UNITED STATES SECURITIES AND EXCHANGE
COMMISSIONWashington, 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, 2004

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                | Progress Energy, Inc.
410 South Wilmington Street
Raleigh, North Carolina 27601-1748
Telephone: (919) 546-6111
State of Incorporation: North Carolina                                               | 56-2155481                           
|1-3382                 | Carolina Power & Light Companyd/b/a Progress Energy Carolinas, Inc.
410 South Wilmington Street
Raleigh, North Carolina 27601-1748
Telephone: (919) 546-6111
State of Incorporation: North Carolina | 56-0165465                           

NONE

Former name, former
address and former fiscal year, if changed since last report)

Indicate by check mark whether the
registrants (1) have 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) have been
subject to such filing requirements for the past 90 days. Yes X No

Indicate by check mark whether
Progress Energy,  Inc.  (Progress  Energy) is an accelerated filer (as defined in Rule
12b-2 of          the Exchange Act).  Yes  X  No __

Indicate  by check mark  whether
 Carolina  Power & Light  Company is an  accelerated  filer (as  defined in Rule 12b-2 of
the          Exchange Act).  Yes __  No X

This combined Form 10-Q is filed
separately by two registrants: Progress Energy and Carolina Power & Light Company
d/b/a Progress Energy Carolinas, Inc. (PEC). Information contained herein relating to
either 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
registrant.

Indicate the number of shares
outstanding of each of the issuers classes of common stock, as of the latest
practicable date. As of November 3, 2004, each registrant had the following shares of
common stock outstanding:

|Registrant      | Description                      | Shares                                                       
|--------------- | -------------------------------- | -------------------------------------------------------------
|Progress Energy | Common Stock (Without Par Value) | 247,047,599                                                  
|PEC             | Common Stock (Without Par Value) | 159,608,055 (all of which
were held by Progress Energy, Inc.)

---

# PROGRESS ENERGY, INC.
AND PROGRESS ENERGY CAROLINAS, INC. FORM 10-Q  For
the Quarter Ended September 30, 2004

Glossary of Terms

Safe Harbor For
Forward-Looking Statements

PART I. FINANCIAL
INFORMATION

Item 1. Financial
Statements

| | Consolidated
Interim Financial Statements:
| | ------------------------------------------

| | Progress
Energy, Inc.         ________________________________________
| | ----------------------------------------------------------------------

| | Unaudited
Consolidated Statements of Income                                 Unaudited Consolidated Balance
Sheets                                 Unaudited Consolidated Statements of Cash Flows
                           Notes to Consolidated Interim Financial Statements
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Carolina
Power & Light Company                            d/b/a Progress Energy Carolinas, Inc.
       ________________________________________
| | -----------------------------------------------------------------------------------------------------------------------------------------------

| | Unaudited
Consolidated Statements of Income                                 Unaudited Consolidated Balance
Sheets                                 Unaudited Consolidated Statements of Cash Flows
                           Notes to Consolidated Interim Financial Statements
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

Item 2.   Management's
Discussion and Analysis of Financial Condition and                   Results of Operations

Item 3.  Quantitative and
Qualitative Disclosures About Market Risk

Item 4. Controls and
Procedures

PART II. OTHER INFORMATION

Item 1. Legal
Proceedings

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

Item 6. Exhibits

Signatures

---

# GLOSSARY OF TERMS

The following abbreviations or
acronyms used in the text of this combined Form 10-Q are defined below:

|TERM                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                           | DEFINITION                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                              
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|AFUDC
the Agreement
Bcf
Btu
CAIR
CCO
Colona
the Company or Progress
    Energy
CR3
CVO
DIG
DMT
DOE
DWM
EIA
EITF
ENCNG
EPA
FASB Staff Position 106-2
FDEP
Federal Circuit
FERC
FIN No. 46R
Florida Progress or FPC
FPSC
Fuels
Genco
Jackson
MACT
Medicare Act
Mesa
MGP
Moody's
MW
NCNG
NCUC
Norfolk Southern
NOx
NOx SIP Call
NRC
NSP
OCI
O&M
OPEB
PCH
PEC
PEF
PFA
the Plan
PLRs
Progress Rail
PRP
PTC
PT LLC
Progress Ventures
PUHCA
PVI
PWR
Rail Services or Rail
RTO
SCPSC
Section 29
Service Company
SFAS No. 71
SFAS No. 131
SFAS No. 133
SFAS No. 142
SFAS No. 143
SFAS No. 148
SFAS No. 149
SMD NOPR
SO2
S&P
SRS
STB
Tax Agreement
the Trust
Westchester | Allowance for funds used during construction
Stipulation and Settlement Agreement
Billion cubic feet
British thermal units
Clean Air Interstate Rule
Competitive Commercial Operations business segment
Colona Synfuel Limited Partnership, LLLP
Progress Energy, Inc. and subsidiaries
Progress Energy Florida Inc.'s nuclear generating plant, Crystal River Unit No. 3
Contingent value obligation
Derivatives Implementation Group
Dynegy Marketing and Trading
United States Department of Energy
North Carolina Department of Environment and Natural Resources, Division of Waste
Management
Energy Information Agency
Emerging Issues Task Force
Eastern North Carolina Natural Gas Company, formerly referred to as Eastern NC
United States Environmental Protection Agency
Accounting and Disclosure Requirements Related to the Medicare Prescription Drug
Improvement and Modernization Act of 2003
Florida Department of Environment and Protection
United States Circuit Court of Appeals
Federal Energy Regulatory Commission
FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - An
Interpretation of ARB No. 51," revised December 2003
Florida Progress Corporation
Florida Public Service Commission
Fuels business segment
Progress Genco Ventures, LLC
Jackson County EMC
Maximum Available Control Technology
Medicare Prescription Drug, Improvement and Modernization Act of 2003
Mesa Hydrocarbons, LLC
Manufactured gas plant
Moody's Investors Service
Megawatts
North Carolina Natural Gas Corporation
North Carolina Utilities Commission
Norfolk Southern Railway Company
Nitrogen oxide
EPA rule which requires 23 jurisdictions including North and South Carolina and
Georgia to further reduce nitrogen oxide emissions
United States Nuclear Regulatory Commission
Northern States Power
Accumulated other comprehensive income
Operating and maintenance
Other post-employment benefits
Progress Capital Holdings, Inc.
Progress Energy Carolinas, Inc., formerly referred to as Carolina Power & Light
Company
Progress Energy Florida, Inc., formerly referred to as Florida Power Corporation
IRS Pre-filing Agreement
Revenue Sharing Incentive Plan
Private Letter Rulings
Progress Rail Services Corporation
Potentially responsible parties
Progress Telecommunications Corporation
Progress Telecom LLC
Business unit of Progress Energy primarily made up of nonregulated energy
generation, gas, coal and synthetic fuel operations and energy marketing
Public Utility Holding Company Act of 1935, as amended
Legal entity of Progress Ventures, Inc.
Pressurized water reactor
Rail Services business segment
Regional Transmission Organization
Public Service Commission of South Carolina
Section 29 of the Internal Revenue Code
Progress Energy Service Company, LLC
Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of
Certain Types of Regulation"
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. 142, "Goodwill and Other
Intangible Assets"
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"
Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133
on Derivative Instruments and Hedging Activities"
Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue
Discrimination through Open Access Transmission and Standard Market Design
Sulfur dioxide
Standard & Poor's Rating Agency
Strategic Resource Solutions Corp.
Surface Transportation Board
Inter-company Income Tax Allocation Agreement
FPC Capital I trust
Westchester Gas Company
|                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                               |                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                                         

---

SAFE
HARBOR FOR FORWARD-LOOKING STATEMENTS

This combined report contains
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-headings Liquidity and Capital Resourcesand Other Matters about
the effects of new environmental regulations, nuclear decommissioning costs and the
effect of electric utility industry restructuring.

Any forward-looking statement speaks
only as of the date on which such statement is made, and neither Progress Energy, Inc.
(Progress Energy or the Company) nor Progress Energy Carolinas, Inc. (PEC) undertakes any
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
government laws and regulations, including those relating to the environment;
deregulation or restructuring in the electric industry that may result in increased
competition and unrecovered (stranded) costs; the uncertainty regarding the timing,
creation and structure of regional transmission organizations; weather conditions that
directly influence the demand for electricity; our ability to recover through the
regulatory process, and the timing of, the costs associated with the four hurricanes that
impacted our service territory in 2004 or other 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
Progress Energy, Inc. and its subsidiaries commercial and industrial customers; the
ability of the Companys subsidiaries to pay upstream dividends or distributions to
it; the impact on the facilities and the businesses of the Company from a terrorist
attack; the inherent risks associated with the operation of nuclear facilities, including
environmental, health, regulatory and financial risks; the ability to successfully access
capital markets on favorable terms; the impact that increases in leverage may have on the
Company; the ability of the Company to maintain its current credit ratings; the impact of
derivative contracts used in the normal course of business by the Company; investment
performance of pension and benefit plans; the Company's ability to control costs, including pension and benefit expense, and achieve
its cost management targets for 2007; the
availability and use of Internal Revenue Code Section 29 (Section 29) tax credits by
synthetic fuel producers and the Companys continued ability to use Section 29 tax
credits related to its coal and synthetic fuel businesses; the impact to our financial
condition and performance in the event it is determined the Company is not entitled to
previously taken Section 29 tax credits; the Companys ability to manage the risks
involved with the operation of its nonregulated plants, including dependence on third
parties and related counter-party risks, and a lack of operating history; the Companys
ability to manage the risks associated with its 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 the Companys
subsidiaries.

These and other risk factors are
detailed from time to time in the Progress Energy and PEC United States Securities and
Exchange Commission (SEC) reports. Many, but not all of the factors that may impact
actual results are discussed in the Risk Factors sections of Progress Energys and
PECs annual report on Form 10-K for the year ended December 31, 2003, which were
filed with the SEC on March 12, 2004. These reports should be read carefully. All such
factors are difficult to predict, contain uncertainties that may materially affect actual
results and may be beyond the control of Progress Energy and PEC. 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 Progress Energy and PEC.

---

PART I. FINANCIAL
INFORMATION

Item 1. Financial
Statements

# PROGRESS ENERGY, INC. CONSOLIDATED INTERIM
FINANCIAL STATEMENTSSeptember 30, 2004

UNAUDITED
CONSOLIDATED STATEMENTS of INCOME

|                                                                  | Three Months Ended
September 30 | Nine Months Ended
September 30
|----------------------------------------------------------------- | ------------------------------- | ------------------------------
|                                                                 
|
|                                                                 
|Operating Revenues                                                |                                 |                               
|Utility                                                           |                                 | $ 2,043                       
|Diversified business                                              |                                 | 732                           
|                                                                 
|Total Operating Revenues                                          |                                 | 2,775                         
|                                                                 
|Operating Expenses                                                |                                
|Utility                                                           |                                
|Fuel used in electric generation                                  |                                 | 556                           
|Purchased power                                                   |                                 | 269                           
|Operation and maintenance                                         |                                 | 324                           
|Depreciation and amortization                                     |                                 | 213                           
|Taxes other than on income                                        |                                 | 114                           
|Diversified business                                              |                                
|Cost of sales                                                     |                                 | 620                           
|Depreciation and amortization                                     |                                 | 52                            
|Other                                                             |                                 | 43                            
|                                                                 
|Total Operating Expenses                                          |                                 | 2,191                         
|                                                                 
|Operating Income                                                  |                                 | 584                           
|                                                                 
|Other Income (Expense)                                            |                                
|Interest income                                                   |                                 | 2                             
|Other, net                                                        |                                 | 36                            
|                                                                 
|Total Other Income (Expense)                                      |                                 | 38                            
|                                                                 
|Interest Charges                                                  |                                
|Net interest charges                                              |                                 | 160                           
|Allowance for borrowed funds used during construction             |                                 | (2                            
|                                                                 
|Total Interest Charges, Net                                       |                                 | 158                           
|                                                                 
|Income from Continuing Operations before Income Tax and           |                                 | 464                           
|Cumulative Effect of Change in Accounting Principle               |                                
|Income Tax Expense (Benefit)                                      |                                 | 161                           
|                                                                 
|Income from Continuing Operations before Cumulative Effect of     |                                 | 303                           
|Change in Accounting Principle                                    |                                
|Discontinued Operations, Net of Tax                               |                                 |                              
|                                                                 
|Income before Cumulative Effect of Change in Accounting Principle |                                 | 303                           
|Cumulative Effect of Change in Accounting Principle, Net of Tax   |                                 |                              
|                                                                 
|Net Income                                                        |                                 | $    303                      
|                                                                 
|Average Common Shares Outstanding                                 |                                 | 243                           
|                                                                 
|Basic Earnings per Common Share                                   |                                
|Income from Continuing Operations before Cumulative               |                                
|Effect of Change in Accounting Principle                          |                                 | $   1.25                      
|Discontinued Operations, Net of Tax                               |                                 |                              
|Net Income                                                        |                                 | $   1.25                      
|                                                                 
|Diluted Earnings per Common Share                                 |                                
|Income from Continuing Operations before Cumulative               |                                
|Effect of Change in Accounting Principle                          |                                 | $   1.24                      
|Discontinued Operations, Net of Tax                               |                                 |                              
|Net Income                                                        |                                 | $   1.24                      
|                                                                 
|Dividends Declared per Common Share                               |                                 | $ 0.575                       
|                                                                 

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

---

PROGRESS
ENERGY, INC. UNAUDITED
CONSOLIDATED BALANCE SHEETS

|(in millions)                                                       | September 30 | December 31
|------------------------------------------------------------------- | ------------ | -----------
|
|                                                                   
|Utility Plant                                                       |              |            
|Utility plant in service                                            |              | $ 22,068   
|Accumulated depreciation                                            |              | (8,417     
|                                                                   
|Utility plant in service, net                                       |              | 13,651     
|Held for future use                                                 |              | 13         
|Construction work in progress                                       |              | 680        
|Nuclear fuel, net of amortization                                   |              | 220        
|                                                                   
|Total Utility Plant, Net                                            |              | 14,564     
|                                                                   
|Current Assets                                                      |             
|Cash and cash equivalents                                           |              | 57         
|Accounts receivable                                                 |              | 794        
|Unbilled accounts receivable                                        |              | 231        
|Inventory                                                           |              | 935        
|Deferred fuel cost                                                  |              | 382        
|Prepayments and other current assets                                |              | 397        
|                                                                   
|Total Current Assets                                                |              | 2,796      
|                                                                   
|Deferred Debits and Other Assets                                    |             
|Regulatory assets                                                   |              | 894        
|Nuclear decommissioning trust funds                                 |              | 993        
|Diversified business property, net                                  |              | 2,186      
|Miscellaneous other property and investments                        |              | 454        
|Goodwill                                                            |              | 3,719      
|Prepaid pension costs                                               |              | 474        
|Intangibles, net                                                    |              | 295        
|Other assets                                                        |              | 245        
|                                                                   
|Total Deferred Debits and Other Assets                              |              | 9,260      
|                                                                   
|Total Assets                                                        |              | $ 26,620   
|                                                                   
|CAPITALIZATION AND LIABILITIES                                      |             
|                                                                   
|Common Stock Equity                                                 |             
|Common stock without par value, 500 million shares authorized,      |             
|247 and 246 million shares issued and outstanding, respectively     |              | $   5,339  
|Unearned restricted shares                                          |              | (15        
|Unearned ESOP shares                                                |              | (76        
|Accumulated other comprehensive loss                                |              | (62        
|Retained earnings                                                   |              | 2,475      
|                                                                   
|Total Common Stock Equity                                           |              | 7,661      
|                                                                   
|Preferred Stock of Subsidiaries-Not Subject to Mandatory Redemption |              | 93         
|Long-Term Debt, Affiliate                                           |              | 309        
|Long-Term Debt, Net                                                 |              | 9,245      
|                                                                   
|Total Capitalization                                                |              | 17,308     
|                                                                   
|Current Liabilities                                                 |             
|Current portion of long-term debt                                   |              | 348        
|Accounts payable and accrued liabilities                            |              | 940        
|Interest accrued                                                    |              | 154        
|Dividends declared                                                  |              | 141        
|Short-term obligations                                              |              | 668        
|Customer deposits                                                   |              | 174        
|Other current liabilities                                           |              | 652        
|                                                                   
|Total Current Liabilities                                           |              | 3,077      
|                                                                   
|Deferred Credits and Other Liabilities                              |             
|Accumulated deferred income taxes                                   |              | 807        
|Accumulated deferred investment tax credits                         |              | 179        
|Regulatory liabilities                                              |              | 2,977      
|Asset retirement obligations                                        |              | 1,323      
|Other liabilities                                                   |              | 949        
|                                                                   
|Total Deferred Credits and Other Liabilities                        |              | 6,235      
|                                                                   
|Commitments and Contingencies (Note 15)                             |             
|                                                                   
|Total Capitalization and Liabilities                                |              | $ 26,620   
|                                                                   
|                                                                    |             

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

---

PROGRESS
ENERGY, INC. UNAUDITED
CONSOLIDATED STATEMENTS of CASH FLOWS



|                                                                         | Nine Months Ended September 30
|------------------------------------------------------------------------ | ------------------------------
|
|                                                                        
|Operating Activities                                                     |                               
|Net income                                                               |                               
|Adjustments to reconcile net income to net cash provided by operating    |                               
|activities:                                                              |                               
|(Income) loss from discontinued operations                               |                               
|Cumulative effect of change in accounting principle                      |                               
|Depreciation and amortization                                            |                               
|Deferred income taxes                                                    |                               
|Investment tax credit                                                    |                               
|Deferred fuel credit                                                     |                               
|Cash provided (used) by changes in operating assets and liabilities      |                               
|Accounts receivable                                                      |                               
|Inventories                                                              |                               
|Prepayments and other current assets                                     |                               
|Accounts payable                                                         |                               
|Income taxes, net                                                        |                               
|Other current liabilities                                                |                               
|Other                                                                    |                               
|                                                                        
|Net Cash Provided by Operating Activities                                |                               
|                                                                        
|Investing Activities                                                     |                               
|Gross utility property additions                                         |                               
|Diversified business property additions                                  |                               
|Nuclear fuel additions                                                   |                               
|Contributions to nuclear decommissioning trust                           |                               
|Investments in non-utility activities                                    |                               
|Acquisition of intangibles                                               |                               
|Proceeds from sales of investments and assets                            |                               
|Net decrease in restricted cash                                          |                               
|Other                                                                    |                               
|                                                                        
|Net Cash Used in Investing Activities                                    |                               
|                                                                        
|Financing Activities                                                     |                               
|Issuance of common stock                                                 |                               
|Purchase of common stock                                                 |                               
|Issuance of long-term debt                                               |                               
|Net increase (decrease) in short-term indebtedness                       |                               
|Net decrease in cash provided by checks drawn in excess of bank balances |                               
|Retirement of long-term debt                                             |                               
|Dividends paid on common stock                                           |                               
|Other                                                                    |                               
|                                                                        
|Net Cash Used in Financing Activities                                    |                               
|                                                                        
|Net (Decrease) Increase in Cash and Cash Equivalents                     |                               
|Cash and Cash Equivalents at Beginning of Period                         |                               
|                                                                        
|Cash and Cash Equivalents at End of Period                               |                               
|                                                                        
|Supplemental Disclosures of Cash Flow Information                        |                               
|Cash paid during the year - interest (net of amount capitalized)         |                               
|income taxes (net of refunds)                                            |                               

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

---

# PROGRESS ENERGY, INC.
         NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1.        ORGANIZATION
AND BASIS OF PRESENTATION

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

| | Progress
Energy, Inc. is a holding company  headquartered in Raleigh,  North Carolina and
registered under the Public                   Utility  Holding  Company Act of 1935
 (PUHCA),  as amended.  As such,  Progress  Energy,  Inc. and its  subsidiaries
                  (Progress Energy or the Company) are subject to the regulatory
provisions of PUHCA.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Through
its wholly-owned  subsidiaries,  Carolina Power & Light Company d/b/a Progress Energy
 Carolinas,  Inc. (PEC)                   and Florida Power Corporation d/b/a Progress
Energy Florida,  Inc. (PEF), the Company's PEC Electric and PEF segments
                  are primarily  engaged in the  generation,  transmission,  distribution
 and sale of electricity in portions of North                   Carolina,  South
 Carolina and Florida.  The Progress  Ventures  business  unit consists of the Fuels
(Fuels) and the                   Competitive  Commercial  Operations  (CCO) business
 segments.  The Fuels segment is involved in natural gas drilling                   and
production,  coal terminal services,  coal mining,  synthetic fuel production,  fuel
transportation and delivery.                   The CCO  segment  includes  nonregulated
 electric  generation  and energy  marketing  activities.  Through  the Rail
                  Services  (Rail) segment,  the Company is involved in nonregulated
 railcar  repair,  rail parts  reconditioning  and                   sales,  and scrap
metal  recycling.  Through its other  business  units,  the Company  engages in other
 nonregulated                   business areas,  including  telecommunications  and
energy management and related  services.  Progress Energy's 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 regulatory
action,                   which cannot currently be anticipated.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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                   statements.
 Because  the  accompanying  consolidated  interim  financial  statements  do  not
 include  all  of  the                   information and footnotes required by GAAP, they
should be read in conjunction with the audited financial  statements
                  for the period ended December 31, 2003, and notes thereto included in
Progress  Energy's Form 10-K for the year ended                   December 31, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
and PEF collect from customers  certain  excise taxes,  which include gross receipts tax,
 franchise  taxes,  and                   other  excise  taxes,  levied by the state or
local  government  upon the  customers.  PEC and PEF account for excise
                  taxes  on a gross  basis.  For the  three  month  periods  ended
 September  30,  2004  and  2003,  excise  taxes  of                   approximately  $70
 million  and $65  million,  respectively,  are  included  in taxes  other  than on
 income in the                   accompanying  Consolidated  Statements  of Income.  For
the nine month  periods  ended  September  30, 2004 and 2003,                   excise
 taxes of  approximately  $184  million and $169  million,  respectively,  are included
in taxes other than on                   income in the  accompanying  Consolidated
 Statements  of Income.  These  approximate  amounts  are also  included in
                  utility revenues.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
 amounts  included  in the  consolidated  interim  financial  statements  are  unaudited
 but,  in the opinion of                   management,  reflect all normal recurring
 adjustments  necessary to fairly present the Company's  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 2003  have been  reclassified  to  conform  to
the 2004                   presentation.  The results of operations of the Rail Services
segment are reported one month in arrears.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Subsidiary
Reporting Period Change
| | -- | ----------------------------------

| | In
the fourth  quarter of 2003,  the Company  ceased  recording  portions  of Fuels'
 segment  operations,  primarily                   synthetic  fuel  operations,  one
month in arrears.  As a result,  earnings  for the year ended  December 31, 2003 as
                  reported in the Company's Form 10-K,  included 13 months of results for
these operations.  The 2003 quarterly results                   for periods  ended March
31, June 30 and  September 30 have been restated for the  above-mentioned  reporting
 period                   change.  This  resulted in ten months of earnings in the nine
months  ended  September  30,  2003.  The impact of the
                  reclassification of earnings between quarters is outlined in the table
below:
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Three Months Ended September 30, 2003                      | As Previously | Quarter | As
|---------------------------------------------------------- | ------------- | ------- | --
|
|                                                          
|Income from Continuing Operations before Cumulative Effect |               |         |   
|of Change in Accounting Principle                          |               | $338    |   
|Net Income                                                 |               | $319    |   
|Basic earnings per common share                            |              
|Income from Continuing Operations before Cumulative        |              
|Effect of Change in Accounting Principle                   |               | $1.42   |   
|Net Income                                                 |               | $1.34   |   
|Diluted earnings per common share                          |              
|Income from Continuing Operations before Cumulative        |              
|Effect of Change in Accounting Principle                   |               | $1.42   |   
|Net Income                                                 |               | $1.34   |   
|                                                          

|Nine Months Ended September 30, 2003                       | As Previously | Quarter | As
|---------------------------------------------------------- | ------------- | ------- | --
|
|                                                          
|Income from Continuing Operations before Cumulative Effect |               |         |   
|of Change in Accounting Principle                          |               | $684    |   
|Net Income                                                 |               | $680    |   
|Basic earnings per common share                            |              
|Income from Continuing Operations before Cumulative        |              
|Effect of Change in Accounting Principle                   |               | $2.90   |   
|Net Income                                                 |               | $2.88   |   
|Diluted earnings per common share                          |              
|Income from Continuing Operations before Cumulative        |              
|Effect of Change in Accounting Principle                   |               | $2.89   |   
|Net Income                                                 |               | $2.87   |   

| | D. | Stock-Based
Compensation
| | -- | ------------------------

| | The
Company measures compensation expense for stock options as the difference between the
market price of its common stock and the exercise price of the option at the grant date.
The exercise price at which options are granted by the Company equals the market price at
the grant date, and accordingly, no compensation expense has been recognized for stock
option grants. For purposes of the pro forma disclosures required by Statement of
Financial Accounting Standards (SFAS) No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an Amendment of FASB Statement No.
123, the estimated fair value of the Companys stock options is amortized to
expense over the options vesting period. The following table illustrates the effect
on net income and earnings per share if the fair value method had been applied to all
outstanding and unvested awards in each period:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                     | Three Months Ended
September 30 | Nine Months Ended
September 30
|---------------------------------------------------- | ------------------------------- | ------------------------------
|                                                    
|
|                                                    
|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                          
|                                                    
|Basic earnings per share                             |                                
|As reported                                          |                                 | $1.25                         
|Pro forma                                            |                                 | $1.23                         
|Fully diluted earnings per share                     |                                
|As reported                                          |                                 | $1.24                         
|Pro forma                                            |                                 | $1.23                         

| | The
Company expects to begin expensing stock options in 2005, either by adopting SFAS No.
123, as amended by SFAS No. 148, or by adopting new FASB guidance on accounting for
stock-based compensation that is expected to be issued in late 2004 and become effective
July 1, 2005. In 2004, however, the Company made the decision to cease granting stock
options and intends to replace that compensation program with other programs. Therefore,
the amount of stock option expense expected to be recorded in 2005 is below the amount
that would have been recorded if the stock option program had continued. If stock option
expense is recorded for the full year 2005, approximately $7 million of pre-tax expense
would be recorded.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | E. | Consolidation
of Variable Interest Entities
| | -- | -------------------------------------------

| | The
Company consolidates all voting interest entities in which it owns a majority voting
interest and all variable interest entities for which it is the primary beneficiary in
accordance with FASB Interpretation No. 46R, Consolidation of Variable Interest
Entities  an Interpretation of ARB No. 51 (FIN No. 46R). The Company 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 Internal Revenue
Code. As of September 30, 2004, the total assets of the two entities were $39 million,
the majority of which are collateral for the entities obligations and are included
in other current assets and miscellaneous other property and investments in the
Consolidated Balance Sheets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is the primary beneficiary of a limited partnership which invests in 17
low-income housing partnerships that qualify for federal and state tax credits. The
Company has requested but has not received all the necessary information to determine the
primary beneficiary of the limited partnerships underlying 17 partnership
investments, and has applied the information scope exception in FIN No. 46R, paragraph
4(g) to the 17 partnerships. The Company has no direct exposure to loss from the 17
partnerships; the Companys only exposure to loss is from its investment of less
than $1 million in the consolidated limited partnership. The Company will continue its
efforts to obtain the necessary information to fully apply FIN No. 46R to the 17
partnerships. The Company believes that if the limited partnership is determined to be
the primary beneficiary of the 17 partnerships, the effect of consolidating the 17
partnerships would not be significant to the Companys Consolidated Balance Sheets.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has variable interests in two power plants resulting from long-term power
purchase contracts. The Company has requested the necessary information to determine if
the counterparties are variable interest entities or to identify the primary
beneficiaries. Both entities declined to provide the Company with the necessary financial
information, and the Company has applied the information scope exception in FIN No. 46R,
paragraph 4(g). The Companys only significant exposure to variability from these
contracts results from fluctuations in the market price of fuel used by the two entitiesplants
to produce the power purchased by the Company. The Company is able to recover these fuel
costs under PECs fuel clause. Total purchases from these counterparties were
approximately $46 million and $43 million in the first nine months of 2004 and 2003,
respectively. The Company will continue its efforts to obtain the necessary information
to fully apply FIN No. 46R to these contracts. The combined generation capacity of the
two entities power plants is approximately 880 MW. The Company believes that if it
is determined to be the primary beneficiary of these two 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 the Companys
common stock equity, net earnings, or cash flows. However, because the Company has not
received any financial information from these two counterparties, the impact cannot be
determined at this time.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company also has interests in several other variable interest entities for which the
Company is not the primary beneficiary. These arrangements include investments in
approximately 27 limited partnerships, limited liability corporations and venture capital
funds and two building leases with special-purpose entities. The aggregate maximum loss
exposure at September 30, 2004, that the Company could be required to record in its
income statement as a result of these arrangements totals approximately $37 million. The
creditors of these variable interest entities do not have recourse to the general credit
of the Company in excess of the aggregate maximum loss exposure.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2.        NEW
ACCOUNTING STANDARDS

