005 (see Note 5 of the Combined Notes to
Interim Financial Statements). Storm cost amortization is a pass-through expense and has
no impact on earnings. Other
Other
operating expenses decreased $24 million due to the pre-tax gain recognized on the sale of
the Winter Park distribution system (see Note 5 of the Combined Notes to Interim Financial
Statements). Other
income, net
PEFs
other income, net has increased $6 million for the nine months ended September 30, 2005 as
compared to the prior year. This increase is due to an increase in the equity component of
the allowance for funds used during construction of $7 million as a result of the Hines
Unit 3 & Unit 4 construction projects. This favorable item was offset partially by the
FERC Code of Conduct audit settlement that required $3 million to be refunded to customers
(see Note 13 of the Combined Notes to Interim Financial Statements). Total
interest charges, net
PEFs
total interest charges, net increased $6 million to $90 million for the nine months ended
September 30, 2005 as compared to $84 million for the nine months ended September 30,
2004. This increase is due primarily to additional commercial paper and internal money
pool borrowings related to unrecovered storm and fuel costs and interest on long term
debt. Income
tax expense 
GAAP
requires companies to apply a levelized effective tax rate to interim periods that is
consistent with the estimated annual effective tax rate. PEFs income tax expense was
not changed for the nine months ended September 30, 2005, in order to maintain an
effective tax rate consistent with the estimated annual rate. Fluctuations in estimated
annual earnings and the timing of various permanent and temporary deductions can also
cause fluctuations in the effective tax rate for interim periods. Therefore, this
adjustment will vary each quarter, but will have no effect on net income for the year. The
remaining fluctuation in income tax expense is attributable to reduced earnings compared
to prior year and adjustments of certain tax matters.

DIVERSIFIED BUSINESSES
Our
diversified businesses consist of the Fuels segment, the CCO segment and the Synthetic
Fuels segment. These businesses are explained in more detail below. FUELS
The
Fuels segment operations include natural gas drilling and production, coal terminal
operations, coal mining, fuel transportation and delivery. This segment also has an
operating fee agreement with our Synthetic Fuel operations for the procuring and
processing of coal and the transloading and marketing of synthetic fuel. The following
summarizes Fuels segment profits for the three and nine months ended September 30,
2005 and 2004:

|                               | Three Months Ended
  September 30, | Nine Months Ended
    September 30,
|------------------------------ | ---------------------------------- | -----------------------------------
|(in millions)                 
|Gas production                 |                                    | $17                                
|Coal fuel and other operations |                                    | 1                                  
|                              
|Segment Profits                |                                    | $18                                
|                              

Natural Gas Operations 
Natural
gas operations generated profits of $17 million for the three months ended September 30,
2005 and $15 million for the three months ended September 30, 2004, and $41 million and
$40 million for the nine months ended September 30, 2005 and 2004, respectively. The
increase in gas earnings compared to prior year is attributable to higher natural gas
prices partially offset by reduced production as a result of the sale of certain gas
assets in 2004. In December 2004, we sold certain gas-producing properties and related
assets owned by Winchester Production Company, Ltd., a subsidiary of Progress Fuels with
gas operations in north Texas. In addition, results for the three and nine months ended
September 30, 2005 were positively impacted by recognition in the third quarter of 2005 of
a deferred gain of $5 million pre-tax on the sale of the North Texas gas operations. The
following summarizes the gas production, revenues and gross margins for the three and nine
months ended September 30, 2005 and 2004 by production facility:

|                             | Three Months Ended
    September 30, | Nine Months Ended
   September 30,
|---------------------------- | ------------------------------------ | ----------------------------------
|2004                         | 2004                                
|Production in Bcf equivalent |                                      |                                   
|East Texas/LA gas operations |                                      | 6.2                               
|North Texas gas operations   |                                      |                                  
|                            
|Total Production             |                                      | 6.2                               
|                            
|Revenues in millions         |                                     
|East Texas/LA gas operations |                                      | $43                               
|North Texas gas operations   |                                      |                                  
|                            
|Total Revenues               |                                      | $43                               
|                            
|Gross Margin                 |                                     
|in millions of $             |                                      | $34                               
|As a % of revenues           |                                      | 79                                
|                            

Coal Fuel and Other Operations 
Coal
fuel and other operations generated segment profits of $1 million for the three months
ended September 30, 2005 compared to segment profits of $5 million for the three months
ended September 30, 2004. The decrease in earnings compared to the prior period is due to
higher coal mining costs (due to rising prices of fuel and steel) partially offset by
increased sales volumes in the current year. 
Coal
fuel and other operations were essentially breakeven for the nine months ended September
30, 2005 compared to segment profit of $7 million for the nine months ended September 30,
2004. The decrease in earnings of $7 million is due primarily to higher coal mining costs
of $39 million pre-tax (due to increased production volumes, poor mining conditions and
mining start up costs), a workers compensation accrual adjustment booked during the first
quarter of 2005 of $5 million pre-tax and postretirement and severance costs of $6 million
pre-tax as a part of the cost management initiative. This unfavorability was partially
offset by increased revenues as a result of higher coal prices. 
We
are exploring strategic alternatives regarding the Fuels coal mining business, which
could include divesting these assets. As of September 30, 2005, the carrying value of
long-lived assets of the coal mining business was $64 million. We cannot currently predict
the outcome of this matter.

COMPETITIVE COMMERCIAL OPERATIONS
CCOs
operations generated segment losses of $13 million for the three months ended September
30, 2005 compared to segment profit of $14 million in the prior year. The decrease in
earnings compared to prior year is due primarily to a reduction in gross margin of $47
million pre-tax ($28 million after-tax) offset partially by favorable interest expense.
Contract margins are unfavorable compared to prior year due to the expiration of certain
tolling agreements, decreased earnings from new and existing full-requirements contracts
due to higher fuel and purchased power costs and unrealized mark-to-market losses. This
margin unfavorability was partially offset by lower interest expense of $3 million pre-tax
($2 million after-tax) compared to the prior period due to the termination of CCOs
Genco financing arrangement in December 2004. 
CCOs
operations generated segment losses of $21 million for the nine months ended September 30,
2005 compared to segment profit of $11 million in the prior period. The decrease in
earnings compared to prior year is due primarily to a reduction in gross margin of $62
million pre-tax ($37 million after-tax) offset partially by favorable amortization expense
and interest expense. Contract margins are unfavorable compared to prior year due to the
expiration of certain tolling agreements, decreased earnings from new and existing
full-requirements contracts due to higher fuel and purchased power costs and unrealized
mark-to-market losses. In addition, results in the current year include $2 million
pre-tax ($1 million after-tax) in postretirement and severance costs associated with the
cost management initiative. Depreciation and amortization expenses decreased $5 million
pre-tax ($3 million after-tax) as a result of the expiration of certain acquired contracts
that were subject to amortization. Interest expense decreased $8 million pre-tax ($5
million after-tax) due to the termination of the Genco financing arrangement in December
2004.

|                          | Three Months Ended
    September 30, | Nine Months Ended 
   September 30,
|------------------------- | ------------------------------------ | -----------------------------------
|(in millions)             | 2004                                 | 2004                               
|Total revenues            |                                      | $ 267                              
|Gross margin              |                                     
|In millions of $          |                                      | $   16                             
|As a % of revenues        |                                      | 6                                  
|Segment earnings (losses) |                                      | $  (13                             
|                         

We
have contracts for our planned production capacity, which includes callable resources from
the cooperatives, of approximately 77 percent for 2005, approximately 86 percent for 2006
and approximately 81 percent for 2007. We continue to seek opportunities to optimize our
nonregulated generation portfolio. 
In
accordance with accounting standards for goodwill and long-lived assets, we have continued
to monitor the carrying value of our goodwill and long-lived assets in our Georgia region.
Our analyses have continued to support the carrying value of the $64 million of goodwill
and the $960 million of long-lived assets in this region. Future adverse changes in market
conditions or changes in business conditions could require future impairment evaluations
of these or other assets, which could result in an impairment charge.

SYNTHETIC FUEL
The
synthetic fuel operations generated segment profits of $71 million for the three months
ended September 30, 2005, compared to a loss of $57 million for the three months ended
September 30, 2004, and segment profits of $93 million and $15 million for the nine months
ended September 30, 2005 and 2004, respectively. The production and sale of coal-based
solid synthetic fuel generate operating losses, but qualify for tax credits under Section
29 of the Code, which typically more than offset the effect of such losses. See Note 15 of
the Combined Notes to Interim Financial Statements.

