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

                                    FORM 10-Q

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

                For the quarterly period ended September 30, 2003

                                       OR

             [   ] TRANSITION REPORT PURSUANT TO SECTION 13 OR
                  15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

               For the transition period from        to        .
                                              ------    -------
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Commission           Exact name of registrants as specified in their charters, state of           I.R.S. Employer
File Number      incorporation, address of principal executive offices, and telephone number   Identification Number

  1-15929                                   Progress Energy, Inc.                                   56-2155481
                                        410 South Wilmington Street
                                     Raleigh, North Carolina 27601-1748
                                         Telephone: (919) 546-6111
                                   State of Incorporation: North Carolina



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


                                      NONE
Former name, former address and former fiscal year, if changed since last report)
</TABLE>

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 October 31, 2003, each
registrant had the following shares of common stock outstanding:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

  Registrant                 Description                           Shares
Progress Energy    Common Stock (Without Par Value)              245,065,096
PEC                Common Stock (Without Par Value)       159,608,055 (all of which
                                                      were held by Progress Energy, Inc.)
</TABLE>

                                       1
<PAGE>



            PROGRESS ENERGY, INC. AND PROGRESS ENERGY CAROLINAS, INC.
              FORM 10-Q - For the Quarter Ended September 30, 2003


Glossary of Terms

Safe Harbor For Forward-Looking Statements

PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements

         Consolidated Interim Financial Statements:

         Progress Energy, Inc.
         --------------------------------------------------------------
         Consolidated Statements of Income
         Consolidated Balance Sheets
         Consolidated Statements of Cash Flows
         Notes to Consolidated Interim Financial Statements

         Carolina Power & Light Company
         d/b/a Progress Energy Carolinas, Inc.
         ---------------------------------------------------------------
         Consolidated Statements of Income
         Consolidated Balance Sheets
         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.  Changes in Securities and Use of Proceeds

Item 6.  Exhibits and Reports on Form 8-K

Signatures


                                       2

<PAGE>

                                GLOSSARY OF TERMS


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

     TERM                        DEFINITION

AFUDC                       Allowance for funds used during construction
the Agreement               Stipulation and Settlement Agreement
APB No. 28                  Accounting Principles Board Opinion No. 28, "Interim Financial Reporting"
ARO                         Asset retirement obligation
Bcf                         Billion cubic feet
CCO                         Competitive Commercial Operations
the Code                    Internal Revenue Code
Colona                      Colona Synfuel Limited Partnership, L.L.L.P.
the Company                 Progress Energy, Inc. and subsidiaries
CPI                         Consumer Price Index
CR3                         Progress Energy Florida Inc.'s nuclear generating plant, Crystal River Unit No. 3
CVO                         Contingent value obligation
DIG                         Derivatives Implementation Group
DOE                         United States Department of Energy
Dt                          Dekatherm
DWM                         North Carolina Department of Environment and Natural Resources, Division of Waste
                            Management
EITF                        Emerging Issues Task Force
ENCNG                       Eastern North Carolina Natural Gas Company, formerly referred to as Eastern NC
EPA                         United States Environmental Protection Agency
FASB                        Financial Accounting Standards Board
FDEP                        Florida Department of Environment and Protection
Federal Circuit             United States Circuit Court of Appeals
FERC                        Federal Energy Regulatory Commission
FIN No. 46                  FASB Interpretation No. 46, "Consolidation of Variable Interest Entities - An
                            Interpretation of ARB No. 51"
Florida Progress or FPC     Florida Progress Corporation
FPSC                        Florida Public Service Commission
Funding Corp.               Florida Progress Funding Corporation
GAAP                        Accounting principles generally accepted in the United States of America
Genco                       Progress Genco Ventures, LLC
IRS                         Internal Revenue Service
Jackson                     Jackson Electric Membership Corp.
MACT                        Maximum Available Control Technology
Mesa                        Mesa Hydrocarbons, LLC
MGP                         Manufactured gas plant
MW                          Megawatt
NCNG                        North Carolina Natural Gas Corporation
NCUC                        North Carolina Utilities Commission
NOx                         SIP Call EPA rule which requires 23 jurisdictions including North and South
                            Carolina and Georgia to further reduce nitrogen oxide emissions
NRC                         United States Nuclear Regulatory Commission
NSP                         Northern States Power
PCH                         Progress Capital Holdings, Inc.
PEC                         Progress Energy Carolinas, Inc., formerly referred to as Carolina Power & Light Company
PEF                         Progress Energy Florida, Inc., formerly referred to as Florida Power Corporation
PFA                         IRS Prefiling Agreement
the Plan                    Revenue Sharing Incentive Plan
PLRs                        Private Letter Rulings
Preferred Securities        FPC-obligated mandatorily redeemable preferred securities of FPC Capital I
Progress Energy             Progress Energy, Inc.
Progress Rail               Progress Rail Services Corporation
Progress Telecom            Progress Telecommunications Corporation

                                       3

<PAGE>

Progress Ventures           Business unit of Progress Energy primarily made up of nonregulated energy generation,
                            gas, coal and synthetic fuel operations and energy marketing
PUHCA                       Public Utility Holding Company Act of 1935, as amended
PVI                         Legal entity of Progress Ventures, Inc., formerly referred to as CPL Energy Ventures, Inc.
PWR                         Pressurized water reactor
RAFT                        Railcar Asset Financing Trust
Rail                        Rail Services
RTO                         Regional Transmission Organization
SCPSC                       Public Service Commission of South Carolina
SEC                         United States Securities and Exchange Commission
Section 29                  Section 29 of the Internal Revenue Code
Section 42                  Section 42 of the Internal Revenue Code
Service Company             Progress Energy Service Company, LLC
SFAS No. 5                  Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies"
SFAS No. 71                 Statement of Financial Accounting Standards No. 71, "Accounting for the Effects of
                            Certain Types of Regulation"
SFAS No. 131                Statement of Financial Accounting Standards No. 131, "Disclosures about Segments of an
                            Enterprise and Related Information"
SFAS No. 133                Statement of Financial Accounting Standards No. 133, "Accounting for Derivative and
                            Hedging Activities"
SFAS No. 142                Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible
                            Assets"
SFAS No. 143                Statement of Financial Accounting Standards No. 143, "Accounting for Asset Retirement
                            Obligations"
SFAS No. 148                Statement of Financial Accounting Standards No. 148, "Accounting for Stock-Based
                            Compensation - Transition and Disclosure - An Amendment of FASB Statement No. 123"
SFAS No. 149                Statement of Financial Accounting Standards No. 149, "Amendment of Statement 133 on
                            Derivative Instruments and Hedging Activities"
SFAS No. 150                Statement of Financial Accounting Standards No. 150, "Accounting for Certain Financial
                            Instruments with Characteristics of Both Liabilities and Equity"
SMD NOPR                    Notice of Proposed Rulemaking in Docket No. RM01-12-000, Remedying Undue Discrimination
                            through Open Access Transmission and Standard Market Design
SRS                         Strategic Resource Solutions Corporation
the Trust                   FPC Capital I Trust
Westchester                 Westchester Gas Company
</TABLE>

                                       4

<PAGE>

                   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-heading "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) 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;  the impact of recent events in the
energy markets that have  increased the level of public and regulatory  scrutiny
in the energy industry and in the capital markets; 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;  recurring seasonal  fluctuations
in demand for electricity;  fluctuations in the price of energy  commodities and
purchased  power;  economic  fluctuations  and the  corresponding  impact on the
Company's  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  and PEC;  the  ability of the
Company  and PEC to  maintain  their  current  credit  ratings;  the  impact  of
derivative  contracts used in the normal course of business;  the outcome of the
IRS's audit and inquiry into the  availability and use of 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 fuels businesses; the continued
depressed state of the telecommunications  industry and the Company's ability to
realize future returns from Progress Telecommunications Corporation and Caronet,
Inc.; the Company's  ability to successfully  integrate  newly acquired  assets,
properties  or  businesses  into its  operations  as quickly or as profitably as
expected;  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;   and
unanticipated  changes in operating expenses and capital  expenditures.  Most of
these risks similarly impact the Company's subsidiaries including PEC.

These and other risk  factors  are  detailed  from time to time in the  Progress
Energy and PEC 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, 2002, which
were filed with the SEC on March 21, 2003, and PEC's Form 8-K filed on September
8, 2003. 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.

                                       5
<PAGE>

                          PART I. FINANCIAL INFORMATION


Item 1.  Financial Statements

                              Progress Energy, Inc.
                    CONSOLIDATED INTERIM FINANCIAL STATEMENTS
                               September 30, 2003
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

CONSOLIDATED STATEMENTS OF INCOME
                                                               Three Months Ended            Nine Months Ended
(Unaudited)                                                       September 30,                September 30,
----------------------------------------------------------------------------------------------------------------------

(In thousands except per share data)                          2003           2002            2003            2002
----------------------------------------------------------------------------------------------------------------------
Operating Revenues
   Utility                                                 $ 1,914,004    $ 1,908,817     $ 5,150,678     $ 5,007,321
   Diversified business                                        526,762        403,562       1,418,800       1,103,707
----------------------------------------------------------------------------------------------------------------------
      Total Operating Revenues                               2,440,766      2,312,379       6,569,478       6,111,028
----------------------------------------------------------------------------------------------------------------------
Operating Expenses
Utility
   Fuel used in electric generation                            488,607        448,960       1,293,561       1,185,769
   Purchased power                                             254,627        269,108         667,194         675,066
   Operation and maintenance                                   368,769        325,495       1,067,848       1,000,827
   Depreciation and amortization                               220,136        205,922         663,819         628,295
   Taxes other than on income                                  107,222        104,989         304,499         294,217
Diversified business
   Cost of sales                                               433,817        365,481       1,219,934       1,072,818
   Depreciation and amortization                                45,333         28,563         111,751          86,625
   Impairment of long-lived assets                                   -        304,986               -         304,986
   Other                                                        42,739         58,655         128,082         114,937
----------------------------------------------------------------------------------------------------------------------
        Total Operating Expenses                             1,961,250      2,112,159       5,456,688       5,363,540
----------------------------------------------------------------------------------------------------------------------
Operating Income                                               479,516        200,220       1,112,790         747,488
----------------------------------------------------------------------------------------------------------------------
Other Income (Expense)
   Interest income                                               2,166          3,293           8,464          11,673
   Impairment of investments                                         -        (25,011)              -         (25,011)
   Other, net                                                   (3,067)        10,806         (14,950)         14,249
----------------------------------------------------------------------------------------------------------------------
        Total Other Income (Expense)                              (901)       (10,912)         (6,486)            911
----------------------------------------------------------------------------------------------------------------------
Interest Charges
   Net interest charges                                        146,006        142,242         461,774         482,571
   Allowance for borrowed funds used during construction        (1,932)          (624)         (7,041)         (7,530)
----------------------------------------------------------------------------------------------------------------------
        Total Interest Charges, Net                            144,074        141,618         454,733         475,041
----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations before Income Tax            334,541         47,690         651,571         273,358
Income Tax Benefit                                              (3,112)      (109,383)        (33,258)       (129,710)
----------------------------------------------------------------------------------------------------------------------
Income from Continuing Operations                              337,653        157,073         684,829         403,068
Discontinued Operations, Net of Tax                            (18,691)        (5,139)         (4,888)          2,013
----------------------------------------------------------------------------------------------------------------------
Net Income                                                 $   318,962    $   151,934     $   679,941     $   405,081
----------------------------------------------------------------------------------------------------------------------
Average Common Shares Outstanding                              239,025        216,079         236,183         214,700
----------------------------------------------------------------------------------------------------------------------
Basic Earnings per Common Share
    Income from Continuing Operations                           $ 1.42         $ 0.72          $ 2.90          $ 1.88
    Discontinued Operations, Net of Tax                        ($ 0.08)       ($ 0.01)        ($ 0.02)         $ 0.01
    Net Income                                                  $ 1.34         $ 0.71          $ 2.88          $ 1.89
----------------------------------------------------------------------------------------------------------------------
Diluted Earnings per Common Share
    Income from Continuing Operations                           $ 1.42         $ 0.71          $ 2.89          $ 1.87
    Discontinued Operations, Net of Tax                        ($ 0.08)       ($ 0.01)        ($ 0.02)         $ 0.01
    Net Income                                                  $ 1.34         $ 0.70          $ 2.87          $ 1.88
----------------------------------------------------------------------------------------------------------------------

----------------------------------------------------------------------------------------------------------------------
Dividends Declared per Common Share                             $0.560         $0.545          $1.680          $1.635
----------------------------------------------------------------------------------------------------------------------
</TABLE>