| | In
December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(Medicare Act) was signed into law. In accordance with guidance issued by the FASB in
FASB Staff Position 106-2, Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug Improvement and Modernization Act of 2003 (FASB Staff
Position 106-2), the Company elected to defer accounting for the effects of the Medicare
Act due to uncertainties regarding the effects of the implementation of the Medicare Act
and the accounting for certain provisions of the Medicare Act. In May 2004, the FASB
issued definitive accounting guidance for the Medicare Act in FASB Staff Position 106-2,
which was effective for the Company in the third quarter of 2004. FASB Staff Position
106-2 results in the recognition of lower other postretirement employment benefit (OPEB)
costs to reflect prescription drug-related federal subsidies to be received under the
Medicare Act. As a result of the Medicare Act, the Companys accumulated
postretirement benefit obligation as of January 1, 2004 was reduced by approximately $83
million, and the Companys 2004 net periodic cost will be reduced by approximately
$13 million due to the Medicare Act. The Company recorded $10 million of the net periodic
cost reduction in the quarter ended September 30, 2004. Prior quarters were not restated
due to the immateriality of the adjustments.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3.        HURRICANE-RELATED
COSTS

| | Hurricanes
Charley, Frances, Ivan and Jeanne struck significant portions of the Companys
service territories during the third quarter of 2004, most significantly impacting PEFs
territory. Restoration of the Companys systems from hurricane-related damage is
estimated at $379 million. PEC has estimated restoration costs of $13 million, of which
$12 million was charged to operation and maintenance expense and $1 million was charged
to capital expenditures. PEF has estimated total costs of $366 million, of which $55
million was charged to capital expenditures, and $311 million was charged to the storm
damage reserve pursuant to a regulatory order.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
accordance with a regulatory order, PEF accrues $6 million annually to a storm damage
reserve and is allowed to defer losses in excess of the accumulated reserve. Under the
order, the storm reserve is charged with operation and maintenance expenses related to
storm restoration and with capital expenditures related to storm restoration that are in
excess of expenditures assuming normal operating conditions. As of September 30, 2004,
$266 million of hurricane restoration costs in excess of the previously recorded storm
reserve have been classified as a regulatory asset in order to recognize the probable
recoverability of these costs. On November 2, 2004, PEF filed a petition with the Florida
Public Service Commission (FPSC) to recover $252 million of storm costs plust interest from retail
ratepayers over a two-year period. The remaining storm reserve costs of $14 million are
attributable to wholesale customers. The Company believes such costs are recoverable.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
does not have an on-going regulatory mechanism to recover storm costs and; therefore,
hurricane restoration costs recorded in the third quarter of 2004 were charged to
operations and maintenance expenses or capital expenditures based on the nature of the
work performed. In connection with other storms, PEC has previously sought and received
permission from the North Carolina Utilities Commission (NCUC) and the Public Service
Commission of South Carolina (SCPSC) to defer storm expenses and amortize them over a
five-year period. PEC is planning to seek deferral of 2004 storm costs from the NCUC in
the fourth quarter of 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Total
capital expenditures of approximately $56 million have been included in construction work
in progress as reported on the Consolidated Balance Sheets for Progress Energy at
September 30, 2004. Due to the frequency and timing of these storms, the replaced
equipment has not been fully identified or quantified at this time. As such, current
expenditures are recorded as construction work in progress and replaced equipment is
still presented gross in the utility plant in service and accumulated depreciation
balances reported on the Consolidated Balance Sheets of Progress Energy as of September
30, 2004 instead of being retired. Due to the accounting treatment for regulated utility
assets and related depreciation, these retirements, when recorded, will reduce utility
plant in service and accumulated depreciation by offsetting amounts, therefore having no
impact on total utility plant, net or the Consolidated Statements of Income.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
a result of the substantial hurricane restoration costs, the Companys regular
federal income tax liability has been significantly reduced, resulting in a charge of $79
million related to Section 29 tax credits. See Note 14 and 15 for additional discussion.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4.        DIVESTITURES

| | A. | Divestiture
of Synthetic Fuel Partnership Interests
| | -- | ---------------------------------------------------

| | In
June 2004, the Company through its subsidiary Progress Fuels sold, in two transactions, a
combined 49.8% partnership interest in Colona Synfuel Limited Partnership, LLLP, one of
its 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. The Companys book value of the interests sold
totaled approximately $5 million. Based on projected production and tax credit levels, the Company
anticipates receiving total gross proceeds of $10 million in 2004, approximately $30
million per year from 2005 through 2007 and approximately $9 million through the second
quarter of 2008. In the event that the synthetic fuel tax credits from the
Colona facility are reduced, including an increase in the price of oil which could
limit or eliminate synthetic fuel tax credits, the amount of proceeds realized could be
significantly impacted. See Note 15 for additional discussion regarding the impact of oil
prices on Section 29 tax credits. Under the agreements, the buyers had a right to unwind
the transactions if an IRS reconfirmation private letter ruling (PLR) was not received by
October 15, 2004. The reconfirmation PLR was received in September 2004. An immaterial
gain was recorded for the three months ended September 30, 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Railcar
Ltd. Divestiture
| | -- | ------------------------

| | In
December 2002, the Progress Energy Board of Directors adopted a resolution approving the
sale of Railcar Ltd., a subsidiary included in the Rail Services segment. In March 2003,
the Company signed a letter of intent to sell the majority of Railcar Ltd. assets to The
Andersons, Inc., and the transaction closed in February 2004. Proceeds from the sale were
approximately $82 million before transaction costs and taxes of approximately $13
million. In July 2004, the Company sold the remaining assets classified as held for sale
to a third-party for net proceeds of $6 million. The assets of Railcar Ltd. were grouped
as assets held for sale and were included in other current assets on the Consolidated
Balance Sheets at December 31, 2003 at approximately $75 million, which reflected the
Companys estimates of the fair value expected to be realized from the sale of these
assets less costs to sell.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | NCNG
Divestiture
| | -- | ----------------

| | In
October 2002, the Company announced the Board of Directors approval to sell North
Carolina Natural Gas Corporation (NCNG) and the Companys equity investment in
Eastern North Carolina Natural Gas Company (ENCNG) to Piedmont Natural Gas Company, Inc.
On September 30, 2003, the Company completed the sale. The 2003 net income of these
operations is reported as discontinued operations in the Consolidated Statements of
Income. Interest expense of $3 million and $10 million for the three and nine months
ended September 30, 2003, respectively, has been allocated to discontinued operations
based on the net assets of NCNG, assuming a uniform debt-to-equity ratio across the
Companys operations. Results of discontinued operations were as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                           |  |     
|------------------------------------------ |  | ----
|
|                                          
|Revenues                                   |  | $ 59
|                                          
|(Loss) earnings before income taxes        |  | $(16
|Income tax (benefit) expense               |  | (6  
|                                          
|Net (loss) earnings from discontinued      | 
|Operations                                 |  | $(10
|                                          
|Estimated loss on disposal of discontinued | 
|operations, including applicable income    |  | (9  
|tax expense of $4                          | 
|                                          
|Net loss from discontinued operations      |  | $(19
|                                          

| | During
the nine months ended September 30, 2004, the Company recorded a reduction to the loss on
the sale of NCNG of approximately $1 million after-tax related to an adjustment of
deferred taxes.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.        ACQUISITIONS
AND BUSINESS COMBINATIONS

| | Progress
Telecommunications Corporation
| | ---------------------------------------

| | In
December 2003, Progress Telecommunications Corporation (PTC) and Caronet, Inc. (Caronet),
both wholly-owned subsidiaries of Progress Energy, and EPIK Communications, Inc. (EPIK),
a wholly-owned subsidiary of Odyssey Telecorp, Inc. (Odyssey), contributed substantially
all of their assets and transferred certain liabilities to Progress Telecom, LLC (PT
LLC), a subsidiary of PTC. Subsequently, in December 2003 the stock of Caronet was sold
to an affiliate of Odyssey for $2 million in cash and Caronet became a wholly-owned
subsidiary of Odyssey. Following consummation of all the transactions described above,
PTC holds a 55% ownership interest in, and is the parent of, PT LLC. Odyssey holds a
combined 45% ownership interest in PT LLC through EPIK and Caronet. The accounts of PT
LLC are included in the Companys Consolidated Financial Statements since the
transaction date. The minority interest is included in other liabilities and deferred
credits in the Consolidated Balance Sheets.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
transaction was accounted for as a partial acquisition of EPIK through the issuance of
the stock of a consolidated subsidiary. The contributions of PTCs and Caronets
net assets were recorded at their carrying values of approximately $31 million. EPIKs
contribution was recorded at its estimated fair value of $22 million using the purchase
method. No gain or loss was recognized on the transaction. The EPIK purchase price was
initially allocated as follows: property and equipment  $27 million; other current
assets  $9 million; current liabilities  $21 million, and goodwill  $7
million. During 2004, PT LLC obtained certain external appraisals of acquired assets and
developed a restructuring plan to exit certain leasing arrangements of EPIK. Based on the
results of these activities, the preliminary purchase price allocation for EPIK was
revised as follows at September 30, 2004: property and equipment  $39 million;
other current assets  $7 million; intangible assets  $1 million; current
liabilities  $19 million and exit costs  $6 million. The exit costs consist
primarily of lease termination penalties and noncancellable lease payments made after
certain leased properties are vacated. The purchase price allocation is subject to
adjustment in the fourth quarter of 2004 pending the completion of certain external
appraisals and the finalization of the restructuring plan, which is expected to be
substantially completed by December 31, 2004.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6.        REGULATORY
MATTERS

| | A. | Retail
Rate Matters
| | -- | -------------------

| | PEC
has exclusively utilized external funding for its decommissioning liability since 1994.
Prior to 1994, PEC retained funds internally to meet its decommissioning liability. A
NCUC order issued in February 2004 found that by January 1, 2008, PEC must begin
transitioning these amounts to external funds. The transition of $131 million must be
completed by December 31, 2017, and at least 10% must be transitioned each year.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
filed with the SCPSC seeking permission to defer expenses incurred from the first quarter
2004 winter storm. The SCPSC approved PECs request to defer the costs and amortize
them ratably over five years beginning in January 2005. Approximately $10 million related
to storm costs incurred during the first quarter of 2004 was deferred in that quarter.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the first quarter of 2004, PEC met the requirements of both the NCUC and the SCPSC for
the implementation of a depreciation study which allowed the utility to reduce the rates
used to calculate depreciation expense. As a result, depreciation expense decreased $7
million for the three months ended September 30, 2004 compared to the prior year quarter
and decreased $17 million for the nine months ended September 30, 2004 compared to the
prior year nine month period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
October 2004, PEC filed a revised depreciation study with the NCUC and SCPSC supporting a
reduction in annual depreciation expense of approximately $47 million. The reduction is
due solely to extended lives at each of PECs nuclear units. The new depreciation
rates are proposed to be effective January 1, 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
obtained SCPSC and NCUC approval of fuel factors in annual fuel-adjustment proceedings.
The SCPSC approved PECs petition to leave billing rates unchanged from the prior
year by order issued in March 2004. The NCUC approved an annual increase of $62 million
by order issued in September 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
a filing dated September 9, 2004, as amended in November 2004, PEF is requesting the FPSC
to approve recovery through PEFs pass-through clauses in 2005 an increase of $278
million. This includes recovery for various pass-through items, primarily projected fuel cost increases in 2005 and $77
million related to under-recovered fuel costs in 2004 along with projected environmental costs. PEF expects a total of $156
million of under-recovered fuel costs for 2004 as of year end, of which PEF has requested
deferral of $79 million until 2006 to mitigate the impact on customers resulting from the
need to also recover hurricane-related costs. A decision on PEFs request is
expected from the FPSC at the conclusion of its annual fuel hearing, which began
on November 8, 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
June 29, 2004, the FPSC approved a Stipulation and Settlement Agreement, executed on
April 29, 2004, by PEF, the Office of Public Counsel and the Florida Industrial Power
Users Group. The stipulation and settlement resolved the issue pending before the FPSC
regarding the costs PEF will be allowed to recover through its Fuel and Purchased Power
Cost Recovery clause in 2004 and beyond for waterborne coal deliveries by the Companys
affiliated coal supplier, Progress Fuels Corporation. The settlement sets fixed per ton
prices based on point of origin for all waterborne coal deliveries in 2004, and
establishes a market-based pricing methodology for determining recoverable waterborne
coal transportation costs through a competitive solicitation process or market price
proxies in 2005 and thereafter. The settlement reduces the amount that PEF will charge to
the Fuel and Purchased Power Cost Recovery clause for waterborne transportation by
approximately $13 million beginning in 2004.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2002, the parties in PEFs rate case entered into a Stipulation and Settlement
Agreement (the Agreement) related to retail rate matters. The Agreement was approved by
the FPSC and is generally effective May 1, 2002 through December 31, 2005; provided,
however, that if PEFs base rate earnings fall below a 10% return on equity, PEF may
petition the FPSC to amend its base rates.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEF
has determined that additional generating capacity will be required in late 2007 and has
requested approval by the FPSC to build an additional unit at PEFs Hines Complex.
On October 28, 2004, the Prehearing Order in the Hines 4 Determination of Need proceeding
was issued. The order reflects a stipulation between the FPSC Staff and the Company
resolving all issues and agreement that the FPSC should grant an affirmative
Determination of Need for the construction of a Hines Unit 4. The stipulation finds that
Hines Unit 4 is needed to maintain electric system reliability and integrity and to
continue to provide adequate electricity to its ratepayers at a reasonable cost. Hines
Unit 4 will be a combined cycle unit with a generating capacity of 461 megawatts (summer
rating). The estimated total in-service cost of Hines Unit 4 is $286 million, and the
unit is planned for commercial operation in December 2007. If the actual cost is less
than the estimate, customers will receive the benefit of such cost under runs. Any costs
that exceed this estimate will be not recoverable absent extraordinary circumstances as
found by the FPSC in subsequent proceedings. The FPSC approved the final order on
November 3, 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Regional
Transmission Organizations
| | -- | -----------------------------------

| | In
2000, the Federal Energy Regulatory Commission (FERC) issued Order 2000 regarding
regional transmission organizations (RTOs). This Order set minimum characteristics and
functions that RTOs must meet, including independent transmission service. In July 2002,
the FERC issued its Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying
Undue Discrimination through Open Access Transmission Service and Standard Electricity
Market Design (SMD NOPR). If adopted as proposed, the rules set forth in the SMD NOPR
would materially alter the manner in which transmission and generation services are
provided and paid for. In April 2003, the FERC released a White Paper on the Wholesale
Market Platform. The White Paper provides an overview of what the FERC currently intends
to include in a final rule in the SMD NOPR docket. The White Paper retains the
fundamental and most protested aspects of SMD NOPR, including mandatory RTOs and the FERCs
assertion of jurisdiction over certain aspects of retail service. The FERC has not yet
issued a final rule on SMD NOPR. The Company cannot predict the outcome of these matters
or the effect that they may have on the GridSouth and GridFlorida proceedings currently
ongoing before the FERC. It is unknown what impact the future proceedings will have on
the Companys earnings, revenues or prices.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
FPSC ruled in December 2001 that the formation of GridFlorida by the three major
investor-owned utilities in Florida, including PEF, was prudent but ordered changes in
the structure and market design of the proposed organization. In September 2002, the FPSC
set a hearing for market design issues; this order was appealed to the Florida Supreme
Court by the consumer advocate of the state of Florida. In June 2003, the Florida Supreme
Court dismissed the appeal without prejudice. In September 2003, the FERC held a Joint
Technical Conference with the FPSC to consider issues related to formation of an RTO for
peninsular Florida. In December 2003, the FPSC ordered further state proceedings and
established a collaborative workshop process to be conducted during 2004. In June 2004,
the workshop process was abated pending completion of a cost-benefit study currently
anticipated to be completed in December 2004 with subsequent action by the FPSC to be
determined at that time.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company has $33 million and $4 million invested in GridSouth and GridFlorida,
respectively, related to startup costs at September 30, 2004. The Company expects to
recover these startup costs in conjunction with the GridSouth and GridFlorida original
structures or in conjunction with any alternate combined transmission structures that
emerge.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Implementation
of SFAS No. 143
| | -- | ------------------------------

| | In
connection with the implementation of SFAS No. 143, Accounting for Asset Retirement
Obligations, in 2003, PEC filed a request with the NCUC requesting deferral of the
difference between expense pursuant to SFAS No. 143 and expense as previously determined
by the NCUC. The NCUC granted the deferral of the January 1, 2003 cumulative adjustment.
Because the clean air legislation discussed in Note 15 under Air Qualitycontained
a prohibition against cost deferrals unless certain criteria are met, the NCUC denied the
deferral of the ongoing effects. Therefore, PEC ceased deferral of the ongoing effects
during the second quarter for the six months ended June 30, 2003 related to its North
Carolina retail jurisdiction. Pre-tax income for the three and six months ended June 30,
2003 increased by approximately $14 million, which represents a decrease in non-ARO cost
of removal expense, partially offset by an increase in decommissioning expense. The
Company provided additional information to the NCUC that demonstrated that deferral of
the ongoing effects should also be allowed. In August 2003, the NCUC revised its decision
and approved the deferral of the ongoing effects of SFAS No. 143 at which time the $14
million impact was reversed.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | FERC
Market Power Mitigation
| | -- | ----------------------------

| | A
FERC order issued in November 2001 on certain unaffiliated utilities triennial
market based wholesale power rate authorization updates required certain mitigation
actions that those utilities would need to take for sales/purchases within their control
areas and required those utilities to post information on their websites regarding their
power systems status. As a result of a request for rehearing filed by certain
market participants, FERC issued an order delaying the effective date of the mitigation
plan until after a planned technical conference on market power determination. In
December 2003, the FERC issued a staff paper discussing alternatives and held a technical
conference in January 2004. In April 2004, the FERC issued two orders concerning utilities ability
to sell wholesale electricity at market based rates. In the first order, the FERC adopted
two new interim screens for assessing potential generation market power of applicants for
wholesale market based rates, and described additional analyses and mitigation measures
that could be presented if an applicant does not pass one of these interim screens. In
July 2004, the FERC issued an order on rehearing affirming its conclusions in the April
order. In the second order, the FERC initiated a rulemaking to consider whether the FERCs
current methodology for determining whether a public utility should be allowed to sell
wholesale electricity at market-based rates should be modified in any way. Management is
unable to predict the outcome of these actions by the FERC or their effect on future
results of operations and cash flows. However, the Company does not anticipate that the
current operations of PEC or PEF would be impacted materially if they were unable to sell
power at market-based rates in their respective control areas. Due to PECs failure
of one of the two interim market power screens, on August 12, 2004, PEC notified the FERC
that it would revise its Market Based Rate tariff to restrict it to sales outside PECs
control area and file a new cost based tariff for sales within PECs control area
that incorporates the FERCs default cost based rate methodologies for sales of one
year or less. PEC anticipates making this filing by year-end.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7.        GOODWILL
AND OTHER INTANGIBLE ASSETS

| | The
Company performed the annual goodwill impairment test in accordance with FASB Statement
No. 142, Goodwill and Other Intangible Assets, for the CCO segment in the first quarter
of 2004, and the annual goodwill impairment test for the PEC Electric and PEF segments in
the second quarter of 2004, each of which indicated no impairment.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
changes in the carrying amount of goodwill for the periods ended September 30, 2004 and
December 31, 2003, by reportable segment, are as follows:
| | -----------------------------------------------------------------------------------------------------------------------------------------------------

|                                 |  |        |  |        | 
|-------------------------------- |  | ------ |  | ------ | 
|
|                                
|Balance as of January 1, 2003    |  | $1,922 |  | $1,733 | 
|Acquisitions                     |  |       |  |       | 
|                                
|Balance as of December 31, 2003  |  | $1,922 |  | $1,733 | 
|Purchase accounting adjustment   |  |       |  |       | 
|                                
|Balance as of September 30, 2004 |  | $1,922 |  | $1,733 | 

| | In
December 2003, $7 million in goodwill was acquired as part of Progress Telecommunications
Corporations partial acquisition of EPIK and was reported in the Other segment. As
discussed in Note 5, the Company revised the preliminary EPIK purchase price allocation
as of September 2004, and the $7 million of goodwill was reallocated to certain tangible
assets acquired based on the preliminary results of external appraisals.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
gross carrying amount and accumulated amortization of the Companys intangible
assets at September 30, 2004 and December 31, 2003, are as follows:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------

|                           | September 30, 2004 | December 31, 2003
|-------------------------- | ------------------ | -----------------
|                          
|
|                          
|Synthetic fuel intangibles |                    | $134             
|Power agreements acquired  |                    | 221              
|Other                      |                    | 63               
|                          
|Total                      |                    | $410             
|                          
|                           |                   

| | In
June 2004, the Company sold, in two transactions, a combined 49.8 percent partnership
interest in Colona Synfuel Limited Partnership, LLLP, one of its synthetic fuel
operations. Approximately $6 million in synthetic fuel intangibles and $4 million in
related accumulated amortization were included in the sale of the partnership interest.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | All
of the Companys intangibles are subject to amortization. Synthetic fuel intangibles
represent intangibles for synthetic fuel technology. These intangibles are being
amortized on a straight-line basis until the expiration of tax credits under Section 29
of the Internal Revenue Code (Section 29) in December 2007. The intangibles related to
power agreements acquired are being amortized based on the economic benefits of the
contracts. Other intangibles are primarily acquired customer contracts and permits that
are amortized over their respective lives.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Amortization
expense recorded on intangible assets for the three months ended September 30, 2004 and
2003 was $10 million and $11 million, respectively. Amortization expense recorded on
intangible assets for the nine months ended September 30, 2004 and 2003 was $31 million
and $26 million, respectively. The estimated annual amortization expense for intangible
assets for 2004 through 2008, in millions, is approximately $41, $34, $35, $35 and $17,
respectively.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8.        EQUITY

| | A. | Earnings
Per Common Share
| | -- | -------------------------

| | A
reconciliation of the weighted-average number of common shares outstanding for basic and
dilutive earnings per share purposes is as follows:
| | ----------------------------------------------------------------------------------------------------------------------------------------------

|(in millions)                            | Three Months Ended
September 30 | Nine Months Ended
September 30
|---------------------------------------- | ------------------------------- | ------------------------------
|                                        
|
|                                        
|Weighted-average common shares - basic   |                                 | 243                           
|Restricted stock awards                  |                                 |                              
|                                        
|Weighted-average shares - fully dilutive |                                 | 243                           
|                                        

| | B. | Comprehensive
Income
| | -- | --------------------

| | Comprehensive
income for the three months ended September 30, 2004 and 2003 was $297 million and $338
million, respectively. Comprehensive income for the nine months ended September 30, 2004
and 2003 was $553 million and $696 million, respectively. Changes in other comprehensive
income for the periods consisted primarily of changes in the fair value of derivatives
used to hedge cash flows related to interest on long-term debt and gas sales.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9.        FINANCING
ACTIVITIES

| | Between
October 19, 2004 and November 1, 2004, Progress Energy and its subsidiaries PEC and PEF
borrowed a net total of $535 million ($365 million by Progress Energy; $115 million by
PEC; and $55 million by PEF) under certain long-term revolving credit facilities. In
addition, PEF and PEC borrowed $170 million and $90 million, respectively, under their
short-term credit facilities. Each of these credit facilities contains various cross
default and other acceleration provisions. The borrowed funds will be used to pay off
maturing commercial paper and for other cash needs. This action was taken due to the
uncertain impact on Progress Energys, PECs, and PEFs ability to access
the commercial paper markets resulting from recent ratings actions taken by Standard and
Poors (S&P) credit rating agency and Moodys Investor Services
(Moodys).
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 19, 2004, S&P changed Progress Energys outlook from stable to negative.
S&P cited the uncertainties regarding the timing of the recovery of hurricane costs,
the Companys debt reduction plans, and the IRS audit of the Companys Earthco
synthetic fuels facilities as the reasons for the change in outlook. On October 25, 2004,
S&P reduced the short-term debt rating of Progress Energy, PEC and PEF to A-3 from
A-2, as a result of their change in outlook discussed above.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 20, 2004, Moodys changed its outlook for Progress Energy from stable to
negative and placed the ratings of PEF under review for possible downgrade. PECs
ratings were affirmed by Moodys.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Moodys
cited the following reasons for its change in the outlook for Progress Energy: financial
ratios that are weak for its current rating category; rising O&M, pension, benefit,
and insurance costs; and delays in executing its deleveraging plan. With respect to PEF,
Moodys cited declining cash flow coverages and rising leverage over the last
several years; expected funding needs for a large capital expenditure program; risks with
regard to its upcoming 2005 rate case and the timing of hurricane cost recovery as
reasons for putting its ratings under review.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
changes by S&P and Moodys do not trigger any debt or guarantee collateral
requirements, nor do they have any material impact on the overall liquidity of Progress
Energy or any of its affiliates. To date, Progress Energys, PECs, and PEFs
access to the commercial paper markets has not been materially impacted by the rating
agencies actions. However, the changes are expected to increase the interest rate
incurred on its short-term borrowings by 0.25% to 0.875%.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Progress
Energys, PECs, and PEFs long-term credit facilities were arranged
through a syndication of financial institutions and support their commercial paper
programs. Progress Energy took advantage of favorable market conditions and entered into
a new $1.1 billion five year line of credit, effective August 5, 2004, and expiring
August 5, 2009. This facility replaced Progress Energys $250 million 364 day line
of credit and its three year $450 million line of credit, which were both scheduled to
expire in November 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
July 28, 2004, PEC extended its $165 million 364-day line of credit, which was scheduled
to expire on July 29, 2004. The line of credit will expire on July 27, 2005.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
July 1, 2004, PEF paid at maturity $40 million 6.69% Medium-Term Notes Series B with
commercial paper proceeds and cash from operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 30, 2004, PEC redeemed $35 million of Darlington County 6.6% Series Pollution
Control Bonds at 102.5% of par, $2 million of New Hanover County 6.3% Series Pollution
Control Bonds at 101.5% of par, and $2 million of Chatham County 6.3% Series Pollution
Control Bonds at 101.5% of par with cash from operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
March 30, 2004, PEF extended its $200 million 364-day line of credit. The line of credit
will expire on March 29, 2005.
| | --------------------------------------------------------------------------------------------------------------------------

| | On
March 1, 2004, Progress Energy used available cash and proceeds from the issuance of
commercial paper to pay at maturity $500 million 6.55% senior unsecured notes. Cash and
commercial paper capacity for this retirement was created primarily from proceeds of the
sale of assets and long-term debt financings in 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
February 9, 2004, Progress Capital Holdings, Inc. paid at maturity $25 million 6.48%
medium term notes with available cash from operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------

| | On
January 15, 2004, PEC paid at maturity $150 million 5.875% First Mortgage Bonds with
commercial paper proceeds. On April 15, 2004, PEC also paid at maturity $150 million
7.875% First Mortgage Bonds with commercial paper proceeds and cash from operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | For
the nine months ended September 30, 2004, the Company issued approximately 1.3 million
shares of its common stock for approximately $58 million in proceeds from its Investor
Plus Stock Purchase Plan and its employee benefit plans. For the quarter ended September
30, 2004, there were no material stock issuances. For the nine months ended September 30,
2004 and 2003, the dividends paid on common stock were approximately $423 million and
$403 million, respectively.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