The
operations resulted in the following for the three and nine months ended September 30,
2005 and 2004:

|                                        | Three Months Ended 
   September 30, | Nine Months Ended
  September 30,
|--------------------------------------- | ------------------------------------ | ---------------------------------
|(in millions)                           | 2004                                 | 2004                             
|Tons sold                               |                                      | 3.0                              
|                                       
|Operating losses, excluding tax credits |                                      | $(38                             
|Tax credits generated                   |                                      | 82                               
|Tax credits recognized (reversed)       |                                      | 27                               
|                                       
|Segment profits (losses)                |                                      | $ 71                             
|                                       

Synthetic fuels earnings for
the three months ended September 30, 2005, as compared to the same period in the prior
year, were positively impacted by higher sales in the current year, the reversal of $79
million of tax credits in the prior year as a result of hurricane costs which reduced our
projected 2004 regular federal income tax liability and the recognition of
$27 million of tax credits in the current year. During the third quarter of 2005, we
recorded $27 million of tax credits that had previously not been recognized as part of
finalizing our 2004 regular federal income tax liability. These credits were not
previously recognized due to the decrease in tax liability resulting from expenses
incurred for the 2004 hurricanes and loss on sale of Progress Rail. The increase in sales
is due primarily to lower sales in the prior year due to the hurricanes.

Synthetic fuels earnings for
the nine months ended September 30, 2005, as compared to the same period in the prior
year, were positively impacted by the reversal of $79 million of tax credits in the prior
year as a result of the impact of hurricane costs which reduced our projected 2004 regular tax liability and the recognition of $10 million of tax credits in
the current year, partially offset by higher production costs. During the third quarter of
2005, we recorded $27 million of tax credits that had previously not been recognized as
part of finalizing our 2004 regular federal income tax liability. This includes $17
million of tax credits that were reversed in the first quarter of 2005 due to the loss on
sale of Progress Rail. See Note 15 of the Combined Notes to Interim Financial Statements
for further discussion.

SeeOther Matters below for a discussion of uncertainties surrounding our
synthetic fuel production in 2006.

CORPORATE AND OTHER
Corporate
and Other consists of the operations of the Parent, PESC and other consolidating and
non-operating entities. Corporate and Other also includes other nonregulated business
areas including the telecommunications operations of Progress Telecom, LLC (PT LLC) and
the energy management operations of Strategic Resource Solutions (SRS). PT LLC operations
provide broadband capacity services, dark fiber and wireless services in Florida and the
eastern United States. SRS was engaged in providing energy services to industrial,
commercial and institutional customers to help manage energy costs primarily in the
southeastern United States. During 2004, SRS sold its subsidiary, Progress Energy
Solutions, and we exited this business area. Other Nonregulated Business Areas 
Other
nonregulated businesses contributed segment profits of $2 million for the three months
ended September 30, 2005 compared to segment losses of $2 million for the three months
ended September 30, 2004. This favorability is due primarily to an increase in earnings at
SRS. During the third quarter of 2005, SRS recorded insurance proceeds associated with the
San Francisco United School District matter. This was partially offset by the recording of
a settlement related to a military contract. In addition, PT LLC also increased earnings
due to recording a litigation settlement during the third quarter of 2005. 
Other
nonregulated businesses were essentially break even for the nine months ended September
30, 2005 compared to segment losses of $36 million for the nine months ended September 30,
2004. This favorability is due primarily to the reduction of losses at SRS. During the
second quarter of 2004, SRS recorded the litigation settlement reached with the San
Francisco United School District related to civil proceedings which settled all
outstanding claims for approximately $43 million pre-tax ($29 million after-tax).

---

Corporate Services 
Corporate Services (Corporate) includes the operations of the Parent, PESC and consolidation
entities. PESCs expenses are allocated to the other business segments. The remaining
Corporate income (expense), consisting primarily of interest expense and income taxes, is
summarized below:

|                             | Three Months Ended
  September 30, | Nine Months Ended
  September 30,
|---------------------------- | ---------------------------------- | ---------------------------------
|(in millions)                | 2004                               | 2004                             
|Other interest expense       |                                    | $(68                             
|Contingent value obligations |                                    | 4                                
|Tax levelization             |                                    | 85                               
|Tax reallocation             |                                    | (10                              
|Other income taxes           |                                    | 26                               
|Other                        |                                    |                                 
|                            
|Segment profit (loss)        |                                    | $ 37                             
|                            
|                             |                                   

Other
interest expense increased $4 million compared to $64 million for the three months ended
September 30, 2004 and increased $9 million compared to $202 million for the nine months
ended September 30, 2004. Interest increased for the three months ended September 30, 2005
due primarily to the reversal of interest expense on income tax deficiencies in 2004.
Other interest expense increased for the nine months ended September 30, 2005 due to
increased rates on commercial paper borrowings, interest rate swaps, additional expenses
incurred related to draw downs on revolving credit agreements and the 2004 reversal of
interest expense on income tax deficiencies. 
We
issued 98.6 million contingent value obligations (CVOs) in connection with the 2000
acquisition of Florida Progress. Each CVO represents the right to receive contingent
payments based on the performance of four synthetic fuel facilities we own. The payments,
if any, are based on the net after-tax cash flows the facilities generate. At September
30, 2005 and 2004, the CVOs had fair market values of approximately $9 million and $16
million, respectively. We recorded unrealized gains of $4 million and $20 million for the
three months ended September 30, 2005 and 2004, respectively, to record the changes in
fair value of the CVOs, which had average unit prices of $0.09 and $0.16 at September 30,
2005 and 2004, respectively. We recorded an unrealized gain of $4 million and $7 million
for the nine months ended September 30, 2005 and September 30, 2004. 
GAAP
requires companies to apply a levelized effective tax rate to interim periods that is
consistent with the estimated annual effective tax rate. Income tax expense was decreased
by $85 million and $38 million for the three months ended September 30, 2005 and 2004,
respectively, in order to maintain an effective rate consistent with the estimated annual
rate. For the nine months ended September 30, 2005, income tax expense was decreased by
$33 million and for the nine months ended September 30, 2004, income tax expense was
increased by $6 million. The tax credits associated with our synthetic fuel operations and
seasonal fluctuations in our annual earnings primarily drive the fluctuations in the effective
tax rate for interim periods. The tax levelization adjustment will vary each quarter, but
it will have no effect on net income for the year.
Other
income taxes benefit increased $13 million to $26 million for the three months ended
September 30, 2005 and increased $15 million to $87 million for the nine months ended
September 30, 2005. The tax benefit increases are primarily due to certain adjustments
that increased income tax expense at the Parent during the third quarter of 2004,
but were not recurring for the third quarter of 2005. The adjustments that increased
income tax expense during the third quarter of 2004 were related to a reduction in the
Parents allocation of Florida income tax consolidation benefit due to the
impact of hurricanes in the third quarter of 2004 and the recording of a reserve related
to identified state tax deficiencies.

DISCONTINUED OPERATIONS 
On
March 24, 2005, we completed the sale of Progress Rail to One Equity Partners LLC, a
private equity firm unit of J.P. Morgan Chase & Co. Gross cash proceeds from the sale
were $429 million, consisting of $405 million base proceeds plus a working capital
adjustment. Proceeds from the sale were used to reduce debt. The accompanying Progress
Energy consolidated interim financial statements have been restated for all periods
presented for the discontinued operations of Progress Rail. See Notes 3 and 15B of the
Combined Notes to Interim Financial Statements for additional discussion. 
Rail
discontinued operations resulted in losses of $1 million for the three months ended
September 30, 2005 compared to profits of $11 million for the three months ended September
30, 2004. Earnings for 2005 include an adjustment of $1 million to the estimated after-tax
loss on the sale related primarily to working capital adjustments. Results for 2004
include three months of operations. Results for the three months ended September 30, 2005
do not include any income or loss from operations as the sale closed in the first quarter.
See discontinued earnings summary included at Note 3 of the Combined Notes to Interim
Financial Statements.
Rail
discontinued operations resulted in losses of $20 million for the nine months ended
September 30, 2005 compared to profits of $27 million for the nine months ended September
30, 2004. Earnings for 2005 include an estimated after-tax loss on the sale of $25
million. Results for 2004 included nine months of earnings activity compared to only three
months in 2005. 
NCNG
discontinued operations contributed $1 million of net income for the nine months ended
September 30, 2004. The sale of NCNG to Piedmont Natural Gas Company closed in 2003;
however, during the nine months ended September 30, 2004, we recorded an additional gain
of $1 million after-tax related to deferred taxes on the loss from the sale.