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

                                       6
<PAGE>
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Progress Energy, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands except share data)                                         September 30,           December 31,
Assets                                                                       2003                   2002
---------------------------------------------------------------------------------------------------------------
     Utility Plant
  Utility plant in service                                              $   21,198,711          $   20,152,787
  Accumulated depreciation                                                 (10,162,434)            (10,480,880)
---------------------------------------------------------------------------------------------------------------
     Utility plant in service, net                                          11,036,277               9,671,907
  Held for future use                                                           13,177                  15,109
  Construction work in progress                                                862,125                 752,336
  Nuclear fuel, net of amortization                                            219,574                 216,882
---------------------------------------------------------------------------------------------------------------
             Total Utility Plant, Net                                       12,131,153              10,656,234
---------------------------------------------------------------------------------------------------------------
     Current Assets
  Cash and cash equivalents                                                    100,146                  61,358
  Accounts receivable                                                          813,110                 737,369
  Unbilled accounts receivable                                                 190,867                 225,011
  Inventory                                                                    816,425                 875,485
  Deferred fuel cost                                                           327,213                 183,518
  Assets of discontinued operations                                                  -                 490,429
  Prepayments and other current assets                                         328,969                 260,804
---------------------------------------------------------------------------------------------------------------
             Total Current Assets                                            2,576,730               2,833,974
---------------------------------------------------------------------------------------------------------------
     Deferred Debits and Other Assets
  Regulatory assets                                                            649,956                 393,215
  Nuclear decommissioning trust funds                                          883,837                 796,844
  Diversified business property, net                                         2,147,456               1,884,271
  Miscellaneous other property and investments                                 446,026                 463,776
  Goodwill                                                                   3,719,327               3,719,327
  Prepaid pension costs                                                         52,575                  60,169
  Other assets and deferred debits                                             672,272                 517,182
---------------------------------------------------------------------------------------------------------------
             Total Deferred Debits and Other Assets                          8,571,449               7,834,784
---------------------------------------------------------------------------------------------------------------
           Total Assets                                                 $   23,279,332          $   21,324,992
---------------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
---------------------------------------------------------------------------------------------------------------
Common Stock Equity
  Common stock without par value, 500,000,000 shares
      authorized, 244,929,214 and 237,992,513 shares
      issued and outstanding, respectively                              $    5,223,644          $    4,929,104
  Unearned ESOP common stock                                                   (88,734)               (101,560)
  Accumulated other comprehensive loss                                        (221,603)               (237,762)
  Retained earnings                                                          2,366,769               2,087,227
---------------------------------------------------------------------------------------------------------------
        Total Common Stock Equity                                            7,280,076               6,677,009
---------------------------------------------------------------------------------------------------------------
Preferred Stock of Subsidiaries-Not Subject to Mandatory Redemption             92,831                  92,831
Long-Term Debt                                                               9,760,671               9,747,293
---------------------------------------------------------------------------------------------------------------
        Total Capitalization                                                17,133,578              16,517,133
---------------------------------------------------------------------------------------------------------------
Current Liabilities
  Current portion of long-term debt                                            868,008                 275,397
  Accounts payable                                                             566,201                 677,197
  Income taxes accrued                                                         156,928                       -
  Interest accrued                                                             135,550                 220,400
  Dividends declared                                                           136,398                 132,232
  Short-term obligations                                                             -                 694,850
  Customer deposits                                                            167,755                 158,214
  Liabilities of discontinued operations                                             -                 124,767
  Other current liabilities                                                    453,366                 429,222
---------------------------------------------------------------------------------------------------------------
        Total Current Liabilities                                            2,484,206               2,712,279
---------------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
  Accumulated deferred income taxes                                            753,423                 932,813
  Accumulated deferred investment tax credits                                  194,037                 206,221
  Regulatory liabilities                                                       548,321                 119,766
  Asset retirement obligations                                               1,242,165                       -
  Other liabilities and deferred credits                                       923,602                 836,780
---------------------------------------------------------------------------------------------------------------
        Total Deferred Credits and Other Liabilities                         3,661,548               2,095,580
---------------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 15)
---------------------------------------------------------------------------------------------------------------
           Total Capitalization and Liabilities                         $   23,279,332          $   21,324,992
---------------------------------------------------------------------------------------------------------------
</TABLE>

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

                                       7
<PAGE>

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


Progress Energy, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS                                                         Nine Months Ended
(Unaudited)                                                                                      September 30,
(In thousands)                                                                            2003                 2002
-----------------------------------------------------------------------------------------------------------------------
Operating Activities
Net income                                                                            $   679,941         $  405,081
Adjustments to reconcile net income to net cash provided by operating activities:
      (Income) loss from discontinued operations                                            4,888             (2,013)
      Impairment of long-lived assets and investments                                           -            329,997
      Depreciation and amortization                                                       852,015            835,659
      Deferred income taxes                                                              (208,260)          (313,654)
      Investment tax credit                                                               (12,184)           (14,790)
      Deferred fuel credit                                                               (143,695)           (37,290)
      Net increase in accounts receivable                                                 (91,003)           (99,777)
      Net (increase) decrease in inventories                                               62,951            (25,930)
      Net (increase) decrease in prepayments and other current assets                      43,440            (28,377)
      Net increase in accounts payable                                                    (22,049)            59,184
      Net increase in income taxes, net                                                   140,450             162,213
      Net decrease in other current liabilities                                            18,776             (52,906)
      Other                                                                               109,805             74,330
-----------------------------------------------------------------------------------------------------------------------
         Net Cash Provided by Operating Activities                                      1,435,075          1,291,727
-----------------------------------------------------------------------------------------------------------------------
Investing Activities
Gross utility property additions                                                         (759,374)          (771,309)
Diversified business property additions                                                  (475,992)          (455,102)
Nuclear fuel additions                                                                    (96,031)           (56,029)
Acquisition of businesses, net of cash                                                          -           (365,232)
Acquisition of intangibles                                                               (198,234)            (3,079)
Proceeds from sales of subsidiaries and investments                                       477,502             11,931
Other                                                                                     (37,364)           (94,861)
-----------------------------------------------------------------------------------------------------------------------
          Net Cash Used in Investing Activities                                        (1,089,493)        (1,733,681)
-----------------------------------------------------------------------------------------------------------------------
Financing Activities
Issuance of common stock, net of issuance costs                                           283,846             31,916
Issuance of long-term debt, net of issuance costs                                       1,243,046          1,770,622
Net increase (decrease) in short-term indebtedness                                       (695,899)           117,953
Net decrease in cash provided by checks drawn in excess of bank balances                  (53,476)           (37,471)
Retirement of long-term debt                                                             (699,157)        (1,045,380)
Dividends paid on common stock                                                           (403,383)          (358,978)
Other                                                                                      18,457            (31,126)
-----------------------------------------------------------------------------------------------------------------------
           Net Cash (Used In) Provided by Financing Activities                           (306,566)           447,536
-----------------------------------------------------------------------------------------------------------------------
Cash Used in Discontinued Operations                                                         (228)              (640)
-----------------------------------------------------------------------------------------------------------------------
Net Increase in Cash and Cash Equivalents                                                  38,788              4,942
Cash and Cash Equivalents at Beginning of the Period                                       61,358             53,708
-----------------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period                                        $   100,146         $   58,650
-----------------------------------------------------------------------------------------------------------------------
Supplemental Disclosures of Cash Flow Information
Cash paid during the year -  interest (net of amount capitalized)                     $   516,081         $  540,512
                          -  income taxes (net of refunds)                            $    97,301         $  109,520
</TABLE>

Noncash Activities
o    On April 26, 2002, Progress Fuels Corporation, a subsidiary of the Company,
     acquired 100% of Westchester Gas Company. In conjunction with the purchase,
     the Company issued approximately $129.0 million in common stock.

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

                                       8

<PAGE>

Progress Energy, Inc.
NOTES TO CONSOLIDATED INTERIM FINANCIAL STATEMENTS


1.   ORGANIZATION AND BASIS OF PRESENTATION

     A. Organization

     Progress  Energy,  Inc.  (Progress  Energy or the  Company) is a registered
     holding  company  under the  Public  Utility  Holding  Company  Act of 1935
     (PUHCA),  as amended.  Both the Company and its subsidiaries are subject to
     the regulatory  provisions of PUHCA.  Effective  January 1, 2003,  Carolina
     Power & Light Company,  Florida Power  Corporation  and Progress  Ventures,
     Inc. (PVI) began doing business under the names Progress Energy  Carolinas,
     Inc.  (PEC),  Progress  Energy  Florida,  Inc.  (PEF) and  Progress  Energy
     Ventures,  Inc.,  respectively.  The legal names of these entities have not
     changed,  and there was no  restructuring  of any kind  related to the name
     change.   The  current   corporate  and  business  unit  structure  remains
     unchanged.

     Through its wholly-owned subsidiaries,  PEC and PEF, the Company is engaged
     in  the  generation,  purchase,  transmission,  distribution  and  sale  of
     electricity  primarily in portions of North  Carolina,  South  Carolina and
     Florida.  The Progress  Ventures  business  unit  consists of the Fuels and
     Competitive  Commercial  Operations  (CCO)  operating  segments.  The Fuels
     operating segment includes natural gas drilling and production, coal mining
     and  synthetic  fuels  production.   The  CCO  operating  segment  includes
     nonregulated  generation  and energy  marketing  activities.  Through other
     business units, the Company engages in other  nonregulated  business areas,
     including  energy  management  and  related  services,  rail  services  and
     telecommunications.  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 complete financial  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, 2002 and notes thereto included in Progress Energy's Form 10-K
     for the year ended December 31, 2002.

     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 $35.4  million and $39.1  million for the three  months ended
     September  30,  2003  and  2002,  respectively,  in order  to  maintain  an
     effective tax rate  consistent with the estimated  annual rate.  Income tax
     expense was decreased by $40.8 million and increased  $40.5 million for the
     nine months ended September 30, 2003 and 2002, respectively.

     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 2002 have been reclassified to conform
     to the 2003 presentation.


                                       9
<PAGE>



2.   ACQUISITIONS

     During  the  first  quarter  of  2003,   Progress  Fuels   Corporation,   a
     wholly-owned  subsidiary of Progress Energy, entered into three independent
     transactions to acquire  approximately 162 natural gas-producing wells with
     proven reserves of approximately 180 billion cubic feet (Bcf) from Republic
     Energy, Inc. and two other privately-owned  companies, all headquartered in
     Texas.  The primary  assets in the  acquisitions  have been  contributed to
     Progress Fuels North Texas Gas, L.P., a wholly-owned subsidiary of Progress
     Fuels  Corporation.  The cash purchase price for the  transactions  totaled
     $148 million.

     On May 31, 2003, PVI acquired from Williams Energy Marketing and Trading, a
     subsidiary of the Williams Companies,  Inc., a long-term  full-requirements
     power supply  agreement at fixed  prices with Jackson  Electric  Membership
     Corp. (Jackson), for $188 million. See Note 7 for additional information.

3.   DIVESTITURES

     A. NCNG Divestiture

     On September 30, 2003,  the Company  completed  the sale of 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. Net proceeds from the sale were used to reduce debt.

     Based on net proceeds associated with the NCNG sale of $443.3 million,  the
     Company recorded an after-tax loss of $8.9 million during the third quarter
     of 2003. In the fourth quarter of 2002,  the Company  recorded an estimated
     after-tax loss of $29.4 million. The Company anticipates adjustments to the
     loss on the  divestiture  during  the  fourth  quarter  of 2003  related to
     employee  benefit  settlements  and the  finalization  of  other  operating
     estimates.

     The  accompanying  consolidated  interim  financial  statements  have  been
     restated for all periods presented for the discontinued operations of NCNG.
     The net income of these  operations is reported as discontinued  operations
     in the  Consolidated  Statements  of  Income.  Interest  expense  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.
     Interest  expense  allocated for the three months ended  September 30, 2003
     and 2002 was $3.3 million and $3.9 million, respectively. Amounts allocated
     for the nine months ended  September  30, 2003 and 2002 were $10.2  million
     and $11.9 million,  respectively. The Company ceased recording depreciation
     upon classification of the assets as discontinued  operations in the fourth
     quarter of 2002. After-tax depreciation expense recorded by NCNG during the
     three months ended  September 30, 2002 was $3.1 million and during the nine
     months ended  September 30, 2002 was $8.9 million.  Results of discontinued
     operations were as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                         Three Months Ended                   Nine Months Ended
                                                           September 30,                        September 30,
     (in thousands)                                    2003              2002              2003               2002
                                                  --------------     -------------    ---------------    --------------
     Revenues                                         $  59,348          $ 60,589          $ 284,389         $ 211,214
                                                  ==============     =============    ===============    ==============

     Earnings (loss) before income taxes              $ (16,108)         $ (6,527)         $   6,494         $   2,423
     Income tax expense (benefit)                        (6,313)           (1,388)             2,486               410
                                                  --------------     -------------    ---------------    --------------
     Net earnings (loss) from discontinued
          operations                                     (9,795)           (5,139)             4,008             2,013
                                                  --------------     -------------    ---------------    --------------
     Estimated loss on disposal of discontinued
          operations, including applicable income
          tax expense of $3,522                          (8,896)                 -            (8,896)                -
                                                  --------------     -------------    ---------------    --------------
     Earnings (loss) from discontinued operations     $ (18,691)         $ (5,139)         $  (4,888)        $   2,013
                                                  ==============     =============    ===============    ==============
</TABLE>

                                       10

<PAGE>



     The major  balance  sheet  classes  included in assets and  liabilities  of
     discontinued  operations in the Consolidated  Balance Sheets as of December
     31, 2002 are as follows:


     (in thousands)
     Utility plant, net                                        $ 398,931
     Current assets                                               72,821
     Deferred debits and other assets                             18,677
                                                         ---------------
          Assets of discontinued operations                    $ 490,429
                                                         ===============

     Current liabilities                                       $  76,372
     Deferred credits and other liabilities                       48,395
                                                         ---------------
          Liabilities of discontinued operations               $ 124,767
                                                         ===============

     The sale of ENCNG  resulted in net  proceeds of $7.5  million and a pre-tax
     loss of $2.2 million,  which is included in other,  net on the Consolidated
     Statements  of Income for the three and nine  months  ended  September  30,
     2003.  The  Company's  equity  investment  in ENCNG of $7.7  million  as of
     December  31,  2002  is  included  in  miscellaneous   other  property  and
     investments in the Consolidated Balance Sheets.

     B. Mesa Hydrocarbons, Inc. Divestiture

     In September  2003,  the Finance  Committee as  authorized by the Company's
     Board of Directors  adopted a resolution  approving the sale of certain gas
     producing  properties  owned  by Mesa  Hydrocarbons,  LLC,  a  wholly-owned
     subsidiary of Progress  Fuels  Corporation,  which is included in the Fuels
     segment.  The $79.7  million  book  value of the assets to be sold has been
     grouped as assets held for sale and are included in other current assets on
     the accompanying  Consolidated Balance Sheets as of September 30, 2003. The
     primary  components  of  assets  held for sale are oil and gas  leases  and
     wells.

     On October 1, 2003,  the Company  completed the sale of these  assets.  Net
     proceeds of  approximately  $97 million  will be used to reduce  debt.  The
     Company will record this transaction in the fourth quarter of 2003.

     C. Railcar Ltd. Divestiture

     In  December  2002,  the  Progress  Energy  Board of  Directors  adopted  a
     resolution  authorizing  the sale of the  majority of the assets of Railcar
     Ltd.,  a leasing  subsidiary  included  in the Rail  Services  segment.  An
     estimated  impairment  on assets held for sale was  recognized  in December
     2002 to write-down the assets to fair value less costs to sell.

     The assets of Railcar  Ltd.  have been  grouped as assets held for sale and
     are  included  in other  current  assets in the  accompanying  Consolidated
     Balance  Sheets as of September 30, 2003.  The assets are recorded at $33.1
     million and $23.6  million as of September  30, 2003 and December 31, 2002,
     respectively.

     On  March  12,  2003,  the  Company  signed  a letter  of  intent  with The
     Andersons,  Inc. to sell the majority of Railcar Ltd.  assets. A definitive
     purchase  agreement  was  signed  on  November  6,  2003  with the  buyers,
     including Cap Acquire LLC. A  significant  portion of the proceeds from the
     sale  will be used by the  Company  to pay off  certain  Railcar  Ltd.  off
     balance sheet lease  obligations  for railcars that will be  transferred to
     the buyers as part of the sales transaction. The transaction is targeted to
     close in 2003,  but is  subject  to various  closing  conditions  including
     financing.