10.        BENEFIT
PLANS

| | The
Company and some of its subsidiaries have a non-contributory defined benefit retirement
(pension) plan for substantially all full-time employees. The Company also has
supplementary defined benefit pension plans that provide benefits to higher-level
employees. In addition to pension benefits, the Company and some of its subsidiaries
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 three and nine months ended September
30 are:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Three Months Ended September 30             | Pension Benefits | Other Postretirement
Benefits
|------------------------------------------- | ---------------- | -----------------------------
|                                           
|
|                                           
|Service cost                                |                  | $ 14                         
|Interest cost                               |                  | 27                           
|Expected return on plan assets              |                  | (41                          
|Amortization of actuarial (gain) loss       |                  | 4                            
|Other amortization, net                     |                  |                             
|                                           
|Net periodic cost                           |                  | $   4                        
|Additional cost / (benefit) recognition (a) |                  | (4                           
|                                           
|Net periodic cost recognized                |                  | $                           
|                                           

|Nine Months Ended September 30              | Pension Benefits | Other Postretirement
Benefits
|------------------------------------------- | ---------------- | -----------------------------
|                                           
|
|                                           
|Service cost                                |                  | $   40                       
|Interest cost                               |                  | 82                           
|Expected return on plan assets              |                  | (116                         
|Amortization of actuarial (gain) loss       |                  | 16                           
|Other amortization, net                     |                  |                             
|                                           
|Net periodic cost                           |                  | $   22                       
|Additional cost / (benefit) recognition (a) |                  | (12                          
|                                           
|Net periodic cost recognized                |                  | $   10                       
|                                           

| | (a)
  Due to the acquisition of FPC. See Note 16B of Progress Energys Form 10-K
          for year ended December 31, 2003.
| | ----------------------------------------------------------------------------------------------------------------------------

| | The
net periodic costs for other postretirement benefits decreased during the three and nine
months ended September 30, 2004 due to the implementation of FASB Staff Position 106-2.
See discussion in Note 2 to the Progress Energy Consolidated Interim Financial Statements.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11.        RISK
MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS

| | Progress
Energy and its subsidiaries are exposed to various risks related to changes in market
conditions. The Company has 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. The Company 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 17 to the financial statements in Item 8 of the Form 10-K for
the year ended December 31, 2003.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | A. | Commodity
Derivatives
| | -- | ---------------------

| | Nonhedging
Derivatives
| | ----------------------

| | Nonhedging
derivatives, primarily electricity and natural gas contracts, are entered into 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.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Since
December 31, 2003, PEF has entered into derivative instruments related to its exposure to
price fluctuations on fuel oil purchases. At September 30, 2004, the fair value of these
instruments was an $11 million asset position. These instruments receive regulatory
accounting treatment. Gains are recorded in regulatory liabilities and losses are recorded in regulatory
assets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
Flow Hedges
| | ----------------

| | Progress
Energys subsidiaries designate a portion of commodity derivative instruments as
cash flow hedges under SFAS No. 133.
| | ------------------------------------------------------------------------------------------------------------------------------

| | Progress
Fuels periodically enters into derivative instruments to hedge its exposure to price
fluctuations on natural gas sales. As of September 30, 2004, Progress Fuels was hedging
exposures to the price variability of portions of its natural gas production through
December 2005.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair values of cash flow hedges at September 30, 2004 and December 31, 2003 were as
follows:
| | ------------------------------------------------------------------------------------------------

|                          | Progress Fuels
|------------------------- | --------------
|                         
|
|                         
|Fair value of assets      |               
|Fair value of liabilities |               
|                         
|Fair value, net           |               
|                         

| | The
ineffective portion of commodity cash flow hedges for the three and nine month periods
ending September 30, 2004 was not material to the Companys results of operations.
At September 30, 2004, there were $25 million of after-tax deferred losses in accumulated other comprehensive income OCI, of
which $21 million are expected to be reclassified to earnings during the next 12 months
as the hedged transactions occur. Due to the volatility of the commodities markets, the
value in OCI is subject to change prior to its reclassification into earnings.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Interest
Rate Derivatives  Fair Value or Cash Flow Hedges
| | -- | ----------------------------------------------------------

| | The
Company uses cash flow hedging strategies to hedge variable interest rates on long-term
and short-term debt and to hedge interest rates with regard to future fixed-rate debt
issuances. The Company uses fair value hedging strategies to manage its exposure to fixed
interest rates on long-term debt.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
fair values of interest rate hedges at September 30, 2004 and December 31, 2003 were as
follows:
| | ----------------------------------------------------------------------------------------------------

|                                | September 30 | December 31
|------------------------------- | ------------ | -----------
|
|                               
|Interest rate cash flow hedges  |              | $(9        
|Interest rate fair value hedges |              | $ 8        

| | Cash
Flow Hedges
| | ----------------

| | The
following table presents selected information related to the Companys interest rate
cash flow hedges included in accumulated OCI at September 30, 2004:
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------

|     |  
|---- | -
|
|    
|$(24 | )

| | (a)        includes amounts related to terminated hedges
| | --------------------------------------------------------

| | (b)
       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, 2004, PEC had $110 million notional amount of pay-fixed forward swaps to
hedge its exposure to interest rates with regard to future issuances of debt and $26
million notional amount of pay-fixed forward starting swaps to hedge its exposure to
interest rates with regard to an upcoming railcar lease. All the swaps have a
computational period of ten years. The ineffective portion of interest rate cash flow
hedges for the three and nine month periods ending September 30, 2004 was not material to
the Companys results of operations.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | As
of September 30, 2004 Progress Ventures, Inc. (PVI) a wholly-owned subsidiary of Progress
Energy, had $195 million maximum notional amount of interest rate collars in place to hedge
floating interest rate exposure associated with variable-rate long-term debt. PVI is required to hedge 50% of the amount outstanding under its bank
facility through March 2007.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
May 2004, Progress Energy, Inc. terminated interest rate cash flow hedges, with a total
notional amount of $400 million, related to projected outstanding balances of commercial
paper. The fair value of the hedges at December 31, 2003 was $5 million. Amounts in
accumulated other comprehensive income related to these terminated hedges will be
reclassified to earnings as the hedged interest payments occur.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fair
Value Hedges
| | -----------------

| | As
of September 30, 2004, Progress Energy had $500 million notional amount of fixed rate
debt swapped to floating rate debt by executing interest rate derivative agreements.
These agreements expire on various dates through March 2011. During the nine months ended
September 30, 2004 interest rate swap agreements totaling $700 million notional amount
were terminated. In November 2004, Progress Energy terminated $350 million notional amount of
swaps. The gain or loss on the agreements was deferred and is being amortized over the
life of the bonds as these agreements had been designated as fair value hedges for
accounting purposes.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

12.        FINANCIAL
INFORMATION BY BUSINESS SEGMENT

| | The
Company currently provides services through the following business segments: PEC
Electric, PEF, Fuels, CCO, Rail Services and Other.
| | ----------------------------------------------------------------------------------------------------------------------------------------

| | PEC
Electric and PEF are primarily engaged in the generation, transmission, distribution and
sale of electric energy in portions of North Carolina, South Carolina and Florida. These
electric operations are subject to the rules and regulations of the FERC, the NCUC, the
SCPSC, the FPSC and the United States Nuclear Regulatory Commission (NRC). These electric
operations also distribute and sell electricity to other utilities, primarily on the east
coast of the United States.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fuelsoperations,
which are located throughout the United States, are involved in natural gas drilling and
production, coal terminal services, coal mining, synthetic fuel production, fuel
transportation and delivery.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | CCOs
operations, which are located in the southeastern United States, include nonregulated
electric generation operations and marketing activities.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------

| | Rail
Services operations include railcar repair, rail parts reconditioning and sales,
and scrap metal recycling. These activities include maintenance and reconditioning of
salvageable scrap components of railcars, locomotive repair and right-of-way maintenance.
Rail Services operations are located in the United States, Canada and Mexico.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Other segment, whose operations are in the United States, is composed of other
nonregulated business areas including 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
addition to these reportable operating segments, the Company has other corporate
activities that include holding company operations, service company operations and
eliminations. The profit or loss of the identified segments plus the loss of Corporate
represents the Companys total income from continuing operations before cumulative
effect of change in accounting principle.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                         |  | Revenues |  |     |  
|------------------------ |  | -------- |  | --- | -
|                        
|
|                        
|FOR THE THREE MONTHS     |  |          |  |     |  
|ENDED SEPTEMBER 30, 2004 | 
|PEC Electric             |  | $1,014   |  | $  |  
|PEF                      |  | 1,029    |  |    |  
|Fuels                    |  | 332      |  | 75  |  
|CCO                      |  | 90       |  |    |  
|Rail Services            |  | 291      |  |    |  
|Other                    |  | 19       |  |    |  
|Corporate                |  |         |  | (75 | )
|                        
|Consolidated totals      |  | $2,775   |  | $  |  
|                        

|FOR THE THREE MONTHS     |  |        |  |     |   |         |   |       |  
|------------------------ |  | ------ |  | --- | - | ------- | - | ----- | -
|ENDED SEPTEMBER 30, 2003 | 
|PEC Electric             |  | $1,010 |  | $  |   | $ 1,010 |   | $ 160 |  
|PEF                      |  | 904    |  |    |   | 904     |   | 115   |  
|Fuels                    |  | 252    |  | 88  |   | 340     |   | 79    |  
|CCO                      |  | 67     |  |    |   | 67      |   | 13    |  
|Rail Services            |  | 210    |  |    |   | 210     |   | 1     |  
|Other                    |  | 14     |  | 4   |   | 18      |   | (4    | )
|Corporate                |  |       |  | (92 | ) | (92     | ) | (27   | )
|                        
|Consolidated totals      |  | $2,457 |  | $  |   | $ 2,457 |   | $ 337 |  
|                        

|                         |  | Revenues |  |       
|------------------------ |  | -------- |  | ------
|                        
|
|                        
|FOR THE NINE MONTHS      |  |          |  |       
|ENDED SEPTEMBER 30, 2004 | 
|PEC Electric             |  | $2,776   |  | $   --
|PEF                      |  | 2,673    |  | --    
|Fuels                    |  | 928      |  | 226   
|CCO                      |  | 196      |  | --    
|Rail Services            |  | 816      |  | --    
|Other                    |  | 62       |  | 2     
|Corporate                |  | --       |  | (228  
|                        
|Consolidated totals      |  | $7,451   |  | $   --
|                        
|FOR THE NINE MONTHS      | 
|ENDED SEPTEMBER 30, 2003 | 
|PEC Electric             |  | $2,752   |  | $   --
|PEF                      |  | 2,399    |  | --    
|Fuels                    |  | 763      |  | 257   
|CCO                      |  | 137      |  | --    
|Rail Services            |  | 601      |  | --    
|Other                    |  | 42       |  | 11    
|Corporate                |  | --       |  | (268  
|                        
|Consolidated totals      |  | $6,694   |  | $   --
|                        

| | No
single customer accounted for 10% or more of unaffiliated revenues.
| | ----------------------------------------------------------------------

13.        OTHER
INCOME AND OTHER EXPENSE

| | Other
income and expense includes interest income and other income and expense items as
discussed below. The components of other, net as shown on the accompanying Consolidated
Statements of Income are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                   | Three Months Ended
September 30 | Nine Months Ended
September 30
|-------------------------------------------------- | ------------------------------- | ------------------------------
|                                                  
|
|                                                  
|Other income                                       |                                 |                               
|Net financial trading gain                         |                                 | $  3                          
|Nonregulated energy and delivery services income   |                                 | 6                             
|Contingent value obligations unrealized gain       |                                 | 20                            
|Investment gains                                   |                                 | 2                             
|Income from equity investments                     |                                 | 6                             
|AFUDC equity                                       |                                 | 3                             
|Gain on sale of property                           |                                 | 2                             
|Other                                              |                                 | 8                             
|                                                  
|Total other income                                 |                                 | $50                           
|                                                  
|Other expense                                      |                                
|Nonregulated energy and delivery services expenses |                                 | $  5                          
|Donations                                          |                                 | 2                             
|Investment losses                                  |                                 |                              
|Contingent value obligations unrealized loss       |                                 |                              
|Loss from equity investments                       |                                 |                              
|Write-off of non-trade receivable                  |                                 |                              
|Loss on sale of property                           |                                 |                              
|Other                                              |                                 | 7                             
|                                                  
|Total other expense                                |                                 | $14                           
|                                                  
|Other, net                                         |                                 | $36                           
|                                                  
|                                                   |                                

| | Net
financial trading gains and losses represent non-asset-backed trades of electricity and
gas. 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

14.        INCOME
TAXES

| | 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.
Income tax expense was decreased by $38 million and $35 million for the three months
ended September 30, 2004 and 2003, respectively, in order to maintain an effective tax
rate consistent with the estimated annual rate. Income tax expense was increased by $6
million and decreased by $41 million for the nine months ended September 30, 2004 and
2003, respectively. The income tax provisions for the Company differ from amounts
computed by applying the Federal statutory tax rate to income before income taxes,
primarily due to the recognition of synthetic fuel tax credits.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Progress
Energy, through its subsidiaries, produces a coal-based solid synthetic fuel. The
production and sale of the synthetic fuel from these facilities qualifies for tax credits
under Section 29 of the Code (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. Synthetic fuel
tax credit amounts not utilized are carried forward indefinitely as deferred alternative
minimum tax credits. The amount of Section 29 credits that the Company is allowed to claim in
any calendar year is limited by the amount of the Companys regular federal income
tax liability. Because of the substantial costs the Company incurred from damage
attributable to hurricanes in August through September 2004, the Companys regular
federal income tax liability for 2004 will be significantly reduced. Based on the revised
projections of 2004 taxable income, the Company has generated more Section 29 credits
through September 30, 2004 than it currently estimates are allowable for calendar year
2004. As a result, the Company recorded a charge of $79 million in September 2004 related to
previously recognized Section 29 credits that it anticipates cannot be used.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

15.        COMMITMENTS
AND CONTINGENCIES

| | Contingencies
and significant changes to the commitments discussed in Note 21 of the Companys
2003 Annual Report on Form 10-K are described below.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | A. | Guarantees
| | -- | ----------

| | As
a part of normal business, Progress Energy and certain wholly-owned subsidiaries 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 45).  Such agreements include guarantees, standby
letters of credit and surety bonds. At September 30, 2004, management does 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 Consolidated Balance Sheets.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | At
September 30, 2004, the Company had issued guarantees on behalf of third parties with a
maximum exposure of approximately $10 million. These guarantees support synthetic fuel
operations.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
connection with the sale of partnership interests in Colona (see Note 4A), Progress
Fuels indemnified the buyers against any claims related to Colona resulting from
violations of any environmental laws. Although the terms of the agreement provide for no
limitation to the maximum potential future payments under the indemnification, the
Company has estimated that the maximum total of such payments would not be material.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Insurance
| | -- | ---------

| | Both
PEC and PEF are insured against public liability for a nuclear incident up to $10.8
billion per occurrence. Under the current provisions of the Price Anderson Act, which
limits liability for accidents at nuclear power plants, each company, as an owner of
nuclear units, can be assessed a portion of any third-party liability claims arising from
an accident at any commercial nuclear power plant in the United States. In the event that
public liability claims from an insured nuclear incident exceed $300 million (currently
available through commercial insurers), each company would be subject to assessments of
up to $101 million for each reactor owned per occurrence. Payment of such assessments
would be made over time as necessary to limit the payment in any one year to no more than
$10 million per reactor owned. Congress is considering revisions to the Price Anderson
Act that could include increased limits and assessments per reactor owned. The final
outcome of this matter cannot be predicted at this time.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
and PEF self-insure their transmission and distribution lines against loss due to storm
damage and other natural disasters. PEF accrues $6 million annually to a storm damage
reserve pursuant to a regulatory order and may defer losses in excess of the reserve. See
Note 3 to the Progress Energy Consolidated Financial Statements for discussion of major
storms and related impact.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Claims
and Uncertainties
| | -- | ------------------------

| | The
Company is subject to federal, state and local regulations addressing hazardous and solid
waste management, air and water quality and other environmental matters. Reference is
made to Note 21E to the financial statements in Item 8 of the Form 10-K for the year
ended December 31, 2003.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Hazardous
and Solid Waste Management
| | ------------------------------------

| | 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 potentially
responsible parties (PRPs) at several manufactured gas plant (MGP) sites. In addition,
the Company and its subsidiaries are periodically notified by regulators including the
EPA and various state agencies of their involvement or potential involvement in sites,
other than MGP sites, that may require investigation and/or remediation. A discussion of
these sites by legal entity follows.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC,
PEF and Progress Fuels Corporation have filed claims with the Companys general
liability insurance carriers to recover costs arising from actual or potential
environmental liabilities. Some claims have been settled and others are still pending.
While the Company cannot predict the outcome of these matters, the outcome is not
expected to have a material effect on the consolidated financial position or results of
operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company is also currently in the process of assessing potential costs and exposures at
other sites. As the assessments are developed and analyzed, the Company will accrue costs
for the sites to the extent the costs are probable and can be reasonably estimated.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC. There
are nine former MGP sites and other sites associated with PEC that have required or are
anticipated to require investigation and/or remediation costs. PEC received insurance
proceeds to address costs associated with environmental liabilities related to its
involvement with some sites. All eligible expenses related to these are charged against a
specific fund containing these proceeds. At December 31, 2003, the balance in the fund
was $9 million. During the nine months ended September 30, 2004, PEC spent approximately
$2 million related to environmental remediation. The remaining balance in the fund at
September 30, 2004 was $7 million. At September 30, 2004, PEC had an accrual of $9
million recorded for environmental liabilities, which includes $2 million transferred
from NCNG at the time of the sale of NCNG. PEC is unable to provide an estimate of the
reasonably possible total remediation costs beyond what is currently accrued due to the
fact that investigations have not been completed at all sites. This accrual has been
recorded on an undiscounted basis. PEC measures its liability for these sites based on
available evidence including its experience in investigating and remediating
environmentally impaired sites. The process often involves assessing and developing
cost-sharing arrangements with other PRPs. PEC will accrue costs for the sites to the
extent its 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 to the stage where a reasonable
estimate of the remediation costs can be made, PEC cannot determine the total costs that
may be incurred in connection with the remediation of all sites at this time. It is
anticipated that sufficient information will become available for several sites during
2005 to allow a reasonable estimate of PECs obligation for those sites to be made.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEF. At
September 30, 2004, PEF has accrued $27 million for probable and estimable costs related
to various environmental sites. Of this accrual, $17 million is for costs associated with
the remediation of distribution and substation transformers for which PEF has received
approval from the FPSC for recovery through the Environmental Cost Recovery Clause
(ECRC). The remaining $10 million is related to two former MGP sites and other sites
associated with PEF that have required or are anticipated to require investigation and/or
remediation costs. At December 31, 2003, the accrual balance for costs associated with
the remediation of distribution transformers was $12 million. For the nine months ended
September 30, 2004, PEF accrued an additional $8 million and spent approximately $3
million related to the remediation of transformers and recorded a regulatory asset for
the probable recovery through the ECRC.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | These
accruals have been recorded on an undiscounted basis. PEF measures its liability for
these sites based on available evidence including its experience in investigating and
remediating environmentally impaired sites. This process often includes assessing and
developing cost-sharing arrangements with other PRPs. 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 advanced to the stage where a reasonable estimate of the
remediation costs can be made, at this time PEF is unable to provide an estimate of its
obligation to remediate these sites beyond what is currently accrued. As more activity
occurs at these sites, PEF will assess the need to adjust the accruals. It is anticipated
that sufficient information will be become available in 2005 to make a reasonable
estimate of PEFs obligation for one of these MGP sites.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Florida Legislature passed the risk-based corrective action (RBCA, known as Global RBCA)
legislation in the 2003 regular session. 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 law
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. Over the
past 18 months, the Florida Department of Environmental Protection (FDEP) has been in the
process of developing the rules required by the RBCA statute, holding meetings with
interested stakeholders and hosting public workshops. The rules have the potential for
making future clean-ups in Florida more costly to complete. The FDEP has not yet
announced its schedule to submit its rule for adoption. The Company cannot predict the
outcome of this matter.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Florida
Progress Corporation (FPC). In 2001, FPC sold its Inland Marine Transportation
business operated by MEMCO Barge Line, Inc. to AEP Resources, Inc. FPC established an
accrual to address indemnities and retained an environmental liability associated with
the transaction. FPC estimates that its contractual liability to AEP Resources, Inc.,
associated with Inland Marine Transportation, is $4 million at September 30, 2004 and has
accrued such amount. The previous accrual of $10 million was reduced in 2003 based on a
change in estimate. This accrual has been determined on an undiscounted basis. FPC
measures its liability for this site based on estimable and probable remediation
scenarios.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Certain
historical sites exist that are being addressed voluntarily by FPC. An immaterial accrual
has been established to address investigation expenses related to these sites. The
Company cannot determine the total costs that may be incurred in connection with these
sites.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Rail. Rail
Services is voluntarily addressing certain historical waste sites. The Company cannot
determine the total costs that may be incurred in connection with these sites.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Air
Quality
| | -----------

| | There
has been and may be further proposed legislation requiring reductions in air emissions
for NOx, 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 which could be
material to the Companys consolidated financial position or results of operations.
Control equipment that will be installed on North Carolina fossil generating facilities
as part of the North Carolina legislation discussed below may address some of the issues
outlined above. However, the Company cannot predict the outcome of this matter.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
EPA is conducting an enforcement initiative related to a number of coal-fired utility
power plants in an effort to determine whether modifications at those facilities were
subject to New Source Review requirements or New Source Performance Standards under the
Clean Air Act. The Company was asked to provide information to the EPA as part of this
initiative and cooperated in providing 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, ranging from $1.0 billion to $1.4 billion. A utility that was not
subject to a civil enforcement action settled its New Source Review issues with the EPA
for $300 million. 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. The Company cannot predict
the outcome of this matter.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2003, the EPA published a final rule addressing routine equipment replacement under the
New Source Review program. The rule defines routine equipment replacement and the types
of activities that are not subject to New Source Review requirements or New Source
Performance Standards under the Clean Air Act. The rule was challenged in the Federal
Appeals Court and its implementation stayed. In July 2004, the EPA announced it will
reconsider certain issues arising from the final routine equipment replacement rule.
Reconsideration does not impact the court-approved stay. The agency had indicated its
plans to issue a final decision on these reconsidered issues by year-end. The Company
cannot predict the outcome of this matter.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
1998, the EPA published a final rule under Section 110 of the Clean Air Act addressing
the regional transport of ozone (NOx SIP Call). Total capital expenditures to meet the
requirements of the NOx SIP Call Rule in North and South Carolina could reach
approximately $370 million, which has not been adjusted for inflation. The Company has
spent approximately $284 million to date related to these projected amounts. Increased
operation and maintenance costs relating to the NOx SIP Call are not expected to be
material to the Companys results of operations. Further controls are anticipated as
electricity demand increases.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
1997, the EPA issued final regulations establishing a new 8-hour ozone standard. In April
2004, the EPA identified areas that do not meet the standard. The states with identified
areas, including North and South Carolina, are proceeding with the implementation of the
federal 8-hour ozone standard. Both states promulgated final regulations, which will
require PEC to install NOx controls under the states programs to comply with the
8-hour standard. The costs of those controls are included in the $370 million cost
estimate above. However, further technical analysis and rulemaking may result in a
requirement for additional controls at some units. The Company cannot predict the outcome
of this matter.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2002, legislation was enacted in North Carolina requiring the states electric
utilities to reduce the emissions of NOx and SO2 from coal-fired power plants. Progress
Energy projects that its capital costs to meet these emission targets will total over
$800 million by the end of 2013. PEC has expended approximately $69 million of these
capital costs through September 30, 2004. PEC currently has approximately 5,100 MW of
coal-fired generation capacity in North Carolina that is affected by this legislation.
The law requires the emissions reductions to be completed in phases by 2013, and applies
to each utilitys total system rather than setting requirements for individual power
plants. The law also freezes the utilities base rates for five years unless there
are extraordinary events beyond the control of the utilities or unless the utilities
persistently earn a return substantially in excess of the rate of return established and
found reasonable by the NCUC in the utilities last general rate case. Further, the
law allows the utilities to recover from their retail customers the projected capital
costs during the first seven years of the ten-year compliance period beginning on January
1, 2003. The utilities must recover at least 70% of their projected capital costs during
the five-year rate freeze period. PEC recognized amortization of $20 million for the
quarter ended September 30, 2004. No amortization was recognized in the quarter ended
September 30, 2003. PEC recognized amortization of $50 million and $54 million in the
nine months ended September 30, 2004 and 2003, respectively, and has recognized $124
million in cumulative amortization through September 30, 2004. Pursuant to the law, PEC
entered into an agreement with the State of North Carolina to transfer to the State
certain NOx and SO2 emissions allowances that result from compliance with the collective
NOx and SO2 emissions limitations set out in the law. The law also requires the State to
undertake a study of mercury and carbon dioxide emissions in North Carolina. Operation
and maintenance costs will increase due to the additional personnel, materials and
general maintenance associated with the equipment. Operation and maintenance expenses are
recoverable through base rates, rather than as part of this program. Progress Energy
cannot predict the future regulatory interpretation, implementation or impact of this law.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
1997, the EPAs Mercury Study Report and Utility Report to Congress concluded that
mercury is not a risk to the average person in America and expressed uncertainty about
whether reductions in mercury emissions from coal-fired power plants would reduce human
exposure. Nevertheless, the EPA determined in 2000 that regulation of mercury emissions
from coal-fired power plants was appropriate. In 2003, the EPA proposed alternative
control plans that would limit mercury emissions from coal-fired power plants. The first,
a Maximum Achievable Control Technology (MACT) standard applicable to every coal-fired
plant, would require compliance in 2008. The second, which the EPA has stated it prefers,
is a mercury cap and trade program that would require limits to be met in two phases, in
2010 and 2018. The EPA expects to finalize the mercury rule in March 2005. Achieving
compliance with the proposal could involve significant capital costs that could be
material and adverse to the Companys consolidated financial position or results of
operations. The Company cannot predict the outcome of this matter.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
conjunction with the proposed mercury rule, the EPA proposed a MACT standard to regulate
nickel emissions from residual oil-fired units. The agency estimates the proposal will
reduce national nickel emissions to approximately 103 tons. As proposed, the rule may
require the company to install additional pollution controls on its residual oil-fired
units, resulting in significant capital expenditures. PECs oil-fired units have
pollution controls in place, which would meet the proposed requirements of the nickel
rule. The EPA expects to finalize the nickel rule in March 2005. Compliance costs will be
determined once the rule is finalized.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2003, the EPA released its proposed Interstate Air Quality Rule, currently
referred to as the Clean Air Interstate Rule (CAIR). The EPAs proposal requires 28
jurisdictions, including North Carolina, South Carolina, Georgia and Florida, to further
reduce NOx and SO2 emissions in order to attain preset state NOx and SO2 emissions
levels. The rule is expected to become final by the end of 2004. The air quality controls
already installed for compliance with the NOx SIP Call and currently planned by the
Company to comply with the North Carolina Clean Smokestacks Act will reduce the costs
required to meet the CAIR requirements for the Companys North Carolina units.
Additional compliance costs will be determined once the rule is finalized.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 thirteen other states, including South Carolina to reduce their NOx and SO2
emissions. The state of North Carolina contends these out-of-state polluters are
interfering with North Carolinas ability to meet national air quality standards for
ozone and particulate matter. The EPA has not made a determination on the Section 126
petition, and the Company cannot predict the outcome of this matter.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 PEC and PEF in the immediate and extended future.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | After
many years of litigation and settlement negotiations the EPA adopted regulations in
February 2004 to implement Section 316(b) of the Clean Water Act. These regulations
became effective September 7, 2004. The purpose of these regulations is to minimize
adverse environmental impacts caused by cooling water intake structures and intake
systems. Over the next several years these regulations will impact the larger base load
generation facilities and may require the facilities to mitigate the effects to aquatic
organisms by constructing intake modifications or undertaking other restorative
activities. The Company currently estimates that from 2005 through 2009 the range of its
expenditures to meet the Section 316(b) requirements of the Clean Water Act will be $85
million to $115 million. The range includes $20 million to $30 million at PEC and $65
million to $85 million at PEF.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
Environmental Matters
| | ---------------------------

| | The
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. Russia recently
announced its intent to ratify the Protocol, which would allow the treaty to enter into
force. 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 and by the Bush administration. Reductions in
carbon dioxide emissions to the levels specified by the Kyoto Protocol and some
legislative proposals could be materially adverse to the Companys consolidated
financial position or results of operations if associated costs of control or limitation
cannot be recovered from customers. The Company favors the voluntary program approach
recommended by the administration and is evaluating options for the reduction, avoidance
and sequestration of greenhouse gases. However, the Company cannot predict the outcome of
this matter.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
Contingencies
| | -------------------