LIQUIDITY AND CAPITAL RESOURCESProgress Energy

The
Parent is a registered holding company and, as such, has no operations of its own. The
primary cash needs at the holding company level are our common stock dividend and interest
expense and principal payments on our $4.3 billion of senior unsecured debt. The ability
to meet these needs is dependent on the Parents access to the capital markets, the
earnings and cash flows of the Utilities and nonregulated subsidiaries, and the ability of
those subsidiaries to pay dividends or repay funds to the Parent.Cash Flows from Operations

The
majority of our operating costs are related to the Utilities. A significant portion of the
Utilities costs, including the cost of fuel and purchased power, are recovered from
customers in accordance with rate plans. As such, changes in the Utilities fuel and
purchased power costs may affect the timing of cash flows but not net income.
Net
cash provided by operating activities decreased by $332 million for the nine months ended
September 30, 2005, when compared to the corresponding period in the prior year. The $332
million decrease in operating cash flow was primarily due to a $211 million increase in the under-recovery of fuel at the Utilities driven by rising fuel costs (see Note 5 to
the Combined Notes to Interim Financial Statements) and increased working capital needs. The increase in working
capital needs was mainly driven by a $215 million increase in the change
in receivables and a $51 million increase in inventory purchases, primarily coal at PEC, partially
offset by a $159 million increase in the change in accounts payable. The increase in the change in
receivables is primarily due to increased sales at the Utilities driven by weather and timing of receipts, and
increased sales at our nonregulated subsidiaries, mainly driven by rising gas prices and changes in the
production level of our synthetic fuel plants over the prior year. The change in accounts
payable is primarily due to higher fuel prices and increased quantities of fuel purchases
at our nonregulated subsidiaries. Investing Activities

Net
cash used in investing activities decreased by $44 million for the nine months ended
September 30, 2005, when compared to the corresponding period in the prior year. The
decrease is due primarily to $405 million in base proceeds from the sale of Progress Rail
in March 2005 and $42 million in proceeds from the sale of Winter Park assets in June 2005,
compared to $112 million in proceeds from the sale of assets during the
nine months ended September 30, 2004. See Note 3 of the Combined Notes to Interim
Financial Statements. This was partially offset by $144 million of lower net proceeds from
short-term investments, $81 million in additional capital expenditures for utility
property and nuclear fuel additions, and $27 million in additional diversified business
property additions. See Note 4 of the Combined Notes to Interim Financial Statements.Financing Activities 
Net
cash used in financing activities was $201 million for the nine months ended September 30,
2005, compared to $647 million for the nine months ended September 30, 2004, or a net
decrease of $446 million. The change in cash used in financing activities was due
primarily to the March 1, 2004 maturity of $500 million 6.55% senior unsecured notes.
These notes were paid with cash and commercial paper capacity which was created from the
sale of assets during 2003. 
In January 2005, Progress Energy used proceeds from the issuance of commercial paper to pay
off $260 million of revolving credit agreement (RCA) loans at the Utilities, which
included $90 million at PEC and $170 million at PEF. PEF subsequently used money pool
borrowings to reduce its outstanding commercial paper balance.
On
January 31, 2005, Progress Energy entered into a new $600 million RCA, which was scheduled
to expire on December 30, 2005. This facility was added to provide additional liquidity,
to the extent necessary, during 2005 due in part to the uncertainty of the timing of storm
restoration cost recovery from the hurricanes in Florida during 2004. On February 4, 2005,
$300 million was drawn under the new facility to reduce commercial paper and pay off the
remaining amount of loans outstanding under other RCA facilities, which consisted of $160
million at Progress Energy and, through the money pool, $55 million at PEF. As discussed
below, the maximum size of this RCA was reduced to $300 million on March 22, 2005 and
subsequently terminated on May 16, 2005. 
On
March 22, 2005, PEC issued $300 million of First Mortgage Bonds, 5.15% Series due 2015,
and $200 million of First Mortgage Bonds, 5.70% Series due 2035. The net proceeds from the
sale of the bonds were used to pay at maturity $300 million of PECs 7.50% Senior
Notes on April 1, 2005 and reduce the outstanding balance of PECs commercial paper.
Pursuant to the terms of our $600 million RCA, commitments were reduced to $300 million,
effective March 22, 2005.
In
March 2005, Progress Energys $1.1 billion five-year credit facility was amended to
increase the maximum total debt to total capital ratio from 65% to 68% due to the
potential impacts of a proposed interpretation of SFAS No. 109 regarding accounting rules
for uncertain tax positions (See Note 2 of the Combined Notes to Interim Financial
Statements).
On
March 28, 2005, PEF entered into a new $450 million five-year RCA with a syndication of
financial institutions. The PEF RCA will be used to provide liquidity support for
PEFs issuances of commercial paper and other short-term obligations. The PEF RCA is
scheduled to expire on March 28, 2010. The new $450 million PEF RCA replaced PEFs
$200 million three-year RCA and $200 million 364-day RCA, which were each terminated
effective March 28, 2005. Fees and interest rates under the new PEF RCA are to be
determined based upon the credit rating of PEFs long-term unsecured senior
non-credit enhanced debt, currently rated as A3 by Moodys Investor Services
(Moodys) and BBB by Standard and Poors (S&P). The RCA includes a defined
maximum total debt to capital ratio of 65%. The PEF RCA also contains various
cross-default and other acceleration provisions, including a cross-default provision for
defaults of indebtedness in excess of $35 million. The PEF RCA does not include a material
adverse change representation for borrowings or a financial covenant for interest
coverage, which had been provisions in the terminated agreements. 

On
March 28, 2005, PEC entered into a new $450 million five-year RCA with a syndication of
financial institutions. The PEC RCA will be used to provide liquidity support for
PECs issuances of commercial paper and other short-term obligations. The PEC RCA is
scheduled to expire on June 28, 2010. The new $450 million PEC RCA replaced PECs
$285 million three-year RCA and $165 million 364-day RCA, which were each terminated
effective March 28, 2005. Fees and interest rates under the new PEC RCA are to be
determined based upon the credit rating of PECs long-term unsecured senior
non-credit enhanced debt, currently rated as Baa1 by Moodys and BBB by S&P. The
PEC RCA includes a defined maximum total debt to capital ratio of 65%. The RCA also
contains various cross-default and other acceleration provisions, including a
cross-default provision for defaults of indebtedness in excess of $35 million. The PEC RCA
does not include a material adverse change representation for borrowings, which had been a
provision in the terminated agreements.
In
May 2005, Progress Energy used proceeds from the issuance of commercial paper to pay off
$300 million of its $600 million RCA. 

On
May 16, 2005, PEF issued $300 million of First Mortgage Bonds, 4.50% Series due 2010. The
net proceeds from the sale of the bonds were used to reduce the outstanding balance of
commercial paper. Pursuant to the terms of the Progress Energy $600 million RCA,
commitments were completely reduced and the RCA was terminated, effective May 16, 2005. 

On
July 1, 2005, PEF paid at maturity $45 million of its 6.72% Medium-Term Notes, Series B
with commercial paper proceeds. 

On
July 28, 2005, PEC filed a shelf registration statement with the SEC to provide an
additional $1.0 billion of capacity in addition to the $400 million remaining on
PECs current shelf registration statement. The shelf registration statement, when
declared effective, will allow PEC to issue various securities, including First Mortgage
Bonds, Senior Notes, Debt Securities and Preferred Stock. 
On
July 28, 2005, PEF filed a shelf registration statement with the SEC to provide an
additional $1.0 billion of capacity in addition to the $450 million remaining on
PEFs current shelf registration statement. The shelf registration statement, when
declared effective, will allow PEF to issue various securities, including First Mortgage
Bonds, Debt Securities and Preferred Stock. 

For
the nine months ended September 30, 2005, we issued approximately 4.4 million shares
representing approximately $193 million in proceeds from our Investor Plus Stock Purchase
Plan and our employee benefit and stock option plans, net of purchases of restricted
shares. For the year 2005, we expect to realize approximately $200 million aggregate
amount from the sale of stock through these plans.

Future Liquidity and Capital Resources 
As
of September 30, 2005, there were no material changes in our Capital
Expenditures, Other Cash Needs, Credit Facilities, or
Credit Rating Matters as compared to those discussed under LIQUIDITY AND
CAPITAL RESOURCES in Item 7 of the Progress Registrants annual reports on
Form 10-K, other than Environmental Matters as described below and under
Financing Activities. 
As
of September 30, 2005, the current portion of our long-term debt was $852 million, which
includes $800 million of Progress Energy senior unsecured notes due March 1, 2006. We
expect to refinance this note with issuances of new long-term debt. 
The
following regulatory matters may impact our future liquidity and financing activities. The
amount and timing of future sales of company securities will depend on market conditions,
operating cash flow, asset sales and our specific needs. We may from time to time sell
securities beyond the amount needed to meet capital requirements in order to allow for the
early redemption of long-term debt, the redemption of preferred stock, the reduction of
short-term debt or for other general corporate purposes. 