4.   FINANCIAL INFORMATION BY BUSINESS SEGMENT

     The Company  currently  provides  services  through the following  business
     segments:  PEC Electric,  PEF,  Fuels,  Competitive  Commercial  Operations
     (CCO), Rail and Other.

     PEC  Electric  and  PEF  are  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 and the FPSC. PEC
     Electric  also  distributes  and  sells  electricity  to  other  utilities,
     primarily on the east coast of the United States.

                                       11

<PAGE>

     Fuels'  operations,  which  are  located  in  the  United  States,  include
     synthetic  fuel   operations;   natural  gas  production;   and  coal  fuel
     extraction, manufacturing and delivery.

     CCO's  operations,  which are located in the  southeastern  United  States,
     include nonregulated generation and energy marketing activities.

     Rail's operations  include railcar repair,  rail parts  reconditioning  and
     sales,  railcar  leasing  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's operations are located in the United States, Canada and Mexico.

     The Other segment,  whose operations are primarily in the United States, is
     made up of other nonregulated  business areas including  telecommunications
     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." Included in this segment's 2002 losses
     are  asset   impairments   and  certain  other   charges   related  to  the
     telecommunications operations of $224.8 million.

     Prior to 2003,  PEC  Electric  was  referred to as CP&L  Electric,  PEF was
     referred to as Florida Power Electric,  and Fuels and CCO were collectively
     referred to as Progress  Ventures.  The nature of the PEC  Electric and PEF
     segments is unchanged from previous years' reporting. With the expansion of
     the nonregulated  energy generation  facilities and the current  management
     structure, CCO is now a distinct operating segment.

     In addition to these reportable  operating segments,  the Company has other
     corporate  activities  that include  holding  company  operations,  service
     company operations and eliminations.  These corporate  activities have been
     included  in the Other  segment in the past.  Additionally,  earnings  from
     wholesale  customers of the regulated  plants have previously been reported
     in both the  regulated  utilities'  results  and the  results  of  Progress
     Ventures.  With the realignment of the reportable  business segments,  this
     activity is now included in the  regulated  utilities'  results  only.  The
     operations  of  NCNG,  previously  reported  in  the  Other  segment,  were
     reclassified to discontinued  operations and therefore were not included in
     the results from continuing  operations  during the periods  reported.  For
     comparative purposes, the 2002 results have been restated to align with the
     new business segment structure.

     The profit or loss of the  identified  segments  plus the loss of Corporate
     represents the Company's total income from continuing operations.

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

                                                                   Revenues
                                              ---------------------------------------------------      Segment
     (in thousands)                           Unaffiliated     Intersegment           Total          Profit (Loss)
                                              ------------    ---------------    ----------------    ------------
     Three Months Ended September 30, 2003
        PEC Electric                           $ 1,009,889         $        -         $ 1,009,889       $ 159,998
        PEF                                        904,115                  -             904,115         114,341
        Fuels                                      236,691            135,739             372,430          79,752
        CCO                                         66,653                  -              66,653          12,671
        Rail                                       208,795                951             209,746             706
        Other                                       14,679              3,578              18,257          (3,588)
        Corporate                                      (56)          (140,268)           (140,324)        (26,227)
                                              ------------    ---------------    ----------------    ------------
     Consolidated totals                       $ 2,440,766         $        -         $ 2,440,766       $ 337,653
                                              ------------    ---------------    ----------------    ------------

     Three Months Ended September 30, 2002
        PEC Electric                           $ 1,045,180         $        -         $ 1,045,180       $ 179,308
        PEF                                        863,637                  -             863,637         123,774
        Fuels                                      161,962            132,839             294,801          52,123
        CCO                                         44,345                  -              44,345          20,853
        Rail                                       179,712              1,282             180,994             733
        Other                                       17,543              3,562              21,105        (225,884)
        Corporate                                        -           (137,683)           (137,683)          6,166
                                              ------------    ---------------    ----------------    ------------
     Consolidated totals                       $ 2,312,379         $        -         $ 2,312,379       $ 157,073
                                              ------------    ---------------    ----------------    ------------
</TABLE>


                                       12

<PAGE>
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>


                                                                  Revenues                            Segment
                                              -----------------------------------------------
                                                                                                    Profit
     (in thousands)                           Unaffiliated   Intersegment         Total             (Loss)          Assets
                                              ------------  ---------------  ----------------    ------------    -------------
     Nine Months Ended September 30, 2003
        PEC Electric                           $ 2,751,599       $        -       $ 2,751,599       $ 383,262      $ 9,736,103
        PEF                                      2,399,079                -         2,399,079         246,457        6,048,238
        Fuels                                      639,159          380,813         1,019,972         160,139        1,117,205
        CCO                                        137,486                -           137,486          23,579        1,700,765
        Rail                                       600,344              951           601,295            (498)         595,104
        Other                                       41,758           11,214            52,972          (2,648)         279,120
        Corporate                                       53         (392,978)         (392,925)       (125,462)       3,802,797
                                              ------------  ---------------  ----------------    ------------    -------------
     Consolidated totals                       $ 6,569,478       $        -       $ 6,569,478       $ 684,829     $ 23,279,332
                                              ------------  ---------------  ----------------    ------------    -------------

     Nine Months Ended September 30, 2002
        PEC Electric                           $ 2,691,320       $        -       $ 2,691,320       $ 396,530      $ 8,785,416
        PEF                                      2,316,001                -         2,316,001         258,271        5,079,718
        Fuels                                      435,657          389,434           825,091         140,450          843,422
        CCO                                         77,291                -            77,291          25,478        1,538,285
        Rail                                       529,818            2,632           532,450           2,979          579,947
        Other                                       60,941           10,496            71,437        (239,254)         450,511
        Corporate                                        -         (402,562)         (402,562)       (181,386)       3,840,874
                                              ------------  ---------------  ----------------    ------------    -------------
     Consolidated totals                       $ 6,111,028       $        -       $ 6,111,028       $ 403,068     $ 21,118,173
                                              ------------  ---------------  ----------------    ------------    -------------
</TABLE>


5.   IMPACT OF NEW ACCOUNTING STANDARDS

     SFAS  No.  148,  "Accounting  for  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 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  Company's  information  related  to the pro  forma  impact on
     earnings and earnings per share  assuming  stock  options were expensed for
     the three and nine months ended September 30 is as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     (in millions except per share data)                              Three Months Ended           Nine Months Ended
                                                                        September 30,                 September 30,
                                                              ------------------------------  ----------------------------
                                                                   2003            2002           2003           2002
                                                              ---------------  -------------  ------------  --------------
     Net income, as reported                                        $ 318,962      $ 151,934     $ 679,941       $ 405,081
     Deduct:  Total stock option expense determined under fair
       value method for all awards, net of related tax effects          2,794          1,686         7,070           4,798
                                                              ---------------  -------------  ------------  --------------
     Pro forma net income                                           $ 316,168      $ 150,248     $ 672,871       $ 400,283
                                                              ===============  =============  ============  ==============

     Basic earnings per share
       As reported                                                     $ 1.34         $ 0.71        $ 2.88          $ 1.89
       Pro forma                                                       $ 1.33         $ 0.70        $ 2.85          $ 1.87

     Fully diluted earnings per share
       As reported                                                     $ 1.34         $ 0.70        $ 2.87          $ 1.88
       Pro forma                                                       $ 1.32         $ 0.69        $ 2.84          $ 1.86
</TABLE>

                                       13

<PAGE>

     During 2003, the Financial  Accounting  Standards Board (FASB) has approved
     certain decisions in conjunction with its stock-based compensation project.
     Some of the  key  decisions  reached  by the  FASB  were  that  stock-based
     compensation should be recognized as an expense and that the expense should
     be  measured  as of the grant date at fair  value.  The FASB  continues  to
     deliberate additional issues in this project and plans to issue an exposure
     draft in early 2004.

     Derivative Instruments and Hedging Activities
     In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
     Derivative  Instruments and Hedging  Activities."  The statement amends and
     clarifies SFAS No. 133 on accounting for derivative instruments,  including
     certain derivative instruments embedded in other contracts, and for hedging
     activities.  The new guidance  incorporates  decisions  made as part of the
     Derivatives  Implementation  Group  (DIG)  process,  as well  as  decisions
     regarding  implementation  issues raised in relation to the  application of
     the  definition  of a derivative.  SFAS No. 149 is generally  effective for
     contracts entered into or modified after June 30, 2003. Interpretations and
     implementation issues with regard to SFAS No. 149 continue to evolve. Based
     on its analysis and  understanding  to date, and  considering  the types of
     contracts  historically  entered into, the Company does not anticipate that
     this statement will have a significant  impact on its results of operations
     or financial position.

     In connection  with the January 2003 FASB Emerging Issues Task Force (EITF)
     meeting, the FASB was requested to reconsider an interpretation of SFAS No.
     133.   The   interpretation,   which  is   contained   in  the   Derivative
     Implementation  Group's C11  guidance,  relates to the pricing of contracts
     that include broad market indices (e.g., CPI). In particular, that guidance
     discusses  whether the pricing in a contract  that  contains  broad  market
     indices could qualify as a normal  purchase or sale (the normal purchase or
     sale term is a defined accounting term, and may not, in all cases, indicate
     whether the contract would be "normal" from an operating entity viewpoint).
     In late June 2003,  the FASB issued final  superseding  guidance (DIG Issue
     C20) on this issue,  which is  significantly  different  from the tentative
     superseding  guidance  that was issued in April 2003.  The new  guidance is
     effective  October 1, 2003 for the  Company.  DIG Issue C20  specifies  new
     pricing-related  criteria for qualifying as a normal  purchase or sale, and
     it requires a special transition adjustment as of October 1, 2003.

     PEC determined that it has one existing  "normal" contract that is affected
     by this revised  guidance.  The contract is a purchase power agreement with
     Broad River LLC, which is a subsidiary of Calpine Corporation.  Pursuant to
     the  provisions of DIG Issue C20, PEC will record a pre-tax fair value loss
     transition adjustment of $37.6 million in the fourth quarter of 2003, which
     will  be  reported  as a  cumulative  effect  of  a  change  in  accounting
     principle. The subject contract meets the DIG Issue C20 criteria for normal
     purchase or sale and, therefore,  was designated as a normal purchase as of
     October 1, 2003.  The liability of $37.6 million  associated  with the fair
     value  loss will be  amortized  to  earnings  over the term of the  related
     contract.

     SFAS  No.  150,   "Accounting  for  Certain   Financial   Instruments  with
     Characteristics of Both Liabilities and Equity"
     In May  2003,  the  FASB  issued  SFAS No.  150,  "Accounting  for  Certain
     Financial Instruments with Characteristics of Both Liabilities and Equity."
     SFAS 150  establishes  standards for how an issuer  classifies and measures
     certain financial  instruments with characteristics of both liabilities and
     equity. The financial  instruments within the scope of SFAS No. 150 include
     mandatorily redeemable stock, obligations to repurchase the issuer's equity
     shares by transferring  assets, and certain obligations to issue a variable
     number of shares. SFAS No. 150 is effective  immediately for such financial
     instruments  entered into or modified after May 31, 2003, and was effective
     for previously  issued  financial  instruments  within its scope on July 1,
     2003.

     The FPC  Capital I  Preferred  Securities,  as  discussed  in Note 12, were
     reported as debt prior to July 1, 2003. Therefore, the adoption of SFAS No.
     150 did not have a material impact on the Company's  financial  position or
     results of operations as of and for the periods ended September 30, 2003.

     FIN No. 46, "Consolidation of Variable Interest Entities"
     In January 2003, the FASB issued  Interpretation No. 46,  "Consolidation of
     Variable Interest Entities - an Interpretation of ARB No. 51" (FIN No. 46).
     This  interpretation  provides  guidance  related to  identifying  variable
     interest   entities  and  determining   whether  such  entities  should  be
     consolidated.  FIN No. 46 requires an enterprise to  consolidate a variable
     interest  entity when the enterprise (a) absorbs a majority of the variable
     interest entity's expected losses,  (b) receives a majority of the entity's
     expected residual returns,  or both, as a result of ownership,  contractual
     or other financial interests in the entity.  Prior to the effective date of
     FIN No. 46, entities were generally  consolidated by an enterprise that had
     control through ownership of a majority voting interest in the entity.  FIN
     No. 46  applies  immediately  to  variable  interest  entities  created  or
     obtained after January 31, 2003.  During the first nine months of 2003, the
     Company did not  participate  in the  creation of, or obtain a new variable
     interest in, any variable  interest  entity.  On October 9, 2003,  the FASB
     issued Staff Position No. FIN 46-6, which allowed for the optional deferral
     of the  effective  date of FIN No. 46 from July 1, 2003 until  December 31,
     2003, for interests held by a public company in variable  interest entities
     created prior to February 1, 2003.  Because the Company expects  additional
     transitional  guidance to be issued, it has deferred its  implementation of
     FIN No. 46 until December 31, 2003.

                                       14

<PAGE>

     The Company has entered into  arrangements  with several variable  interest
     entities through its Railcar, Ltd. subsidiary. These agreements include six
     synthetic leases with a master trust, a servicing contract with the Railcar
     Asset Financing Trust (RAFT), and a receivables  securitization transaction
     with a commercial  paper conduit.  Because the Company expects to divest of
     its interests in all of these arrangements in 2003, the adoption of FIN No.
     46  related  to  these  variable  interests  is  not  expected  to  have  a
     significant  effect on the  Company's  financial  position  or  results  of
     operations.  If the  Company  does not divest of its  interests  in 2003 as
     expected,  under the current  guidance the Company  would  consolidate  the
     master  trust  and  record  an  increase  in both  total  assets  and total
     liabilities of approximately  $25.8 million.  As of September 30, 2003, the
     maximum  cash  obligations  under  all  three of these  arrangements  total
     approximately $39.2 million. Management believes this maximum loss exposure
     is significantly reduced based on the current fair values of the underlying
     assets of the entities.

     Upon  adoption of FIN No. 46 as currently  issued,  the Company  expects to
     deconsolidate   the  FPC   Capital  I  Trust  (the   Trust),   which  holds
     FPC-obligated  mandatorily  redeemable  preferred securities (see Note 12).
     The Trust is a variable interest entity,  but the Company does not absorb a
     majority of the Trust's  expected  losses and  therefore is not its primary
     beneficiary.  In connection with the planned deconsolidation as of December
     31, 2003, the Company expects to record an additional  equity investment in
     the Trust of approximately $9.3 million, an increase in outstanding debt of
     approximately  $8.0  million,  and a gain  of  approximately  $1.3  million
     relating to the cumulative effect of a change in accounting principle.  See
     Note 12 for a discussion of the Company's guarantees with the Trust.