| | 1.
As required under the Nuclear Waste Policy Act of 1982, PEC and PEF each
          entered into a contract with the United States 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
1995, the DOE issued a final interpretation that it did not have an unconditional
obligation to take spent nuclear fuel by January 31, 1998. In Indiana Michigan Power
v. DOE, the Court of Appeals vacated the DOEs final interpretation and ruled
that the DOE had an unconditional obligation to begin taking spent nuclear fuel. The
Court did not specify a remedy because the DOE was not yet in default.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | After
the DOE failed to comply with the decision in Indiana Michigan Power v. DOE, a
group of utilities petitioned the Court of Appeals in Northern States Power (NSP) v.
DOE, seeking an order requiring the DOE to begin taking spent nuclear fuel by January
31, 1998. The DOE took the position that their delay was unavoidable, and the DOE was
excused from performance under the terms and conditions of the contract. The Court of
Appeals found that the delay was not unavoidable, but did not order the DOE to begin
taking spent nuclear fuel, stating that the utilities had a potentially adequate remedy
by filing a claim for damages under the contract.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | After
the DOE failed to begin taking spent nuclear fuel by January 31, 1998, a group of
utilities filed a motion with the Court of Appeals to enforce the mandate in NSP v. DOE.
Specifically, this group of utilities asked the Court to permit the utilities to escrow
their waste fee payments, to order the DOE not to use the waste fund to pay damages to
the utilities, and to order the DOE to establish a schedule for disposal of spent nuclear
fuel. The Court denied this motion based primarily on the grounds that a review of the
matter was premature, and that some of the requested remedies fell outside of the mandate
in NSP v. DOE.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Subsequently,
a number of utilities each filed an action for damages in the Federal Court of Claims.
The U.S. Circuit Court of Appeals (Federal Circuit) ruled that utilities may sue the DOE
for damages in the Federal Court of Claims instead of having to file an administrative
claim with the DOE.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
January 2004, PEC and PEF filed a complaint with 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 Progress Energy facilities on or before January 31, 1998.
Damages due to DOEs breach will likely exceed $100 million. Similar suits have been
initiated by over two dozen other utilities.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
July 2002, Congress passed an override resolution to Nevadas veto of DOEs
proposal to locate a permanent underground nuclear waste storage facility at Yucca
Mountain, Nevada. DOE plans to submit a license application for the Yucca Mountain
facility by the end of 2004. In November 2003, Congressional negotiators approved $580
million for fiscal year 2004 for the Yucca Mountain project, $123 million more than the
previous year. 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. 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. The DOE continues to
state it plans to begin operation of the repository at Yucca Mountain in 2010. PEC and
PEF cannot predict the outcome of this matter.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
certain modifications and additional approval by the NRC including the installation of
onsite dry storage facilities at Robinson (2005) and Brunswick (2010), 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.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEF
is currently storing spent nuclear fuel onsite in spent fuel pools. PEFs nuclear
unit, Crystal River Unit No. 3 (CR3), has sufficient storage capacity in place for fuel
consumed through the end of the expiration of the current license in 2016. PEF will seek
renewal of the CR3 operating license and if approved, additional dry storage will be
necessary in 2014.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 2.
In November 2001, Strategic Resource Solutions Corp. (SRS) filed a claim
          against the San Francisco Unified School District (the District) and other
          defendants claiming that SRS is entitled to approximately $10 million in unpaid
          contract payments and delay and impact damages related to the Districts
          $30 million contract with SRS. In March 2002, the District filed a
counterclaim,           seeking compensatory damages and liquidated damages in excess of
$120 million,           for various claims, including breach of contract and demand on a
performance           bond. SRS asserted defenses to the Districts claims. SRS
amended its           claims and asserted new claims against the District and other
parties, including           a former SRS employee and a former District employee.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
March 2003, the City Attorney and the District filed new claims in the form of a
cross-complaint against SRS, Progress Energy, Inc., Progress Energy Solutions, Inc., and
certain individuals, alleging fraud, false claims, violations of California statutes, and
seeking compensatory damages, punitive damages, liquidated damages, treble damages,
penalties, attorneys fees and injunctive relief. The filing stated that the City
and the District seek more than $300 million in damages and penalties. PEC
was later added as a cross-defendant.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2004, the Company reached a settlement agreement with the District in this matter.
The settlement totaled $43 million and is included in diversified business cost of sales
in the accompanying Consolidated Statement of Income for the nine months ended September
30, 2004. The accrual of the settlement was recorded on an undiscounted basis. The terms
of the settlement require SRS to pay the District $10 million upon approval in September
2004, and an additional $16 million in 2005 and $17 million in 2006. In addition, during
a transition period ending September 10, 2004, SRS provided maintenance and training on
the equipment and software it installed and maintained for the District. The agreement
settles all claims and cross-claims related to SRS, Progress Energy, Progress Energy
Solutions and PEC.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 3.
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 the appeal on the ground that PECs notice of appeal should have been filed
on or before May 6, 2004. On June 16, 2004, PEC filed a motion with the trial court
requesting an extension of the deadline for the filing of the notice of appeal. By order
dated September 10, 2004, the trial court denied the extension request. On September 15,
2004, PEC filed a notice of appeal of the September 10, 2004 order and by order dated
September 29, 2004, the appellate court consolidated the first and second appeals. DMTs
motion to dismiss the first appeal remains pending.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 4.
On February 1, 2002, the Company 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 dated December 2003, the STB found that the
rates were           unreasonable and awarded reparations of $23 million and prescribed a
methodology           to determine maximum rates. Both parties petitioned for
reconsideration of the           December 2003 decision. On October 20, 2004, the STB
reversed its December 2003           decision and concluded that the rates charged by
Norfolk Southern were not           unreasonable. The Company is in the process of
evaluating future actions, which           may include an application to the STB to phase
in the new rates, or a judicial           appeal. As of September 30, 2004, the Company
has accrued a liability of $39           million, to return the reparations of $23 million, which
was originally recorded as a regulatory liability, and accrue
additional 2004 expenses of $16           million, of which $14 million, has been
allocated to retail customers and           recorded as deferred fuel cost while the
remaining $2 million attributable to           wholesale customers has been charged to
fuel used in electric generation.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 5.
The Company, through its subsidiaries, is a majority owner in five entities and
          a minority owner in one entity that owns facilities that produce synthetic fuel
          as defined under the Internal Revenue Code (Code). The production and sale of
          the synthetic fuel from these facilities qualifies 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. The amount of Section 29 credits that the Company
is allowed to claim in any calendar year is limited by the amount of the Company's regular federal income tax liability.  Synthetic fuel tax
credit           amounts allowed but not utilized are carried forward indefinitely as
deferred           alternative minimum tax credits. All entities have received private
letter           rulings (PLRs) from the Internal Revenue Service (IRS) with respect to
their           synthetic fuel operations. The PLRs do not limit the production on which
          synthetic fuel credits may be claimed. Total Section 29 credits generated to
          date (including those generated by FPC prior to its acquisition by the Company)
          are approximately $1.4 billion, of which $669 million has been used and $700
          million are being carried forward as deferred alternative minimum tax credits.
          Also $79 million has not been recognized due to the decrease in tax liability
          from the 2004 hurricane damage. The current Section 29 tax credit program
          expires at the end of 2007.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Impact
of Hurricanes
| | --------------------

| | For
the nine-month period ended September 30, 2004, the Companys synthetic fuel
facilities have sold 7.7 million tons of synthetic fuel which generated an estimated $204
million of Section 29 tax credits. Due to the anticipated decrease in the Companys
tax liability as a result of the 2004 hurricanes, the Company estimates that it will be
able to use in 2004 or carry forward to future years only $125 million of these Section
29 tax credits. As a result, the Company has recorded a charge of $79 million related to
Section 29 tax credits. The Company is currently evaluating its options for mitigating
some or all of this loss of tax credits.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Pre-Filing
Agreement Program
| | ----------------------------

| | In
September 2002, all of Progress Energys majority-owned synthetic fuel entities were
accepted into the IRSs Pre-Filing Agreement (PFA) program. The PFA program allows
taxpayers to voluntarily accelerate the IRS exam process in order to seek resolution of
specific issues. Either the Company or the IRS can withdraw from the program at any time,
and issues not resolved through the program may proceed to the next level of the IRS exam
process.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
February 2004, subsidiaries of the Company finalized execution of the Colona Closing
Agreement with the IRS concerning their Colona synthetic fuel facilities. 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 IRS PFA program with respect to Colona.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
July 2004, Progress Energy was notified that the Internal Revenue Service (IRS) field
auditors anticipate taking an adverse position regarding the placed-in-service date of
the Companys four Earthco synthetic fuel facilities. Due to the auditors position,
the IRS has decided to exercise its right to withdraw from the Pre-Filing Agreement (PFA)
program with Progress Energy. With the IRSs withdrawal from the PFA program, the
review of Progress Energys Earthco facilities is back on the normal procedural
audit path of the Companys tax returns. Through September 30, 2004, the Company, on
a consolidated basis, has used or carried forward $1 billion of tax credits generated by
Earthco facilities. If these credits were disallowed, the Companys one time
exposure for cash tax payments would be $286 million (excluding interest), and earnings
and equity would be reduced by $1 billion, excluding interest. Progress Energys
$1.13 billion credit facility includes a covenant which limits the maximum debt-to-total
capital ratio to 65%. This ratio includes other forms of indebtedness such as guarantees
issued by PGN, letters of credit and capital leases. As of September 30, 2004, the Companys
debt-to-total impact was 60.6% based on the credit agreement definition for this ratio.
The impact on this ratio of reversing $1 billion of tax credits and paying $286 million
for taxes would be to increase the ratio to 64.4%.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 29, 2004, Progress Energy received the IRS field auditors report concluding
that the Earthco facilities had not been placed in service before July 1, 1998, and that
the tax credits generated by those facilities should be disallowed. The Company disagrees
with the field audit teams factual findings and believes that the Earthco
facilities were placed in service before July 1, 1998. The Company also believes that the
report applies an inappropriate legal standard concerning what constitutes placed
in service. The Company intends to contest the field auditors findings and
their proposed disallowance of the tax credits.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Because
of the stark disagreement between the Company and the field auditors as to the proper
legal standard to apply, the Company believes that it is appropriate to have this issue
reviewed by the National Office of the IRS, just as the National Office reviewed the
issues involving chemical change. The Company could go directly to the Appeals section of
the IRS, but it believes that clarification on the critical legal disagreements would
help to resolve this matter. At this point, however, the Company does not know if the
field auditors will agree to present this matter to the National Office. The Company
believes that the appeals process, including proceedings before the National Office,
could take up to two years to complete, however, it cannot control the actual timing of
resolution and cannot predict the outcome of this matter.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
managements opinion, the Company is complying with all the necessary requirements
to be allowed such credits under Section 29, and, although it cannot provide certainty,
it believes that it will prevail in these matters. Accordingly, while the Company has
adjusted its synthetic fuel production for 2004 in response to the effects of the
hurricane damage on its 2004 tax liability, it has no current plans to alter its
synthetic fuel production schedule for future years as a result of the IRS field auditorsreport.
However, should the Company fail to prevail in these matters, there could be material
liability for previously taken Section 29 tax credits, with a material adverse impact on
earnings and cash flows.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
July 2004, the FASB stated that it plans to issue an exposure draft of a proposed
interpretation of SFAS No. 109, Accounting for Income Taxes, that would
address the accounting for uncertain tax positions. The FASB has indicated that the
interpretation would require that uncertain tax benefits be probable of being sustained
in order to record such benefits in the financial statements. The exposure draft is
expected to be issued in the fourth quarter of 2004. The Company cannot predict what
actions the FASB will take or how any such actions might ultimately affect the Companys
financial position or results of operations, but such changes could have a material
impact on the Companys evaluation and recognition of Section 29 tax credits.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 the Companys synthetic fuel operations. Progress Energy is
providing information in connection with this investigation. The Company cannot predict
the outcome of this matter.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Sale
of Partnership Interest
| | ----------------------------

| | In
June 2004, the Company through its subsidiary, Progress Fuels sold, in two transactions,
a combined 49.8 percent partnership interest in Colona Synfuel Limited Partnership, LLLP,
one of its 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. The Companys book value of the
interests sold totaled approximately $5 million. Based on projected production and tax credit levels,
the Company anticipates receiving total gross proceeds of $10 million in 2004,
approximately $30 million per year from 2005 through 2007 and approximately $9 million
through the second quarter of 2008. In the event that the synthetic fuel
tax credits from the Colona facility are reduced, including an increase in the price of
oil which could limit or eliminate synthetic fuel tax credits, the amount of proceeds
realized from the sale could be significantly impacted.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Under
the agreements, the buyers had a right to unwind the transactions if an IRS
reconfirmation private letter ruling (PLR) was not received by October 15, 2004. The
reconfirmation PLR was received in September 2004. An immaterial gain was recorded for
the three months ended September 30, 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Impact
of Crude Oil Prices
| | --------------------------

| | Although
the Internal Revenue Code Section 29 tax credit program is expected to continue through
2007, recent unprecedented and unanticipated increases in the price of oil could limit
the amount of those credits or eliminate them altogether 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 value (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 2003, the Threshold Price was
$50.14 per barrel and the Phase Out Price was $62.94 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
Average Annual Price falls in that continuum. For example, for 2003, if the Annual
Average Price had been $56.54 per barrel, there would have been a 50% 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 2003 was published in April 2004.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Although
the official notice for 2004 is not expected to be published until April of 2005, the
Company does not believe that the Annual Average Price for 2004 will reach the Threshold
Price for 2004. Even with oil prices at historic highs, oil prices would have to
experience a significant and sustained increase for the remainder of the year for the
Annual Average Price to approach the anticipated Threshold Price. Consequently, the
Company does not expect the amount of its 2004 Section 29 tax credits to be adversely
affected by oil prices.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Company cannot predict with any certainty the Annual Average Price for 2005 or beyond.
Therefore, it cannot predict whether the price of oil will have a material effect on its
synthetic fuel business after 2004. However, if during 2005 through 2007, oil prices
remain at historically high levels or increase, the Companys synthetic fuel
business may be adversely affected for those years and, depending on the magnitude of
such increases in oil prices, the adverse affect for those years could be material and
could have an impact on the Companys synthetic fuel production plans.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 6.
The Company and its subsidiaries are involved in various litigation matters in
          the ordinary course of business, some of which involve substantial amounts.
          Where appropriate, accruals and disclosures have been made in accordance with
          SFAS No. 5, Accounting for Contingencies, to provide for such
          matters. In the opinion of management, the final disposition of pending
          litigation would not have a material adverse effect on the Companys
          consolidated results of operations or financial position.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

# CAROLINA POWER &
LIGHT COMPANY d/b/a PROGRESS ENERGY
CAROLINAS, INC.CONSOLIDATED INTERIM
FINANCIAL STATEMENTSSeptember 30, 2004

UNAUDITED
CONSOLIDATED STATEMENTS of INCOME

|                                                      | Three Months Ended
September 30 | Nine Months Ended
September 30
|----------------------------------------------------- | ------------------------------- | ------------------------------
|                                                     
|
|                                                     
|Operating Revenues                                    |                                 |                               
|Electric                                              |                                 | $ 1,014                       
|Diversified business                                  |                                 |                              
|                                                     
|Total Operating Revenues                              |                                 | 1,014                         
|                                                     
|Operating Expenses                                    |                                
|Fuel used in electric generation                      |                                 | 220                           
|Purchased power                                       |                                 | 96                            
|Operation and maintenance                             |                                 | 197                           
|Depreciation and amortization                         |                                 | 139                           
|Taxes other than on income                            |                                 | 44                            
|Diversified business                                  |                                 |                              
|                                                     
|Total Operating Expenses                              |                                 | 696                           
|                                                     
|Operating Income                                      |                                 | 318                           
|                                                     
|Other Income (Expense)                                |                                
|Interest income                                       |                                 |                              
|Other, net                                            |                                 | 7                             
|                                                     
|Total Other Income (Expense)                          |                                 | 7                             
|                                                     
|Interest Charges                                      |                                
|Interest charges                                      |                                 | 50                            
|Allowance for borrowed funds used during construction |                                 | (1                            
|                                                     
|Total Interest Charges, Net                           |                                 | 49                            
|                                                     
|Income before Income Tax                              |                                 | 276                           
|Income Tax Expense                                    |                                 | 101                           
|                                                     
|Net Income                                            |                                 | $    175                      
|Preferred Stock Dividend Requirement                  |                                 | 1                             
|                                                     
|Earnings for Common Stock                             |                                 | $    174                      
|                                                     

See
Notes to Consolidated Interim Financial Statements.

---

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

|(in millions)                                                  | September 30 | December 31
|-------------------------------------------------------------- | ------------ | -----------
|
|                                                              
|Utility Plant                                                  |              |            
|Utility plant in service                                       |              | $ 13,563   
|Accumulated depreciation                                       |              | (5,499     
|                                                              
|Utility plant in service, net                                  |              | 8,064      
|Held for future use                                            |              | 5          
|Construction work in progress                                  |              | 297        
|Nuclear fuel, net of amortization                              |              | 169        
|                                                              
|Total Utility Plant, Net                                       |              | 8,535      
|                                                              
|Current Assets                                                 |             
|Cash and cash equivalents                                      |              | 18         
|Accounts receivable                                            |              | 266        
|Unbilled accounts receivable                                   |              | 135        
|Receivables from affiliated companies                          |              | 39         
|Inventory                                                      |              | 381        
|Deferred fuel cost                                             |              | 170        
|Prepayments and other current assets                           |              | 69         
|                                                              
|Total Current Assets                                           |              | 1,078      
|                                                              
|Deferred Debits and Other Assets                               |             
|Regulatory assets                                              |              | 498        
|Nuclear decommissioning trust funds                            |              | 554        
|Miscellaneous other property and investments                   |              | 166        
|Other assets                                                   |              | 135        
|                                                              
|Total Deferred Debits and Other Assets                         |              | 1,353      
|                                                              
|Total Assets                                                   |              | $ 10,966   
|                                                              
|CAPITALIZATION AND LIABILITIES                                 |             
|                                                              
|Common Stock Equity                                            |             
|Common stock without par value, authorized 200 million shares, |             
|160 million shares issued and outstanding                      |              | $   1,973  
|Unearned ESOP common stock                                     |              | (76        
|Accumulated other comprehensive loss                           |              | (9         
|Retained earnings                                              |              | 1,338      
|                                                              
|Total Common Stock Equity                                      |              | 3,226      
|                                                              
|Preferred Stock - Not Subject to Mandatory Redemption          |              | 59         
|Long-Term Debt, Net                                            |              | 2,749      
|                                                              
|Total Capitalization                                           |              | 6,034      
|                                                              
|Current Liabilities                                            |             
|Current portion of long-term debt                              |              | 300        
|Accounts payable and accrued liabilities                       |              | 248        
|Payables to affiliated companies                               |              | 89         
|Notes payable to affiliated companies                          |              |           
|Interest accrued                                               |              | 58         
|Short-term obligations                                         |              | 146        
|Other current liabilities                                      |              | 251        
|                                                              
|Total Current Liabilities                                      |              | 1,092      
|                                                              
|Deferred Credits and Other Liabilities                         |             
|Accumulated deferred income taxes                              |              | 1,103      
|Accumulated deferred investment tax credits                    |              | 142        
|Regulatory liabilities                                         |              | 1,240      
|Asset retirement obligations                                   |              | 973        
|Other liabilities                                              |              | 382        
|                                                              
|Total Deferred Credits and Other Liabilities                   |              | 3,840      
|                                                              
|Commitments and Contingencies (Note 11)                        |             
|                                                              
|Total Capitalization and Liabilities                           |              | $ 10,966   
|                                                              

See Notes to Consolidated Interim
Financial Statements.

---

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

|                                                                                  | Nine Months Ended September 30
|--------------------------------------------------------------------------------- | ------------------------------
|
|                                                                                 
|Operating Activities                                                              |                               
|Net income                                                                        |                               
|Adjustments to reconcile net income to net cash provided by operating activities: |                               
|Depreciation and amortization                                                     |                               
|Deferred income taxes                                                             |                               
|Investment tax credit                                                             |                               
|Deferred fuel (credit) cost                                                       |                               
|Cash provided (used) by changes in operating assets and liabilities:              |                               
|Accounts receivable                                                               |                               
|Inventories                                                                       |                               
|Prepayments and other current assets                                              |                               
|Accounts payable                                                                  |                               
|Other current liabilities                                                         |                               
|Other                                                                             |                               
|                                                                                 
|Net Cash Provided by Operating Activities                                         |                               
|                                                                                 
|Investing Activities                                                              |                               
|Gross property additions                                                          |                               
|Proceeds from sale of assets and investments                                      |                               
|Nuclear fuel additions                                                            |                               
|Contributions to nuclear decommissioning trust                                    |                               
|Other investing activities                                                        |                               
|                                                                                 
|Net Cash Used in Investing Activities                                             |                               
|                                                                                 
|Financing Activities                                                              |                               
|Issuance of long-term debt, net                                                   |                               
|Net increase (decrease) in short-term obligations                                 |                               
|Net change in intercompany notes                                                  |                               
|Retirement of long-term debt                                                      |                               
|Dividends paid to parent                                                          |                               
|Dividends paid on preferred stock                                                 |                               
|                                                                                 
|Net Cash Used in Financing Activities                                             |                               
|                                                                                 
|Net (Decrease) Increase in Cash and Cash Equivalents                              |                               
|Cash and Cash Equivalents at Beginning of Period                                  |                               
|                                                                                 
|Cash and Cash Equivalents at End of Period                                        |                               
|                                                                                 
|Supplemental Disclosures of Cash Flow Information                                 |                               
|Cash paid during the year - interest (net of amount capitalized)                  |                               
|income taxes (net of refunds)                                                     |                               
|                                                                                 

See Notes to Consolidated Interim
Financial Statements.

---

CAROLINA
POWER & LIGHT COMPANY d/b/a
PROGRESS ENERGY CAROLINAS, INC.NOTES TO
CONSOLIDATED INTERIM FINANCIAL STATEMENTS

1.        ORGANIZATION
AND BASIS OF PRESENTATION

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

| | Carolina
Power & Light Company d/b/a Progress Energy Carolinas, Inc. (PEC) is a public service
corporation primarily engaged in the generation, transmission, distribution and sale of
electricity in portions of North Carolina and South Carolina. Through its wholly-owned
subsidiaries, PEC is also involved in nonregulated business activities. PEC is a
wholly-owned subsidiary of Progress Energy, Inc. (the Company or Progress Energy). The
Company is a registered holding company under the Public Utility Holding Company Act of
1935 (PUHCA). Both the Company and its subsidiaries are subject to the regulatory
provisions of PUHCA. PEC is regulated by the North Carolina Utilities Commission (NCUC),
the Public Service Commission of South Carolina (SCPSC), the Federal Energy Regulatory
Commission (FERC) and the United States Nuclear Regulatory Commission (NRC).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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
statements. Because the accompanying consolidated interim financial statements do not
include all of the information and footnotes required by GAAP, they should be read in
conjunction with the audited financial statements for the period ended December 31, 2003
and notes thereto included in PECs Form 10-K for the year ended December 31, 2003.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
collects from customers certain excise taxes, which include gross receipts tax, franchise
taxes, and other excise taxes, levied by the state or local government upon the
customers. PEC accounts for excise taxes on a gross basis. For the three month periods
ended September 30, 2004 and 2003, excise taxes of approximately $25 million are included
in taxes other than on income in the accompanying Consolidated Statements of Income. For
the nine month periods ended September 30, 2004 and 2003, excise taxes of approximately
$70 million and $65 million, respectively, are included in taxes other than on income in
the accompanying Consolidated Statements of Income. These approximate amounts are also
included in utility revenues.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
amounts included in the consolidated interim financial statements are unaudited but, in
the opinion of management, reflect all normal recurring adjustments necessary to fairly
present PECs 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 2003 have been reclassified to conform to the
2004 presentation.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Stock-Based
Compensation
| | -- | ------------------------

| | PEC
measures compensation expense for stock options as the difference between the market
price of its common stock and the exercise price of the option at the grant date. The
exercise price at which options are granted by the Company equals the market price at the
grant date, and accordingly, no compensation expense has been recognized for stock option
grants. For purposes of the pro forma disclosures required by Statement of Financial
Account Standards (SFAS) No. 148, Accounting for Stock-Based Compensation Transition
and Disclosure  an Amendment of FASB Statement No. 123 (SFAS No. 148), the
estimated fair value of the Companys stock options is amortized to expense over the
options vesting period. The following table illustrates the effect on net income
and earnings per share if the fair value method had been applied to all outstanding and
unvested awards in each period:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                                                                                   | Three Months Ended
September 30 | Nine Months Ended
September 30
|------------------------------------------------------------------------------------------------------------------ | ------------------------------- | ------------------------------
|                                                                                                                  
|
|                                                                                                                  
|Earnings for Common Stock, as reported                                                                             |                                 | $174                          
|Deduct:  Total stock option expense determined underfair   value method for all awards, net of related tax effects |                                 | 2                             
|                                                                                                                  
|Pro forma net income                                                                                               |                                 | $172                          
|                                                                                                                  
|                                                                                                                   |                                

| | PEC
expects to begin expensing stock options in 2005, either by adopting SFAS No. 123, as
amended by SFAS No. 148, or by adopting new FASB guidance on accounting for stock-based
compensation that is expected to be issued in late 2004 and become effective July 1,
2005. In 2004, however, the Company made the decision to cease granting stock options and
intends to replace that compensation program with other programs. Therefore, the amount
of stock option expense expected to be recorded in 2005 is below the amount that would
have been recorded if the stock option program had continued. If stock option expense is
recorded for the full year 2005, approximately $3 million of pre-tax expense would be
recorded.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | Consolidation
of Variable Interest Entities
| | -- | -------------------------------------------

| | PEC
consolidates all voting interest entities in which it owns a majority voting interest and
all variable interest entities for which it is the primary beneficiary in accordance with
FASB Interpretation No. 46R, Consolidation of Variable Interest Entities  an
Interpretation of ARB No. 51 (FIN No. 46R). 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 Internal Revenue Code. As of September 30,
2004, the total assets of the two entities were $39 million, the majority of which are
collateral for the entities obligations and are included in other current assets and miscellaneous
other property in the Consolidated Balance Sheet.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
is the primary beneficiary of a limited partnership which invests in 17 low-income
housing partnerships that qualify for federal and state tax credits. PEC has requested
but has not received all the necessary information to determine the primary beneficiary
of the limited partnerships underlying 17 partnership investments, and has applied
the information scope exception in FIN No. 46R, paragraph 4(g) to the 17 partnerships.
PEC has no direct exposure to loss from the 17 partnerships; PECs only exposure to
loss is from its investment of less than $1 million in the consolidated limited
partnership. PEC will continue its efforts to obtain the necessary information to fully
apply FIN No. 46R to the 17 partnerships. PEC believes that if the limited partnership is
determined to be the primary beneficiary of the 17 partnerships, the effect of
consolidating the 17 partnerships would not be significant to PECs Consolidated
Balance Sheets.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
has variable interests in two power plants resulting from long-term power purchase
contracts. PEC has requested the necessary information to determine if the counterparties
are variable interest entities or to identify the primary beneficiaries. Both entities
declined to provide PEC with the necessary financial information, and PEC has applied the
information scope exception in FIN No. 46R, paragraph 4(g). PECs only significant
exposure to variability from these contracts results from fluctuations in the market
price of fuel used by the two entities plants to produce the power purchased by
PEC. PEC is able to recover these fuel costs under its fuel clause. Total purchases from
these counterparties were approximately $46 million and $43 million in the first nine
months of 2004 and 2003, respectively. PEC will continue its efforts to obtain the
necessary information to fully apply FIN No. 46R to these contracts. The combined
generation capacity of the two entities power plants is approximately 880 MW. PEC
believes that if it is determined to be the primary beneficiary of these two 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. However, because PEC has not received
any financial information from these two counterparties, the impact cannot be determined
at this time.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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. The aggregate maximum loss exposure at September
30, 2004, that PEC could be required to record in its income statement as a result of
these arrangements totals approximately $24 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.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

2.        NEW
ACCOUNTING STANDARDS

| | In
December 2003, the Medicare Prescription Drug, Improvement and Modernization Act of 2003
(Medicare Act) was signed into law. In accordance with guidance issued by the FASB in
FASB Staff Position 106-2, Accounting and Disclosure Requirements Related to the
Medicare Prescription Drug Improvement and Modernization Act of 2003 (FASB Staff
Position 106-2), PEC elected to defer accounting for the effects of the Medicare Act due
to uncertainties regarding the effects of the implementation of the Medicare Act and the
accounting for certain provisions of the Medicare Act. In May 2004, the FASB issued
definitive accounting guidance for the Medicare Act in FASB Staff Position 106-2, which
was effective for PEC in the third quarter of 2004. FASB Staff Position 106-2 results in
the recognition of lower other post retirement employee benefit (OPEB) costs to reflect
prescription drug-related federal subsidies to be received under the Medicare Act. As a
result of the Medicare Act, PECs accumulated postretirement benefit obligation as
of January 1, 2004 was reduced by approximately $42 million and PECs 2004 net
periodic cost will be reduced by approximately $7 million. PEC recorded $5 million of the
net periodic cost reduction in the quarter ended September 30, 2004. Prior quarters were
not restated due to the immateriality of the adjustments.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

3.        HURRICANE-RELATED
COSTS

| | Hurricanes
Charley and Ivan struck portions of PECs service territory during the third quarter
of 2004. PEC has estimated restoration costs of $13 million, of which $12 million was
charged to operation and maintenance expense and $1 million was charged to capital
expenditures.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
does not have an on-going regulatory mechanism to recover storm costs and, therefore,
hurricane restoration costs recorded in the third quarter of 2004 were charged to
operations and maintenance expenses or capital expenditures based on the nature of the
work performed. In connection with other storms, PEC has previously sought and received
permission from the North Carolina Utilities Commission (NCUC) and the Public Service
Commission of South Carolina (SCPSC) to defer storm expenses and amortize them over a
five-year period. PEC is planning to seek deferral of 2004 storm costs from the NCUC in
the fourth quarter of 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