On April 27, 2005, PEC filed for an increase in the fuel rate charged to its South Carolina
retail customers with the Public Service Commission of South Carolina (SCPSC). PEC
requested the increase for under-recovered fuel costs for the previous 15 months and to
meet future expected fuel costs. On June 23, 2005, the SCPSC approved a settlement
agreement that authorizes an annual increase of $55 million in PECs rates, effective
July 1, 2005. See Note 5 of the Combined Notes to Interim Financial Statements. 
On
June 3, 2005, PEC filed for a $276 million increase in the fuel rate charged to its North
Carolina retail customers with the North Carolina Utilities Commission (NCUC). PEC
requested the increase for under-recovered fuel costs for the previous 12 months and to
meet future expected fuel costs. On September 26, 2005, the NCUC approved a settlement
that authorizes PEC to collect all of its fuel cost under-collections that occurred during
the test year ended March 31, 2005 over a one-year period beginning October 1, 2005.
Additionally, the NCUC approved a partial recovery of future expected fuel costs in order
to address customer concerns regarding the magnitude of the proposed increase. The
increase was effective October 1, 2005. See Note 5 of the Combined Notes to Interim
Financial Statements. 
In
September and October 2005, PEF filed requests with the Florida Public Service Commission
(FPSC) seeking a total increase of $605 million over 2005 to cover rising fuel and other
costs to generate electricity. The proposed new charges would take effect January 1, 2006.
The FPSC is scheduled to hold hearings on the proposals on November 7 through 9, 2005. See
Note 5 of the Combined Notes to Interim Financial Statements. 

On
September 7, 2005, the FPSC approved an agreement (Base Rate Settlement) that maintains
PEFs base rates at the current level through 2007. The new base rates will take
effect the first billing cycle of January 2006 and will remain in effect through the last
billing cycle of December 2009 with PEF having sole option to extend through the last
billing cycle of June 2010. PEFs initial petition on April 29, 2005 was for an
annual base revenue increase of $206 million. See Note 5 of the Combined Notes to Interim
Financial Statements. 
On
July 14, 2005, the FPSC issued an order authorizing PEF to recover $232 million of storm
costs over a two-year period, effective August 1, 2005. PEFs initial petition in
November 2004 for $252 million was an estimate. On September 12, 2005, PEF filed a true-up
for an additional $19 million in storm costs in excess of the amount requested in the
original petition. The recovery of this difference is still subject to FPSC approval and
will be determined during the hearings being held on November 7 through 9, 2005. If the
FPSC approves the storm cost increase, the impact will be included in customer bills
beginning January 1, 2006. See Note 5 of the Combined Notes to Interim Financial
Statements. 

On
June 1, 2005, the Governor of Florida signed into law a bill that would allow utilities to
petition the FPSC to use securitized bonds to recover storm related costs. PEF is
reviewing whether it will seek FPSC approval to issue securitized debt to recover any
outstanding balance of its 2004 storm costs and to replenish its storm reserve fund or to
seek replenishment of its storm reserve fund through base rates or a surcharge mechanism.
If PEF seeks recovery through securitization and assuming FPSC approval, PEF expects the
process to take six to nine months to complete. See Note 5 of the Combined Notes to
Interim Financial Statements.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONSOur
off-balance sheet arrangements and contractual obligations are described below.Guarantees
As
a part of normal business, we enter into various agreements providing future financial or
performance assurances to third parties that are outside the scope of FASB Interpretation
No. 45, Guarantors Accounting and Disclosure Requirements for Guarantees,
Including Indirect Guarantees of Indebtedness of Others (FIN No. 45). These
agreements are entered into primarily to support or enhance the creditworthiness otherwise
attributed to Progress Energy or our subsidiaries on a stand-alone basis, thereby
facilitating the extension of sufficient credit to accomplish the subsidiaries
intended commercial purposes. Our guarantees include performance obligations under power
supply agreements, tolling agreements, transmission agreements, gas agreements, fuel
procurement agreements and trading operations. Our guarantees also include standby letters
of credit, surety bonds and guarantees in support of nuclear decommissioning. As of
September 30, 2005, we have issued $1.68 billion of guarantees for future financial or
performance assurance. We do not believe conditions are likely for significant performance
under the guarantees of performance issued by or on behalf of affiliates. 

The
majority of contracts supported by the guarantees contain provisions that trigger
guarantee obligations based on downgrade events to below investment grade (below BBB- or
Baa3), ratings triggers, monthly netting of exposure and/or payments and offset provisions
in the event of a default. As of September 30, 2005, no guarantee obligations had been
triggered. If the guarantee obligations were triggered, the maximum amount of liquidity
requirements to support ongoing operations within a 90-day period, associated with
guarantees for Progress Energys nonregulated portfolio and power supply agreements
was $606 million. We believe that we would be able to meet this obligation with cash or
letters of credit. 

As
of September 30, 2005, we have issued guarantees and indemnifications of certain legal,
tax and environmental matters to third parties in connection with sales of businesses and
for timely payment of obligations in support of our non-wholly owned synthetic fuel
operations. Related to the sales of businesses, the notice period extends until 2012 for
the majority of matters provided for in the indemnification provisions. For matters for
which we receive timely notice, our indemnity obligations may extend beyond the notice
period. Certain environmental indemnifications related to the sale of synthetic fuel
operations have no limitations as to time or maximum potential future payments. Other
guarantees and indemnifications have an estimated maximum exposure of approximately $152
million. As of September 30, 2005, we have recorded liabilities related to guarantees and
indemnifications to third-parties of approximately $26 million. Management does not
believe conditions are likely for significant performance under these agreements in excess
of the recorded liabilities. 

As
of September 30, 2005, the Utilities had no guarantees issued on behalf of unconsolidated
subsidiaries or other third parties. 
In
addition, the Parent has issued $300 million of guarantees of certain payments of two
wholly owned indirect subsidiaries. See Note 8 of the Combined Notes to Interim Financial
Statements for additional information.

Market Risk and Derivatives
Under
its risk management policy, we may use a variety of instruments, including swaps, options
and forward contracts, to manage exposure to fluctuations in commodity prices and interest
rates. See Note 10 of the Combined Notes to the Interim Financial Statements and Item 3,
Quantitative and Qualitative Disclosures about Market Risk, for a discussion
of market risk and derivatives. Contractual Obligations
As
part of our ordinary course of business, we enter into various long and short term
contracts for fuel requirements at our generating plants. Through September 30, 2005,
contracts procured through the Utilities and other businesses have increased our aggregate
purchase obligations for fuel and purchased power by approximately $1.83 billion as
compared to the amount stated in our annual report on Form 10-K for the year ended
December 31, 2004. The increase primarily relates to the period ranging from 2005 through
2009. A majority of the contracts related to this increase are for future coal purchases
primarily with fixed prices and future gas purchases primarily with variable prices.

OTHER MATTERSSynthetic Fuels Tax Credits
We
have substantial operations associated with the production of coal-based solid synthetic
fuels. The production and sale of these products qualifies for federal income tax credits
so long as certain requirements are satisfied. These operations are subject to numerous
risks. 
Although
we believe that we operate our synthetic fuel facilities in compliance with applicable
legal requirements for claiming the credits, our four Earthco facilities are under audit
by the IRS. IRS field auditors have taken an adverse position with respect to compliance
with the placed-in-service date requirements, and if we fail to prevail with respect to
this position, we could incur significant liability and/or lose the ability to claim the
benefit of tax credits carried forward or generated in the future. Similarly, in July 2005
the FASB issued proposed new accounting rules that would require that uncertain tax
benefits (such as those associated with the Earthco facilities) be probable of being sustained
in order to be recorded on the financial statements. If adopted as currently drafted, this
provision could have a material adverse impact on our financial position and results of
operations. See Notes 2 and 15 to the Combined Notes to Interim Financial Statements.
Our
ability to utilize tax credits is currently dependent on having sufficient tax liability.
Any conditions that reduce our tax liability, such as weather, could also diminish our
ability to utilize credits, including those previously generated. Synthetic fuel is
generally not economical to produce absent the tax credits. 
As
discussed in Note 15 to the Combined Interim Financial Statements, the tax credits
associated with synthetic fuels may be phased out if market prices for crude oil exceed
certain prices. While we cannot predict with any certainty the Annual Average Price for
2005 or beyond, we do not currently believe that the 2005 Average Annual Price will
trigger a phase out of the Section 29 tax credits in 2005. 
Our
future synthetic fuel production levels for 2006 and beyond remain uncertain because we
cannot predict with any certainty the Annual Average Price for 2005 or beyond., If oil
prices for 2006 remained at the October 17, 2005 average futures price level of $63 per
barrel for the entire year in 2006, it is unlikely that we would produce any synthetic
fuel in 2006. This could have a material adverse impact on our results of operations. We
will continue to monitor the level of oil prices and retain the ability to adjust
production based on future oil price levels. 
Due
to the significant uncertainty surrounding our synthetic fuel production in 2006 and
beyond based on the current level of oil prices, we evaluated our synthetic fuel and other
related operating long-lived assets for impairment during the third quarter of 2005. We
determined that no impairment of these assets was required this quarter, partly due to the
estimated future cash flows from tax credits generated in the fourth quarter of 2005 from
synthetic fuel production. However, a decrease in future synthetic fuel production and
cash flows could require additional impairment evaluations in the fourth quarter of 2005,
which could result in a future impairment of these assets, which have total carrying
values of approximately $115 million. The majority of these assets will be fully
depreciated by the end of 2007, the scheduled end of the Section 29 tax credit program.
The outcome of this matter cannot be determined. 
Our
synthetic fuel operations and related risks are described in more detail in Note 15 of the
Combined Notes to the Interim Financial Statements and in the Risk Factors section of
Progress Energys annual report on Form 10-K for the year ended December 31, 2004.