     The Company also has investments in 14 limited  partnerships  accounted for
     under the equity method for which it may be the primary beneficiary.  These
     partnerships  invest  in and  operate  low-income  housing  and  historical
     renovation  properties that qualify for federal and state tax credits.  The
     Company has not concluded  whether it is the primary  beneficiary  of these
     partnerships.  These  partnerships are partially funded with financing from
     third party  lenders,  which is secured by the assets of the  partnerships.
     The creditors of the  partnerships do not have recourse to the Company.  As
     of  September  30,  2003,  the maximum  exposure to loss as a result of the
     Company's investments for these limited partnerships is approximately $15.5
     million.   The  Company   expects  to  complete  its  evaluation  of  these
     partnerships  under FIN No. 46 during  the fourth  quarter of 2003.  If the
     Company had  consolidated  these 14 entities as of September  30, 2003,  it
     would have recorded an increase to both total assets and total  liabilities
     of approximately $45.8 million.

     The Company is also evaluating  several other potential  variable  interest
     entities  created  before January 31, 2003, for which the Company would not
     be  the  primary   beneficiary  based  on  the  current   guidance.   These
     arrangements   include  equity  investments  in  approximately  20  limited
     partnerships, limited liability corporations and venture capital funds, and
     two building leases with special purpose entities. If all of these entities
     were determined to be variable  interest  entities,  the aggregate  maximum
     loss  exposure as of  September  30, 2003 under these  arrangements  totals
     approximately  $37.3  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.  The Company  expects to
     complete  its  evaluation  of these  entities  under FIN No. 46 during  the
     fourth quarter of 2003.

     EITF Issue No. 03-04, "Accounting for `Cash Balance' Pension Plans"
     In May  2003,  the  EITF  reached  consensus  in EITF  Issue  No.  03-04 to
     specifically address the accounting for certain cash balance pension plans.
     The consensus reached in EITF Issue No. 03-04 requires certain cash balance
     pension  plans to be  accounted  for as  defined  benefit  plans.  For cash
     balance plans  described in the consensus,  the consensus also requires the
     use of the  traditional  unit credit  method for purposes of measuring  the
     benefit  obligation  and annual cost of  benefits  earned as opposed to the
     projected unit credit method.  The Company has  historically  accounted for
     its cash balance plans as defined  benefit plans;  however,  the Company is
     required  to adopt the  measurement  provisions  of EITF  03-04 at its cash
     balance plans' next  measurement date of December 31, 2003. Any differences
     in the measurement of the obligations as a result of applying the consensus
     will be reported as a component  of actuarial  gain or loss.  The effect of
     this standard on the Company is dependent on other factors that also affect
     the  determination  of  actuarial  gains  and  losses  and  the  subsequent
     amortization of such gains and losses. However, the Company does not expect
     the  adoption  of EITF  03-04 to have a material  effect on its  results of
     operations or financial position.

                                       15

<PAGE>

6.   ASSET RETIREMENT OBLIGATIONS

     SFAS No.  143,  "Accounting  for Asset  Retirement  Obligations,"  provides
     accounting  and   disclosure   requirements   for  retirement   obligations
     associated with long-lived  assets and was adopted by the Company effective
     January  1,  2003.  This  statement  requires  that  the  present  value of
     retirement  costs for which the Company has a legal  obligation be recorded
     as  liabilities  with an  equivalent  amount  added to the  asset  cost and
     depreciated over an appropriate period. The liability is then accreted over
     time by  applying  an  interest  method  of  allocation  to the  liability.
     Cumulative  accretion and accumulated  depreciation were recognized for the
     time period from the date the liability  would have been recognized had the
     provisions  of this  statement  been in effect,  to the date of adoption of
     this statement.  For assets acquired  through  acquisition,  the cumulative
     effect was based on the acquisition date.

     Upon  adoption  of SFAS No.  143,  the Company  recorded  asset  retirement
     obligations (AROs) totaling $1,182.5 million for nuclear decommissioning of
     irradiated  plant at PEC and PEF.  The Company  used an expected  cash flow
     approach  to measure  these  obligations.  This  amount  includes  accruals
     recorded prior to adoption  totaling $775.2 million,  which were previously
     recorded in accumulated  depreciation.  The related asset retirement costs,
     net of  accumulated  depreciation,  recorded upon adoption  totaled  $367.5
     million for  regulated  operations.  The adoption of this  statement had no
     impact on the income of the regulated entities,  as the effects were offset
     by the  establishment  of a  regulatory  asset and a  regulatory  liability
     pursuant to SFAS No. 71,  "Accounting  for the Effects of Certain  Types of
     Regulation." A regulatory  asset was recorded  related to PEC in the amount
     of $271.1 million,  representing  the cumulative  accretion and accumulated
     depreciation  for the time  period from the date the  liability  would have
     been  recognized had the provisions of this statement been in effect to the
     date of adoption,  less amounts previously recorded. A regulatory liability
     was recorded  related to PEF in the amount of $231.3 million,  representing
     the amount by which previously  recorded  accruals  exceeded the cumulative
     accretion and  accumulated  depreciation  for the time period from the date
     the  liability  would  have  been  recognized  had the  provisions  of this
     statement  been in effect at the date of the  acquisition  of the assets by
     Progress Energy to the date of adoption.

     Funds set aside in the Company's nuclear decommissioning trust fund for the
     nuclear  decommissioning  liability totaled $883.8 million at September 30,
     2003 and $796.8  million at December 31, 2002. In accordance  with SFAS No.
     143, unrealized gains and losses on the nuclear  decommissioning trust fund
     are  now  included  in  regulatory   liabilities  rather  than  accumulated
     depreciation.  The balances of these regulatory liabilities as of September
     30, 2003 were $84.3 million for PEC and $78.1 million for PEF.

     The Company also recorded AROs  totaling  $10.3 million for synthetic  fuel
     operations of PVI and coal mine  operations,  synthetic fuel operations and
     gas production of Progress Fuels Corporation.  The Company used an expected
     cash flow  approach to measure  these  obligations.  This  amount  includes
     accruals  recorded  prior to  adoption  totaling  $4.6  million,  which was
     previously recorded in other liabilities and deferred credits.  The related
     asset  retirement  costs,  net of accumulated  depreciation,  recorded upon
     adoption totaled $7.0 million for nonregulated  operations.  The cumulative
     effect of  initial  adoption  of this  statement  related  to  nonregulated
     operations was $1.3 million of pre-tax income,  which is included in other,
     net on the  Consolidated  Statements  of Income for the nine  months  ended
     September 30, 2003. The ongoing impact on earnings related to accretion and
     depreciation  was not  significant  for the  three  or  nine  months  ended
     September 30, 2003.

     Pro forma net income has not been presented for prior years because the pro
     forma  application of SFAS No. 143 to prior years would result in pro forma
     net income not materially different from the actual amounts reported.

     The Company has  identified  but not  recognized  AROs  related to electric
     transmission and  distribution,  gas  distribution  and  telecommunications
     assets as the result of easements  over  property not owned by the Company.
     These easements are generally  perpetual and only require retirement action
     upon  abandonment  or cessation  of use of the  property for the  specified
     purpose.  The ARO  liability  is not  estimable  for such  easements as the
     Company intends to utilize these properties indefinitely.  In the event the
     Company  decides to abandon or cease the use of a particular  easement,  an
     ARO liability would be recorded at that time.

     The utilities have  previously  recognized  removal costs as a component of
     depreciation in accordance with regulatory  treatment.  As of September 30,
     2003, the portions of such costs not  representing  AROs under SFAS No. 143
     were $908.7 million for PEC and $955.8 million for PEF. The amounts for PEC
     and  PEF are  included  in  accumulated  depreciation  on the  accompanying
     Consolidated  Balance  Sheets.  PEC  and PEF  have  collected  amounts  for
     non-irradiated  areas at nuclear  facilities,  which do not represent asset
     retirement  obligations.  The  amounts  at  September  30,  2003 were $65.7
     million  for  PEC  and  $61.5  million  for  PEF,  which  are  included  in
     accumulated  depreciation on the accompanying  Consolidated Balance Sheets.
     PEF previously collected amounts for dismantlement of its fossil generation
     plants. As of September 30, 2003, this amounted to $142.4 million, which is
     included  in  accumulated  depreciation  on the  accompanying  Consolidated
     Balance  Sheets.  This  collection was suspended  pursuant to the rate case
     settlement discussed in Note 13A.

                                       16

<PAGE>

     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 initially denied the deferral of
     the ongoing effects. During the second quarter of 2003, PEC ceased deferral
     of the ongoing  effects 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  $13.6 million,
     which represented a decrease in non-ARO cost of removal expense,  partially
     offset  by  an  increase  in   decommissioning   expense.   PEC   requested
     reconsideration  from the NCUC  regarding the ongoing  effects.  During the
     third  quarter of 2003,  the NCUC issued an order  allowing the deferral of
     the ongoing  effects of SFAS No. 143 and PEC  reversed  the second  quarter
     income statement impact in accordance with the NCUC's decision.  Therefore,
     the ongoing effects of SFAS No. 143 have no impact on the income of PEC for
     the nine months ended September 30, 2003.

     On April 8, 2003,  the SCPSC  approved a joint  request by PEC, Duke Energy
     and South  Carolina  Electric  and Gas Company for an  accounting  order to
     authorize the deferral of all cumulative and prospective effects related to
     the adoption of SFAS No. 143.

     On January 23, 2003, the Staff of the FPSC issued a notice of proposed rule
     development to adopt provisions relating to accounting for asset retirement
     obligations  under SFAS No. 143.  Accompanying  the notice was a draft rule
     presented  by the Staff which adopts the  provisions  of SFAS No. 143 along
     with the requirement to record the difference between amounts prescribed by
     the FPSC and those used in the  application  of SFAS No. 143 as  regulatory
     assets or  regulatory  liabilities,  which  was  accepted  by all  parties.
     Therefore, the adoption of the statement had no impact on the income of PEF
     due to the establishment of a regulatory liability pursuant to SFAS No. 71.
     A final order was issued in the third quarter of 2003.

7.   GOODWILL AND OTHER INTANGIBLE ASSETS

     SFAS No.  142,  "Goodwill  and  Other  Intangible  Assets,"  requires  that
     goodwill be tested for  impairment  at least  annually and more  frequently
     when indicators of impairment  exist. SFAS No. 142 requires a two-step fair
     value-based  test. The first step, used to identify  potential  impairment,
     compares the fair value of the  reporting  unit with its  carrying  amount,
     including  goodwill.  The second  step,  used to measure  the amount of the
     impairment loss if step one indicates a potential impairment,  compares the
     implied fair value of the reporting unit goodwill with the carrying  amount
     of the  goodwill.  This  assessment  could  result in  periodic  impairment
     charges.  The Company performed the annual goodwill impairment test for the
     CCO  segment  in the  first  quarter  of  2003,  and  the  annual  goodwill
     impairment test for the PEC Electric and PEF segments in the second quarter
     of 2003, which indicated no impairment.

     During 2002, the Company  acquired  Westchester Gas Company  (Westchester).
     The purchase  price was  finalized  during the first  quarter 2003 with the
     purchase price being primarily  allocated to fixed assets including oil and
     gas properties. No goodwill was recorded.

     The carrying  amounts of goodwill at  September  30,  2003,  by  reportable
     segment, are $1.9 billion, $1.7 billion and $64.1 million for PEC Electric,
     PEF and CCO, respectively.

     The gross carrying  amount and  accumulated  amortization  of the Company's
     intangible  assets as of  September  30, 2003 and  December 31, 2002 are as
     follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                September 30, 2003                             December 31, 2002
                                    -------------------------------------------    ------------------------------------------
     (in thousands)                 Gross Carrying Amount      Accumulated         Gross Carrying Amount     Accumulated
                                                              Amortization                                   Amortization
                                    --------------------- ---------------------    --------------------- --------------------
     Synthetic fuel intangibles                 $ 140,469             $(59,481)                $ 140,469            $(45,189)
     Power agreements acquired                    221,218              (15,161)                   33,000              (5,593)
     Other                                         60,117              (10,357)                   40,968              (7,792)
                                    --------------------- ---------------------    --------------------- --------------------
                 Total                          $ 421,804             $(84,999)                $ 214,437            $(58,574)
                                    --------------------- ---------------------    --------------------- --------------------
</TABLE>

     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
     (the Code) in December 2007.

     On May 31, 2003, PVI acquired from Williams Energy Marketing and Trading, a
     subsidiary of The Williams Companies,  Inc., a long-term  full-requirements
     power supply  agreement at fixed  prices with Jackson  Electric  Membership
     Corp.,  located in  Jefferson,  Georgia  for $188  million.  Assignment  of
     Williams'  responsibilities  under  the  contract  began  in June  2003 and
     terminates in 2015,  with a first refusal  option to extend for five years.
     The agreement  includes the use of 640 megawatts (MW) of contracted Georgia
     System generation comprised of nuclear,  coal, gas and pumped-storage hydro
     resources.  The  intangible  related  to  this  power  agreement  is  being
     amortized  based on the economic  benefits of the contract.  As part of the
     acquisition  of  generating  assets from LG&E Energy Corp.  on February 15,
     2002,  power  agreements  of $33.0  million were recorded and are amortized
     based on the economic  benefits of the contracts through December 31, 2004,
     which approximates straight-line.

                                       17

<PAGE>

     Other  intangibles  are primarily  customer  contracts and permits that are
     amortized over their respective  lives. Of the increase in other intangible
     assets,  $9.2 million relates to customer contracts acquired as part of the
     Westchester acquisition, which was identified as an intangible in the final
     purchase price allocation.

     Net intangible  assets are included in other assets and deferred  debits in
     the accompanying Consolidated Balance Sheets. Amortization expense recorded
     on  intangible  assets for the three  months ended  September  30, 2003 and
     2002,  respectively,  was  $10.7  million  and $8.3  million.  Amortization
     expense  recorded on intangible  assets for the nine months ended September
     30, 2003 and 2002,  respectively,  was $26.4 million and $24.5 million. The
     estimated  annual  amortization  expense  for  intangible  assets  for 2003
     through 2007, in millions,  is approximately $36.8, $41.3, $34.8, $35.9 and
     $36.1, respectively.