4.        REGULATORY
MATTERS

| | A. | Retail
Rate Matters
| | -- | -------------------

| | PEC
has exclusively utilized external funding for its decommissioning liability since 1994.
Prior to 1994, PEC retained funds internally to meet its decommissioning liability. An
NCUC order issued in February 2004 found that by January 1, 2008 PEC must begin
transitioning these amounts to external funds. The transition of $131 million must be
completed by December 31, 2017, and at least 10% must be transitioned each year.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
filed with the SCPSC seeking permission to defer expenses incurred from the first quarter
2004 winter storm. The SCPSC approved PECs request to defer the costs and amortize
them ratably over five years beginning in January 2005. Approximately $10 million related
to storm costs incurred during the first quarter of 2004 was deferred in that quarter.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | During
the first quarter of 2004, PEC met the requirements of both the NCUC and the SCPSC for
the implementation of a depreciation study which allowed the utility to reduce the rates
used to calculate depreciation expense. As a result, depreciation expense decreased $7
million for the three months ended September 30, 2004 compared to the prior year quarter
and decreased $17 million for the nine months ended September 30, 2004 compared to the
prior year nine month period.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
October 2004, PEC filed a revised depreciation study with the NCUC and SCPSC supporting a
reduction in annual depreciation expense of approximately $47 million. The reduction is
due solely to extended lives at each of PECs nuclear units. The new depreciation
rates are proposed to be effective January 1, 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
obtained SCPSC and NCUC approval of fuel factors in annual fuel-adjustment proceedings.
The SCPSC approved PECs petition to leave billing rates unchanged from the prior
year by order issued in March 2004. The NCUC approved an annual increase of $62 million
by order issued in September 2004.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Regional
Transmission Organizations
| | -- | -----------------------------------

| | In
2000, the FERC issued Order No. 2000 on RTOs, which set minimum characteristics and
functions that RTOs must meet, including independent transmission service. In July 2002,
the FERC issued its Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying
Undue Discrimination through Open Access Transmission Service and Standard Electricity
Market Design (SMD NOPR). If adopted as proposed, the rules set forth in the SMD NOPR
would materially alter the manner in which transmission and generation services are
provided and paid for. In April 2003, the FERC released a White Paper on the Wholesale
Market Platform. The White Paper provides an overview of what the FERC currently intends
to include in a final rule in the SMD NOPR docket. The White Paper retains the
fundamental and most protested aspects of SMD NOPR, including mandatory RTOs and the FERCs
assertion of jurisdiction over certain aspects of retail service. The FERC has not yet
issued a final rule on SMD NOPR. PEC cannot predict the outcome of these matters or the
effect that they may have on the GridSouth proceedings currently ongoing before the FERC.
It is unknown what impact the future proceedings will have on PECs earnings,
revenues or prices.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
has $33 million invested in GridSouth related to startup costs at September 30, 2004. PEC
expects to recover these startup costs in conjunction with the GridSouth original
structure or in conjunction with any alternate combined transmission structures that
emerge.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | C. | Implementation
of SFAS No. 143
| | -- | ------------------------------

| | In
connection with the implementation of SFAS No. 143, Accounting for Asset Retirement
Obligations, in 2003, PEC filed a request with the NCUC requesting deferral of the
difference between expense pursuant to SFAS No. 143 and expense as previously determined
by the NCUC. The NCUC granted the deferral of the January 1, 2003 cumulative adjustment.
Because the clean air legislation discussed in Note 11 under Air Qualitycontained
a prohibition against cost deferrals unless certain criteria are met, the NCUC denied the
deferral of the ongoing effects. Therefore, PEC ceased deferral of the ongoing effects
during the second quarter for the six months ended June 30, 2003 related to its North
Carolina retail jurisdiction. Pre-tax income for the three and six months ended June 30,
2003 increased by approximately $14 million, which represents a decrease in non-ARO cost
of removal expense, partially offset by an increase in decommissioning expense. The
Company provided additional information to the NCUC that demonstrated that deferral of
the ongoing effects should also be allowed. In August 2003, the NCUC revised its decision
and approved the deferral of the ongoing effects of SFAS No. 143 at which time the $14
million impact was reversed.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | D. | FERC
Market Power Mitigation
| | -- | ----------------------------

| | A
FERC order issued in November 2001 on certain unaffiliated utilities triennial
market based wholesale power rate authorization updates required certain mitigation
actions that those utilities would need to take for sales/purchases within their control
areas and required those utilities to post information on their websites regarding their
power systems status. As a result of a request for rehearing filed by certain
market participants, FERC issued an order delaying the effective date of the mitigation
plan until after a planned technical conference on market power determination. In
December 2003, the FERC issued a staff paper discussing alternatives and held a technical
conference in January 2004. In April 2004, the FERC issued two orders concerning utilities ability
to sell wholesale electricity at market based rates. In the first order, the FERC adopted
two new interim screens for assessing potential generation market power of applicants for
wholesale market based rates, and described additional analyses and mitigation measures
that could be presented if an applicant does not pass one of these interim screens. In
July 2004, the FERC issued an order on rehearing affirming its conclusions in the April
order. In the second order, the FERC initiated a rulemaking to consider whether the FERCs
current methodology for determining whether a public utility should be allowed to sell
wholesale electricity at market-based rates should be modified in any way. Management is
unable to predict the outcome of these actions by the FERC or their effect on future
results of operations and cash flows. However, PEC does not anticipate that its current
operations would be impacted materially if they were unable to sell power at market-based
rates in their respective control areas. Due to PECs failure of one of the two
interim market power screens, on August 12, 2004, PEC notified the FERC that it would
revise its Market Based Rate tariff to restrict it to sales outside PECs control
area and file a new cost based tariff for sales within PECs control area that
incorporates the FERCs default cost based rate methodologies for sales of one year
or less. PEC anticipates making this filing by year-end.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

5.        COMPREHENSIVE
INCOME

| | Comprehensive
income for the three months ended September 30, 2004 and 2003 was $170 million and $162
million, respectively. Comprehensive income for the nine months ended September 30, 2004
and 2003 was $384 million and $385 million, respectively. Changes in other comprehensive
income for the periods consisted primarily of changes in fair value of derivatives used
to hedge cash flows related to interest on long-term debt.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

6.        FINANCING
ACTIVITIES

| | Between
October 19, 2004 and November 1, 2004, PEC borrowed a net total of $115 million under
certain long-term revolving credit facilities. In addition, PEC borrowed $90 million
under its short-term credit facility. The credit facilities contain various cross default
and other acceleration provisions. PECs long-term credit facilities were arranged
through a syndication of financial institutions and support its commercial paper
programs. The borrowed funds will be used to pay off maturing commercial paper and for
other cash needs. This action was taken due to the uncertain impact on PECs ability
to access the commercial paper markets resulting from recent ratings actions taken by
Standard and Poors (S&P) credit rating agency and Moodys
Investor Services (Moodys).
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 19, 2004, S&P changed Progress Energys outlook from stable to negative.
S&P cited the uncertainties regarding the timing of the recovery of hurricane costs,
the Companys debt reduction plans, and the IRS audit of the Companys Earthco
synthetic fuels facilities as the reasons for the change in outlook. On October 25, 2004,
S&P reduced the short-term debt rating of PEC to A-3 from A-2, as a result of their
change in outlook discussed above.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
October 20, 2004, Moodys changed its outlook for Progress Energy from stable to
negative. PECs ratings were affirmed by Moodys.
| | -------------------------------------------------------------------------------------------------------------------------------------

| | The
changes by S&P do not trigger any debt or guarantee collateral requirements, nor do
they have any material impact on the overall liquidity of PEC. To date, PECs access
to the commercial paper markets has not been materially impacted by the rating agencies actions.
However, the changes are expected to increase the interest rate incurred on its
short-term borrowings by 0.25% to 0.875%.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
July 28, 2004, PEC extended its $165 million 364-day line of credit, which was scheduled
to expire on July 29, 2004. The line of credit will expire on July 27, 2005.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
April 30, 2004, PEC redeemed $35 million of Darlington County 6.6% Series Pollution
Control Bonds at 102.5% of par, $2 million of New Hanover County 6.3% Series Pollution
Control Bonds at 101.5% of par, and $2 million of Chatham County 6.3% Series Pollution
Control Bonds at 101.5% of par with cash from operations.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | On
January 15, 2004, PEC paid at maturity $150 million 5.875% First Mortgage Bonds with
commercial paper proceeds. On April 15, 2004, PEC also paid at maturity $150 million
7.875% First Mortgage Bonds with commercial paper proceeds and cash from operations.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

7.        BENEFIT
PLANS

| | PEC
has a non-contributory defined benefit retirement (pension) plan for substantially all
full-time employees. PEC also has supplementary defined benefit pension plans that
provide benefits to higher-level employees. In addition to pension benefits, PEC provides
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 three and nine months ended September 30 are:
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|Three Months Ended September 30 | Pension Benefits | Other Postretirement
Benefits
|------------------------------- | ---------------- | -----------------------------
|                               
|
|                               
|Service cost                    |                  | $   6                        
|Interest cost                   |                  | 13                           
|Expected return on plan assets  |                  | (18                          
|Amortization, net               |                  |                             
|                               
|Net periodic cost               |                  | $   1                        
|                               

|Nine Months Ended September 30 | Pension Benefits | Other Postretirement
Benefits
|------------------------------ | ---------------- | -----------------------------
|                              
|
|                              
|Service cost                   |                  | $ 18                         
|Interest cost                  |                  | 39                           
|Expected return on plan assets |                  | (52                          
|Amortization, net              |                  | 1                            
|                              
|Net periodic cost              |                  | $   6                        
|                              

| | Net
periodic costs for other postretirement benefits decreased during the three and nine
months ended September 30, 2004 due to the implementation of FASB Staff Position 106-2.
See discussion in Note 2 to the Consolidated Interim Financial Statements.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

8.        RISK
MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS

| | 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 12 to the financial statements in Item 8 of the Annual Report on
Form 10-K for the year ended December 31, 2003.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Nonhedging
Derivatives
| | ----------------------

| | Nonhedging
derivatives, primarily electricity and natural gas contracts, are entered into 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. Gains
and losses from such contracts were not material during the nine months ending September
30, 2004, and PEC did not have material outstanding positions in such contracts at
September 30, 2004.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Cash
Flow Hedges
| | ----------------

| | PEC
uses cash flow hedging strategies to hedge variable interest rates on long-term and
short-term debt and to hedge interest rates with regard to future fixed-rate debt
issuances. As of September 30, 2004, PEC had $110 million notional amount of pay-fixed
forward swaps to hedge its exposure to interest rates with regard to future issuances of
debt and $26 million notional amount of pay-fixed forward starting swaps to hedge its
exposure to interest rates with regard to an upcoming railcar lease. All the swaps have a
computational period of ten years. These hedges had a fair value liability position of $2
million at September 30, 2004. PEC had no open cash flow hedges at December 31, 2003. The
ineffective portion of interest rate cash flow hedges for the three and nine-month
periods ending September 30, 2004 was not material to PECs results of operations.
As of September 30, 2004, PEC had $7 million of after-tax deferred losses in accumulated
other comprehensive income (OCI), including amounts related to terminated hedges, of
which $1 million are expected to be reclassified to earnings within the next 12 months.
Due to the volatility of interest rates, the value in OCI is subject to change prior to
its reclassification into earnings.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Fair
Value Hedges
| | -----------------

| | PEC
uses fair value hedging strategies to manage its exposure to fixed interest rates on
long-term debt. At September 30, 2004 and December 31, 2003, PEC had no open interest
rate fair value hedges.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

9.        FINANCIAL
INFORMATION BY BUSINESS SEGMENT

| | PECs
operations consist primarily of the PEC Electric segment which is engaged in the
generation, transmission, distribution and sale of electric energy primarily in portions
of North Carolina and South Carolina. These electric operations are subject to the rules
and regulations of the FERC, the NCUC, the SCPSC and the NRC. PEC Electric also
distributes and sells electricity to other utilities, primarily on the east coast of the
United States.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
Other segment, whose operations are primarily in the United States, is made up of other
nonregulated business areas and eliminations that do not separately meet the disclosure
requirements of SFAS No. 131, Disclosures about Segments of an Enterprise and
Related Information.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
financial information for PEC segments for the three and nine months ended September 30,
2004 and 2003 is as follows:
| | -------------------------------------------------------------------------------------------------------------------------

|Three Months Ended September 30 |  | 2004   |  |     | 2003 |       
|------------------------------- |  | ------ |  | --- | ---- | ------
|                               
|
|                               
|Total revenues                  |  | $1,014 |  | $  |      | $1,014
|Earnings available              |  | 175    |  | (1  | )    | 174   
|for common                      | 

|Nine Months Ended September 30 |  | 2004   |  |     | 2003 |       
|------------------------------ |  | ------ |  | --- | ---- | ------
|                              
|
|                              
|Total revenues                 |  | $2,776 |  | $ 1 |      | $ 2777
|Earnings available             |  | 388    |  | (4  | )    | 384   
|for common                     | 

| | No
single customer accounted for 10% or more of unaffiliated revenues.
| | ----------------------------------------------------------------------

10.        OTHER
INCOME AND OTHER EXPENSE

| | Other
income and expense includes interest income and other income and expense items as
discussed below. The components of other, net as shown on the accompanying Consolidated
Statements of Income are as follows:
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|                                                   | Three Months Ended
September 30 | Nine Months Ended
September 30
|-------------------------------------------------- | ------------------------------- | ------------------------------
|                                                  
|
|                                                  
|Other income                                       |                                 |                               
|Net financial trading gain                         |                                 | $  3                          
|Nonregulated energy and delivery services income   |                                 | 2                             
|Investment gains                                   |                                 | 2                             
|AFUDC equity                                       |                                 | 1                             
|Gain on sale of property                           |                                 | 2                             
|Other                                              |                                 | 2                             
|                                                  
|Total other income                                 |                                 | $12                           
|                                                  
|Other expense                                      |                                
|Nonregulated energy and delivery services expenses |                                 | $  2                          
|Donations                                          |                                 | 1                             
|Investment losses                                  |                                 |                              
|Write-off of non-trade receivable                  |                                 |                              
|Loss on sale of property                           |                                 |                              
|Other                                              |                                 | 2                             
|                                                  
|Total other expense                                |                                 | $  5                          
|                                                  
|Other, net                                         |                                 | $  7                          
|                                                  

| | Net
financial trading gains and losses represent non-asset-backed trades of electricity and
gas. 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.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

11.        COMMITMENTS
AND CONTINGENCIES

| | Contingencies
and significant changes to the commitments discussed in Note 16 of the Companys
2003 Annual Report on Form 10-K are described below.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------

| | A. | Guarantees
| | -- | ----------

| | As
a part of normal business, PEC enters into various agreements providing future financial
or performance assurances to third parties, which are outside the scope of Financial
Accounting Standards Board (FASB) Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). Such agreements include guarantees, standby
letters of credit and surety bonds. At September 30, 2004, management does 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 Consolidated Balance Sheets. At September
30, 2004, PEC had no guarantees issued on behalf of unconsolidated subsidiaries or other
third parties.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | B. | Insurance
| | -- | ---------

| | PEC
is insured against public liability for a nuclear incident up to $10.8 billion per
occurrence. Under the current provisions of the Price Anderson Act, which limits
liability for accidents at nuclear plants, PEC, as an owner of nuclear units, can be
assessed a portion of any third-party liability claims arising from an accident at any
commercial nuclear power plant in the United States. In the event that public liability
claims from an insured nuclear incident exceed $300 million (currently available through
commercial insurers), PEC would be subject to assessments of up to $101 million for each
reactor owned per occurrence. Payment of such assessments would be made over time as
necessary to limit the payment in any one year to no more than $10 million per reactor
owned. Congress is considering revisions to the Price Anderson Act that could include
increased limits and assessments per reactor owned. The final outcome of this matter
cannot be predicted at this time.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
self-insures its transmission and distribution lines against loss due to storm damage and
other natural disasters.
| | ----------------------------------------------------------------------------------------------------------------------

| | C. | Claims
and Uncertainties
| | -- | ------------------------

| | PEC
is subject to federal, state and local regulations addressing hazardous and solid waste
management, air and water quality and other environmental matters. See Note 16D to the
financial statements in Item 8 of the Form 10-K for the year ended December 31, 2003.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Hazardous
and Solid Waste Management
| | ------------------------------------

| | Various
organic materials associated with the production of manufactured gas, generally referred
to as coal tar, are regulated under federal and state laws. The principal regulatory
agency that is responsible for a specific former manufactured gas plant (MGP) site
depends largely upon the state in which the site is located. There are several MGP sites
to which PEC has some connection. In this regard, PEC and other potentially responsible
parties (PRPs) are participating in, investigating and, if necessary, remediating former
MGP sites with several regulatory agencies, including, but not limited to, the U.S.
Environmental Protection Agency (EPA) and the North Carolina Department of Environment
and Natural Resources, Division of Waste Management (DWM). In addition, PEC is
periodically notified by regulators such as the EPA and various state agencies of its
involvement or potential involvement in sites, other than MGP sites, that may require
investigation and/or remediation.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
has filed claims with its general liability insurance carriers to recover costs arising
from actual or potential environmental liabilities. All claims have been settled other
than with insolvent carriers. These settlements have not had a material effect on the
consolidated financial position or results of operations.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | PEC
is also currently in the process of assessing potential costs and exposures at other
environmentally impaired sites. As the assessments are developed and analyzed, PEC will
accrue costs for the sites to the extent the costs are probable and can be reasonably
estimated.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | There
are nine former MGP sites and other sites associated with PEC that have required or are
anticipated to require investigation and/or remediation costs. PEC received insurance
proceeds to address costs associated with environmental liabilities related to its
involvement with some sites. All eligible expenses related to these are charged against a
specific fund containing these proceeds. At December 31, 2003, the balance in the fund
was $9 million. During the nine months ended September 30, 2004, PEC spent approximately
$2 million related to environmental remediation. The remaining balance in the fund at
September 30, 2004 was $7 million. At September 30, 2004, PEC had an accrual of $9
million recorded for environmental liabilities, which includes $2 million transferred
from NCNG at the time of the sale of NCNG. PEC is unable to provide an estimate of the
reasonably possible total remediation costs beyond what is currently accrued due to the
fact that investigations have not been completed at all sites. This accrual has been
recorded on an undiscounted basis. PEC measures its liability for these sites based on
available evidence including its experience in investigating and remediating
environmentally impaired sites. The process often involves assessing and developing
cost-sharing arrangements with other PRPs. PEC will accrue costs for the sites to the
extent its 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 to the stage where a reasonable
estimate of the remediation costs can be made, PEC cannot determine the total costs that
may be incurred in connection with the remediation of all sites at this time. It is
anticipated that sufficient information will become available for several sites during
2005 to allow a reasonable estimate of PECs obligation for those sites to be made.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Air
Quality
| | -----------

| | There
has been and may be further proposed legislation requiring reductions in air emissions
for NOx, 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 which could be
material to PECs consolidated financial position or results of operations. Control
equipment that will be installed on North Carolina fossil generating facilities as part
of the North Carolina legislation discussed below may address some of the issues outlined
above. However, PEC cannot predict the outcome of this matter.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | The
EPA is conducting an enforcement initiative related to a number of coal-fired utility
power plants in an effort to determine whether modifications at those facilities were
subject to New Source Review requirements or New Source Performance Standards under the
Clean Air Act. PEC was asked to provide information to the EPA as part of this initiative
and cooperated in providing 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, ranging from $1.0 billion to $1.4 billion. A utility that was not
subject to a civil enforcement action settled its New Source Review issues with the EPA
for $300 million. 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. PEC cannot predict the
outcome of this matter.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
2003, the EPA published a final rule addressing routine equipment replacement under the
New Source Review program. The rule defines routine equipment replacement and the types
of activities that are not subject to New Source Review requirements or New Source
Performance Standards under the Clean Air Act. The rule was challenged in the Federal
Appeals Court and its implementation stayed. In July 2004, the EPA announced it will
reconsider certain issues arising from the final routine equipment replacement rule.
Reconsideration does not impact the court-approved stay. The agency plans to issue a
final decision on these reconsidered issues by year end. PEC cannot predict the outcome
of this matter.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
1998, the EPA published a final rule at Section 110 of the Clean Air Act addressing the
regional transport of ozone (NOx SIP Call). Total capital expenditures to meet these
measures in North and South Carolina could reach approximately $370 million, which has
not been adjusted for inflation. PEC has spent approximately $284 million to date related
to these expenditures. Increased operation and maintenance costs relating to the NOx SIP
Call are not expected to be material to PECs results of operations. Further
controls are anticipated as electricity demand increases.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
1997, the EPA issued final regulations establishing a new 8-hour ozone standard. In 1999,
the District of Columbia Circuit Court of Appeals ruled against the EPA with regard to
the federal 8-hour ozone standard. The U.S. Supreme Court has upheld, in part, the
District of Columbia Circuit Court of Appeals decision. In April 2004, the EPA identified
areas that do not meet the standard. The states with identified areas, including North
and South Carolina are proceeding with the implementation of the federal 8-hour ozone
standard. Both states promulgated final regulations, which will require PEC to install
NOx controls under the states 8-hour standard. The costs of those controls are
included in the $370 million cost estimate above. However, further technical analysis and
rulemaking may result in a requirement for additional controls at some units. PEC cannot
predict the outcome of this matter.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
June 2002, legislation was enacted in North Carolina requiring the states electric
utilities to reduce the emissions of NOx and SO2 from coal-fired power plants. PEC
expects its capital costs to meet these emission targets will be over $800 million by
2013. PEC has expended approximately $69 million of these capital costs through September
30, 2004. PEC currently has approximately 5,100 MW of coal-fired generation capacity in
North Carolina that is affected by this legislation. The law requires the emissions
reductions to be completed in phases by 2013, and applies to each utilitys total
system rather than setting requirements for individual power plants. The law also freezes
the utilities base rates for five years unless there are extraordinary events
beyond the control of the utilities or unless the utilities persistently earn a return
substantially in excess of the rate of return established and found reasonable by the
NCUC in the utilities last general rate case. Further, the law allows the utilities
to recover from their retail customers the projected capital costs during the first seven
years of the ten-year compliance period beginning on January 1, 2003. The utilities must
recover at least 70% of their projected capital costs during the five-year rate freeze
period. PEC recognized amortization of $20 million in the quarter ended September 30,
2004. No amortization was recognized in the quarter ended September 30, 2003. PEC
recognized amortization of $50 million and $54 million in the nine months ended September
30, 2004 and 2003, respectively, and has recognized $124 million in cumulative
amortization through September 30, 2004. Pursuant to the law, PEC entered into an
agreement with the state of North Carolina to transfer to the state certain NOx and SO2
emissions allowances that result from compliance with the collective NOx and SO2
emissions limitations set out in the law. The law also requires the state to undertake a
study of mercury and carbon dioxide emissions in North Carolina. Operation and
maintenance costs will increase due to the additional personnel, materials and general
maintenance associated with the equipment. Operation and maintenance expenses are
recoverable through base rates, rather than as part of this program. PEC cannot predict
the future regulatory interpretation, implementation or impact of this law.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
1997, the EPAs Mercury Study Report and Utility Report to Congress conveyed that
mercury is not a risk to the average American and expressed uncertainty about whether
reductions in mercury emissions from coal-fired power plants would reduce human exposure.
Nevertheless, the EPA determined in 2000 that regulation of mercury emissions from
coal-fired power plants was appropriate. In 2003, the EPA proposed alternative control
plans that would limit mercury emissions from coal-fired power plants. The first, a
Maximum Achievable Control Technology (MACT) standard applicable to every coal-fired
plant, would require compliance in 2008. The second, which the EPA has stated it prefers,
is a mercury cap and trade program that would require limits to be met in two phases,
2010 and 2018. The EPA expects to finalize the mercury rule in March 2005. Achieving
compliance with the proposal could involve significant capital costs which could be
material to PECs consolidated financial position or results of operations. PEC
cannot predict the outcome of this matter.
| | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
conjunction with the proposed mercury rule, the EPA proposed a MACT standard to regulate
nickel emissions from residual oil-fired units. The agency estimates the proposal will
reduce national nickel emissions to approximately 103 tons. The EPA expects to finalize
the nickel rule in March 2005. PECs oil-fired units have pollution controls in
place, which would meet the proposed requirements of the nickel rule.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
December 2003, the EPA released its proposed Interstate Air Quality Rule, currently
referred to as the Clean Air Interstate Rule (CAIR). The EPAs proposal requires 28
jurisdictions, including North Carolina, South Carolina, Georgia and Florida, to further
reduce NOx and SO2 emissions in order to attain preset state NOx and SO2 emissions
levels. The rule is expected to become final by the end of 2004. The air quality controls
already installed for compliance with the NOx SIP Call and currently planned by PEC for
compliance with the North Carolina law will reduce the costs required to meet the CAIR
requirements for PECs North Carolina units. Additional compliance costs will be
determined once the rule is finalized.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 thirteen other states, including South Carolina, to reduce their NOx and SO2
emissions. The state of North Carolina contends these out-of-state polluters are
interfering with North Carolinas ability to meet national air quality standards for
ozone and particulate matter. The EPA has not made a determination on the Section 126
petition, and PEC cannot predict the outcome of this matter.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 applicable
facilities. Integration of these new wastewater streams into the existing wastewater
treatment processes may result in permitting, construction and requirements imposed on
PEC in the immediate and extended future.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | After
many years of litigation and settlement negotiations the EPA adopted regulations in
February 2004 for the implementation of Section 316(b) of the Clean Water Act. These
regulations became effective September 7, 2004. The purpose of these regulations is to
minimize adverse environmental impacts caused by cooling water intake structures and
intake systems. Over the next several years these regulations will impact the larger base
load generation facilities and may require the facilities to mitigate the effects to
aquatic organisms by constructing intake modifications or undertaking other restorative
activities. Substantial costs could be incurred by the facilities in order to comply with
the new regulation. PEC currently estimates that from 2005 through 2009 the range of its
expenditures to meet the Section 316(b) requirements of the Clean Water Act will be $20
million to $30 million.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
Environmental Matters
| | ---------------------------

| | The
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. Russia recently
announced its intent to ratify the Protocol, which would allow the treaty to enter into
force. 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 and by the Bush administration. Reductions in
carbon dioxide emissions to the levels specified by the Kyoto Protocol and some
legislative proposals could be materially adverse to PECs consolidated financial
position or results of operations if associated costs cannot be recovered from customers.
PEC favors the voluntary program approach recommended by the administration and is
evaluating options for the reduction, avoidance, and sequestration of greenhouse gases.
However, PEC cannot predict the outcome of this matter.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Other
Contingencies
| | -------------------

| | 1.
As required under the Nuclear Waste Policy Act of 1982, PEC entered into a
          contract with the 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.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
1995, the DOE issued a final interpretation that it did not have an unconditional
obligation to take spent nuclear fuel by January 31, 1998. In Indiana Michigan Power
v. DOE, the Court of Appeals vacated the DOEs final interpretation and ruled
that the DOE had an unconditional obligation to begin taking spent nuclear fuel. The
Court did not specify a remedy because the DOE was not yet in default.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | After
the DOE failed to comply with the decision in Indiana Michigan Power v. DOE, a
group of utilities petitioned the Court of Appeals in Northern States Power (NSP) v.
DOE, seeking an order requiring the DOE to begin taking spent nuclear fuel by January
31, 1998. The DOE took the position that its delay was unavoidable, and the DOE was
excused from performance under the terms and conditions of the contract. The Court of
Appeals found that the delay was not unavoidable, but did not order the DOE to begin
taking spent nuclear fuel, stating that the utilities had a potentially adequate remedy
by filing a claim for damages under the contract.
| | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | After
the DOE failed to begin taking spent nuclear fuel by January 31, 1998, a group of
utilities filed a motion with the Court of Appeals to enforce the mandate in NSP v. DOE.
Specifically, this group of utilities asked the Court to permit the utilities to escrow
their waste fee payments, to order the DOE not to use the waste fund to pay damages to
the utilities, and to order the DOE to establish a schedule for disposal of spent nuclear
fuel. The Court denied this motion based primarily on the grounds that a review of the
matter was premature, and that some of the requested remedies fell outside of the mandate
in NSP v. DOE.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | Subsequently,
a number of utilities each filed an action for damages in the Federal Court of Claims.
The U.S. Circuit Court of Appeals (Federal Circuit) ruled that utilities may sue the DOE
for damages in the Federal Court of Claims instead of having to file an administrative
claim with DOE.
| | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
January 2004, PEC filed a complaint with 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 Progress Energy facilities on or before January 31, 1998. Damages due
to DOEs breach will likely exceed $100 million. Similar suits have been initiated
by over two dozen other utilities.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | In
July 2002, Congress passed an override resolution to Nevadas veto of DOEs
proposal to locate a permanent underground nuclear waste storage facility at Yucca
Mountain, Nevada. DOE plans to submit a license application for the Yucca Mountain
facility by the end of 2004. In November 2003, Congressional negotiators approved $580
million for fiscal year 2004 for the Yucca Mountain project, $123 million more than the
previous year. 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. 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. The DOE continues to
state it plans to begin operation of the repository at Yucca Mountain in 2010. PEC cannot
predict the outcome of this matter.
| | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | With
certain modifications and additional approval by the NRC including the installation of
onsite dry storage facilities at Robinson (2005) and Brunswick (2010), PECs spent
nuclear fuel storage facilities will be sufficient to provide storage space for spent
fuel generated on its system through the expiration of the operating licenses for all of
its nuclear generating units.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 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 the appeal on the ground that PECs notice of appeal should have been filed
on or before May 6, 2004. On June 16, 2004, PEC filed a motion with the trial court
requesting an extension of the deadline for the filing of the notice of appeal. By order
dated September 10, 2004, the trial court denied the extension request. On September 15,
2004, PEC filed a notice of appeal of the September 10, 2004 order and by order dated
September 29, 2004, the appellate court consolidated the first and second appeals. DMTs
motion to dismiss the first appeal remains pending.
| | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

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

| | 3.
On February 1, 2002, 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           dated December 2003, the STB found that the rates were unreasonable
and awarded           reparations of $23 million and prescribed a methodology to determine maximum
rates. Both           parties petitioned for reconsideration of the December 2003
decision. On October           20, 2004, the STB reversed its December 2003 decision and
concluded that the           rates charged by Norfolk Southern were not unreasonable. The
Company is in the           process of evaluating future actions, which may include an
application to the           STB to phase in the new rates, or a judicial appeal. As of
September 30, 2004,           PEC has accrued a liability of $39 million, to return the
reparations of $23 million, which was originally recorded as a regulatory liability, and accrue           additional 2004 expenses of $16 million, of which $14
million, has been           allocated to retail customers and recorded as deferred fuel
cost while the           remaining $2 million attributable to wholesale customers has
been charged to           fuel used in electric generation.
| | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

| | 4.
PEC and its subsidiaries are involved in various litigation matters in the
          ordinary course of business, some of which involve substantial amounts. Where
          appropriate, accruals have been made in accordance with SFAS No. 5,
          Accounting for Contingencies, to provide for such matters. In the
          opinion of management, the final disposition of pending litigation would not
          have a material adverse effect on PECs 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 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. Many, but not all of the factors that may impact actual
results are discussed in the Risk Factors sections of Progress Energys and PECs
annual report on Form 10-K for the year ended December 31, 2003, which were filed with
the SEC on March 12, 2004. Please review SAFE HARBOR FOR FORWARD-LOOKING STATEMENTS herein
for a discussion of the factors that may impact any such forward-looking statements made
herein.

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, significant weather events, timing
of maintenance on electric generating units and timing of synthetic fuel production,
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 2003 Form 10-K.