Potential Submittal of Applications for Nuclear Power Plant Licenses
We
have notified the NRC that we will potentially submit a combined construction and
operating license application for one or more new nuclear power plants. We expect to
select potential sites and a reactor vendor by the end of 2005. The notification does not
bind us to take any action. Demand, fuel prices, security issues and other factors will
affect any future plans. We cannot predict the outcome of this matter. PEF Rate Case Settlement
On
April 29, 2005, PEF submitted minimum filing requirements, based on a 2006 projected test
year, to initiate a base rate proceeding regarding its future base rates. In its filing,
PEF requested a $206 million annual increase in base rates effective January 1, 2006. On
September 7, 2005, the FPSC approved the Base Rate Settlement, effective the first billing
cycle of January 2006 through the last billing cycle of December 2009 with PEF having sole
option to extend through the last billing cycle of June 2010. The Base Rate Settlement
maintains PEFs base rates at their current level through late 2007 and allows PEF to
recover the cost of the Hines 4 generation facility when it goes into service in late 2007
and transfer recovery of the Hines 2 generation facility from the fuel clause, into base
rates at the same time. Among other things, the Base Rate Settlement also provides for 1)
revenue sharing, 2) the ability to petition for a rate increase if PEFs regulatory
return on equity falls below 10% 3) continued suspension of the fossil dismantlement and
nuclear decommissioning accruals, 4) a $26 million decrease in depreciation expense, 5) an
adjustment to capital structure to increase common equity for the impact of S&Ps
imputed debt to qualifying facilities and certain other providers, 6) an 11.75% return on
equity on the adjusted capital structure for clause recoveries and AFUDC calculations, 7)
a maximum 57.83% adjusted equity ratio, and 8) capacity clause recovery of post-9/11
security costs and fuel clause recovery of coal inventory in transit and procurement
costs. PEF Storm Cost Recovery
On
July 14, 2005, the FPSC issued an order authorizing PEF to recover $232 million over a
two-year period, including interest, of the costs it incurred and previously deferred
related to PEFs restoration of power associated with the four hurricanes in 2004.
The ruling allowed PEF to include a charge of approximately $3.27 on the average
residential monthly customer bill beginning August 1, 2005. The ruling by the FPSC
approved the majority of PEFs requests with two exceptions: the reclassification of
$8 million of previously deferred costs to utility plant and the reclassification of $17
million of previously deferred costs as normal O&M expense which was expensed in the
second quarter of 2005. 
The
amount included in the original petition requesting recovery of $252 million in November
2004 was an estimate, as actual total costs were not known at that time. On September 12,
2005, PEF filed a true-up to the original amount requested. PEF incurred an additional $19
million in costs in excess of the amount requested in the original petition. The recovery
of this difference is still subject to FPSC approval and will be determined during the
hearings to be held on November 7 through 9, 2005. If the FPSC approves the increase, the
impact will be included in customer bills beginning January 1, 2006. 
On
June 1, 2005, the Governor of Florida signed into law a bill that would allow utilities to
petition the FPSC to use securitized bonds to recover storm related costs. PEF is
reviewing whether it will seek FPSC approval to issue securitized debt to recover any
outstanding balance of its 2004 storm cots and to replenish its storm reserve fund or to
seek replenishment of its storm reserve fund through base rates or a surcharge mechanism.
If PEF seeks recovery through securitization and assuming FPSC approval, PEF expects the
process to take six to nine months to complete. Energy Policy Act of 2005
On
August 8, 2005, the Energy Policy Act of 2005 (EPACT) was signed into law. This new
federal law contains key provisions affecting the electric power industry. These
provisions include tax changes for the utility industry, incentives for emissions
reductions, federal insurance and incentives to build new nuclear power plants, repeal of
the Public Utility Holding Company Act (PUHCA) effective February 8, 2006, and protection
for native retail load customers of utilities that are not in regional transmission
organizations. It gives FERC backstop transmission siting authority as well as
increased utility merger oversight. The law also provides incentives and funding for clean
coal technologies and initiatives to voluntarily reduce greenhouse gases and redesignates
the Section 29 tax credit as a general business credit. See Note 15 to the Combined
Interim Financial Statements for additional information on the redesignation of the
Section 29 tax credits.
The
law requires FERC to issue certain regulations implementing EPACT within 120 days of
enactment. FERC has commenced the rulemaking process and it is ongoing. We have reviewed
the proposed rules and are participating in the public comment process. However, we cannot
currently predict what impact the final rules will have on our financial condition and
results of operations. Franchise Litigation 

PEF
has resolved all but one of its outstanding franchise matters. On August 25, 2005, the
City Council of Edgewood, Florida approved a new 30-year electric utility franchise
agreement with PEF which resolved all outstanding litigation with the City of Edgewood
(1,400 customers). On August 22, 2005, the 7,000-customer City of Maitland also entered
into a new 30-year franchise agreement with PEF. As previously noted, in accordance with
the terms of an arbitration panels award issued in May 2003 and after satisfying
regulatory and operational requirements, Winter Park acquired from PEF the electric
distribution system that serves Winter Park (13,000 customers) for approximately $42
million. PEF transferred the distribution system to Winter Park on June 1, 2005 and
recognized a pre-tax gain of $25 million on the transaction, which is included as an
offset to other utility expense on the Statements of Income. This amount was decreased $1
million in the third quarter of 2005 upon accumulation of the final capital expenditures
since arbitration. PEF also recorded a regulatory liability of $8 million for stranded
costs which will be amortized to revenues over the next six years in accordance with the
provisions of the transfer agreement with Winter Park. In addition, Winter Park executed a
wholesale power supply contract with PEF with a five-year term from the date service
begins and a renewal option. 
The
2,500 customer Town of Belleair (Belleair) is the last municipality with pending
litigation against PEF. Arbitration with Belleair to determine the value of PEFs
electric distribution system within Belleair was completed in June 2003. In September
2003, the arbitration panel issued an award in that case setting the value of the electric
distribution system within Belleair at approximately $6 million. The panel further
required Belleair to pay to PEF its requested $1 million in separation and reintegration
costs and $2 million in stranded costs. Belleair has not yet decided whether it will
attempt to acquire the system; however, on January 18, 2005, it issued a request for
proposals for wholesale power supply and to operate and maintain the distribution system.
In March 2005, PEF submitted a bid to supply wholesale power to Belleair. Belleair
received several other proposals for wholesale power and distribution services. In
February 2005, the Town Commission also voted to put the issue of whether to acquire the
distribution system to a voter referendum. A referendum is scheduled to occur on November
8, 2005. At this time, whether and when there will be further proceedings regarding
Belleair cannot be determined.

Environmental Matters
We
are subject to federal, state and local regulations addressing air and water quality,
hazardous and solid waste management and other environmental matters. We currently
estimate total compliance costs for the Utilities, related to environmental laws and
regulations addressing air and water quality, which will primarily be for capital
expenditures, to be in excess of $2.0 billion over ten years. These environmental matters
are discussed in detail in Note 14 of the Combined Notes to Interim Financial Statements.
This discussion identifies specific environmental issues, the status of the issues,
accruals associated with issue resolutions and our associated exposures. We accrue costs
to the extent they are probable and can be reasonably estimated. It is reasonably possible
that additional losses, which could be material, may be incurred in the future. Progress Energy Carolinas, Inc.
The
information required by this item is incorporated herein by reference to the following
portions of Progress Energys Managements Discussion and Analysis of Financial
Condition and Results of Operations, insofar as they relate to PEC: RESULTS OF OPERATIONS;
LIQUIDITY AND CAPITAL RESOURCES and OTHER MATTERS.