8.   COMPREHENSIVE INCOME

     Comprehensive income for the three and nine months ended September 30, 2003
     was $337.9 million and $696.1 million,  respectively.  Comprehensive income
     for the three and nine months ended  September 30, 2002 was $141.8  million
     and $398.2 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

     On February 21,  2003,  PEF issued $425  million of First  Mortgage  Bonds,
     4.80% Series,  Due March 1, 2013 and $225 million of First Mortgage  Bonds,
     5.90% Series,  Due March 1, 2033.  Proceeds from this issuance were used to
     repay the balance of its  outstanding  commercial  paper,  to refinance its
     secured and  unsecured  indebtedness,  including $70 million of PEF's First
     Mortgage  Bonds,  6.125% Series,  Due March 1, 2003, and to redeem on March
     24,  2003,  the $150  million  aggregate  outstanding  balance of its First
     Mortgage Bonds, 8% Series, Due December 1, 2022 at 103.75% of the principal
     amount of such bonds.

     In March  2003,  Progress  Genco  Ventures,  LLC  (Genco),  a  wholly-owned
     subsidiary  of PVI,  terminated  its $50  million  working  capital  credit
     facility. A related  construction  facility initially provided for Genco to
     draw up to $260 million. The amount outstanding under this facility is $241
     million as of September 30, 2003.  During the three months ended  September
     30, 2003,  Genco  determined it did not need to make any  additional  draws
     under this facility.

     On April 1,  2003,  PEF  entered  into a new $200  million  364-day  credit
     agreement and a new $200 million three-year credit agreement, replacing its
     prior credit  facilities (which had been a $90 million 364-day facility and
     a $200 million five-year facility). The new PEF credit facilities contain a
     defined  maximum  total debt to total capital ratio of 65%; as of September
     30,  2003 the  calculated  ratio,  as  defined,  was 51.3%.  The new credit
     facilities also contain a requirement that the ratio of EBITDA,  as defined
     in the  facilities,  to  interest  expense  to be at  least  3 to 1;  as of
     September 30, 2003 the calculated ratio, as defined, was 8.1 to 1.

     Also on April 1, 2003, PEC reduced the size of its existing  364-day credit
     facility  from  $285  million  to $165  million.  The  other  terms of this
     facility were not changed.  On July 30, 2003,  PEC renewed its $165 million
     364-day credit  agreement.  PEC's $285 million  three-year credit agreement
     entered  into in 2002  remains  in  place,  for  total  facilities  of $450
     million.

     On May 27, 2003,  PEC redeemed $150 million of First Mortgage  Bonds,  7.5%
     Series, Due March 1, 2023 at 103.22% of the principal amount of such bonds;
     PEC funded the redemption with commercial paper.

     On July 1, 2003, $110 million of PEF's First Mortgage  Bonds,  6.0% Series,
     Due July 1, 2003 and $35 million of PEF's medium-term  notes, 6.62% Series,
     matured; PEF funded the redemption with commercial paper.

     On August 15, 2003,  PEC redeemed  $100  million of First  Mortgage  Bonds,
     6.875%  Series,  Due August 15, 2023 at 102.84%.  PEC funded the redemption
     with commercial paper.

     On September  11, 2003,  PEC issued $400 million of First  Mortgage  Bonds,
     5.125%  Series,  Due September 15, 2013 and $200 million of First  Mortgage
     Bonds,  6.125% Series, Due September 15, 2033.  Proceeds from this issuance
     were used to reduce the balance of PEC's  outstanding  commercial paper and
     short-term  notes payable to affiliated  companies,  which notes  represent
     PEC's borrowings under an internal money pool operated by Progress Energy.

     On September 30, 2003,  Progress Energy  completed the sale of NCNG and the
     Company's equity  investment in ENCNG.  Net proceeds of approximately  $450
     million were used to reduce debt.

                                       18
<PAGE>

     In addition, the Company received net proceeds of approximately $97 million
     in  October  2003  for the  sale of its  Mesa  gas  properties  located  in
     Colorado. Net proceeds will primarily be used to reduce short-term debt.

     For  the  three  months  ended  September  30,  2003,  the  Company  issued
     approximately 2.7 million shares representing approximately $112 million in
     proceeds  from its  Investor  Plus  Stock  Purchase  Plan and its  employee
     benefit  plans.  For the nine months ended  September 30, 2003, the Company
     issued  approximately 6.9 million shares through these plans,  resulting in
     approximately $284 million of cash proceeds.

     On October 31, 2003,  PEF announced  the  redemption of $100 million of its
     First  Mortgage  Bonds,  7% Series,  Due 2023 at  103.19% of the  principal
     amount of such  bonds.  PEF intends to redeem the bonds on December 1, 2003
     with commercial paper proceeds.

10.  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 is  chaired by the Chief  Financial  Officer  and  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 manages its market risk in accordance with its established risk
     management  policies,  which may include  entering into various  derivative
     transactions.

     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.  Treasury
     rate lock agreements were terminated in conjunction with the pricing of the
     PEF First  Mortgage  Bonds in February 2003. The loss on the agreements was
     deferred  and is  being  amortized  over  the  life of the  bonds  as these
     agreements had been designated as cash flow hedges for accounting purposes.
     The amount of this loss was not material.

     As of September  30, 2003,  Progress  Energy had $850 million of fixed rate
     debt swapped to floating rate debt by executing  interest  rate  derivative
     agreements. Under terms of these swap rate agreements, Progress Energy will
     receive a fixed rate and pay a floating rate based on 3-month LIBOR.  These
     agreements expire in March of 2006, April 2007 and October 2008.

     In March, April, May and June of 2003, PEC entered into treasury rate locks
     to hedge its exposure to interest rates with regard to a future issuance of
     fixed-rate debt.  These agreements had a computational  period of ten years
     and were  designated  as cash flow  hedges  for  accounting  purposes.  The
     agreements,  with a total notional amount of $110 million,  were terminated
     simultaneously  with  the  pricing  of the  PEC  First  Mortgage  Bonds  in
     September 2003. The $4.2 million gain on the agreements was deferred and is
     being  amortized  over the life of the bonds as these  agreements  had been
     designated as cash flow hedges for accounting purposes.

     Progress Fuels Corporation  periodically enters into derivative instruments
     to hedge its  exposure to price  fluctuations  on natural gas sales.  As of
     September 30, 2003,  Progress Fuels Corporation had approximately  12.6 Bcf
     of cash  flow  hedges  in  place  for its  natural  gas  production.  These
     positions  span the  remainder of 2003 and extend  through  December  2004.
     These  instruments  did  not  have  a  material  impact  on  the  Company's
     consolidated financial position or results of operations.

     Genco has a series of interest rate collars to hedge floating rate exposure
     associated with the construction  credit facility.  These collars hedge 75%
     of the drawn facility balance through March of 2007.

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

                                       19

<PAGE>

11.  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 thousands):
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                        Three Months Ended                Nine Months Ended
                                                           September 30,                    September 30,
                                                  -----------------------------     -------------------------------
                                                      2003             2002             2003                 2002
                                                  -------------    ------------     ------------    ---------------
     Weighted-average common shares - basic             239,025         216,079          236,183            214,700
     Restricted stock awards                                959             746              965                709
     Stock options                                            2              59               12                173
                                                  -------------    ------------     ------------    ---------------
     Weighted-average shares - fully dilutive           239,986         216,884          237,160            215,582
                                                  -------------    ------------     ------------    ---------------
</TABLE>

12.  FPC-OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF A SUBSIDIARY
     HOLDING SOLELY FPC GUARANTEED NOTES

     In April 1999,  the Trust,  an  indirect  wholly-owned  subsidiary  of FPC,
     issued 12 million  shares of $25 par cumulative  FPC-obligated  mandatorily
     redeemable  preferred securities  (Preferred  Securities) due 2039, with an
     aggregate liquidation value of $300 million and an annual distribution rate
     of 7.10%. Currently, all 12 million shares of the Preferred Securities that
     were issued are outstanding.  Concurrent with the issuance of the Preferred
     Securities,  the  Trust  issued to  Florida  Progress  Funding  Corporation
     (Funding Corp.) all of the common  securities of the Trust (371,135 shares)
     for $9.3 million. Funding Corp. is a direct wholly-owned subsidiary of FPC.

     The existence of the Trust is for the sole purpose of issuing the Preferred
     Securities  and the common  securities  and using the  proceeds  thereof to
     purchase  from  Funding  Corp.  its 7.10%  Junior  Subordinated  Deferrable
     Interest Notes  (subordinated  notes) due 2039,  for a principal  amount of
     $309.3  million.  The  subordinated  notes  and  the  Notes  Guarantee  (as
     discussed below) are the sole assets of the Trust. Funding Corp.'s proceeds
     from the sale of the  subordinated  notes were advanced to Progress Capital
     and used for  general  corporate  purposes  including  the  repayment  of a
     portion of certain outstanding short-term bank loans and commercial paper.

     FPC has fully and  unconditionally  guaranteed  the  obligations of Funding
     Corp. under the subordinated notes (Notes Guarantee).  In addition, FPC has
     guaranteed  the  payment of all  distributions  required  to be made by the
     Trust,  but only to the extent that the Trust has funds  available for such
     distributions  (Preferred Securities  Guarantee).  The Preferred Securities
     Guarantee, considered together with the Notes Guarantee, constitutes a full
     and  unconditional  guarantee by FPC of the Trust's  obligations  under the
     Preferred Securities.

     The  subordinated  notes may be  redeemed  at the option of  Funding  Corp.
     beginning in 2004 at par value plus accrued interest through the redemption
     date. The proceeds of any redemption of the subordinated notes will be used
     by the Trust to redeem proportional amounts of the Preferred Securities and
     common  securities  in accordance  with their terms.  Upon  liquidation  or
     dissolution of Funding Corp.,  holders of the Preferred Securities would be
     entitled to the  liquidation  preference  of $25 per share plus all accrued
     and unpaid dividends thereon to the date of payment.

     These  Preferred  Securities  are  classified  as  long-term  debt  on  the
     Company's  accompanying  Consolidated  Balance Sheets. Upon adoption of the
     current FIN No. 46 standard,  the Company  anticipates  deconsolidating the
     Trust which is not expected to have a material  effect on the  consolidated
     financial position, results of operations or liquidity (See Note 5).

13.  REGULATORY MATTERS

     A. Retail Rate Matters

     On  March  27,  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 on April 23,  2002.  The
     Agreement  provides that PEF will operate under a Revenue Sharing Incentive
     Plan (the Plan) through 2005 and thereafter until terminated by the FPSC.

     The Plan establishes annual revenue caps and sharing  thresholds.  The Plan
     provides that all retail base revenues between an established threshold and
     cap will be shared - a 2/3 share to be refunded to PEF's retail  customers,
     and a 1/3 share to be received by PEF's shareholders.  All retail base rate
     revenues above the retail base rate revenue caps  established for each year
     will be refunded 100% to retail  customers on an annual  basis.  The retail
     base rate revenue sharing threshold amounts for 2003 are $1.333 billion and

                                       20

<PAGE>

     will increase $37 million each year thereafter. The retail base revenue cap
     for 2003 is  $1.393  billion  and  will  increase  $37  million  each  year
     thereafter.  As of  December  31,  2002,  $4.7  million was accrued and was
     refunded to customers in March 2003.  On February 24, 2003,  the parties to
     the Agreement  filed a motion seeking an order from the FPSC to enforce the
     Agreement. In this motion, the parties disputed PEF's calculation of retail
     revenue  subject  to  refund  and  contended  that  the  refund  should  be
     approximately  $23 million.  On July 9, 2003,  the FPSC ruled that PEF must
     provide an additional $18.4 million to its retail customers  related to the
     2002 revenue  sharing  calculation.  PEF recorded this refund in the second
     quarter of 2003 as a charge against electric operating revenue and refunded
     this amount by October 31, 2003.  For the nine months ended  September  30,
     2003,  PEF  recorded  an  additional  accrual  of $5.4  million  related to
     estimated 2003 revenue sharing.

     On March 4, 2003,  the FPSC  approved  PEF's  petition to increase its fuel
     factors  due to  continuing  increases  in oil and  natural  gas  commodity
     prices. New rates became effective on March 28, 2003.

     On September 12, 2003,  PEF asked the FPSC to approve a cost  adjustment in
     its annual fuel filing, primarily related to rising costs of fuel that will
     increase retail customer bills beginning  January 1, 2004. The total amount
     of the fuel  adjustment  requested  above current levels was  approximately
     $322 million. A decision from the FPSC is expected on November 12, 2003.

     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 March 28, 2003.
     The NCUC  approved an increase of $19.6  million by order issued  September
     25, 2003.

     On October 16, 2003,  PEC made a filing with the North  Carolina  Utilities
     Commission  (NCUC)  to seek  permission  to defer  expenses  incurred  from
     Hurricane Isabel and the February 2003 winter storms. As a result of rising
     storm costs and the  frequency of major storm damage,  Progress  Energy has
     asked the NCUC to allow the  company to create a deferred  account in which
     the company  would place  expenses  incurred as a result of named  tropical
     storms,  hurricanes and significant winter storms. The future  amortization
     of such deferred costs would be includable as allowable  costs in base rate
     filings.  The Company  estimates that it would charge $23.5 million in 2003
     from  Hurricane  Isabel and from  current  year ice storms to the  deferred
     account,  if approved.  Any  additional  major storm activity in 2003 could
     cause the amount to increase.

     B. Regional Transmission Organizations

     In early 2000, the FERC issued Order 2000 regarding  regional  transmission
     organizations (RTOs). This Order set minimum  characteristics and functions
     that RTOs must  meet,  including  independent  transmission  service.  As a
     result of Order 2000,  PEF,  along with Florida  Power & Light  Company and
     Tampa  Electric  Company,   filed  with  the  FERC,  in  October  2000,  an
     application  for  approval of a  GridFlorida  RTO. In March 2001,  the FERC
     issued an order provisionally  approving GridFlorida.  PEC, along with Duke
     Energy  Corporation and South Carolina  Electric & Gas Company,  filed with
     the FERC, for approval of a GridSouth RTO. In July 2001, the FERC issued an
     order provisionally  approving  GridSouth.  However, in July 2001, the FERC
     issued orders  recommending  that  companies in the  Southeast  engage in a
     mediation to develop a plan for a single RTO for the Southeast. PEF and PEC
     participated   in  the  mediation.   The  FERC  has  not  issued  an  order
     specifically on this mediation. 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. PEF and
     PEC, as  subsidiaries  of Progress  Energy,  filed comments on November 15,
     2002 and supplemental  comments on January 10, 2003. On April 28, 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.  PEF and PEC, as subsidiaries of Progress  Energy,  plan to
     file  comments  on the White  Paper.  The FERC has also  indicated  that it
     expects  to  issue a final  rule  after  Congress  votes  this  fall on the
     proposed  House and Senate Energy  Bills.  The Company  cannot  predict the
     outcome  of  these  matters  or  the  effect  that  they  may  have  on the
     GridFlorida and GridSouth  proceedings  currently  ongoing before the FERC.
     The  Company  has  $31.3  million  and an  immaterial  amount  invested  in
     GridSouth  and  GridFlorida,  respectively,  at September  30, 2003.  It is
     unknown  what  impact the  future  proceedings  will have on the  Company's
     earnings, revenues or prices.