RESULTS OF OPERATIONS

Progress Energy
is an integrated energy company, with its primary focus on the end-use and wholesale
electricity markets. The Companys reportable business segments and their primary
operations include:

|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;
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Progress
Energy Florida (PEF)  primarily engaged in the generation, transmission,
distribution and sale of electricity in portions of Florida;
|- | -----------------------------------------------------------------------------------------------------------------------------------------------

|o | Competitive
Commercial Operations (CCO)  engaged in nonregulated electric generation operations
and marketing activities primarily in the southeastern United States;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Fuels
 primarily engaged in natural gas drilling and production in Texas and Louisiana,
coal terminal services, coal mining, the production of synthetic fuels and related
services, and fuel transportation and delivery, all of which are located in Kentucky,
West Virginia, and Virginia;
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Rail
Services (Rail)  engaged in various rail and railcar related services in 23 states,
Mexico and Canada; and o Other Businesses (Other)  engaged in other nonregulated
business areas, including telecommunications primarily in the eastern United
States and energy service operations, which do not meet the requirements for separate
segment reporting disclosure.
|- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Corporate
activities that include holding company operations, service company operations and
eliminations.
|- | ----------------------------------------------------------------------------------------------------------

In this section, earnings and the
factors affecting earnings for the three and nine months ended September 30, 2004 as
compared to the same periods in 2003 are discussed. The discussion begins with a
summarized overview of the Companys consolidated earnings, which is followed by a
more detailed discussion and analysis by business segment.

OVERVIEW

For the quarter ended September 30,
2004, Progress Energys net income was $303 million or $1.25 per share compared to
$318 million or $1.33 per share for the same period in 2003. The decrease in net income
as compared to the prior quarter was attributable to:

|o | A
reduction in synthetic fuel earnings due to lower synthetic fuel sales and the recording
of a charge related to tax credits due to the impact of hurricanes during the quarter.
|- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Increased
interest charges as results in 2003 were favorably impacted by the reversal of interest
expense for resolved tax matters.
|- | -----------------------------------------------------------------------------------------------------------------------------------

|o | Reduction
in revenues due to customer outages in Florida associated with hurricanes.
|- | ------------------------------------------------------------------------------------

Partially offsetting these items were:

|o | Favorable
customer growth in the Carolinas.
|- | -------------------------------------------

|o | Increased
margins as a result of the allowed return on the Hines 2 Plant in Florida.
|- | ------------------------------------------------------------------------------------

|o | Reduced
operations and maintenance (O&M) costs at the utilities due primarily to reduction in
salaries and benefits and timing of projects delayed due to storm restoration efforts.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Increased
Rail earnings due to higher volumes and prices.
|- | ---------------------------------------------------------

|o | Unrealized
gains recorded on contingent value obligations.
|- | ----------------------------------------------------------

|o | Reduction
in losses recorded for discontinued operations.
|- | ---------------------------------------------------------

For the nine months ended September
30, 2004, Progress Energys net income was $565 million or $2.33 per share compared
to $694 million or $2.94 per share for the same period in 2003. The decrease in net
income as compared to prior year was due primarily to:

|o | A
reduction in synthetic fuel earnings due to lower synthetic fuel sales and the recording
of a charge related to tax credits due to the impact of hurricanes during the year.
|- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Lower
off-system wholesale sales, primarily at PEC Electric.
|- | ------------------------------------------------------------

|o | Recording
of litigation settlement reached in the civil suit by SRS.
|- | --------------------------------------------------------------------

|o | Decreased
nonregulated generation earnings due to receipt of a contract termination payment on a
tolling agreement in 2003 and higher fixed costs and interest charges in 2004.
|- | -------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

|o | Reduction
in revenues due to customer outages in Florida associated with the hurricanes.
|- | ----------------------------------------------------------------------------------------

|o | Increased
interest charges as results in 2003 were favorably impacted by the reversal of interest
expense for resolved tax matters.
|- | -----------------------------------------------------------------------------------------------------------------------------------

|o | The
impact of tax levelization.
|- | -------------------------------

Partially offsetting these items were:

|o | Favorable
weather in the Carolinas.
|- | -----------------------------------

|o | Reduction
in revenue sharing provisions in Florida
|- | --------------------------------------------------

|o | Favorable
customer growth in both the Carolinas and Florida.
|- | ------------------------------------------------------------

|o | Increased
margins as a result of the allowed return on the Hines 2 Plant in Florida.
|- | ------------------------------------------------------------------------------------

|o | Lower
depreciation and amortization costs at the utilities.
|- | -----------------------------------------------------------

|o | Increased
earnings for natural gas and Rail operations.
|- | -------------------------------------------------------

|o | Unrealized
gains recorded on contingent value obligations.
|- | ----------------------------------------------------------

|o | Reduction
in losses recorded for discontinued operations.
|- | ---------------------------------------------------------

Basic earnings per share decreased in
2004 due in part to the factors outlined above. Dilution related to the issuances under
the Companys Investor Plus Stock Purchase Plan and employee benefit programs in
2003 and 2004 also reduced basic earnings per share by $0.02 for the third quarter of
2004 and $0.06 for the nine months ended September 30, 2004.

Beginning in the fourth quarter of
2003, the Company ceased recording portions of Fuels segments operations, primarily
synthetic fuel facilities, one month in arrears. As a result, earnings for the year ended
December 31, 2003 included 13 months of operations, resulting in a net income increase of
$2 million for the year. The Company restated previously reported consolidated quarterly
earnings to reflect the new reporting periods which resulted in four months earnings in
the first quarter of 2003 and changed reported net income for subsequent quarters.
Earnings decreased $1 million for the three months ended September 30, 2003 and increased
$14 million for the nine months ended September 30, 2003 as compared to amounts
originally reported.

The Companys segments
contributed the following profits or losses for the three and nine months ended September
30, 2004 and 2003:

|                                         
|-----------------------------------------
|
|                                         
|
|                                         
|PEC Electric                             
|PEF                                      
|Fuels                                    
|CCO                                      
|Rail                                     
|Other                                    
|                                         
|Total Segment Profit                     
|Corporate                                
|                                         
|Income from continuing operations        
|NCNG discontinued operations             
|Cumulative effect of change in accounting
|principle, net of tax                    
|                                         
|Net income                               
|                                         

In March 2003, the SEC completed an
audit of Progress Energy Service Company, LLC (Service Company) and recommended that the
Company change its cost allocation methodology for allocating Service Company costs. As
part of the audit process, the Company was required to change the cost allocation
methodology for 2003 and record retroactive reallocations between its affiliates in the
first quarter of 2003 for allocations originally made in 2001 and 2002. This change in
allocation methodology and the related retroactive adjustments have no impact on
consolidated expense or earnings. The new allocation methodology, as compared to the
previous allocation methodology, generally decreases expenses in the regulated utilities
and increases expenses in the nonregulated businesses. The regulated utilities reallocations
are within operation and maintenance (O&M) expense, while the diversified businesses reallocations
are generally within diversified business expenses. The impact on the individual lines of
business is included in the following discussions.

Cost Management Initiative

On October 12, 2004, Progress Energy
announced to its employees a cost-management initiative to analyze the size and structure
of the entire organization and reduce projected operating expenses over the next three
years. This initiative is focused on reducing the rate of cost increases throughout the
Company. These cost initiatives will likely require some workforce reductions. Among the
options being considered is a voluntary early-retirement program. By 2007, the Company is
estimating total annual savings of at least $75 million from this cost management
initiative.

PROGRESS ENERGY CAROLINAS ELECTRIC

PEC Electric contributed segment
profits of $175 million and $160 million for the three months ended September 30, 2004
and 2003, respectively, and $388 million and $383 million for the nine months ended
September 30, 2004 and 2003, respectively. The increase in profits for the three months
ended September 30, 2004 as compared to the same period in 2003 is due primarily to
increased revenue from customer growth, lower O&M charges and the impact of losses
booked on investments in limited partnerships in 2003, partially offset by lower
wholesale revenues. The increase in profits for the nine months ended September 30, 2004
as compared to the same period in 2003 is primarily due to the favorable impact of
weather, increased revenues from customer growth and lower depreciation and amortization
charges, partially offset by lower wholesale revenues and higher O&M charges.

PEC Electrics revenues for the
three and nine months ended September 30, 2004 and 2003, and the percentage change by
customer class are as follows:

|                       
|-----------------------
|
|                       
|
|                       
|Residential            
|Commercial             
|Industrial             
|Governmental           
|                       
|Total retail revenues  
|Wholesale              
|Unbilled               
|Miscellaneous          
|                       
|Total electric revenues
|                       

PEC Electrics energy sales for
the three and nine months ended September 30, 2004 and 2003, and the amount and
percentage change by customer class are as follows:

|                     
|---------------------
|
|                     
|
|                     
|Residential          
|Commercial           
|Industrial           
|Governmental         
|                     
|Total retail revenues
|Wholesale            
|Unbilled             
|                     
|Total mWh sales      
|                     

Three months ended September 30,
2004 compared to the three months ended September 30, 2003

PEC Electrics revenues,
excluding recoverable fuel revenues of $183 million and $180 million for the three months
ended September 30, 2004 and 2003, respectively, increased $1 million. The increase in
retail revenues was due primarily to favorable customer growth offset by unfavorable
weather. PEC Electric has approximately 26,000 additional customers as of September 30,
2004 compared to September 30, 2003. Weather was unfavorable due primarily to a reduction
in cooling and heating degree days of 3% and 56%, respectively, compared to prior
quarter. The increase in retail revenues was offset partially by a reduction in wholesale
revenues. The reduction in wholesale revenues is due primarily to weaker power market
conditions, increased fuel prices and lower contracted capacity in the wholesale market.
PEC monitors its wholesale contract portfolio on a regular basis. During 2003 and 2004,
several contracts expired or were renegotiated with less favorable terms. Due to the
slightly depressed wholesale market and increased competition, this trend could continue
as contracts are renewed in the upcoming years.

Fuel and purchased power costs
represent the costs of generation, which includes 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 is subject to recovery
is deferred for future collection or refund to customers.

Fuel and purchased power expenses
decreased $16 million from $332 million for the three months ended September 30, 2003 to
$316 million for the three months ended September 30, 2004. Fuel used in electric
generation decreased $14 million to $220 compared to the same period in the prior year.
This decrease is due to a reduction in deferred fuel expense of $30 million as a result
of the underrecovery of current period fuel costs offset by an increase in fuel used in
generation of $16 million due primarily to higher coal costs. Purchased power expenses
decreased $2 million to $96 million compared to prior year.

O&M costs were $197 million for
the three months ended September 30, 2004, which represents an $8 million decrease
compared to the same period in 2003. O&M costs decreased $8 million due primarily to
lower benefits expenses resulting from favorable adjustments to pension and OPEB
obligations based on the latest actuarial valuations which reflected the implementation
of FASB Staff Position 106-2 for OPEB obligations. See discussion in Note 2 to the
Progress Energy Consolidated Interim Financial Statements.

Hurricanes Charley and Ivan struck
portions of PECs service territory during the third quarter of 2004. Restoration of
the PECs system from hurricane-related damage is estimated at $13 million, of which
$12 million has been charged to O&M expenses and $1 million has been charged to
capital expenditures. Storm costs for 2004 did not significantly reduce earnings when
compared to the prior year quarter as results for the three months ended September 30,
2003 included restoration costs related to Hurricane Isabel.

PEC does not have an on-going
regulatory mechanism to recover storm costs and; therefore, hurricane restoration costs
recorded in the third quarter of 2004 have been charged to O&M expenses or capital
expenditures based on the nature of the work performed. In connection with other storms,
PEC has previously sought and received permission for the North Carolina Utilities Commission (NCUC) and the Public Service
Commision of South Carolina (SCPSC) to defer storm expenses and amortize
them over a five-year period. PEC is planning to seek deferral of 2004 storm costs in the
fourth quarter of 2004.

Depreciation and amortization expense
increased $4 million from $135 million for the quarter ended September 30, 2003 to $139
million for the quarter ended September 30, 2004. The increase compared to prior quarter
is due to increased clean air amortization of $20 million compared to the prior year and
higher depreciation expense due to assets placed in service of $3 million. In addition, a
depreciation adjustment was made to increase depreciation expense by $7 million in the
third quarter of 2004 for cost of removal. These items were partially offset by the
impact of the depreciation study and the impact of an adjustment booked in 2003 related
to the SFAS No. 143 implementation. During the first half of 2004, PEC Electric filed
with the NCUC and obtained approval from the
SCPSC for a depreciation study which allowed the
utility to reduce the rates used to calculate depreciation expense. As a result,
depreciation expense decreased $7 million compared to the prior year quarter. In October
2004, PEC filed a revised depreciation study with the NCUC and the SCPSC supporting a
reduction in annual depreciation expense of approximately $47 million. The reduction is
due solely to extended lives at each of PECs nuclear units. The new depreciation
rates are proposed to be effective January 1, 2004. Depreciation expense also decreased
$14 million from the impact of an adjustment booked in 2003 related to the implementation
of SFAS No. 143. In the prior year, PEC filed a request with the NCUC requesting deferral
of the difference between expense pursuant to SFAS No. 143 and expense as previously
determined by the NCUC. The NCUC granted deferral of the cumulative adjustment but denied
deferral of the ongoing effects. As a result, PEC ceased deferral of the ongoing effects
during the second quarter of 2003 related to its North Carolina retail rate
jurisdictions. This resulted in a reduction of depreciation and amortization expense for
the quarter ended June 30, 2003 of $14 million which represented a decrease in non-ARO
cost of removal expense partially offset by an increase in decommissioning expense. In
August 2003, the NCUC revised its decision and approved deferral of the ongoing effects
of SFAS No. 143 at which time the $14 million reduction was reversed which increased
depreciation and amortization for the quarter ended September 30, 2003.

Other expenses have decreased $11
million for the three months ended September 30, 2004 as compared to the same period in
the prior year. This decrease is primarily due to losses on limited partnership
investments recorded in 2003.

Nine months ended September 30,
2004 compared to the nine months ended September 30, 2003

PEC Electrics revenues,
excluding recoverable fuel revenues of $505 million and $473 million for the nine months
ended September 30, 2004 and 2003, respectively, decreased $8 million. The decrease in
revenues was due primarily to lower wholesale sales. Wholesale revenues decreased $97
million from $538 million to $441 million. Revenues for the nine months ended September
30, 2003 included strong sales to the Northeastern United States as a result of favorable
market conditions. The decline in wholesale revenues was partially offset by increased
retail revenues of $38 million as a result of favorable weather, with cooling degree days
and heating degree days 15% and 1%, respectively, above prior year. In addition,
favorable customer growth increased revenue $42 million, partially offsetting the
decrease in wholesale sales.

Fuel and purchased power costs
represent the costs of generation, which includes 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 is subject to recovery
is deferred for future collection or refund to customers.

Fuel and purchased power expenses
were $875 million for the nine months ended September 30, 2004, which represents a $2
million decrease compared to the same period in the prior year. This decrease is due to a
reduction in deferred fuel expense as a result of the underrecovery of current period
fuel costs offset by an increase in fuel used in generation due primarily to higher coal
costs. Purchased power expenses decreased $2 million to $238 million compared to prior
year.

O&M costs were $632 million for
the nine months ended September 30, 2004, which represents a $27 million increase
compared to the same period in 2003. O&M costs increased $21 million primarily due to
an increase in outage scope and duration at the nuclear plants. In addition, O&M
charges were favorably impacted by $16 million related to the retroactive reallocation of
Service Company costs in the prior year. These increases were partially offset by a
reduction in storm restoration costs of $7 million compared to the prior year. Storm
costs for the nine months ended September 30, 2003 were $25 million and included costs
associated with the major ice storms and Hurricane Isabel. Storm costs for the nine
months ended September 30, 2004 were $18 million and included costs related to an ice
storm and Hurricanes Charley and Ivan.

Depreciation and amortization expense
decreased $23 million from $416 million for the nine months ended September 30, 2003 to
$393 million for the nine months ended September 30, 2004. As previously discussed, PEC
filed a depreciation study which allowed the utility to reduce the rates used to
calculate depreciation expense. The impact of the study for the nine months ended
September 30, 2004 was a reduction of depreciation of $17 million compared to the same
prior year period. In addition, clean air amortization for the nine months ended
September 30, 2004 decreased $3 million compared to the same prior year period. These
decreases were partially offset by increases for assets placed in service.

Taxes other than on income increased
$8 million from $124 million for the nine months ended September 30, 2003 to $132 million
for the nine months ended September 30, 2004. This increase is due to an increase in
gross receipts taxes of $5 million related to an increase in revenues and a 2004
adjustment related to the prior year. The remaining variance in other taxes is due to an
increase in property taxes of $3 million.

PROGRESS ENERGY FLORIDA

PEF contributed segment profits of
$140 million and $115 million for the three months ended September 30, 2004 and 2003,
respectively, and $273 million and $247 million for the nine months ended September 30,
2004 and 2003, respectively. The increase in profits for the three months ended September
30, 2004 when compared to 2003 is primarily due to favorable weather and customer growth,
increased wholesale sales, the additional return on investment for the Hines 2 plant and
reduced O&M expenditures. These items were partially offset by the reduction in
revenues related to major storms and increased interest expense. Profits for the nine
months ended September 30, 2004 increased due to a reduction in the provision for revenue
sharing, favorable customer growth, the additional return on investment on the Hines 2
plant and reduced O&M expenses. These items were partially offset by unfavorable
weather, a reduction in revenues related to the hurricanes, increased interest expenses
and increased depreciation expense from assets placed in service.

PEFs electric revenues for the
three and nine months ended September 30, 2004 and 2003, and the amount and percentage
change by customer class are as follows:

|                       
|-----------------------
|
|                       
|
|                       
|Residential            
|Commercial             
|Industrial             
|Governmental           
|Retail revenue sharing 
|                       
|Total retail revenues  
|Wholesale              
|Unbilled               
|Miscellaneous          
|                       
|Total electric revenues
|                       

PEFs electric energy sales for
the three and nine months ended September 30, 2004 and 2003, and the amount and
percentage change by customer class are as follows:

|                         
|-------------------------
|
|                         
|
|                         
|Residential              
|Commercial               
|Industrial               
|Governmental             
|                         
|Total retail energy sales
|Wholesale                
|Unbilled                 
|                         
|Total mWh sales          
|                         

Three months ended September 30,
2004 compared to the three months ended September 30, 2003

PEFs revenues, excluding
recoverable fuel and other pass-through revenues of $588 million and $485 million for the
three months ended September 30, 2004 and 2003, respectively, increased $22 million. This
increase was due to favorable customer growth and weather (excluding the hurricane
impacts), and increased wholesale sales. Favorable customer growth contributed an
additional $13 million compared to the prior quarter. PEF has approximately 31,000
additional customers as of September 30, 2004 compared to September 30, 2003. The impact
of favorable weather resulted in an $8 million increase in revenues. Wholesale revenues
are $7 million higher compared to prior quarter as a result of signing new contracts and
extending pre-existing contracts. Included in fuel revenues is the return on Hines 2
which contributed $9 million in additional revenues. Based on the Stipulation and
Settlement Agreement reached with the FPSC in April 2002, beginning with the in-service
date of PEFs Hines Unit 2 and continuing through December 2005, PEF will be allowed
to recover through the fuel cost recovery clause a return on average investment and
depreciation expense for Hines Unit 2, to the extent such costs do not exceed the Units
cumulative fuel cost savings over the recovery period. These increases were offset
partially by the reduction in revenues of approximately $12 million related to customer
outages caused by Hurricanes Charley, Frances and Jeanne.

Fuel and purchased power costs
represent the costs of generation, which includes 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 is subject to recovery
is deferred for future collection or refund to customers.

Fuel and purchased power expenses
increased $97 million from $411 million for the three months ended September 30, 2003 to
$508 million for the three months ended September 30, 2004. This increase is attributable
primarily to an increase in fuel used in electric generation which increased $80 million.
Higher system requirements and increased fuel costs in the current year account for $66
million of the $80 million increase in fuel used in electric generation. The remaining
increase is due to the recovery of fuel expenses that were deferred in the prior year.
Purchased power expenses increased $17 million compared to the prior quarter due to
higher system requirements and an increase in prices.

O&M costs decreased $25 million,
when compared to the $163 million incurred during the three months ended September 30,
2003. This decrease is primarily related to lower business unit spending of $17 million
due the timing of outages and maintenance activities at generation facilities (including
the nuclear outage costs in the prior year) and the delay of several major projects due
to storm restoration work (storm costs are recorded in the storm reserve). In addition,
benefit-related costs decreased $11 million due primarily to pension and OPEB adjustments
which were recorded during the current quarter based on the latest actuarial valuations
which reflected the implementation of FASB Staff Position 106-2 for OPEB obligations. See
discussion in Note 2 to the Consolidated Interim Financial Statements.

Hurricanes Charley, Frances, Ivan and
Jeanne struck significant portions of PEFs service territory during the third
quarter of 2004. PEF incurred total costs of $366 million, of which $55 million has been
charged to capital expenditures, and $311 million has been charged to the storm damage
reserve.

In accordance with a regulatory
order, PEF accrues $6 million annually to a storm damage reserve and is allowed to defer
losses in excess of the accumulated reserve. Under the order, the storm reserve is
charged with O&M expenses related to storm restoration and with capital expenditures
related to storm restoration that are in excess of expenditures assuming normal operating
conditions. As of September 30, 2004, $266 million of hurricane restoration costs in
excess of the previously recorded storm reserve have been classified as a regulatory
asset in order to recognize the probable recoverability of these costs. On November 2,
2004, PEF filed a petition with the Florida Public Service Commission (FPSC) to recover
$252 million of storm costs plus interest from retail ratepayers over a two-year period. See
discussion in Note 3 to the Consolidated Financial Statements.

Depreciation and amortization
decreased $14 million when compared to the $82 million incurred during the three months
ended September 30, 2003, primarily due to the amortization of the Tiger Bay regulatory
asset in the prior year. The Tiger Bay regulatory asset, for contract termination costs,
was recovered pursuant to an agreement between PEF and the FPSC which was approved in
1997. The amortization of the regulatory asset was calculated using revenues collected
under the fuel adjustment clause; as such, fluctuations in this expense did not have an
impact on earnings. During the third quarter of 2003, Tiger Bay amortization was $17
million. The Tiger Bay asset was fully amortized in September 2003. The decrease in Tiger
Bay amortization was partially offset by additional depreciation for assets placed in
service.

Interest charges increased $17
million from $10 million for the quarter ended September 30, 2003 to $27 million for the
quarter ended September 30, 2004. Interest costs in 2003 were favorably impacted by the
reversal of interest expense due to the resolution of certain tax matters.

Nine months ended September 30,
2004 compared to the nine months ended September 30, 2003

PEFs revenues, excluding
recoverable fuel and other pass-through revenues of $1,513 million and $1,279 million for
the nine months ended September 30, 2004 and 2003, respectively, increased $40 million.
This increase was due primarily to a reduction in the provision for revenue sharing of
$22 million. Results for 2003 included the accrual of an additional $18 million related
to the 2002 revenue sharing provision as ordered by the FPSC in June of 2003. In
addition, favorable customer growth and increased wholesale sales increased revenues by
$22 million and $9 million, respectively. Included in fuel revenues is the return on
Hines Unit 2, which contributed $27 million in additional revenues in 2004. These
increases were partially offset by the reduction in revenues related to customer outages
for Hurricanes Charley, Frances and Jeanne of approximately $12 million and the impact of
milder weather in the current year of approximately $9 million.

Fuel and purchased power costs
represent the costs of generation, which includes 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 is subject to recovery
is deferred for future collection or refund to customers.

Fuel and purchased power expenses
were $1,313 million for the nine months ended September 30, 2004, which represents a $229
million increase compared to the same period in the prior year. This increase is due to
increases in fuel used in electric generation and purchased power expenses of $223
million and $6 million, respectively. Higher system requirements and increased fuel costs
in the current year account for $75 million of the increase in fuel used in electric
generation. The remaining increase is due to the recovery of fuel expenses that were
deferred in the prior year, partially offset by the deferral of current year
underrecovered fuel expenses. In November 2003, the FPSC approved PEFs request for
a cost adjustment in its annual fuel filing due to the rising costs of fuel. The new
rates became effective January 2004.

O&M costs decreased $8 million,
when compared to the $458 million incurred during the nine months ended September 30,
2003. This decrease is primarily related to favorable benefit related costs of $9
million, primarily pension and OPEB adjustments which were recorded based on the latest
actuarial valuations which reflected the implementation of FASB Staff Position 106-2 for
OPEB obligations. See discussion in Note 2 to the Consolidated Interim Financial
Statements.

Depreciation and amortization
decreased $32 million when compared to the $241 million incurred during the nine months
ended September 30, 2003, primarily due to the amortization of the Tiger Bay regulatory
asset in the prior year. The Tiger Bay regulatory asset, for contract termination costs,
was recovered pursuant to an agreement between PEF and the FPSC which was approved in
1997. The amortization of the regulatory asset was calculated using revenues collected
under the fuel adjustment clause; as such, fluctuations in this expense did not have an
impact on earnings. During the nine months ended September 30, 2003, Tiger Bay
amortization was $47 million. The Tiger Bay asset was fully amortized in September 2003.
The decrease in Tiger Bay amortization was partially offset by additional depreciation
for assets placed in service, including expenses for Hines Unit 2 of approximately $7
million. This depreciation expense is being recovered through the fuel cost recovery
clause as allowed by the FPSC. See discussion of the return in the revenues analysis
above.

Taxes other than on income have
increased $16 million from $180 million for the nine months ended September 30, 2003 to
$196 million for the nine months ended September 30, 2004. This increase is due to
increases in gross receipts and franchise taxes of $6 million and $5 million,
respectively, related to an increase in revenues and an increase in property taxes of $7
million due to increases in property placed in service and tax rate increases.

Interest charges increased $19
million from $68 million for the nine months ended September 30, 2003 to $87 million for
the nine months ended September 30, 2004. Interest costs in 2003 were favorably impacted
by the reversal of interest expense due to the resolution of certain tax matters.

DIVERSIFIED BUSINESSES

The Companys diversified
businesses consist of the Fuels segment, the CCO segment, the Rail segment and the Other
segment. These businesses are explained in more detail below.

FUELS

The Fuels segment operations
include synthetic fuels production, natural gas production, coal extraction and terminal
operations. Fuels results for the nine months ended September 30, 2003 were
restated to reflect ten months of earnings for certain operations, primarily synthetic
fuel facilities.

The following summarizes Fuels segment
profits for the three and nine months ended September 30, 2004 and 2003:

|                         
|-------------------------
|
|                         
|
|                         
|Synthetic fuel operations
|Gas production           
|Coal and other operations
|                         
|Segments Profits         
|                         

Synthetic Fuel Operations

The synthetic fuel operations
generated net losses of $57 million for the three months ended September 30, 2004
compared to net profits of $60 million for the three months ended September 30, 2003.
Synthetic fuel operations generated segment profits of $15 million and $143 million for
the nine months ended September 30, 2004 and 2003, respectively. The production and sale
of synthetic fuel generate operating losses, but qualify for tax credits under Section 29
of the Code, which more than offset the effect of such losses. See Note 15 to the
Progress Energy Notes to the Consolidated Interim Financial Statements for further
discussion of synthetic fuel tax credit matters.

The operations resulted in the
following for the three and nine months ended September 30, 2004 and 2003:

|                                       
|---------------------------------------
|
|                                       
|
|                                       
|Tons sold                              
|                                       
|Operating losses, excluding tax credits
|Tax credits generated                  
|Tax credits reversed                   
|                                       
|Net profits                            
|                                       

Synthetic fuel operations net profits
decreased in the three months ended September 30, 2004 as compared to the same period in
2003 due primarily to a decrease in synthetic fuel production and the recording of a
charge related to tax credits as a result of hurricane costs (as described above) which
reduced the Companys projected 2004 regular tax liability. These factors also
explain the decrease in synthetic fuels net profits for the nine months ended September
30, 2004. The Companys anticipated 2004 tax liability is based on approximately five million tons.
As such, the Company recorded a charge of $79 million for tax credits associated with approximately 2.7 million tons sold during
the year which the Company anticipates cannot be used. The Company anticipates total synthetic fuel production
of approximately eight million tons in 2004 which is down compared to 2003 production
levels of approximately 12 million tons. The Company has ceased production at its Earthco
facilities for the remainder of 2004 due to the decrease in tax appetite.