---

RESULTS OF OPERATIONS

The
results of operations for the PEC Electric segment are identical between PEC and Progress
Energy. The results of operations for PECs nonutility subsidiaries for the three and
nine months ended September 30, 2005 and 2004 are not material to PECs consolidated
financial statements.LIQUIDITY AND CAPITAL RESOURCES
Cash
provided by operating activities decreased $182 million for the nine months ended
September 30, 2005, when compared to the corresponding period in the prior year. The $182
million decrease in operating cash flow was primarily due to an $89 million increase in the under-recovery of fuel driven by rising fuel
costs (see Note 5 to the Combined Notes to Interim Financial Statements) and a $98 million increase in working
capital needs. The increase in working capital needs was primarily due to a $57 million increase in inventory
purchases, primarily coal, an $83 million increase in the change in receivables and a
change in emission allowance inventory fluctuations. The increase in the change in receivables is
primarily due to increased sales driven by weather and the timing of receipts. These
factors were partially offset by the timing of payables to affiliated companies. 
Cash
used in investing activities increased $238 million for the nine months ended September
30, 2005, when compared to the corresponding period in the prior year primarily due to
$144 million of lower net proceeds from short-term investments and $96 million in
additional capital expenditures for utility property additions. 
See
Progress Energys Managements Discussion and Analysis of Financial Condition
and Results of Operations, LIQUIDITY AND CAPITAL RESOURCES, for a discussion
of PECs financing activities.

OFF-BALANCE SHEET ARRANGEMENTS AND CONTRACTUAL OBLIGATIONSPECs
off-balance sheet arrangements and contractual obligations are described below.Market Risk and Derivatives

Under
its risk management policy, PEC may use a variety of instruments, including swaps, options
and forward contracts, to manage exposure to fluctuations in commodity prices and interest
rates. See Note 10 of the Combined Notes to Interim Financial Statements and Item 3,
Quantitative and Qualitative Disclosures about Market Risk, for a discussion
of market risk and derivatives. Contractual Obligations
As
part of PECs ordinary course of business, it enters into various long and short term
contracts for fuel requirements at its generating plants. Through September 30, 2005,
these contracts have increased PECs aggregate purchase obligations for fuel and
purchased power by approximately $1.15 billion as compared to the amount stated in
PECs Form 10-K for the year ended December 31, 2004. The increase primarily relates
to the period ranging from 2005 through 2009. A majority of the contracts related to this
increase are for future coal purchases primarily with fixed prices. Progress Energy Florida, Inc. 

The
information required by this item is incorporated herein by reference to the following
portions of Progress Energys Managements Discussion and Analysis of Financial
Condition and Results of Operations, insofar as they relate to PEF: RESULTS OF OPERATIONS;
LIQUIDITY AND CAPITAL RESOURCES and OTHER MATTERS.

RESULTS OF OPERATIONS The
results of operations for the PEF segment are identical between PEF and Progress Energy.

---

LIQUIDITY AND CAPITAL RESOURCES
PEFs
net cash provided by operating activities decreased $219 million for the nine months ended
September 30, 2005, when compared to the corresponding period in the prior year. The decrease
was due primarily to a $122 million  increase in the under-recovery of fuel driven by
rising fuel costs (see Note 5 to the Combined Notes to Interim Financial Statements), a
$76 million increase in the change in receivables and unfavorability from tax payments. The increase
in the change in receivables is primarily due to increased sales driven by weather and timing of receipts.
Cash
used in investing activities increased $6 million for the nine months ended September 30,
2005, when compared to the corresponding period in the prior year. The increase in cash
used in investing activities is primarily due to $46 million in nuclear fuel additions
related to a planned outage during the fourth quarter of 2005. These increases were
partially offset by $42 million in proceeds from the sale of Winter Park assets (see Note
5 of the Combined Notes to Interim Financial Statements).
See
Progress Energys Managements Discussion and Analysis of Financial Condition
and Results of Operations, LIQUIDITY AND CAPITAL RESOURCES, for a discussion
of PEFs financing activities.

---

Item 3. Quantitative and Qualitative Disclosures about Market Risk
We are exposed to various risks
related to changes in market conditions. Market risk represents the potential loss arising
from adverse changes in market rates and prices. We have a risk management committee that
includes senior executives from various business groups. The risk management committee is
responsible for administering risk management policies and monitoring compliance with
those policies by all subsidiaries. Under our risk policy, we may use a variety of
instruments, including swaps, options and forward contracts, to manage exposure to
fluctuations in commodity prices and interest rates. Such instruments contain credit risk
to the extent that the counterparty fails to perform under the contract. We mitigate such
risk by performing credit reviews using, among other things, publicly available credit
ratings of such counterparties. See Note 10 to the Combined Interim Financial Statements.

Certain market risks are inherent in
our financial instruments, which arise from transactions entered into in the normal course
of business. Our primary exposures are changes in interest rates with respect to our
long-term debt and commercial paper, fluctuations in the return on marketable securities
with respect to our nuclear decommissioning trust funds, changes in the market value of
CVOs, and changes in energy related commodity prices.

Progress Energy

Other than described below, the
various risks that we are exposed to have not materially changed since December 31, 2004.

Interest Rate Risk

Our exposure to changes in interest
rates from fixed rate and variable rate long-term debt at September 30, 2005 has changed
from December 31, 2004. The total notional amount of fixed rate long-term debt as of
September 30, 2005, was $9.31 billion, with an average interest rate of 6.40% and fair
market value of $9.83 billion. The total notional amount of variable rate long-term debt
as of September 30, 2005, was $861 million, with an average interest rate of 2.49% and
fair market value of $861 million.

In addition to our variable rate
long-term debt, we typically have commercial paper and/or loans outstanding under our RCA
facilities, which are also exposed to floating interest rates. As of September 30, 2005,
approximately 12.4 percent of consolidated debt, including interest rate swaps, was in
floating rate mode compared to 16.1 percent at the end of 2004.

From time to time, we use interest
rate derivative instruments to adjust the mix between fixed and floating rate debt in our
debt portfolio, to mitigate our exposure to interest rate fluctuations associated with
certain debt instruments, and to hedge interest rates with regard to future fixed rate
debt issuances.

The notional amounts of interest rate
derivatives are not exchanged and do not represent exposure to credit loss. In the event
of default by a counterparty, the risk in the transaction is the cost of replacing the
agreements at current market rates. We only enter into interest rate derivative agreements
with banks with credit ratings of single A or better.

We use a number of models and methods
to determine interest rate risk exposure and fair value of derivative positions. For
reporting purposes, fair values and exposures of derivative positions are determined as of
the end of the reporting period using the Bloomberg Financial Markets system.

In accordance with SFAS No. 133,
interest rate derivatives that qualify as hedges are broken into one of two categories,
cash flow hedges or fair value hedges. Cash flow hedges are used to reduce exposure to
changes in cash flow due to fluctuating interest rates. Fair value hedges are used to
reduce exposure to changes in fair value due to interest rate changes.

The following tables summarize the terms, fair market values and exposures of our interest
rate derivative instruments.

Cash
Flow Hedges

As of September 30, 2005 and December 31, 2004, we had $200 million notional of pay-fixed
swaps to hedge cash flow for commercial paper interest. As of September 30, 2005, we also
had $100 million notional of pay-fixed forward starting swaps to hedge cash flow risk with
regard to future financing transactions. Under terms of these swap agreements, we will pay
a fixed rate and receive a floating rate based on either 1-month or 3-month London Inter
Bank Offering Rate (LIBOR), respectively.

|Notional
 Amount        
---------------                                                                                                                                                                                                                                                                                     | Pay        
-----------                                     | Receive(b)    
-----------------------                           | Fair Value     
---------------                                               | Exposure(c)
--------------                 
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------- | ---------------------------------------------------------------- | ----------------------------------------------------------------------------- | -------------------------------------------
|                                                                                                                                                                                                                                                                                                                             |                                                             |                                                                  |                                                                               |                                            
|                                                                                                                                                                                                                                                                                                                             |                                                             |                                                                  |                                                                               |                                            
|Risk hedged as of September 30, 2005:
Commercial Paper interest rate risk through
through 2005 
Anticipated 10-year debt issue(d) 
-------------------------------------------
Total 
-------------------------------------------Risk hedged as of December 31, 2004:
Commercial Paper interest risk from 2005 
through 2008 | $ 200  
 $ 100  
--------
 $ 300  
--------
        
 $ 200 | 3.07%  
  4.87%  
---------
 3.67%(a)
---------
         
 3.07% | 1-month LIBOR 
 3-month LIBOR 
               
               
 1-month LIBOR | $ -  
 $ -  
------
 $ -  
------
    
 $ -

As
of September 30, 2005, PEC had no open interest rate cash flow hedges. As of December 31, 2004, PEC had $131 million notional of pay-fixed forward starting swaps to hedge cash flow
risk with regard to future financing transactions.

|                                                                                                                                                                                                                                                                                      |                                                                                     |                                                                         |                                                                                           |                                                      
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------- | ----------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | -----------------------------------------------------
|                                                                                                                                                                                                                                                                                      |                                                                                     |                                                                         |                                                                                           |                                                      
|                                                                                                                                                                                                                                                                                      |                                                                                     |                                                                         |                                                                                           |                                                      
|Risk hedged as of September 30, 2005:Risk hedged as of December 31, 2004:
----------------------------------------------
Anticipated 10-year debt issue 
Rail car lease payment 
----------------------------------------------
Total 
---------------------------------------------- | None 
------------
 $ 110      
 $ 21       
------------
 $ 131      
------------ | -----------
 4.85%     
 5.17%     
-----------
 4.90%(a)  
----------- | -------------------------
 3-month LIBOR    
 3-month LIBOR    
------------------------- | -----
 $ (1)        
 $ (1)        $ (2)        -----

(a) Weighted average interest rate.(b) 1-month LIBOR rate was 3.86% as of September 30, 2005, and 2.40% as of December 31, 2004.
      3-month LIBOR rate was 4.07% as of September 30, 2005, and 2.56% as of December 31, 2004.(c) Exposure indicates change in value due to 25 basis point unfavorable shift in interest rates.
(d) Anticipated 10-year debt issue hedges mature on March 1, 2016, and require mandatory cash settlement
      on March 1, 2006.