     In October 2002,  the FPSC abated its  proceedings  regarding its review of
     the proposed GridFlorida RTO. The FPSC action to abate the proceedings came
     in response to the Florida  Office of Public  Counsel's  appeal  before the
     State Supreme  Court  requesting  review of the FPSC's order  approving the
     transfer of operational  control of electric  transmission assets to an RTO
     under the  jurisdiction  of the FERC.  On June 2, 2003 the Florida  Supreme
     Court  dismissed  the appeal  without  prejudice on the ground that certain
     portions  of the  Commission's  order  constituted  non-final  action.  The
     dismissal is without  prejudice to any party to challenge the  Commission's
     order after all portions are final. A technical conference for the state of
     Florida was conducted by the FERC on September 15, 2003. It is unknown when
     the FERC or the FPSC will take final  action  with  regard to the status of
     GridFlorida  or what the  impact of  further  proceedings  will have on the
     Company's earnings, revenues or prices.

                                       21

<PAGE>

14.  OTHER INCOME AND OTHER EXPENSE

     Other  income and expense  includes  interest  income,  gain on the sale of
     investments,  impairment of investments  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:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                                  Three Months Ended              Nine Months Ended
                                                                    September 30,                   September 30,
                                                           ------------------------------    -------------------------------
     (in thousands)                                             2003             2002            2003             2002
                                                           --------------     -----------    ------------    ---------------
     Other income
     Net financial trading gain (loss)                          $     607        $   (169)      $  (2,026)          $ (1,598)
     Net energy brokered for resale                                  (189)          1,909             (33)             2,664
     Nonregulated energy and delivery services income               5,185           7,563          16,427             20,022
     Contingent value obligation mark-to-market gain (loss)        (3,945)          9,371          (3,945)            22,192
     Investment gains                                                   -           8,000               -             10,960
     AFUDC equity                                                   1,986           2,728           7,900              6,806
     Other                                                          2,532          (2,755)          8,127              4,133
                                                           --------------     -----------    ------------    ---------------
         Total other income                                     $   6,176        $ 26,647       $  26,450           $ 65,179
                                                           --------------     -----------    ------------    ---------------

     Other expense
     Nonregulated energy and delivery services expenses         $   4,596        $  6,492       $  14,292           $ 15,933
     Donations                                                      3,910           3,447          10,920             10,453
     Investment losses                                                558             952           9,201              6,704
     Other (a)                                                        179           4,950           6,987             17,840
                                                           --------------     -----------    ------------    ---------------
        Total other expense                                     $   9,243        $ 15,841       $  41,400           $ 50,930
                                                           --------------     -----------    ------------    ---------------

     Other, net                                                 $  (3,067)       $ 10,806       $ (14,950)          $ 14,249
                                                           ==============     ===========    ============    ===============
     (a)   2003 includes reduction of approximately $6 million in the FPC
           contractual environmental liability as discussed in Note 15.
</TABLE>

     Net financial trading gains and losses represent non-asset-backed trades of
     electricity and gas. Net energy brokered for resale represents  electricity
     purchased for simultaneous sale to a third party.  Nonregulated  energy and
     delivery  services  include  power  protection  services  and  mass  market
     programs (surge  protection,  appliance  services and area light sales) and
     delivery,  transmission and substation work for other utilities. Investment
     losses primarily represent losses on limited partnership investment funds.

15.  COMMITMENTS AND CONTINGENCIES

     Contingencies and significant changes to the commitments  discussed in Note
     24 of the financial statements included in the Company's 2002 Annual Report
     on Form 10-K are described below.

     A. Guarantees

     a) As a part of normal business,  Progress Energy and certain  subsidiaries
     enter into various agreements providing financial or performance assurances
     to third parties.  Such agreements include  guarantees,  standby letters of
     credit and surety bonds.  These  agreements  are entered into  primarily to
     support  or  enhance  the   creditworthiness   otherwise  attributed  to  a
     subsidiary on a stand-alone  basis,  thereby  facilitating the extension of
     sufficient  credit to  accomplish  the  subsidiaries'  intended  commercial
     purposes.  As of September 30, 2003, management does not believe conditions
     are likely for significant  performance under the guarantees of performance
     issued by or on behalf of affiliates discussed herein.


                                       22
<PAGE>


     Guarantees as of September 30, 2003,  are summarized in the table below and
     discussed more fully in the subsequent paragraphs.
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     (in millions)
     Guarantees issued on behalf of affiliates
          Guarantees supporting nonregulated portfolio and energy marketing
               activities issued by Progress Energy                                  $ 330.6
          Guarantees supporting nuclear decommissioning                                276.0
          Guarantee supporting power supply agreements                                 312.0
          Standby letters of credit                                                      9.6
          Surety bonds                                                                   1.6
          Other guarantees                                                               8.2
     Guarantees issued on behalf of third parties
          Other guarantees                                                              26.4
                                                                                ------------
        Total                                                                        $ 964.4
                                                                                ============
</TABLE>

     Guarantees   Supporting   Nonregulated   Portfolio  and  Energy   Marketing
     Activities

     Progress  Energy has issued  approximately  $330.6 million of guarantees on
     behalf of Progress  Ventures (the business unit) and its  subsidiaries  for
     obligations  under  tolling  agreements,   transmission   agreements,   gas
     agreements,   construction  agreements,  fuel  procurement  agreements  and
     trading  operations.  Approximately  $68 million of these  guarantees  were
     issued during the year to support energy marketing activities. The majority
     of the marketing  contracts  supported by the guarantees  contain  language
     regarding downgrade events,  ratings triggers,  monthly netting of exposure
     and/or payments and offset provisions in the event of a default. Based upon
     current  business  levels at September 30, 2003,  if the Company's  ratings
     were to decline below investment  grade, the Company  estimates that it may
     have to deposit cash or provide  letters of credit or other cash collateral
     of   approximately   $145   million  for  the  benefit  of  the   Company's
     counterparties to support ongoing operations within a 90-day period.

     Guarantees Supporting Nuclear Decommissioning

     In 2003, PEC determined that its external funding levels did not fully meet
     the nuclear decommissioning financial assurance levels required by the NRC.
     Therefore,  PEC met  the  financial  assurance  requirements  by  obtaining
     guarantees from Progress Energy in the amount of $276.0 million.

     Guarantees Supporting Power Supply Agreements

     On March 20, 2003,  PVI entered into a definitive  agreement  with Williams
     Energy Marketing and Trading, a subsidiary of The Williams Companies, Inc.,
     to acquire a long-term  full-requirements  power supply  agreement at fixed
     prices with  Jackson.  The power supply  agreement  included a  performance
     guarantee by Progress  Energy.  The  transaction  closed  during the second
     quarter of 2003. The Company issued a payment and performance  guarantee to
     Jackson  related to the power supply  agreement of $285.0  million.  In the
     event that Progress  Energy's credit ratings fall below  investment  grade,
     Progress  Energy may be required to provide  additional  security  for this
     guarantee  in form and amount (not to exceed $285  million)  acceptable  to
     Jackson.  During the third  quarter,  PVI entered  into an  agreement  with
     Morgan Stanley Capital Group Inc. to fulfill Morgan  Stanley's  obligations
     to schedule  resources and supply energy to Oglethorpe Power Corporation of
     Georgia   through  March  31,  2005.  The  Company  issued  a  payment  and
     performance  guarantee  to  Morgan  Stanley  related  to the  power  supply
     agreement.  In the event that Progress  Energy's  credit ratings fall below
     investment  grade,  Progress  Energy  estimates that it may have to deposit
     cash or provide letters of credit or other cash collateral of approximately
     $27 million for the benefit of Morgan Stanley as of September 30, 2003.

     Standby Letters of Credit

     The  Company  has  issued  $9.6  million  of  standby  letters of credit to
     financial  institutions for the benefit of third parties that have extended
     credit to the  Company and certain  subsidiaries.  These  letters of credit
     have been issued primarily for the purpose of supporting  payments of trade
     payables,  securing  performance  under contracts and lease obligations and
     self-insurance  for workers'  compensation.  If a  subsidiary  does not pay
     amounts when due under a covered contract, the counterparty may present its
     claim for payment to the financial institution,  which will in turn request
     payment from the Company.  Any amounts owed by the  Company's  subsidiaries
     are reflected in the accompanying Consolidated Balance Sheets.

                                       23
<PAGE>

     Surety Bonds

     At  September  30,  2003,  the  Company  had $1.6  million in surety  bonds
     purchased  primarily for purposes such as providing  workers'  compensation
     coverage,   obtaining  licenses,  permits  and  rights-of-way  and  project
     performance.  To the extent  liabilities  are  incurred  as a result of the
     activities  covered by the surety bonds,  such  liabilities are included in
     the accompanying Consolidated Balance Sheets.

     Other Guarantees

     The  Company  has  other  guarantees  outstanding  of  approximately  $34.6
     million.  Included  in the $34.6  million are $26.4  million of  guarantees
     issued on behalf of third  parties  of which  $16.4  million  is related to
     obligations on leasing  arrangements  and $10 million in support of synfuel
     operations  at a third party plant.  The Company  estimates it will have to
     perform under the guarantees  related to the leasing agreements and as such
     $2.4  million  has  been  accrued  and is  reflected  in  the  accompanying
     Consolidated  Balance  Sheets.  The  remaining  $8.2  million in  affiliate
     guarantees  are related  primarily to prompt  performance  payments,  lease
     obligations and other payments subject to contingencies.

     B. Insurance

     Both  PEC  and PEF are  insured  against  public  liability  for a  nuclear
     incident.  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 pro rata
     assessments  for each reactor owned per  occurrence.  Effective  August 20,
     2003, the retroactive premium  assessments  increased to $100.6 million per
     reactor  from  the  previous  amount  of $88.1  million.  The  total  limit
     available to cover  nuclear  liability  losses  increased as well from $9.6
     billion to $10.8  billion.  The  annual  retroactive  premium  limit of $10
     million per reactor owned did not change.

     C. Claims and uncertainties

     Environmental

     a)  The  Company  is  subject  to  federal,  state  and  local  regulations
     addressing hazardous and solid waste management,  air and water quality and
     other environmental matters.

     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
     both electric utilities have some connection. In this regard, both electric
     utilities and the gas utility and other potentially responsible parties 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),  the Florida  Department of
     Environmental  Protection  (FDEP)  and the  North  Carolina  Department  of
     Environment and Natural  Resources,  Division of Waste Management (DWM). In
     addition,  the Company and its subsidiaries  are  periodically  notified by
     regulators such as 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  There are 9 former  MGP  sites  and 14 other  sites or groups of 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 MGP sites. All eligible expenses related to these are
     charged against a specific fund containing these proceeds.  As of September
     30, 2003,  approximately $8.7 million remains in this centralized fund with
     a related accrual of $8.7 million  recorded for the associated  expenses of
     environmental  issues.  As  PEC's  share  of costs  for  investigating  and
     remediating these sites becomes known, the fund is assessed to determine if
     additional  accruals  will be  required.  PEC does not believe  that it can
     provide an estimate of the  reasonably  possible  total  remediation  costs
     beyond what remains in the environmental  insurance  recovery fund. This is
     due to the fact that the sites are at different  stages:  investigation has
     not begun at three sites, investigation has begun but remediation cannot be
     estimated at five sites and remediation has begun at one site. PEC measures
     its  liability  for these sites based on available  evidence  including its
     experience in investigating and remediating environmentally impaired sites.

                                       24

<PAGE>

     The  process  often   involves   assessing  and   developing   cost-sharing
     arrangements  with  other  potentially   responsible   parties.   Once  the
     environmental  insurance  recovery fund is depleted,  PEC will accrue costs
     for the sites to the extent its  liability is probable and the costs can be
     reasonably estimated.  Presently, PEC cannot determine the total costs that
     may be incurred in connection with the remediation of all sites.

     In September  2003, the Company sold NCNG to Piedmont  Natural Gas Company,
     Inc. As part of the sales agreement, the Company retained responsibility to
     remediate  five  former  NCNG MGP sites to state  standards  pursuant to an
     Administrative  Order by  consent.  These  sites  are  anticipated  to have
     investigation   or  remediation   costs  associated  with  them.  NCNG  had
     previously  accrued  approximately $2.2 million for probable and reasonably
     estimable  remediation  costs at these  sites.  These  accruals  have  been
     recorded on an  undiscounted  basis. At the time of the sale, the liability
     for these costs and the related  accrual was transferred to a subsidiary of
     PEC.  PEC does not believe it can  provide an  estimate  of the  reasonably
     possible total remediation costs beyond the accrual because two of the five
     sites  have not  begun  investigation  activities.  Therefore,  PEC  cannot
     currently determine the total costs that may be incurred in connection with
     the  investigation  and/or  remediation  of all sites.  Based upon  current
     information, the Company does not expect the future costs at these sites to
     be material to the Company's financial condition or results of operations.

     PEF As of September  30, 2003,  PEF has accrued  $23.6 million for probable
     and  estimable  costs  related  to  various  environmental  sites.  Of this
     accrual,  $16.6 million is for costs associated with the  investigation and
     remediation of transmission and  distribution  substations and transformers
     which are more fully discussed below. The remaining $7.0 million is related
     to two former MGP sites and 10 other active sites  associated with PEF that
     have  required  or  are   anticipated  to  require   investigation   and/or
     remediation  costs. PEF does not believe that it can provide an estimate of
     the reasonably  possible total  remediation  costs beyond what is currently
     accrued.

     In 2002,  PEF accrued  approximately  $3.4  million for  investigation  and
     remediation  associated with transmission and distribution  substations and
     transformers  and received  approval  from the FPSC for annual  recovery of
     these  environmental  costs through the Environmental  Cost Recovery Clause
     (ECRC). In September 2003, PEF also accrued an additional $15.1 million for
     similar  environmental  costs as a result of increased  sites and estimated
     costs per site.  PEF plans to seek  approval from the FPSC to recover these
     costs through the ECRC. As more  activity  occurs at these sites,  PEF will
     assess the need to adjust the accruals.

     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 potentially  responsible  parties.  Presently,  PEF
     cannot  determine the total costs that may be incurred in  connection  with
     the remediation of all sites.