Natural Gas Operations

Natural gas operations generated
profits of $15 million and $10 million for the three months ended September 30, 2004 and
2003, respectively, and $40 million and $26 million for the nine months ended September
30, 2004 and 2003, respectively. There is an increase in production resulting from the
acquisition of North Texas Gas in late February 2003, along with increased drilling. The
increase in production, coupled with higher gas prices in 2004, contributed to the
increased earnings in 2004 as compared to 2003. Volume and prices have increased 17% and
22%, respectively, compared to the three months ended September 30, 2003. Volume and
prices have increased 20% and 17%, respectively, for the nine months ended September 30,
2004 compared to the nine months ended September 30, 2003. In October 2003, the Company
completed the sale of certain gas producing properties owned by Mesa Hydrocarbons, LLC.
The following summarizes the gas production, revenues and gross margins for the three and
nine months ended September 30, 2004 and 2003 by production facility:

|                            
|----------------------------
|
|                            
|
|                            
|Production in Bcf equivalent
|Mesa                        
|Westchester                 
|North Texas Gas             
|                            
|Total Production            
|                            
|Revenues in millions        
|Mesa                        
|Westchester                 
|North Texas Gas             
|                            
|Total Revenues              
|                            
|Gross Margin                
|in millions of $            
|As a % of revenues          
|                            

Coal and Other Operations

Coal and other operations generated
segment profits of $6 million for the three months ended September 30, 2004 compared to
$9 million segment profits for the comparable period in the prior year. The decrease in
profits of $3 million is due primarily to reduced earnings from fuel transportation
operations related to the waterborne transportation ruling by the FPSC. This ruling
reduced the price charged to PEF for waterborne coal deliveries by the fuel
transportation operations of the Fuels segment. See Note 6A of the Progress Energy
Consolidated Interim Financial Statements. For the nine months ended September 30, 2004,
coal fuel and other operations generated segment profits of $14 million compared to
segment profits of $6 million for the comparable period in the prior year. This increase
in profits for the year to date is due primarily to higher volumes and margins for coal
fuel operations of $15 million after-tax offset by a reduction in profits of $7 million
after-tax for fuel transportation operations related to the waterborne transportation
ruling by the FPSC as discussed above. The increase in profits is also due to the impact
of the retroactive Service Company allocation in the prior year. Results in the same
period for the prior year were negatively impacted by the retroactive reallocation of
Service Company costs of $4 million after-tax.

The Company has begun exploring
strategic alternatives regarding the Fuels coal mining business. As of September
30, 2004 the carrying value of long-lived assets of the coal mining business were $61 million. As a result
of this initiative, the Company may trigger an impairment review in the fourth quarter of
2004; however, the Company cannot currently predict the outcome of this matter.

COMPETITIVE COMMERCIAL OPERATIONS

CCOs operations generated
segment profits of $15 million for the three months ended September 30, 2004 compared to
$13 million of segment profits for the comparable period in the prior year. Results for
the three months ended September 30, 2004 were favorably impacted by an increase in
margins from serving new and existing contracts and market sales of $8 million pre-tax
partially offset by an increase in fixed costs. Fixed costs increased $2 million pre-tax
from interest expense due primarily to interest no longer being capitalized due to the
completion of construction in the prior year and from an increase in gas transportation
expenses of $2 million pre-tax. Results for 2004 include a full quarters charge for
gas transportation services while results for 2003 include only one months service
charges.

CCOs operations generated
segment profits of $11 million for the nine months ended September 30, 2004 compared to
$23 million of segment profits for the comparable period in the prior year. Results for
the nine months ended September 30, 2004 were favorably impacted by increased gross
margin which was more than offset by higher fixed costs. Revenues increased $58 million
pre-tax in the nine months ended September 30, 2004 due to increased revenues from
marketing and tolling contracts offset by a termination payment received on a marketing
contract in 2003 and current period realized and unrealized losses of $11 million pre-tax
on contracts subject to mark to market accounting. Expenses for the cost of fuel and
purchased power to supply marketing contracts offset the increased revenues of $58
million netting to an increase in gross margin of $13 million pre-tax for the nine months
ended September 30, 2004 as compared to the same prior year period. Fixed costs increased
$15 million pre-tax from additional depreciation and amortization on plants placed into
service in 2003 and from an increase in interest expense of $13 million pre-tax due
primarily to interest no longer being capitalized due to the completion of construction
in the prior year. In addition, plant operating expenses increased $9 million pre-tax
primarily due to higher gas transportation service charges which increased over prior
year due to full period of expenses being reflected in current year results. Expenses
were favorably impacted by a reduction in Service Company allocations. Results for 2003
were negatively impacted by the retroactive reallocation of Service Company costs of $3
million ($2 million after-tax).

|                        
|------------------------
|
|                        
|
|                        
|Total revenues          
|                        
|Gross margin            
|In millions of $        
|As a % of revenues      
|                        
|Segment profits (losses)
|                        

The Company has contracts for 93% of
planned production capacity for 2004 and approximately 77% in both 2005 and 2006. The
2005 decline results from the expiration of three tolling contracts. The Company
continues to pursue opportunities with both current and potential new customers.

RAIL

Rails operations include
railcar and locomotive repair, trackwork, rail parts reconditioning and sales, scrap
metal recycling and other rail related services. The Company sold the majority of the
assets of Railcar Ltd., a leasing subsidiary, in 2004. See Note 4B of the Progress Energy
Notes to the Consolidated Interim Financial Statements.

Rail contributed segment profits of
$8 million and $1 million for the three months ended September 30, 2004 and 2003,
respectively. Revenues have increased $81 million to $291 million for the three months
ended September 30, 2004 compared to the same period in the prior year. This increase is
due primarily to increased volumes and higher prices in recycling operations and in part
to increased production and sales in locomotive and railcar services and engineering and
track services. Cost of goods sold increased $71 million from $182 million in the prior
year. The increase in costs of good sold is due to increased costs for inventory, labor
and operations as a result of the increased volume in the recycling operations,
locomotive and railcar services and engineering and track services.

Rail contributed segment profit of
$17 million for the nine months ended September 30, 2004 compared with a segment loss of
less than $1 million for the same period in the prior year. Revenues increased $215
million to $816 million for the nine months ended September 30, 2004 compared to the same
period in the prior year. This increase is due primarily to increased volumes and higher
prices in recycling operations and in part to increased production and sales in
locomotive and railcar services and engineering and track services. Tonnage for recycling
operations is up 10 to 15% on an annualized basis compared to 2003. The increase in
tonnage coupled with an increase in the average index price of approximately 90% accounts
for the significant increase in revenues year over year. The American Metal Market index
price for #1 rail road heavy melt (which is used as the index for buying and selling of
railcars) has increased to $198 as of September 30, 2004 from $104 as of September 30,
2003. Cost of goods sold increased $183 million from $525 million in the prior year. The
increase in costs of good sold is due to increased costs for inventory, labor and
operations as a result of the increased volume in the recycling operations, locomotive
and railcar services and engineering and track services. Results in the prior year were
negatively impacted by the retroactive reallocation of Service Company costs of $3
million after-tax. The favorability related to the reallocation was offset by an increase
in general and administrative costs in the current year related primarily to higher
professional fees.

OTHER BUSINESSES SEGMENT

Progress Energys Other segment
primarily includes the operations of SRS and the telecommunications operations of PT LLC.
SRS is engaged in providing energy services to industrial, commercial and institutional
customers to help manage energy costs and currently focuses its activities in the
southeastern United States. PT LLC operations provide broadband capacity services, dark
fiber and wireless services in Florida and the eastern United States.

SRS recorded a segment profit of less
than $1 million for the three months ended September 30, 2004 compared with net loss of
$1 million for the same period in the prior year. SRS recorded a net loss of $29 million
for the nine months ended September 30, 2004 compared to a net loss of $1 million for the
nine months ended September 30, 2004. The increased nine-month segment loss compared to
the prior year is due primarily to the recording of the litigation settlement reached
with San Francisco United School District related to civil proceedings. In June 2004, SRS
reached a settlement with the District which settled all outstanding claims for
approximately $43 million pre-tax ($29 million after-tax). See additional discussion in
Note 15 to the Progress Energy Consolidated Interim Financial Statements.

CORPORATE SERVICES

Corporate Services
includes the operations of the Holding Company, the Service Company and consolidation
entities, as summarized below:

|                            
|----------------------------
|
|                            
|
|                            
|Other interest expense      
|Contingent value obligations
|Tax levelization            
|Tax reallocation            
|Other income taxes          
|Other                       
|                            
|Segment profit (loss)       
|                            

Other interest expense decreased $9
million to $64 million compared to $73 million for the three months ended September 30,
2003 and decreased $6 million compared to $202 million for the nine months ended
September 30, 2003. Interest expense decreased during the current periods due to the
repayment of a $500 million unsecured note by the Holding Company on March 1, 2004 which
reduced interest expense by $8 million pre-tax for the quarter and $19 million pre-tax
for the year to date. For the year to date this reduction was offset by interest no
longer being capitalized due to the completion of construction at the CCO segment in the
prior year. Approximately $10 million ($6 million after-tax) was capitalized in the nine
months ended September 30, 2003. No interest expense was capitalized for the quarter
ended September 30, 2003.

Progress Energy issued 98.6 million
contingent value obligations (CVOs) in connection with the acquisition of FPC in 2000.
Each CVO represents the right to receive contingent payments based on the performance of
four synthetic fuel facilities owned by Progress Energy. The payments, if any, are based
on the net after-tax cash flows the facilities generate. At September 30, 2004 and 2003,
the CVOs had fair market values of approximately $16 million and $18 million,
respectively. Progress Energy recorded an unrealized gain of $20 million for the three
months ended September 30, 2004 and an unrealized loss of $4 million for the three months
ended September 30, 2003 to record the changes in fair value of the CVOs, which had
average unit prices of $0.16 and $0.18 at September 30, 2004 and 2003, respectively.
Progress Energy recorded an unrealized gain of $7 million and an unrealized loss of $4
million for nine months ended September 30, 2004 and 2003, respectively.

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 $38 million and $35 million
for the three months ended September 30, 2004 and 2003, respectively, in order to
maintain an effective tax rate consistent with the estimated annual rate. Income tax
expense was increased by $6 million and decreased by $41 million for the nine months
ended September 30, 2004 and 2003, respectively. The tax credits associated with the
Companys synthetic fuel operations primarily drive the required levelization
amount. Fluctuations in estimated annual earnings and tax credits can also cause large
swings 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.

Progress Energy and its affiliates
file a consolidated federal income tax return. The consolidated income tax of Progress
Energy is allocated to subsidiaries in accordance with the Inter-company Income Tax
Allocation Agreement (Tax Agreement). The Tax Agreement provided an allocation that
recognizes positive and negative corporate taxable income. The Tax Agreement provides for
an equitable method of apportioning the carry over of uncompensated tax benefits.
Progress Energy tax benefits not related to acquisition interest expense are allocated to
profitable subsidiaries, beginning in 2002, in accordance with a PUHCA order.

Other income taxes benefit decreased
$19 million when compared to $32 million for the quarter ended September 30, 2004. This
decrease is due primarily to increased taxes booked at the Holding Company of $15
million. The tax increase at Holding Company is due to a reduction in Florida
consolidated return tax benefit of approximately $8 million due to the impact of the
hurricanes. Income taxes increased an additional $6 million at the Holding Company as a
result of a reserve booked related to identified state tax
deficiencies. Other income taxes benefit decreased $22 million for the nine months ended
September 30, 2004 compared to $94 million for the nine months ended September 30, 2003.
This decrease is due primarily to the factors discussed for the quarter to date above.

Other expenses decreased $11 million
and $18 million for the three and nine months ended September 30, 2004 and 2003,
respectively, as compared to the same prior year periods. The $18 million decrease
compared to prior year is due to reductions at the Service Company and the Holding
Company. Other expense decreased compared to the prior year due to a reduction in Service
Company expenses of approximately $6 million driven by decreases in advertising expenses
due a shift in timing of promotions compared to prior year, reduced supply expense due to
completion of a major project in prior year. These favorable items
were offset partially by increased salaries and benefits due primarily to merit increases
and incentive payouts related to storm support. Other costs at the Holding Company
decreased $11 million compared to prior year due primarily to the impact of the
retroactive reallocation of Service Company costs in the prior year. Other expenses for
the prior year included $5 million in expenses based on the reallocation. An additional
$3 million of favorability at the Holding Company is a result of a reduction of other
taxes of approximately $3 million related to a 2003 assessment received from the South
Carolina Department of Revenue which reduced the South Carolina license fee. These
favorable items were offset by an increase in depreciation at the Service Company due to
assets being placed in service.

DISCONTINUED OPERATIONS

In 2002, the Company approved the
sale of NCNG to Piedmont Natural Gas Company, Inc. The sale closed on September 30, 2003.
Net proceeds of approximately $443 million from the sale of NCNG were used to reduce
outstanding short-term debt. NCNG contributed $19 million of net loss for the three
months ended September 30, 2003. NCNG contributed $1 million of net income for the nine
months ended September 30, 2004 compared to $5 million net loss for the comparable prior
year period. During the nine months ended September 30, 2004, the Company recorded a
reduction to the loss on the sale of NCNG of approximately $1 million after-tax related
to deferred taxes.

LIQUIDITY AND CAPITAL RESOURCES

Progress Energy, Inc.

Progress Energy is a registered
holding company and, as such, has no operations of its own. As a holding company,
Progress Energys primary cash needs are funding its common dividend and interest
expense. The ability to meet its cash needs is primarily dependent on the earnings and
cash flows of its two electric utilities and nonregulated subsidiaries, and the ability
of those subsidiaries to pay dividends or repay funds to Progress Energy.

Net cash provided by operating
activities of $1.3 billion decreased $114 million for the nine months ended September 30,
2004, when compared to the corresponding period in the prior year. The decrease in cash
flow from operating activities for the 2004 period is primarily due to the impact of
hurricane costs at PEF during the third quarter.

Net cash used in investing activities
of $889 million decreased $181 million for the nine months ended September 30, 2004, when
compared to $1.1 billion in the corresponding period in the prior year. The decrease is
primarily due to reduced nonregulated capital expenditures, primarily the purchase of
North Texas Gas assets and a long-term power supply contract during the first nine months
of 2003.

Between October 19, 2004 and November
1, 2004, Progress Energy and its subsidiaries PEC and PEF borrowed a net total of $535
million ($365 million by Progress Energy; $115 million by PEC; and $55 million by PEF)
under certain long-term revolving credit facilities. In addition, PEF and PEC borrowed
$170 million and $90 million, respectively, under their short-term credit facilities.
Each of these credit facilities contains various cross default and other acceleration
provisions. The borrowed funds will be used to pay off maturing commercial paper and for
other cash needs. This action was taken due to the uncertain impact on Progress Energys,
PECs, and PEFs ability to access the commercial paper markets resulting from
recent ratings actions taken by Standard and Poors (S&P) credit
rating agency and Moodys Investor Services (Moodys).

On October 19, 2004, S&P changed
Progress Energys outlook from stable to negative. S&P cited the uncertainties
regarding the timing of the recovery of hurricane costs, the Companys debt
reduction plans, and the IRS audit of the Companys Earthco synthetic fuels
facilities as the reasons for the change in outlook. On October 25, 2004, S&P reduced
the short-term debt rating of Progress Energy, PEC and PEF to A-3 from A-2, as a result
of their change in outlook discussed above.

On October 20, 2004, Moodys
changed its outlook for Progress Energy from stable to negative and placed the ratings of
PEF under review for possible downgrade. PECs ratings were affirmed by Moodys.

Moodys cited the following
reasons for its change in the outlook for Progress Energy: financial ratios that are weak
for its current rating category; rising O&M, pension, benefit, and insurance costs;
and delays in executing its deleveraging plan. With respect to PEF, Moodys cited
declining cash flow coverages and rising leverage over the last several years; expected
funding needs for a large capital expenditure program; risks with regard to its upcoming
2005 rate case and the timing of hurricane cost recovery as reasons for putting its
ratings under review.

The changes by S&P and Moodys
do not trigger any debt or guarantee collateral requirements, nor do they have any
material impact on the overall liquidity of Progress Energy or any of its affiliates. To
date, Progress Energys, PECs, and PEFs access to the commercial paper
markets has not been materially impacted by the rating agencies actions. However,
the changes are expected to increase the interest rate incurred on its short-term
borrowings by 0.25% to 0.875%.

Due to the lower short-term debt
rating issued by S&P, Progress Energy, PEC and PEF may continue to borrow under their
revolving credit facilities instead of issuing commercial paper due to the difference in
investor demand for lower-rated commercial paper. While the cost of borrowing under its
revolving credit facilities is higher than commercial paper, it provides the same amount
of liquidity.

Progress Energys, PECs,
and PEFs long-term credit facilities were arranged through a syndication of
financial institutions and support their commercial paper programs. Progress Energy took
advantage of favorable market conditions and entered into a new $1.1 billion five year
line of credit, effective August 5, 2004, and expiring August 5, 2009. This facility
replaces Progress Energys $250 million 364 day line of credit and its three year
$450 million line of credit, which were both scheduled to expire in November 2004.

On July 28, 2004, PEC extended its
$165 million 364-day line of credit, which was scheduled to expire on July 29, 2004. The
line of credit will expire on July 27, 2005.

On July 1, 2004, PEF paid at maturity
$40 million 6.69% Medium-Term Notes Series B with commercial paper proceeds and cash from
operations.

On April 30, 2004, PEC redeemed $35
million of Darlington County 6.6% Series Pollution Control Bonds at 102.5% of par, $2
million of New Hanover County 6.3% Series Pollution Control Bonds at 101.5% of par, and
$2 million of Chatham County 6.3% Series Pollution Control Bonds at 101.5% of par with
cash from operations.

On March 30, 2004, PEF extended its
$200 million 364-day line of credit. The line of credit will expire on March 29, 2005.

On March 1, 2004, Progress Energy
used available cash and proceeds from the issuance of commercial paper to pay at maturity
$500 million 6.55% senior unsecured notes. Cash and commercial paper capacity for this
retirement was created primarily from proceeds of the sale of assets and long-term debt
financings in 2003.

On February 9, 2004, Progress Capital
Holdings, Inc. paid at maturity $25 million 6.48% medium term notes with available cash
from operations.

On January 15, 2004, PEC paid at
maturity $150 million 5.875% First Mortgage Bonds with commercial paper proceeds. On
April 15, 2004, PEC also paid at maturity $150 million 7.875% First Mortgage Bonds with
commercial paper proceeds and cash from operations.

For the nine months ended September
30, 2004, the Company issued approximately 1.3 million shares of its common stock for
approximately $58 million in proceeds from its Investor Plus Stock Purchase Plan and its
employee benefit plans. For the quarter ended September 30, 2004, there were no material
stock issuances. For the nine months ended September 30, 2004 and 2003, the dividends
paid on common stock were approximately $423 million and $403 million, respectively.

The Companys filings with the
Securities and Exchange Commission provide additional discussion of the risks associated
with a credit ratings downgrade. See the Risk Factors section the Companys
Form 10-K for the year ended December 31, 2003. Also, see the Form 8-K filed November 3,
2004 for a discussion of the Companys borrowings under its revolving credit
facilities.

The amount and timing of future sales
of company securities will depend on market conditions, operating cash flow, asset sales
and the specific needs of the Company. The Company 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.

CONTRACTUAL OBLIGATION AND
OFF-BALANCE SHEET ARRANGEMENTS

As of September 30, 2004, Progress
Energys contractual cash obligations and other commercial commitments have not
changed materially from what was reported in the 2003 Annual Report on Form 10-K.

As of September 30, 2004, the current
portion of long-term debt is $348 million. Progress Energy expects to have sufficient
resources to meet its future obligations either through internally generated funds, its
short-term borrowing facilities or through the issuance of long-term debt.

Guarantees

As a part of normal business,
Progress Energy and certain wholly-owned subsidiaries enter into various agreements
providing future financial or performance assurances to third parties which are outside
the scope of Financial Accounting Standards Board (FASB) Interpretation No. 45, Guarantors
Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others (FIN 45). These agreements are entered into primarily to
support or enhance the creditworthiness otherwise attributed to Progress Energy and
subsidiaries on a stand-alone basis, thereby facilitating the extension of sufficient
credit to accomplish the subsidiariesintended commercial purposes. The Companys
guarantees include performance obligations under power supply agreements, tolling
agreements, transmission agreements, gas agreements, fuel procurement agreements and
trading operations. The Companys guarantees also include standby letters of credit,
surety bonds and guarantees in support of nuclear decommissioning. At September 30, 2004,
the Company had issued $1.3 billion of guarantees for future financial or performance
assurance. Management does 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. The recent outlook changes from S&P and Moodys do not trigger any
guarantee obligations. As of September 30, 2004, 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 the companys nonregulated
portfolio and power supply agreements were $457 million.

As of September 30, 2004, Progress
Energy had guarantees issued on behalf of third parties of approximately $10 million. See
Note 15A of the Notes to Consolidated Interim Financial Statements in Item
1, Financial Statements, for a discussion of guarantees in accordance with FIN 45.

OTHER MATTERS

PEF Regulatory Matters

Rate Case Settlement

In March 2002, the parties in PEFs
rate case entered into a Stipulation and Settlement Agreement (the Agreement) related to
retail rate matters. The Agreement was approved by the FPSC and is generally effective
from May 1, 2002 through December 31, 2005; provided, however, that if PEFs base
rate earnings fall below a 10% return on equity, PEF may petition the FPSC to amend its
base rates.

Hines Unit 4 Determination

PEF has determined that additional
generating capacity will be required in late 2007 and has requested approval by the FPSC
to build an additional unit at PEFs Hines Complex. On October 28, 2004, the
Prehearing order in the Hines 4 Determination of Need proceeding was issued. The order
reflects a stipulation between the FPSC Staff and the Company resolving all issues and
agreement that the FPSC should grant an affirmative Determination of Need for the
construction of a Hines Unit 4. The stipulation finds that Hines Unit 4 is needed to
maintain electric system reliability and integrity and to continue to provide adequate
electricity to its ratepayers at a reasonable cost. Hines Unit 4 will be a combined cycle
unit with a generating capacity of 461 megawatts (summer rating). The estimated total
in-service cost of Hines Unit 4 is $286 million and the unit is planned for commercial
operation in December 2007. If the actual cost is less than the estimate, customers will
receive the benefit of such cost under runs. Any costs that exceed this estimate will be
not recoverable absent extraordinary circumstances as found by the FPSC in subsequent
proceedings. The FPSC approved the final order on November 3, 2004.

Synthetic Fuels Tax Credits

Progress Energys synthetic fuel
operations are subject to numerous risks that may impact the Company, its operations, and
the value of its securities. Many of these risks are discussed in the Companys 2003
10-K, particularly the Risk Factors section. You should carefully read about these risks.

Progress Energy, through its
subsidiaries, produces a coal-based solid synthetic fuel. The production and sale of the
synthetic fuel from these facilities qualifies for tax credits under Section 29 of the
Code (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. The amount of Section 29 credits that the Company is allowed
to claim in any calendar year is limited by the amount of the Company's regular federal income tax liabiilty.
Synthetic fuel tax credit amounts allowed but not
utilized are carried forward indefinitely as deferred alternative minimum tax credits.
All of Progress Energys synthetic fuel facilities have received private letter
rulings (PLRs) from the Internal Revenue Service (IRS) with respect to their synthetic
fuel operations. These tax credits are subject to review by the IRS, and if Progress
Energy fails to prevail through the administrative or legal process, there could be a
significant tax liability owed for previously taken Section 29 credits, with a
significant impact on earnings and cash flows. Additionally, the ability to use tax
credits currently being carried forward could be denied. Total Section 29 credits
generated to date (including those generated by FPC prior to its acquisition by the
Company) are approximately $1.4 billion, of which $669 million has been used and $700
million are being carried forward as deferred alternative minimum tax credits. Also $79
million has not been recognized due to the decrease in tax liability from the 2004
hurricane damage. The current Section 29 tax credit program expires at the end of 2007.

Impact of Hurricanes

For the nine-month period ended
September 30, 2004, the Companys synthetic fuel facilities have sold 7.7 million
tons of synthetic fuel which generated an estimated $204 million of Section 29 tax
credits. Due to the anticipated decrease in the Companys tax liability as a result
of the 2004 hurricanes, the Company estimates that it will be able to use in 2004 or
carry forward to future years only $125 million of these Section 29 tax credits. As a
result, the Company has recorded a charge of $79 million due to Section 29 tax credits.
The Company is currently evaluating its options for mitigating some or all of this loss
of tax credits.

Pre-Filing Agreement Program

In September 2002, all of the Companys
majority-owned synthetic fuel entities were accepted into the IRSs Pre-filing
Agreement (PFA) program. The PFA program allows taxpayers to voluntarily accelerate the
IRS exam process in order to seek resolution of specific issues. Either the Company or
the IRS can withdraw from the program, and issues not resolved through the program may
proceed to the next level of the IRS exam process.

In February 2004, subsidiaries of the
Company finalized execution of the Colona Closing Agreement with the IRS concerning their
Colona synthetic fuel facilities. 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 IRS PFA program with
respect to Colona.

In July 2004, Progress Energy was
notified that the Internal Revenue Service (IRS) field auditors anticipate taking an
adverse position regarding the placed-in-service date of the Companys four Earthco
synthetic fuel facilities. Due to the auditors position, the IRS has decided to
exercise its right to withdraw from the Pre-Filing Agreement (PFA) program with Progress
Energy. With the IRSs withdrawal from the PFA program, the review of Progress Energys
Earthco facilities is back on the normal procedural audit path of the Companys tax
returns. Through September 30, 2004, the Company, on a consolidated basis, has used or
carried forward $1 billion of tax credits generated by Earthco facilities. If these
credits were disallowed, the Companys one time exposure for cash tax payments would
be $286 million (excluding interest), and earnings and equity would be reduced by $1
billion, excluding interest. Progress Energys $1.13 billion credit facility
includes a covenant which limits the maximum debt-to-total capital ratio to 65%. This
ratio includes other forms of indebtedness such as guarantees issued by PGN, letters of
credit and capital leases. As of September 30, 2004, the Companys debt-to-total
impact was 60.6% based on the credit agreement definition for this ratio. The impact on
this ratio of reversing $1 billion of tax credits and paying $286 million for taxes would
be to increase the ratio to 64.4%.

On October 29, 2004, Progress Energy
received the IRS field auditors report concluding that the Earthco facilities had
not been placed in service before July 1, 1998, and that the tax credits generated by
those facilities should be disallowed. The Company disagrees with the field audit teams
factual findings and believes that the Earthco facilities were placed in service before
July 1, 1998. The Company also believes that the report applies an inappropriate legal
standard concerning what constitutes placed in service. The Company intends
to contest the field auditors findings and their proposed disallowance of the tax
credits.

Because of the stark disagreement
between the Company and the field auditors as to the proper legal standard to apply, the
Company believes that it is appropriate to have this issue reviewed by the National
Office of the IRS, just as the National Office reviewed the issues involving chemical
change. The Company could go directly to the Appeals section of the IRS, but it believes
that clarification on the critical legal disagreements would help to resolve this matter.
At this point, however, the Company does not know if the field auditors will agree to
present this matter to the National Office. The Company believes that the appeals
process, including proceedings before the National Office, could take up to two years to
complete, however, it cannot control the actual timing of resolution and cannot predict
the outcome of this matter.

In managements opinion,
Progress Energy is complying with all the necessary requirements to be allowed such
credits under Section 29, and, although it cannot provide certainty, it believes that it
will prevail in these matters. Accordingly, while the Company has adjusted its synthetic
fuel production for 2004 in response to the effects of the hurricane damage on its 2004
tax liability, it has no current plans to alter its synthetic fuel production schedule
for future years as a result of the IRS field auditors report. However, should the
Company fail to prevail in these matters, there could be material liability for
previously taken Section 29 tax credits, with a material adverse impact on earnings and
cash flows.

In July 2004, the FASB stated that it
plans to issue an exposure draft of a proposed interpretation of SFAS No. 109, Accounting
for Income Taxes, that would address the accounting for uncertain tax positions.
The FASB has indicated that the interpretation would require that uncertain tax benefits
be probable of being sustained in order to record such benefits in the financial
statements. The exposure draft is expected to be issued in the fourth quarter of 2004.
The Company cannot predict what actions the FASB will take or how any such actions might
ultimately affect the Companys financial position or results of operations, but
such changes could have a material impact on the Companys evaluation and
recognition of Section 29 tax credits.

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 the Companys
synthetic fuel operations. Progress Energy is providing information in connection with
this investigation. The Company cannot predict the outcome of this matter.

Sale of Partnership Interest

In June 2004, the Company through its
subsidiary, Progress Fuels sold, in two transactions, a combined 49.8 percent partnership
interest in Colona Synfuel Limited Partnership, LLLP, one of its 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. The Companys book value of the interests sold totaled
approximately $5 million. Based on projected production and tax credit levels, the Company anticipates
receiving total gross proceeds of $10 million in 2004, approximately $30 million per year
from 2005 through 2007 and approximately $9 million through the second quarter of 2008.
In the event that the synthetic fuel tax credits at the Colona facility
are reduced, including an increase in the price of oil which could limit or eliminate
synthetic fuel tax credits, the amount of proceeds realized from the sale could be
significantly impacted. Under the agreements, the buyers had a right to unwind the
transactions if an IRS reconfirmation private letter ruling (PLR) was not received by
October 15, 2004. The reconfirmation PLR was received in September 2004. An immaterial
gain was recorded for the three months ended September 30, 2004.

Impact of Crude Oil Prices

Although the Internal Revenue Code
Section 29 tax credit program is expected to continue through 2007, recent unprecedented
and unanticipated increases in the price of oil could limit the amount of those credits
or eliminate them altogether 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 value (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 2003, the Threshold Price was $50.14 per barrel
and the Phase Out Price was $62.94 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 Average Annual Price falls in
that continuum. For example, for 2003, if the Annual Average Price had been $56.54 per
barrel, there would have been a 50% 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 2003 was published in April 2004.

Although the official notice for 2004
is not expected to be published until April of 2005, the Company does not believe that
the Annual Average Price for 2004 will reach the Threshold Price for 2004. Even with oil
prices at historic highs, oil prices would have to experience a significant and sustained
increase for the remainder of the year for the Annual Average Price to approach the
anticipated Threshold Price. Consequently, the Company does not expect the amount of its
2004 Section 29 tax credits to be adversely affected by oil prices.