Fair
Value Hedges:

As of September 30, 2005 and December 31, 2004, we had $150 million notional of fixed rate
debt swapped to floating rate debt. Under terms of these swap agreements, we will receive
a fixed rate and pay a floating rate based on 3-month LIBOR.

As of September 30, 2005 and December 31, 2004, PEC had no open interest rate fair value
hedges.

|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                             |                                                                                                                                                                                                    |                                                                                                                                                                                                                |                                                                                                                                                                                              
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                             |                                                                                                                                                                                                    |                                                                                                                                                                                                                |                                                                                                                                                                                              
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                   |                                                                                                                                                                                                             |                                                                                                                                                                                                    |                                                                                                                                                                                                                |                                                                                                                                                                                              
|Progress Energy, Inc. 
----------------------------------------------Risk hedged as of September 30, 2005:
----------------------------------------------
5.85% Notes due 10/30/2008 
                                              
7.10% Notes due 3/1/2011 
----------------------------------------------
Total 
----------------------------------------------
Risk hedged as of December 31, 2004:
----------------------------------------------
5.85% Notes due 10/30/2008 
7.10% Notes due 3/1/2011 
----------------------------------------------
Total 
---------------------------------------------- | Notional     
 Amount      
-------------
-------------
  $ 100      
  $ 50

-------------
  $ 150      
-------------
-------------
  $ 100      
  $ 50       
-------------
  $ 150      
------------- | Receive     
------------
------------
 4.10%      
            
 4.65%      
------------
 4.28%(a)   
------------
------------
 4.10%      
 4.65%      
------------
 4.28%(a)   
------------ | Pay(b)
------------------------
------------------------
 3-month LIBOR
            
 3-month LIBOR
------------------------
 
------------------------
 3-month LIBOR
 3-month LIBOR
------------------------ | Fair Value  
------------
------------
   $ (1)    
   $   -            
------------
   $ (1)    
------------
------------
    $ 1     
    $ 2     
------------
    $ 3     
------------

(a) Weighted average interest rate.(b) 3-month LIBOR rate was 4.07% as of September 30, 2005, and 2.56% as of December 31, 2004.
(c) Exposure indicates change in value due to 25 basis point unfavorable shift in interest rates.

Marketable
Securities Price Risk

As
of September 30, 2005 and December 31, 2004, the fair value of our nuclear decommissioning
trust funds was $1.11 billion and $1.04 billion, respectively, including $628 million and
$581 million, respectively, for PEC and $487 million and $463 million, respectively, for
PEF. The accounting for nuclear decommissioning recognizes that the Utilities
regulated electric rates provide for recovery of these costs net of any trust fund
earnings, and, therefore, fluctuations in trust fund marketable security returns do not
affect earnings.

CVO
Market Value Risk

CVOs
are recorded at fair value, and unrealized gains and losses from changes in fair value are
recognized in earnings. As of September 30, 2005 and December 31, 2004, the fair value of
CVOs was $9 million and $13 million, respectively. A hypothetical 10 percent change in the
market price would not have had a material effect on our financial position, results of
operations or cash flows as of September 30, 2005.

Commodity
Price Risk

We
are exposed to the effects of market fluctuations in the price of natural gas, coal, fuel
oil, electricity and other energy-related products marketed and purchased as a result of
our ownership of energy-related assets. Our exposure to these fluctuations is
significantly limited by the cost-based regulation of the Utilities. Each state commission
allows electric utilities to recover certain of these costs through various cost recovery
clauses to the extent the respective commission determines that such costs are prudent.
Therefore, while there may be a delay in the timing between when these costs are incurred
and when these costs are recovered from the ratepayers, changes from year to year have no
material impact on operating results. In addition, many of our long-term power sales
contracts shift substantially all fuel responsibility to the purchaser. We also have oil
price risk exposure related to synfuel tax credits. See Note 15E of the Combined Notes to
Interim Financial Statements.

Derivative
products, primarily electricity and natural gas contracts, may be entered into from time
to time for economic hedging purposes. While management believes the economic hedges
mitigate exposures to fluctuations in commodity prices, these instruments are not
designated as hedges for accounting purposes and are monitored consistent with trading
positions. We manage open positions with strict policies that limit our exposure to market
risk and require daily reporting to management of potential financial exposures. We
recorded a pre-tax loss of $7 million and a pre-tax gain of $13 million on such contracts
for the three months ended September 30, 2005 and 2004, respectively. We recorded pre-tax
losses of $5 and $1 million on such contracts for the nine months ended September 30, 2005
and 2004, respectively. Gains and losses from such contracts at the Utilities were not
material to results of operations during the three and nine months ended September 30,
2005. PEC did not have material outstanding positions in such contracts as of September
30, 2005 and December 31, 2004. We and PEF did not have material outstanding positions in
such contracts as of September 30, 2005 and December 31, 2004, other than those receiving
regulatory accounting treatment at PEF, as discussed below.

PEF has derivative instruments
related to its exposure to price fluctuations on fuel oil and natural gas purchases. These
instruments receive regulatory accounting treatment. Unrealized gains and losses are
recorded in regulatory liabilities and regulatory assets, respectively, until the contracts
are settled. Once settled, any realized gains or losses are passed through the fuel clause.
As of September 30, 2005, the fair values of these instruments were a $105 million short-term derivative
asset position included in other current assets, a $45 million long-term derivative asset
position included in other assets and deferred debits and a $2 million short-term
derivative liability position included in other current liabilities. As of December 31,
2004, the fair values of these instruments were a $2 million long-term derivative asset
position included in other assets and deferred debits and a $5 million short-term
derivative liability position included in other current liabilities.

We use natural gas and power hedging
instruments to manage a portion of the market risk associated with fluctuations in the
future purchase and sales prices of natural gas and power. Our subsidiaries designate a
portion of commodity derivative instruments as cash flow hedges under SFAS No. 133. As of
September 30, 2005, PEC had an immaterial amount of open commodity cash flow hedges. As of
December 31, 2004, the Utilities had no open commodity cash flow hedges. The fair values of
commodity cash flow hedges as of September 30, 2005 and December 31, 2004 were as follows:

| |                    |                                                                                      
| | ------------------ | -------------------------------------------------------------------------------------
| |                    |                                                                                      
| |                    |                                                                                      
| | September 30, 2005 | December 31, 2004       
                                  --------------------------

|                                                                                                                                                                                                                                  |                                                                                                     |                                                           |                                                           |                                                                                                    |                                                          |                                                    
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | --------------------------------------------------------------------------------------------------- | --------------------------------------------------------- | --------------------------------------------------------- | -------------------------------------------------------------------------------------------------- | -------------------------------------------------------- | ---------------------------------------------------
|                                                                                                                                                                                                                                  |                                                                                                     |                                                           |                                                           |                                                                                                    |                                                          |                                                    
|                                                                                                                                                                                                                                  |                                                                                                     |                                                           |                                                           |                                                                                                    |                                                          |                                                    
|(in millions)                    
----------------------------------
 Fair value of assets             
----------------------------------
 Fair value of liabilities        
----------------------------------
 Fair value, net | Progress  
   Energy   
------------
    $ 119   
------------
     (100)  
------------
    $   19 | PEC   
--------
  $ -   
--------
    -   
--------
  $ - | PEF   
--------
  $ -   
--------
    -   
--------
  $ - | Progress  
   Energy   
------------
    $ -     
------------
     (15)   
------------
    $(15) | PEC  
--------
  $ -   
--------
    -   
--------
  $ - | PEF  
-------
  $ -  
-------
    -  
-------
  $ -

We perform sensitivity analyses to
estimate our exposure to the market risk of our commodity positions. Our exposure to
commodity price risk has not changed materially since December 31, 2004. A hypothetical 10
percent increase or decrease in quoted market prices in the near term on our derivative
commodity instruments would not have had a material effect on our financial position,
results of operations or cash flows as of September 30, 2005.