     Florida Progress Corporation In 2001, Progress Fuels sold its Inland Marine
     Transportation   business  operated  by  MEMCO  Barge  Line,  Inc.  to  AEP
     Resources,   Inc.   Progress  Fuels   established  an  accrual  to  address
     indemnities  and retained an  environmental  liability  associated with the
     transaction. Progress Fuels estimates that its contractual liability to AEP
     Resources,  Inc.,  associated  with Inland  Marine  Transportation  is $3.5
     million at September  30, 2003 and has accrued  such  amount.  The previous
     accrual of $9.9  million was reduced  based on a change in  estimate.  This
     accrual  has been  determined  on an  undiscounted  basis.  Progress  Fuels
     measures  its  liability  for this site  based on  estimable  and  probable
     remediation  scenarios.  The  Company  believes  that it is not  reasonably
     probable   that   additional   costs  will  be  incurred   related  to  the
     environmental  indemnification  provision  beyond the amount  accrued.  The
     Company cannot predict the outcome of this matter.

     Certain  historical waste sites exist that are being addressed  voluntarily
     by Fuels. The Company cannot determine the total costs that may be incurred
     in connection  with these sites.  The Company cannot predict the outcome of
     this matter.

     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. The Company cannot predict the outcome of this matter.

     PEC, PEF and Fuels have filed claims with the Company's  general  liability
     insurance  carriers to recover  costs  arising  out of actual or  potential
     environmental  liabilities.  Some claims  have been  settled and others are
     still pending. The Company cannot predict the outcome of these matters.

     The Company is also currently in the process of assessing  potential  costs
     and exposures at other  environmentally  impaired 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.

                                       25
<PAGE>

     Air Quality

     There has been and may be further  proposed federal  legislation  requiring
     reductions in air emissions for nitrogen  oxides,  sulfur  dioxide,  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.  Some  companies  may seek
     recovery  of  the  related  cost  through  rate   adjustments   or  similar
     mechanisms.  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.
     Both PEC and PEF were  asked to provide  information  to the EPA as part of
     this  initiative  and  cooperated in providing  the requested  information.
     During  the  first  quarter  of  2003,  PEC  responded  to  a  supplemental
     information  request from the EPA. PEF has received a similar  supplemental
     information  request,  and responded to it in the second  quarter.  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  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 the EPA's  initiative or its impact,
     if any, on the Company.

     In 1998, the EPA published a final rule  addressing the regional  transport
     of ozone.  This rule is commonly  known as the NOx SIP Call. The EPA's rule
     requires 23  jurisdictions,  including North  Carolina,  South Carolina and
     Georgia,  but not Florida,  to further reduce  nitrogen oxide  emissions in
     order to attain  pre-set state NOx emission  levels by May 31, 2004. PEC is
     currently  installing  controls  necessary to comply with the rule. Capital
     expenditures  needed to meet  these  measures  in North and South  Carolina
     could reach  approximately  $370  million,  which has not been adjusted for
     inflation.  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. The Company cannot predict the outcome of this matter.

     In  July  1997,  the  EPA  issued  final  regulations  establishing  a  new
     eight-hour  ozone  standard.  In October  1999,  the  District  of Columbia
     Circuit  Court of Appeals  ruled against the EPA with regard to the federal
     eight-hour ozone standard.  The U.S. Supreme Court has upheld, in part, the
     District of Columbia  Circuit Court of Appeals'  decision.  Designation  of
     areas that do not attain the standard is proceeding, and further litigation
     and  rulemaking on this and other aspects of the standard are  anticipated.
     North  Carolina  adopted  the  federal  eight-hour  ozone  standard  and is
     proceeding with the implementation  process. North Carolina has promulgated
     final  regulations,  which  will  require  PEC to  install  nitrogen  oxide
     controls under the state's eight-hour standard. The costs of those controls
     are included in the $370 million cost  estimate set forth in the  preceding
     paragraph. 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.

     The EPA published a final rule approving petitions under Section 126 of the
     Clean Air Act.  This rule,  as  originally  promulgated,  required  certain
     sources to make  reductions in nitrogen oxide emissions by May 1, 2003. The
     final rule also includes a set of  regulations  that affect  nitrogen oxide
     emissions  from  sources  included  in the  petitions.  The North  Carolina
     coal-fired  electric  generating  plants are  included in these  petitions.
     Acceptable  state  plans  under the NOx SIP Call can be approved in lieu of
     the final rules the EPA approved as part of the Section 126 petitions. PEC,
     other  utilities,  trade  organizations  and other states  participated  in
     litigation  challenging the EPA's action.  On May 15, 2001, the District of
     Columbia  Circuit  Court of Appeals  ruled in favor of the EPA,  which will
     require North Carolina to make  reductions in nitrogen  oxide  emissions by
     May 1, 2003.  However,  the Court,  in its May 15th decision,  rejected the
     EPA's  methodology for estimating the future growth factors the EPA used in
     calculating the emissions  limits for utilities.  In August 2001, the Court
     granted a request by PEC and other utilities to delay the implementation of
     the Section 126 rule for electric  generating  units pending  resolution by
     the EPA of the growth factor issue.  The Court's order tolls the three-year
     compliance  period  (originally  set to end on May 1,  2003)  for  electric
     generating units as of May 15, 2001. On April 30, 2002, the EPA published a
     final rule  harmonizing  the dates for the Section 126 rule and the NOx SIP
     Call. In addition,  the EPA  determined in this rule that the future growth
     factor estimation methodology was appropriate.  The new compliance date for
     all affected sources is now May 31, 2004,  rather than May 1, 2003. The EPA
     has approved North  Carolina's NOx SIP Call rule and has formally  proposed
     to rescind  the  Section 126 rule.  This  rulemaking  is expected to become
     final by early  2004.  The  Company  expects a  favorable  outcome  of this
     matter.

                                       26


<PAGE>

     On June 20, 2002,  legislation was enacted in North Carolina  requiring the
     state's  electric  utilities to reduce the emissions of nitrogen  oxide and
     sulfur dioxide from  coal-fired  power plants.  Progress Energy expects its
     capital costs to meet these  emission  targets will be  approximately  $813
     million by 2013.  PEC  currently has  approximately  5,100 MW of coal-fired
     generation capacity in North Carolina that is affected by this legislation.
     The legislation 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 legislation 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 legislation 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.  Pursuant to the new law, PEC entered into an agreement
     with the state of North  Carolina  to  transfer  to the  state  any  future
     emissions  allowances  acquired as a result of compliance with the new law.
     The new law also  requires  the state to  undertake  a study of mercury and
     carbon dioxide emissions in North Carolina.  Progress Energy cannot predict
     the future regulatory interpretation,  implementation or impact of this new
     law. PEC did not record any clean air  amortization in the third quarter of
     2003 and recorded  approximately  $54 million of clean air  amortization to
     date in 2003.  Clean air  expenditures  to date were  $16.4  million  as of
     September 30, 2003.

     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.  The United  States has not adopted the Kyoto  Protocol;
     however,  a number of carbon dioxide  emissions control proposals have been
     advanced   in   Congress   and  by  the  Bush   administration.   The  Bush
     administration  favors  voluntary  programs.  Reductions in carbon  dioxide
     emissions  to  the  levels   specified  by  the  Kyoto  Protocol  and  some
     legislative proposals could be materially adverse to Company financials and
     operations  if associated  costs 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.

     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. Pursuant to a Court Order, the EPA is developing a Maximum
     Available Control  Technology (MACT) standard,  which is expected to become
     final in December 2004, with compliance in 2008.  Achieving compliance with
     the MACT standard  could be materially  adverse to the Company's  financial
     condition and results of  operations.  However,  the Company cannot predict
     the outcome of this matter.

     b) As required under the Nuclear Waste Policy Act of 1982, PEC and PEF each
     entered  into a contract  with the U.S.  Department  of Energy  (DOE) under
     which the DOE agreed to begin  taking  spent  nuclear fuel by no later than
     January 31, 1998.  All similarly  situated  utilities were required to sign
     the same standard contract.

     In April 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.

                                       27

<PAGE>

     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)  has  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.  PEC and PEF are in the process of  evaluating  whether  they
     should each file a similar action for damages.

     On July 9, 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. PEC and PEF
     cannot predict the outcome of this matter.

     With certain modifications, and additional approval by the NRC, 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
     current  operating  licenses  for all of PEC's  nuclear  generating  units.
     Subsequent or prior to the expiration of these licenses,  or any renewal of
     these  licenses,  dry storage or  acquisition  of new shipping casks may be
     necessary.  PEC obtained  approval from the NRC to use  additional  storage
     space at the Harris Plant in December  2000. PEC is currently in the design
     phase  for  adding  dry  storage  capability  at the  Robinson  Plant.  PEF
     currently is storing spent nuclear fuel onsite in spent fuel pools.  If PEF
     does not seek renewal of the Crystal River  Nuclear  Plant (CR3)  operating
     license,  CR3 will  have  sufficient  storage  capacity  in place  for fuel
     consumed  through the end of the  expiration of the license in 2016. If PEF
     extends the CR3 operating license, dry storage may be necessary.

     Other Contingencies

     a) Progress Energy,  through its  subsidiaries,  produces  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. Any synthetic fuel tax credit amounts
     not utilized are carried  forward  indefinitely.  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  $1.121 billion,  of which $489.1 million have been used
     and $631.9 million are being carried  forward as of September 30, 2003. The
     current Section 29 tax credit program expires at the end of 2007.

     One synthetic fuel entity,  Colona Synfuel  Limited  Partnership,  L.L.L.P.
     (Colona),  from which the Company (and FPC prior to its  acquisition by the
     Company) has been allocated  approximately $286.6 million in tax credits to
     date, is being  audited by the IRS. The audit of Colona was  expected.  The
     Company is audited regularly in the normal course of business,  as are most
     similarly situated companies.

     In September  2002,  all of the  Company's  majority-owned  synthetic  fuel
     entities,  including Colona, were accepted into the IRS Prefiling 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 June 2003,  the Company was informed that IRS field  auditors had raised
     questions   regarding  the  chemical  change   associated  with  coal-based
     synthetic fuel  manufactured at its Colona facility and the testing process
     by  which  the  chemical  change  is  verified.  (The  questions  arose  in
     connection  with  the  Company's  participation  in the PFA  program.)  The
     chemical  change and the associated  testing process were described as part
     of the PLR request for Colona. Based on that application,  the IRS ruled in
     Colona's  PLR that the  synthetic  fuel  produced  at  Colona  undergoes  a
     significant  chemical  change  and thus  qualifies  for tax  credits  under
     Section 29.

     In October 2003,  the National  Office of the IRS informed the Company that
     it had rejected the IRS field auditors'  challenges  regarding  whether the
     synthetic fuel produced at the Company's  Colona facility was the result of
     a significant  chemical change.  The National Office had concluded that the
     experts, engaged by Colona who test the synthetic fuel for chemical change,
     use reasonable scientific methods to reach their conclusions.  Accordingly,
     the  National  Office will not take any adverse  action on the PLR that has
     been issued for the Colona facility.

                                       28
<PAGE>

     A written decision  memorializing the National Office's  conclusions should
     be  available  within  the next two  months.  At that  time,  the IRS field
     auditors  will have the right to ask for  reconsideration  of the  National
     Office's decision.

     Although  this  ruling  applies  only to the Colona  facility,  the Company
     believes that the National Office's  reasoning should be equally applicable
     to the other Progress  Energy  facilities,  given that the Company  applies
     essentially  the same  chemical  process  and  uses  the  same  independent
     laboratories to confirm chemical change in the synthetic fuel  manufactured
     at each of its  other  facilities.  However,  the IRS has not yet  formally
     informed the Company as to its position on the Company's other facilities.

     Although this is a significant event, the audits of the Colona facility and
     the Company's  other  facilities  are not yet  completed.  Progress  Energy
     continues to believe that it operates its facilities in conformity with its
     PLRs and Section 29. Accordingly, the Company has no current plans to alter
     its synthetic fuel production schedule as a result of these matters.

     In  addition,  the Company has  retained an advisor to assist in selling an
     interest in one or more synthetic  fuel  entities.  The Company is pursuing
     the sale of a portion of its  synthetic  fuel  production  capacity that is
     underutilized  due to limits on the amount of credits that can be generated
     and  utilized  by the  Company.  The  Company  would  expect  to  retain an
     ownership  interest and to operate any sold facility for a management  fee.
     The final outcome and timing of the Company's  efforts to sell interests in
     synthetic fuel facilities is uncertain and while the Company cannot predict
     the outcome of this matter,  the outcome is not expected to have a material
     effect on the  consolidated  financial  position,  cash flows or results of
     operations.

     b) In November of 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. On March 4, 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  has  asserted  defenses  to the
     District's  claims.  SRS has  amended  its claims and  asserted  new claims
     against the District and other parties, including a former SRS employee and
     a former District employee.

     On March 13, 2003, the City Attorney's  office  announced the filing of new
     claims  by  the  City   Attorney   and  the  District  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 City Attorney's  announcement  states that
     the City and the  District  seek  "more than $300  million  in damages  and
     penalties."

     The  Company,  SRS,  and  Progress  Energy  Solutions,  Inc. all have filed
     responsive pleadings denying the allegations,  and the discovery process is
     underway.

     On  October  2, 2003,  the  District  filed a motion for leave to amend its
     cross-complaint to add PEC as an additional  defendant and the parties have
     stipulated that the pleadings may be so amended. PEC will file a responsive
     pleading denying the allegations.

     The Company  cannot  predict the  outcome of this  matter,  but the Company
     believes  that it and its  subsidiaries  have good  defenses  to all claims
     asserted by the District and other claimants.

     c) On August 21,  2003,  PEC was served as a  co-defendant  in a  purported
     class action  lawsuit styled as Collins v. Duke Energy  Corporation,  Civil
     Action No.  03CP404050,  in South Carolina's  Circuit Court of Common Pleas
     for the Fifth  Judicial  Circuit.  PEC is one of three  electric  utilities
     operating in South  Carolina  named in the suit. The plaintiffs are seeking
     damages for the alleged  improper  use of electric  easements  but have not
     asserted a dollar amount for their damage  claims.  The  complaint  alleges
     that the licensing of  attachments on electric  utility  poles,  towers and
     other  structures  to  non-utility   third  parties  or   telecommunication
     companies  for other than the  electric  utilities'  internal use along the
     electric right-of-way constitutes a trespass.

     On  September  19,  2003,  PEC filed a motion to dismiss  all counts of the
     complaint on substantive  and procedural  grounds.  On October 6, 2003, the
     plaintiffs  filed a motion  to amend  their  complaint.  PEC  believes  the
     amended  complaint  asserts  the  same  factual  allegations  as are in the
     original complaint and also seeks money damages and injunctive relief.