The Company cannot predict with any
certainty the Annual Average Price for 2005 or beyond. Therefore, it cannot predict
whether the price of oil will have a material effect on its synthetic fuel business after
2004. However, if during 2005 through 2007, oil prices remain at historically high levels
or increase, the Companys synthetic fuel business may be adversely affected for
those years and, depending on the magnitude of such increases in oil prices, the adverse
affect for those years could be material and could have an impact on the Companys
synthetic fuel production plans.

Nuclear Matters

The United States Nuclear Regulatory
Commission (NRC) on April 19, 2004, announced that it has renewed the operating license
for PECs Robinson Nuclear Plant (Robinson) for an additional 20 years through July
2030. The original operating license of 40 years was set to expire in 2010. NRC operating
licenses held by PEC currently expire in December 2014 and September 2016 for Brunswick
Units 2 and 1, respectively. An application to extend these licenses 20 years was
submitted in October 2004. The NRC operating license held by PEC for the Shearon Harris
Nuclear Plant (Harris Plant) currently expires in October 2026. An application to extend
this license 20 years is expected to be submitted in the fourth quarter of 2006.

The NRC operating license held by PEF
for Crystal River Unit No. 3 (CR3) currently expires in December 2016. An application to
extend this license 20 years is expected to be submitted in the first quarter 2009.

On February 27, 2004, PEC requested
to have its license for the Independent Spent Fuel Storage Installation at the Robinson
Plant extended 20 years with an exemption request for an additional 20-year extension.
Its current license is due to expire in August 2006. PEC expects to receive this
extension.

During the first quarter of 2004, PEC
met the requirements of both the NCUC and the SCPSC for the implementation of a
depreciation study which allowed the utility to reduce the rates used to calculate
depreciation expense. In October 2004, PEC filed a revised depreciation study with the
NCUC and SCPSC supporting a reduction in annual depreciation expense of approximately $47
million. The reduction is due solely to extended lives at each of PECs nuclear
units. The new depreciation rates are proposed to be effective January 1, 2004.

In February 2004, the NRC issued a
revised Order for inspection requirements for reactor pressure vessel heads at PWRs. The
Company has reviewed the required inspection frequencies and has incorporated them into
long range plans. The Harris Plant will complete the required non-visual non-destructive
examination (NDE) inspection prior to February 2008. Both CR3 and Robinson will be
required to inspect their new heads within 7 years or four refueling outages after
replacement. CR3 plans to inspect its new head prior to the end of 2009, and Robinson
will need to inspect its new head prior to 2012.

The NRC has issued various orders
since September 2001 with regard to security at nuclear plants. These orders include
additional restrictions on access, increased security measures at nuclear facilities and
closer coordination with the Companys partners in intelligence, military, law
enforcement and emergency response at the federal, state and local levels. The Company is
completing the requirements as outlined in the orders by the committed dates. As the NRC,
other governmental entities and the industry continue to consider security issues, it is
possible that more extensive security plans could be required.

Franchise Litigation

Three cities, with a total of
approximately 18,000 customers, have litigation pending against PEF in various circuit
courts in Florida. As previously reported, three other cities, with a total of
approximately 30,000 customers, have subsequently settled their lawsuits with PEF and
signed new, 30-year franchise agreements. The lawsuits principally seek 1) a declaratory
judgment that the cities have the right to purchase PEFs electric distribution
system located within the municipal boundaries of the cities, 2) a declaratory judgment
that the value of the distribution system must be determined through arbitration, and 3)
injunctive relief requiring PEF to continue to collect from PEFs customers and
remit to the cities, franchise fees during the pending litigation, and as long as PEF
continues to occupy the cities rights-of-way to provide electric service,
notwithstanding the expiration of the franchise ordinances under which PEF had agreed to
collect such fees. The circuit courts in those cases have entered orders requiring
arbitration to establish the purchase price of PEFs electric distribution system
within five cities. Two appellate courts have upheld these circuit court decisions and
authorized the cities to determine the value of PEFs electric distribution system
within the cities through arbitration.

Arbitration in one of the cases (with
the 13,000-customer City of Winter Park) was completed in February 2003. That arbitration
panel issued an award in May 2003 setting the value of PEFs distribution system
within the City of Winter Park at approximately $32 million, not including separation and
reintegration costs and construction work in progress, which could add several million
dollars to the award. The panel also awarded PEF approximately $11 million in stranded
costs, which according to the award decreases over time. In September 2003, Winter Park
voters passed a referendum that would authorize the City to issue bonds of up to
approximately $50 million to acquire PEFs electric distribution system. While the
City has not yet definitively decided whether it will acquire the system, on April 26,
2004, the City Commission voted to enter into a hedge agreement to lock into interest
rates for the acquisition of the system and to proceed with the acquisition. The City
sought and received wholesale power supply bids and on June 23, 2004 executed a wholesale
power supply contract with PEF. On May 12, 2004, the City solicited bids to operate and
maintain the distribution system. The City received bids on July 1, 2004, and expects to
make its selection this year. The City has indicated that its goal is to begin electric
operations in June 2005. At this time, whether and when there will be further proceedings
regarding the City of Winter Park cannot be determined.

Arbitration with the 2,500-customer
Town of 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
the Town at approximately $6 million. The panel further required the Town to pay to PEF
its requested $1 million in separation and reintegration costs and approximately $2
million in stranded costs. The Town has not yet decided whether it will attempt to
acquire the system; however, it has indicated its intent to seek bids for wholesale power
supply and to operate and maintain the distribution system. The Town has also indicated
that it may place the issue of whether to municipalize on a referendum ballot in March
2005. At this time, whether and when there will be further proceedings regarding the Town
of Belleair cannot be determined.

Arbitration in the remaining citys
litigation (the 1,500-customer City of Edgewood) has not yet been scheduled.

A fourth city (the 7,000-customer
City of Maitland) is contemplating municipalization and has indicated its intent to
proceed with arbitration to determine the value of PEFs electric distribution
system within the City. Maitlands franchise expires in August 2005. At this time,
whether and when there will be further proceedings regarding the City of Maitland cannot
be determined.

As part of the above litigation, two
appellate courts have also reached opposite conclusions regarding whether PEF must
continue to collect from its customers and remit to the cities franchise fees under
the expired franchise ordinances. PEF has filed an appeal with the Florida Supreme Court
to resolve the conflict between the two appellate courts. The Florida Supreme Court held
oral argument in one of the appeals in August 2003. Subsequently, the Court requested
briefing from the parties in the other appeal, which was completed in November 2003. On
October 28, 2004, the court issued a decision holding that PEF must collect from its
customers and remit to the cities franchise fees during the interim period when the City
exercises its purchase option or executes a new franchise. The Courts decision
should not have a material impact on the Company.

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 solely 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 non-utility subsidiaries for the three and nine months ended September 30,
2004 and 2003 are not material to PECs consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating activities
decreased $72 million for the nine months ended September 30, 2004, when compared to the
corresponding period in the prior year. The decrease was caused primarily by a $57
million underrecovery of fuel costs.

Net cash used in investing activities
of $442 million increased $48 million for the nine months ended September 30, 2004, when
compared to $394 million in the corresponding period in the prior year. The increase was
due primarily to higher capital spending associated with clean air compliance projects
and increased spending for nuclear fuel.

Between October 19, 2004 and November
1, 2004, PEC borrowed a net total of $115 million under certain long-term revolving
credit facilities. In addition, PEC borrowed $90 million under its short-term credit
facilities. The credit facilities contain various cross default and other acceleration
provisions. PECs long-term credit facilities were arranged through a syndication of
financial institutions and support its commercial paper programs.

The borrowed funds will be used to
pay off maturing commercial paper and for other cash needs. This action was taken due to
the uncertain impact on PECs ability to access the commercial paper markets
resulting from recent ratings actions taken by Standard and Poors (S&P)
credit rating agency and Moodys Investor Services (Moodys).

On October 19, 2004, S&P changed
Progress Energys outlook from stable to negative. S&P cited the uncertainties
regarding the timing of the recovery of hurricane costs, the Companys debt
reduction plans, and the IRS audit of the Companys Earthco synthetic fuels
facilities as the reasons for the change in outlook. On October 25, 2004, S&P reduced
the short-term debt rating of PEC to A-3 from A-2, as a result of their change in outlook
discussed above.

On October 20, 2004, Moodys
changed its outlook for Progress Energy from stable to negative. PECs ratings were
affirmed by Moodys.

The changes by S&P do not trigger
any debt or guarantee collateral requirements, nor do they have any material impact on
the overall liquidity of PEC. To date, PECs access to the commercial paper markets
has not been materially impacted by the rating agencies actions. However, the
changes are expected to increase the interest rate incurred on its short-term borrowings
by 0.25% to 0.875%.

Due to the lower short-term debt
rating issued by S&P, PEC may continue to borrow under its revolving credit facilities
instead of issuing commercial paper due to the difference in investor demand for
lower-rated commercial paper. While the cost of borrowing under its revolving credit
facilities is higher than commercial paper, it provides the same amount of liquidity.

On July 28, 2004, PEC extended its
$165 million 364-day line of credit, which was scheduled to expire on July 29, 2004. The
line of credit will expire on July 27, 2005.

On April 30, 2004, PEC redeemed $35
million of Darlington County 6.6% Series Pollution Control Bonds at 102.5% of par, $2
million of New Hanover County 6.3% Series Pollution Control Bonds at 101.5% of par, and
$2 million of Chatham County 6.3% Series Pollution Control Bonds at 101.5% of par with
cash from operations.

On January 15, 2004, PEC paid at
maturity $150 million 5.875% First Mortgage Bonds with commercial paper proceeds. On
April 15, 2004, PEC also paid at maturity $150 million 7.875% First Mortgage Bonds with
commercial paper proceeds and cash from operations.

PECs filings with the
Securities and Exchange Commission provide additional discussion of the risks associated
with a credit ratings downgrade. See the Risk Factors section the PECs
Form 10-K for the year ended December 31, 2003. Also, see the Form 8-K filed November 3,
2004 for a discussion of PECs borrowings under its revolving credit facilities. PEC
expects to have sufficient resources to meet its future obligations either through
internally generated funds, its short term-term borrowing facilities or through the
issuance of long-term debt.

Guarantees

As a part of normal business, PEC
enters into various agreements providing future financial or performance assurances to
third parties, which are outside the scope of Financial Accounting Standards Board (FASB)
Interpretation No. 45, Guarantors Accounting and Disclosure Requirements for
Guarantees, Including Indirect Guarantees of Indebtedness of Others (FIN 45). Such
agreements include guarantees, standby letters of credit and surety bonds. At September
30, 2004, management does 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
Consolidated Balance Sheets. At September 30, 2004, PEC had no guarantees issued on
behalf of unconsolidated subsidiaries or other third parties. See discussion in Note 11
to the Consolidated Interim Financial Statements.

Contractual Obligations and
Off-Balance Sheet Arrangements

As of September 30, 2004, PECs
contractual cash obligations and other commercial commitments have not changed materially
from what was reported in the 2003 Annual Report on Form 10-K.

As of September 30, 2004, the current
portion of long-term debt is $300 million. PEC expects to have sufficient resources to
meet its future obligations either through internally generated funds, its short-term
borrowing facilities or through the issuance of long-term debt.

---

Item 3.  Quantitative and Qualitative
Disclosures About Market Risk

Progress Energy, Inc.

Other than described below, the
various risks that the Company is exposed to has not materially changed since December
31, 2003.

Market risk represents the potential
loss arising from adverse changes in market rates and prices. Certain market risks are
inherent in the Companys financial instruments, which arise from transactions
entered into in the normal course of business. The Companys primary exposures are
changes in interest rates with respect to its long-term debt and commercial paper, and
fluctuations in the return on marketable securities with respect to its nuclear
decommissioning trust funds. The Company manages its market risk in accordance with its
established risk management policies, which may include entering into various derivative
transactions.

Marketable Securities Price Risk

The Companys exposure to return
on marketable securities for the nuclear decommissioning trust funds has not changed
materially since December 31, 2003.

CVO Market Value Risk

The Companys exposure to market
value risk with respect to the CVOs has not changed materially since December 31, 2003.
The CVOs are recorded at fair value and unrealized gains and losses from changes in fair
value are recognized in earnings. At September 30, 2004 and December 31, 2003, the fair
value of these CVOs was $16 million and $23 million, respectively.

Interest Risk

Progress Energy uses 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 are determined as of the end
of the reporting period using the Bloomberg Financial Markets system.

The exposure to changes in interest
rates on the Companys fixed rate and variable rate long-term debt at September 30,
2004 has changed from December 31, 2003. The total fixed rate long-term debt at September
30, 2004 was $8.8 billion, with an average interest rate of 6.56% and fair market value
of $9.4 billion. The total variable rate long-term debt at September 30, 2004, was $1.1
billion, with an average interest rate of 1.8% and fair market value of $1.1 billion.

The Company maintains a portion of
its outstanding debt with floating interest rates. As of September 30, 2004 approximately
20% of consolidated debt was in floating rate mode compared to 18% at December 31, 2003.

Progress Energy uses interest rate
derivative instruments to adjust the fixed and variable rate debt components of its debt
portfolio and to hedge interest rates with regard to future fixed rate debt issuances. In
accordance with FAS 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 market 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 a counter party, the risk in the transaction is the cost of replacing the
agreements at current market rates. Progress Energy only enters into interest rate
derivative agreements with banks with credit ratings of single A or better.

Fair Value Hedges:

As of September 30, 2004, Progress
Energy had $500 million of fixed rate debt swapped to floating rate debt by executing
receive fixed interest rate swap agreements. Under terms of these swap agreements,
Progress Energy will receive a fixed rate and pay a floating rate based on 3-month LIBOR.
In November 2004, Progress Energy terminated $350 million notional amount of swaps against the
6.05% notes due April 15, 2007.

|Fair Value Hedges (dollars in millions)
Progress Energy, Inc.
as of September 30, 2004 |  |       |  |   |        
|-------------------------------------------------------------------------------------- |  | ----- |  | - | -------
|
|                                                                                      
|6.05% Notes due 4/15/2007                                                              |  | $350  |  | 3 | .35%   
|5.85% Notes due 10/30/2008                                                             |  | $100  |  | 4 | .10%   
|7.10% Notes due 3/1/2011                                                               |  | $  50 |  | 4 | .65%   
|Total                                                                                  |  | $500  |  | 3 | .63%(a)
|as of December 31, 2003                                                                | 
|                                                                                      
|Risk hedged                                                                            | 
|6.75% Notes due 3/1/2006                                                               |  | $300  |  | 2 | .75%   
|6.05% Notes due 4/15/2007                                                              |  | $350  |  | 3 | .35%   
|5.85% Notes due 10/30/2008                                                             |  | $200  |  | 2 | .93%   
|Total                                                                                  |  | $850  |  | 3 | .04%(a)

(a)Weighted average
rate

(b)3-month LIBOR rate was 2.02% at
September 30, 2004 and 1.15% at December 31,           2003.

(c) Exposure indicates
change in value due to 25 basis point           unfavorable shift in interest rates.

Cash Flow Hedges:

As of September 30, 2004, Progress
Energy Inc. did not have any outstanding cash flow hedges. As of December 31, 2003,
Progress Energy had $400 million notional amount of payer swaptions where the Company has
the right, but not the obligation, to enter a pay-fixed swap and receive 3-month LIBOR,
to hedge LIBOR exposure on future commercial paper issues for the period from 2005
through 2008. These swaptions were terminated in the second quarter of 2004 resulting in
an immaterial loss that will be amortized over the period from 2005 through 2008.

As of September 30, 2004, PEC had
$136 million of pay-fixed forward starting swaps in place to hedge cash flow risk due to
future financing transactions. Under terms of these swap agreements, Progress Energy will
receive a fixed rate and pay a floating rate based on 3-month LIBOR.

As of September 30, 2004 Progress
Ventures, Inc. (PVI) a wholly-owned subsidiary of Progress Energy, had $195 million notional
amount of interest rate collars in place to hedge floating interest rate exposure
associated with variable-rate long-term debt. PVI is required to hedge 50% of the
amount outstanding under its bank facility through March 2007.

|Cash Flow Hedges (dollars in millions)
Progress Energy, Inc.
as of September 30, 2004 | None |      |  |   |     
|------------------------------------------------------------------------------------- | ---- | ---- |  | - | ----
|                                                                                     
|
|                                                                                     
|
|Commercial Paper interest risk                                                        |      | $400 |  | 4 | .75%
|from 2005 through 2008                                                                |     

|Progress Energy Carolinas
as of September 30, 2004 |  |                 |      |         |        
|-------------------------------------------------- |  | --------------- | ---- | ------- | -------
|                                                  
|
|Risk hedged                                        |  | Notional Amount |      | Receive | (b)    
|Anticipated 10-Year Debt Issue                     |  | $110            |      | 4       | .85%   
|Rail car lease payment                             |  | $  26           |      | 5       | .17%   
|Total                                              |  | $136            |      | 4       | .91%(a)
|as of December 31, 2003                            |  |                 | None
|                                                  
|Progress Energy Ventures                           | 
|as of September 30, 2004                           | 
|                                                  
|Risk hedged                                        |  | Notional Amount |      | Receive | (b)    
|Libor exposure 6/22/03 to 12/21/04                 |  | $195            |      | 6       | .0%    
|Libor exposure 12/22/04 to 3/16/07                 |  | $130            |      | 6       | .5%    
|Total                                              |  | N/A             | (d)  |         |        
|as of December 31, 2003                            | 
|                                                  
|Risk hedged                                        | 
|Libor exposure 6/22/03 to 12/21/04                 |  | $195            |      | 6       | .0%    
|Libor exposure 12/22/04 to 3/16/07                 |  | $130            |      | 6       | .5%    
|Total                                              |  | N/A             | (d)  |         |        

(a)Weighted
average rate

(b)3-month LIBOR rate was
2.02% at September 30, 2004 and 1.15% at December 31, 2003.

(c)Exposure indicates
change in value due to 25 basis point unfavorable shift in interest rates.

(d)Notional amounts are
not additive because instruments do not cover the same time period.

Commodity Price Risk

Nonhedging Derivatives:

Nonhedging derivatives, primarily
electricity and natural gas contracts, are entered into 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.

Since December 31, 2003, PEF has
entered into derivative instruments related to its exposure to price fluctuations on fuel
oil purchases. At September 30, 2004, the fair value of these instruments was an $11
million asset position. These instruments receive regulatory accounting treatment. Gains are recorded
in regulatory liabilities and losses are recorded in regulatory assets.

Cash Flow Hedges:

Progress Fuels Corporation
periodically enters into derivative instruments to hedge its exposure to price
fluctuations on natural gas sales. As of September 30, 2004, Progress Fuels Corporation
is hedging exposures to the price variability of portions of its natural gas production
through December 2005.

The fair values of cash flow hedges
at September 30, 2004 and December 31, 2003 were as follows:

|                          | Progress Fuels
|------------------------- | --------------
|                         
|
|                         
|Fair value of assets      |               
|Fair value of liabilities |               
|                         
|Fair value, net           |               
|                         

The ineffective  portion of commodity
cash flow hedges for the three and nine month periods ending  September 30, 2004 was not
         material to the Company's  results of operations.  At September 30, 2004, there
were $25 million of after-tax  deferred losses          in accumulated other comprehensive income (OCI),  of which  $21  million
 are  expected  to be  reclassified  to  earnings  during  the next 12  months  as the
 hedged          transactions  occur.  Due to the  volatility of the  commodities
 markets,  the value in OCI is subject to change prior to its          reclassification
into earnings.

Progress Energy Carolinas, Inc.

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,  and  fluctuations  in
the return on marketable  securities  with respect to its nuclear  decommissioning  trust
funds.          PEC's exposure to these risks has not materially changed since December
31, 2003.

---

Item 4:  Controls and Procedures

Progress Energy, Inc.

Pursuant to the  Securities  Exchange
Act of 1934,  Progress  Energy  carried out an  evaluation,  with the  participation  of
         Progress  Energy's  management,  including  Progress  Energy's  President and
Chief  Executive  Officer,  and Chief  Financial          Officer,  of the  effectiveness
 of Progress  Energy'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,  Progress  Energy's          President and Chief
Executive Officer,  and Chief Financial Officer concluded that Progress Energy's
 disclosure  controls and          procedures  are  effective  in timely  alerting  them
to  material  information  relating to Progress  Energy  (including  its
         consolidated subsidiaries) required to be included in Progress Energy's periodic
SEC filings.

There has been no change identified
in Progress  Energy's  internal control over financial  reporting during the quarter
ended          September 30, 2004 that has materially  affected,  or is reasonably
 likely to materially  affect,  Progress Energy's internal          control over
financial reporting.

Progress Energy Carolinas, Inc.

Pursuant to the Securities  Exchange
Act of 1934, PEC carried out an evaluation,  with the  participation of PEC's management,
         including PEC's President 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 President and Chief
Executive  Officer,  and Chief  Financial  Officer  concluded          that PEC's
disclosure  controls and procedures are effective in timely alerting them to material
 information  relating to PEC          (including its consolidated subsidiaries) required
to be included in PEC's periodic SEC filings.

There has been no change  identified
in PEC's internal  control over financial  reporting  during the quarter ended  September
         30, 2004 that has materially  affected,  or is reasonably likely to materially
 affect,  PEC'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. See Note 15 to the  Progress  Energy,  Inc.
 Consolidated          Interim Financial Statements and Note 11 to the PEC's Consolidated
Interim Financial Statements.

|1. | U.S.
Global,  LLC v. Progress Energy,  Inc. et al, Case No.  03004028-03 and Progress  Synfuel
 Holdings,  Inc. et al, v. U.S.                   Global, LLC, Case No. 03004028-03
|-- | ----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

A number of Progress  Energy,  Inc.
 subsidiaries  and affiliates are parties to two lawsuits arising out of an Asset
Purchase          Agreement  dated as of October 19,  1999,  by and among U.S.  Global
LLC  (Global),  Earthco,  certain  affiliates  of Earthco          (collectively  the
Earthco Sellers),  EFC Synfuel LLC (which is owned indirectly be Progress Energy,  Inc.)
and certain of its          affiliates,  including  Solid Energy LLC, Solid Fuel LLC,
 Ceredo  Synfuel LLC, Gulf Coast Synfuel LLC (currently  named Sandy          River
Synfuel LLC) (collectively the Progress  Affiliates),  as amended by an amendment to
Purchase Agreement as of August 23,          2000 (the Asset  Purchase  Agreement).
 Global has asserted  that pursuant to the Asset  Purchase  Agreement it is entitled to
         (1) an interest in two synthetic fuel  facilities  currently owned by the
Progress  Affiliates,  and (2) an option to purchase          additional interests in the
two synthetic fuel facilities.

The first suit, U.S. Global,  LLC v.
Progress Energy,  Inc. et al, was filed in the Circuit Court for Broward County,  Florida
         in March 2003 (the Florida Global Case).  The Florida  Global Case asserts
 claims for breach of the Asset Purchase  Agreement          and other contract and tort
claims related to the Progress  Affiliates'  alleged  interference  with Global's rights
under the          Asset  Purchase  Agreement.  The Florida  Global Case  requests an
 unspecified  amount of  compensatory  damages,  as well as          declaratory  relief.
 Following  briefing and argument on a number of dispositive  motions on successive
 versions of Global's          complaint,  on August 16, 2004,  the Progress  Affiliates
 answered the Fourth Amended  Complaint by generally  denying all of          Global's
 substantive  allegations  and  asserting  numerous  affirmative  defenses.  The  parties
 are  currently  engaged in          discovery in the Florida Global Case.

The second suit,  Progress  Synfuel
 Holdings,  Inc. et al. v. U.S. Global,  LLC, was filed by the Progress  Affiliates in
the          Superior Court for Wake County,  North Carolina seeking  declaratory  relief
 consistent with the Company's  interpretation of          the asset  Purchase  Agreement
 (the North Carolina  Global Case).  Global was served with the North  Carolina  Global
Case on          April 17, 2003.

On May 15, 2003,  Global moved to
dismiss the North Carolina  Global Case for lack of personal  jurisdiction  over Global.
 In          the  alternative,  Global  requested  that the court  decline to exercise
 its  discretion  to hear the  Progress  Affiliates'          declaratory  judgment
 action.  On August 7, 2003,  the Wake  County  Superior  court  denied  Global's  motion
to dismiss and          entered an order  staying the North  Carolina  Global  Case,
 pending the outcome of the Florida  Global  Case.  The  Progress          Affiliates
 appealed the Superior  court's order staying the case. By order dated  September 7,
2004, the North Carolina Court          of Appeals dismissed the Progress Affiliates'
appeal.

The Company cannot predict the
outcome of these matters, but will vigorously defend against the allegations.

|2. | In
re Progress Energy, Inc. Securities Litigation, Master File No. 04-CV-636 (JES)
|-- | ----------------------------------------------------------------------------------

On February 3, 2004,  Progress
Energy,  Inc. was served with a class action complaint alleging  violations of federal
security          laws in connection with the Company's  issuance of Contingent Value
Obligations  (CVOs).  The action was filed by Gerber Asset          Management LLC in the
United States  District Court for the Southern  District of New York and names Progress
 Energy,  Inc.'s          former Chairman William  Cavanaugh III and Progress  Energy,
 Inc. as defendants.  The Complaint  alleges that Progress Energy          failed to
timely  disclose the impact of the  Alternative  Minimum Tax required under  Sections
55-59 of the Internal  Revenue          Code (Code) on the value of certain CVOs issued
in connection with the Florida  Progress  Corporation  merger.  The suit seeks
         unspecified compensatory damages, as well as attorneys' fees and litigation
costs.

On March 31,  2004,  a second  class
 action  complaint  was filed by Stanley  Fried,  Raymond  X.  Talamantes  and  Jacquelin
         Talamantes  against  William  Cavanaugh III and Progress  Energy,  Inc. in the
United States  District  Court for the Southern          District of New York alleging
 violations  of federal  securities  laws arising out of the  Company's  issuance of CVOs
nearly          identical to those alleged in the February 3, 2004 Gerber Asset
 Management  complaint.  On April 29, 2004, the Honorable John          E. Sprizzo
ordered among other things that (1) the two class action cases be  consolidated,  (2)
Peak6 Capital  Management LLC          shall serve as the lead plaintiff in the
 consolidated  action,  and (3) the lead plaintiff shall file a consolidated  amended
         complaint on or before June 15, 2004.

The lead plaintiff filed a
consolidated  amended  complaint on June 15, 2004. In addition to the  allegations
 asserted in the          Gerber Asset Management and Fried complaints,  the consolidated
 amended complaint alleges that the Company failed to disclose          that excess fuel
credits  could not be carried over from one tax year into later years.  On July 30, 2004,
 the Company  filed          a motion to dismiss the complaint;  plaintiff  submitted its
opposition  brief on September 14, 2004. The Court will hear oral          argument on
the Company's motion to dismiss on November 15, 2004.

The Company cannot predict the
outcome of this matter, but will vigorously defend against the allegations.

---

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

Issuer Purchases of Equity Securities
for Third Quarter of 2004

|                           | (a) | (b)     | (c) | (d)     
|-------------------------- | --- | ------- | --- | --------
|
|                          
|July 1 - July 31           |     | 151,596 |     | $     41
|                          
|August 1 - August 31       |     | 0       |     | N/A     
|                          
|September 1 - September 30 |     | 0       |     | N/A     
|                          
|Total:                     |     | 151,596 |     | $     41
|                          

|(1) | As
of September 30, 2004, Progress Energy does not have any publicly announced
               plans or programs to purchase shares of its common stock.
|--- | -------------------------------------------------------------------------------------------------------------------------------------------------------

|(2) | 151,596
shares of our common stock were purchased in open-market transactions by
               the plan administrator satisfy share delivery requirements under
the                Progress Energy 401(k) Savings and Stock Ownership Plan.
|--- | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------

---

Item 6. Exhibits

|Exhibit
Number | Description                                                                                                                        | ProgressEnergy, Inc. | Progress Energy
Carolinas, Inc.
|-------------- | ---------------------------------------------------------------------------------------------------------------------------------- | -------------------- | -------------------------------
|31(a)          | Certifications pursuant to Section 302 of the
Sarbanes-Oxley Action of 2002 - Chairman,
President and Chief Executive Officer      | X                    | X                              
|31(b)          | Certifications pursuant to Section 302 of the
Sarbanes-Oxley Action of 2002 - Executive Vice
President and Chief Financial Officer | X                    | X                              
|32(a)          | Certifications pursuant to Section 906 of the
Sarbanes-Oxley Action of 2002 - Chairman,
President and Chief Executive Officer      | X                    | X                              
|32(b)          | Certifications pursuant to Section 906 of the
Sarbanes-Oxley Action of 2002 - Executive Vice
President and Chief Financial Officer | X                    | X                              

---

# SIGNATURES

Pursuant
to the 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.

|                       | PROGRESS ENERGY, INC.
CAROLINA POWER & LIGHT COMPANY
(Registrants)                                                                            
|---------------------- | ----------------------------------------------------------------------------------------------------------------------------------------------
|Date: November 9, 2004 | By: /s/ Geoffrey S. Chatas______________________________
Geoffrey Chatas
Executive Vice President and
Chief Financial Officer                 
|                       |                                                                                                                                               
|                       | By: /s/Robert H. Bazemore, Jr._________________________________
Robert H. Bazemore, Jr.
Vice President and Controller
Chief Accounting Officer