See Note 10 of the Combined Notes to
Interim Financial Statements for additional information with regard to our commodity
contracts and use of derivative financial instruments.

Progress Energy
Carolinas, Inc.

The information required by this item
is incorporated herein by reference to the Quantitative and Qualitative Disclosures
about Market Risk discussed above insofar as it relates to PEC.

PEC has certain market risks inherent
in its financial instruments, which arise from transactions entered into in the normal
course of business. PECs primary exposures are changes in interest rates with
respect to long-term debt and commercial paper, fluctuations in the return on marketable
securities with respect to its nuclear decommissioning trust funds, and changes in energy
related commodity prices. Other than as discussed above, PECs exposure to these
risks has not materially changed since December 31, 2004.

Progress Energy Florida,
Inc.

Other than as discussed above, the
information called for by Item 3 is omitted pursuant to Instruction H(2)(c) to Form 10-Q
(Omission of Information by Certain Wholly Owned Subsidiaries).

Item 4: Controls and
Procedures

Progress Energy

Pursuant to the Securities Exchange
Act of 1934, we carried out an evaluation, with the participation of management, including
our Chairman and Chief Executive Officer and Chief Financial Officer, of the effectiveness
of our disclosure controls and procedures (as defined under the Securities Exchange Act of
1934) as of the end of the period covered by this report. Based upon that evaluation, our
Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and procedures are effective to ensure that information we are required to disclose in the
reports that we file or submit under the Exchange Act, are recorded, processed, summarized
and reported within the time periods specified in the SECs rules and forms, and that
such information is accumulated and communicated to management, including the Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.

There has been no change in our
internal control over financial reporting during the quarter ended September 30, 2005,
that has materially affected, or is reasonably likely to materially affect, our internal
control over financial reporting.

PEC

Pursuant to the Securities Exchange
Act of 1934, PEC carried out an evaluation, with the participation of its management,
including PECs Chairman and Chief Executive Officer and Chief Financial Officer, of
the effectiveness of PECs disclosure controls and procedures (as defined under the
Securities Exchange Act of 1934) as of the end of the period covered by this report. Based
upon that evaluation, PECs Chief Executive Officer and Chief Financial Officer
concluded that its disclosure controls and procedures are effective to ensure that
information required to be disclosed by PEC in the reports that it files or submits under
the Exchange Act, is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such information is accumulated and
communicated to PECs management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.

There has been no change in
PECs internal control over financial reporting during the quarter ended September
30, 2005, that has materially affected, or is reasonably likely to materially affect, its
internal control over financial reporting.

PEF

Pursuant to the Securities Exchange
Act of 1934, PEF carried out an evaluation, and with the participation of its management,
including PEFs Chief Executive Officer and Chief Financial Officer, of the
effectiveness of PEFs disclosure controls and procedures (as defined under the
Securities Exchange Act of 1934) as of the end of the period covered by this report. Based
upon that evaluation, PEFs Chief Executive Officer and Chief Financial Officer
concluded that its disclosure controls and procedures are effective to ensure that
information required to be disclosed by PEF in the reports that it files or submits under
the Exchange Act, is recorded, processed, summarized and reported within the time periods
specified in the SECs rules and forms, and that such information is accumulated and
communicated to PEFs management, including the Chief Executive Officer and Chief
Financial Officer, as appropriate, to allow timely decisions regarding required
disclosure.

There has been no change in
PEFs internal control over financial reporting during the quarter ended September
30, 2005, that has materially affected, or is reasonably likely to materially affect,
PEFs internal control over financial reporting.

PART II.  OTHER INFORMATION

Item
1. Legal Proceedings

Legal
aspects of certain matters are set forth in Part I, Item 1. For a discussion of certain
other legal matters, see Note 15 of the Combined Notes to Interim Financial Statements.

Item 2.  Unregistered
Sale of Equity Securities and Use of Proceeds

c.
          ISSUER PURCHASES OF EQUITY SECURITIES FOR THIRD QUARTER OF 2005

|Period            
 --------------------------------                                                                                                                                                                                                                    | (a)       
               
 Total Number  
  of Shares    
  (or Units)   
  Purchased    
    (1)(2)     
--------------- | (b)      
             
             
  Average    
 Price Paid  
 Per Share   
 (or Unit)   
------------- | (c)             
                           
 Total Number of Shares    
 (or Units) Purchased as   
    Part of Publicly       
   Announced Plans or      
      Programs (1)         
-------------------------- | (d)
   Maximum Number (or
   Approximate Dollar
  Value) of Shares (or
 Units) that May Yet Be
   Purchased Under the
  Plans or Programs (1)
--------------------------
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | -------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                                                                                                                                                                                                                                                                        |                                                                                                                            |                                                                                                             |                                                                                                                                                                                                                     |                                                                                                                                                                         
|                                                                                                                                                                                                                                                                        |                                                                                                                            |                                                                                                             |                                                                                                                                                                                                                     |                                                                                                                                                                         
|July 1 - July 31                
--------------------------------
August 1- August 31             
--------------------------------
September 1 - September 30      
--------------------------------
Total:                          
-------------------------------- | -        
---------------
    32,850     
---------------
    38,800     
---------------
    71,650     
---------------  | -       
-------------
   42.88     
-------------
   43.63     
-------------
    43.29
-------------      | N/A            
--------------------------
           N/A            
--------------------------
           N/A            
--------------------------
           N/A            
--------------------------        | N/A
--------------------------
           N/A
--------------------------
           N/A
--------------------------
           N/A
--------------------------            

(1) As of September 30, 2005, Progress Energy does not have any publicly announced plans or programs to purchase
shares of its common stock.(2) All shares were purchased in open-market transactions by the plan administrator to meet share delivery
obligations under the Progress Energy 401(k) Savings and      Stock Ownership Plan.



ITEM 6. Exhibits(a) Exhibits

|                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                    |                                                                                           |                                                                                     
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------------------------- | ----------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------
|                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                    |                                                                                           |                                                                                     
|                                                                                                                                                                                      |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         |                                                                                    |                                                                                           |                                                                                     
|ExhibitNumber
 10(a)
      
      
      
      
      
      
      
 10(b)
      
      
 10(c)
      
      
 31(a)
      
      
 31(b)
      
      
 32(a)
      
      
 32(b) | Description
 Agreement and Plan of Merger by and among 
 Progress Rail Services Holdings Corp., PRSC
 Acquisition Corp., PMRC Acquisition Co.,
 Progress Rail Services Corporation, Progress
 Metal Reclamation Company, Progress Fuels
 Corporation and Progress Energy, Inc. (with
 respect to Articles III, VI, VIII and IX), dated
 February 17, 2005
 Executive and Key Manager Performance Share 
 Sub-Plan, Exhibit A to 2002 Equity Incentive
 Plan (Effective January 1, 2005)
 Broad-Based Performance Share Sub-Plan, Exhibit 
 B to 2002 Equity Incentive Plan (Effective
 January 1, 2005)
 Certifications pursuant to Section 302 of the 
 Sarbanes-Oxley Act of 2002 - Chairman and Chief
 Executive Officer
 Certifications pursuant to Section 302 of the 
 Sarbanes-Oxley Act of 2002 - Executive Vice
 President and Chief Financial Officer
 Certifications pursuant to Section 906 of the 
 Sarbanes-Oxley Act of 2002 - Chairman and Chief
 Executive Officer
 Certifications pursuant to Section 906 of the 
 Sarbanes-Oxley Act of 2002 - Executive Vice
 President and Chief Financial Officer | Progress Energy, Inc.
      X
      X 
      X 
      X 
      X 
      X 
      X | Progress EnergyCarolinas, Inc.
       X 
       X 
       X 
       X 
       X 
       X | Progress Energy
 Florida, Inc.
       X
       X
       X
       X
       X
       X

SIGNATURES

Pursuant to requirements of the
Securities Exchange Act of 1934, the registrant has duly caused this report to be signed
on its behalf by the undersigned thereunto duly authorized.

|                       |                                                                                                                                                                                                                                                                                                                       
|---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|                       |                                                                                                                                                                                                                                                                                                                       
|                       |                                                                                                                                                                                                                                                                                                                       
|Date: November 7, 2005 | PROGRESS ENERGY, INC.
CAROLINA POWER & LIGHT COMPANYFLORIDA POWER CORPORATION
(Registrants)
By: /s/ Geoffrey S. Chatas
Geoffrey S. Chatas
Executive Vice President and
Chief Financial Officer
By: /s/ Jeffrey M. Stone
Jeffrey M. Stone
Controller and Chief Accounting Officer
Controller - Florda Power Corporation