     The court has not yet held any  hearings  or made any rulings in this case.
     PEC intends to vigorously  defend itself against the claims asserted by the
     plaintiffs.  PEC cannot  predict the outcome of any future  proceedings  in
     this case.

                                       29
<PAGE>

     d) The  Company and its  subsidiaries  are  involved in various  litigation
     matters in the ordinary  course of business,  some of which involve  claims
     for  substantial  amounts.  Where  appropriate,  accruals have been made in
     accordance with SFAS No. 5, "Accounting for  Contingencies," to provide for
     such  matters.  The  Company  believes  the final  disposition  of  pending
     litigation  would  not have a  material  adverse  effect  on the  Company's
     consolidated results of operations or financial position.

16.  SUBSEQUENT EVENT

     On  November  3,  2003,  Progress  Telecom   Corporation  (PTC),   Progress
     Telecommunications  Corporation  (PTC  Communications),  and Caronet,  Inc.
     (Caronet),  all  of  which  are  indirectly  wholly-owned  subsidiaries  of
     Progress Energy, agreed to enter into a Contribution  Agreement (Agreement)
     with EPIK Communications, Inc. (EPIK). EPIK is a wholly-owned subsidiary of
     Odyssey  Telecorp,  Inc.  (Odyssey).  The Company plans to account for this
     transaction as a business combination.

     Under terms of the Agreement, on November 4, 2003, PTC was converted into a
     limited liability company and renamed Progress Telecom,  LLC (PTC LLC). The
     Agreement  provides  that  PTC   Communications,   Caronet  and  EPIK  will
     contribute   substantially   all  of  their  assets  and  transfer  certain
     liabilities  to PTC LLC in exchange  for  membership  interests in PTC LLC.
     Following  the   contribution   of  their   respective   net  assets,   PTC
     Communications  will  hold a 55  percent  membership  interest  in PTC LLC;
     Caronet will hold a 5 percent membership interest;  and EPIK will hold a 40
     percent  membership  interest.  After the contribution of net assets to PTC
     LLC,  the stock of Caronet will be sold to an affiliate of Odyssey for cash
     and  Caronet  will  then  become an  indirect  wholly-owned  subsidiary  of
     Odyssey.  Following  consummation of the transactions  described above, PTC
     Communications  will hold a 55 percent  ownership  interest in PTC LLC, and
     Odyssey will hold a 45 percent  ownership  interest in PTC LLC through EPIK
     and Caronet.  The Company anticipates closing the transaction by the end of
     the year; however, the closing is subject to certain conditions  precedent,
     including  receipt of applicable  governmental  and regulatory  permits and
     approvals.

                                       30
<PAGE>




                         CAROLINA POWER & LIGHT COMPANY
                      d/b/a PROGRESS ENERGY CAROLINAS, INC.
                    CONSOLIDATED INTERIM FINANCIAL STATEMENTS
                               September 30, 2003
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

CONSOLIDATED STATEMENTS OF INCOME
                                                          Three Months Ended                 Nine Months Ended
(Unaudited)                                                  September 30,                     September 30,
----------------------------------------------------------------------------------------------------------------

(In thousands)                                           2003           2002           2003        2002
----------------------------------------------------------------------------------------------------------------
Operating Revenues
   Electric                                           $ 1,009,889    $ 1,045,180    $ 2,751,599     $ 2,691,320
   Diversified business                                     2,392          4,304          8,211          11,127
----------------------------------------------------------------------------------------------------------------
      Total Operating Revenues                          1,012,281      1,049,484      2,759,810       2,702,447
----------------------------------------------------------------------------------------------------------------
Operating Expenses
   Fuel used in electric generation                       233,537        219,594        636,098         562,297
   Purchased power                                         98,213        123,365        240,370         287,593
   Operation and maintenance                              205,667        183,686        605,838         571,009
   Depreciation and amortization                          135,129        130,530        415,773         405,375
   Taxes other than on income                              44,326         43,502        123,603         118,345
   Diversified business                                       946          7,505          3,480          13,320
   Impairment of diversified business long-lived assets         -        101,251              -         101,251
----------------------------------------------------------------------------------------------------------------
        Total Operating Expenses                          717,818        809,433      2,025,162       2,059,190
----------------------------------------------------------------------------------------------------------------
Operating Income                                          294,463        240,051        734,648         643,257
----------------------------------------------------------------------------------------------------------------
Other Income (Expense)
   Interest income                                            985            330          4,426           5,198
   Impairment of investment                                     -        (25,011)             -         (25,011)
   Other, net                                              (3,190)        (5,551)       (14,121)         (3,870)
----------------------------------------------------------------------------------------------------------------
        Total Other Expense                                (2,205)       (30,232)        (9,695)        (23,683)
----------------------------------------------------------------------------------------------------------------
Interest Charges
   Interest charges                                        46,893         49,390        144,609         167,289
   Allowance for borrowed funds used during                   318            276        (1,265)         (5,597)
       construction
----------------------------------------------------------------------------------------------------------------
        Total Interest Charges, Net                        47,211         49,666        143,344         161,692
----------------------------------------------------------------------------------------------------------------
Income before Income Taxes                                245,047        160,153        581,609         457,882
Income Tax Expense                                         87,473         66,014        200,161         147,471
----------------------------------------------------------------------------------------------------------------
Net Income                                            $   157,574    $    94,139    $   381,448     $   310,411
Preferred Stock Dividend Requirement                          741            741          2,223           2,223
----------------------------------------------------------------------------------------------------------------
Earnings for Common Stock                             $   156,833    $    93,398    $   379,225     $   308,188
----------------------------------------------------------------------------------------------------------------

See Notes to Progress Energy Carolinas, Inc. Consolidated Interim Financial Statements.
</TABLE>

                                       31
<PAGE>
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Carolina Power & Light Company
d/b/a Progress Energy Carolinas, Inc.
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(In thousands)                                                 September 30,                 December 31,
Assets                                                             2003                          2002
----------------------------------------------------------------------------------------------------------
     Utility Plant
  Utility plant in service                                     $ 13,211,543                  $ 12,675,761
  Accumulated depreciation                                       (6,190,180)                   (6,356,933)
----------------------------------------------------------------------------------------------------------
        Utility plant in service, net                             7,021,363                     6,318,828
  Held for future use                                                 5,256                         7,188
  Construction work in progress                                     300,458                       325,695
  Nuclear fuel, net of amortization                                 147,343                       176,622
----------------------------------------------------------------------------------------------------------
        Total Utility Plant, Net                                  7,474,420                     6,828,333
----------------------------------------------------------------------------------------------------------
     Current Assets
  Cash and cash equivalents                                          63,435                        18,284
  Accounts receivable                                               306,242                       301,178
  Unbilled accounts receivable                                      119,477                       151,352
  Receivables from affiliated companies                              18,266                        36,870
  Notes receivable from affiliated companies                        122,577                        49,772
  Taxes receivable                                                        -                        55,006
  Inventory                                                         332,757                       342,886
  Deferred fuel cost                                                135,063                       146,015
  Prepayments and other current assets                               35,500                        45,542
----------------------------------------------------------------------------------------------------------
        Total Current Assets                                      1,133,317                     1,146,905
----------------------------------------------------------------------------------------------------------
     Deferred Debits and Other Assets
  Regulatory assets                                                 522,036                       252,083
  Nuclear decommissioning trust funds                               480,135                       423,293
  Diversified business property, net                                 13,584                         9,435
  Miscellaneous other property and investments                      199,122                       209,657
  Other assets and deferred debits                                  106,519                       104,978
----------------------------------------------------------------------------------------------------------
        Total Deferred Debits and Other Assets                    1,321,396                       999,446
----------------------------------------------------------------------------------------------------------
           Total Assets                                        $  9,929,133                  $  8,974,684
----------------------------------------------------------------------------------------------------------
Capitalization and Liabilities
----------------------------------------------------------------------------------------------------------
Capitalization
----------------------------------------------------------------------------------------------------------
  Common stock                                                 $  1,950,392                  $  1,929,515
  Unearned ESOP common stock                                        (88,734)                     (101,560)
  Accumulated other comprehensive loss                              (79,506)                      (82,769)
  Retained earnings                                               1,395,525                     1,343,929
----------------------------------------------------------------------------------------------------------
        Total Common Stock Equity                                 3,177,677                     3,089,115
----------------------------------------------------------------------------------------------------------
  Preferred stock - not subject to mandatory redemption              59,334                        59,334
  Long-term debt, net                                             3,108,211                     3,048,466
----------------------------------------------------------------------------------------------------------
        Total Capitalization                                      6,345,222                     6,196,915
----------------------------------------------------------------------------------------------------------
Current Liabilities
  Current portion of long-term debt                                 300,000                             -
  Accounts payable                                                  164,726                       259,217
  Payables to affiliated companies                                   77,022                        98,572
  Notes payable to affiliated companies                                 670                             -
  Taxes accrued                                                      36,055                             -
  Interest accrued                                                   47,468                        58,791
  Short-term obligations                                                  -                       437,750
  Current portion of accumulated deferred income taxes               39,607                        66,088
  Other current liabilities                                         109,076                        93,171
----------------------------------------------------------------------------------------------------------
        Total Current Liabilities                                   774,624                     1,013,589
----------------------------------------------------------------------------------------------------------
Deferred Credits and Other Liabilities
  Accumulated deferred income taxes                               1,150,204                     1,179,689
  Accumulated deferred investment tax credits                       150,657                       158,308
  Regulatory liabilities                                            145,976                         7,774
  Asset retirement obligations                                      918,441                             -
  Other liabilities and deferred credits                            444,009                       418,409
----------------------------------------------------------------------------------------------------------
        Total Deferred Credits and Other Liabilities              2,809,287                     1,764,180
----------------------------------------------------------------------------------------------------------
Commitments and Contingencies (Note 10)
----------------------------------------------------------------------------------------------------------
            Total Capitalization and Liabilities                $ 9,929,133                  $  8,974,684
----------------------------------------------------------------------------------------------------------

See Notes to Progress Energy Carolinas, Inc. Consolidated Interim Financial Statements.
</TABLE>

                                       32
<PAGE>
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

Carolina Power & Light Company
d/b/a Progress Energy Carolinas, Inc.
CONSOLIDATED STATEMENTS OF CASH FLOWS                                                   Nine Months Ended
(Unaudited)                                                                               September 30,
(In thousands)                                                                         2003           2002
-----------------------------------------------------------------------------------------------------------------
     Operating Activities
Net income                                                                           $  381,448     $  310,411
Adjustments to reconcile net income to net cash provided by operating
activities:
      Impairment of long-lived assets and investments                                         -        126,262
      Depreciation and amortization                                                     486,285        487,454
      Deferred income taxes                                                             (46,413)       (73,640)
      Investment tax credit                                                              (7,651)        (9,285)
      Deferred fuel cost (credit)                                                        10,952        (22,596)
      Net (increase) decrease in accounts receivable                                      6,353        (36,966)
      Net (increase) decrease in affiliated accounts receivable                          31,706        (47,021)
      Net increase in inventories                                                        17,302         11,893
      Net (increase) decrease in prepayments and other current assets                    10,555         (9,173)
      Net increase (decrease) in accounts payable                                       (48,393)        27,621
      Net increase (decrease) in affiliated accounts payable                            (36,783)         3,163
      Net increase in other current liabilities                                          96,649         89,923
      Other                                                                              54,870         63,341
-----------------------------------------------------------------------------------------------------------------
         Net Cash Provided by Operating Activities                                      956,880        921,387
-----------------------------------------------------------------------------------------------------------------
     Investing Activities
Gross property additions                                                               (347,193)      (454,807)
Proceeds from sale of assets and investments                                             25,671        243,719
Diversified business property additions and acquisitions                                   (358)       (11,625)
Nuclear fuel additions                                                                  (45,657)       (56,051)
Contributions to nuclear decommissioning trust                                          (25,656)       (25,573)
Other investing activities                                                               (1,416)       (12,333)
-----------------------------------------------------------------------------------------------------------------
         Net Cash Used in Investing Activities                                         (394,609)      (316,670)
-----------------------------------------------------------------------------------------------------------------
     Financing Activities
Issuance of long-term debt, net                                                         588,291        542,290
Net decrease in short-term obligations                                                 (437,750)        (8,250)
Net increase in intercompany notes                                                      (72,806)      (114,638)
Retirement of long-term debt                                                           (269,217)      (706,747)
Dividends paid to parent                                                               (327,629)      (300,000)
Dividends paid on preferred stock                                                        (2,223)        (2,223)
Other                                                                                     4,214        (22,488)
-----------------------------------------------------------------------------------------------------------------
         Net Cash Used in Financing Activities                                         (517,120)      (612,056)
-----------------------------------------------------------------------------------------------------------------
     Net Increase (Decrease) in Cash and Cash Equivalents                                45,151         (7,339)
-----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at Beginning of the Period                                     18,284         21,250
-----------------------------------------------------------------------------------------------------------------
Cash and Cash Equivalents at End of the Period                                       $   63,435     $   13,911
-----------------------------------------------------------------------------------------------------------------

Supplemental Disclosures of Cash Flow Information
Cash paid during the year -  interest (net of amount capitalized)                    $  150,512     $  169,092
                          - income taxes (net of refunds)                            $  209,736     $  181,444

Noncash Activities
o    In February 2002,  PEC  transferred  the Rowan plant to Progress  Ventures,
     Inc. and established an intercompany receivable. The property and inventory
     transferred totaled approximately $244 million. In April 2002, PEC received
     cash  proceeds  in  settlement  of  the  intercompany  receivable  totaling
     approximately  $244 million.  This amount is reported in proceeds from sale
     of assets and investments in the investing activities section.

See Notes to Progress Energy Carolinas, Inc. Consolidated Interim Financial Statements.
</TABLE>


                                       33
<PAGE>



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

     Progress  Energy  Carolinas,  Inc.  (PEC) is a public  service  corporation
     primarily engaged in the generation, transmission, distribution and sale of
     electricity primarily in portions of North Carolina and South Carolina. 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.

     Effective  January 1, 2003,  Carolina  Power & Light  Company  began  doing
     business under the assumed name Progress Energy  Carolinas,  Inc. The legal
     name has not changed and there was no  restructuring of any kind related to
     the name change.  The current corporate and business unit structure remains
     unchanged.

     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 complete financial  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, 2002 and notes  thereto  included in PEC's Form 10-K/A for the
     year ended December 31, 2002.

     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,  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 2002 have been reclassified to conform
     to the 2003 presentation.

2.   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 Federal
     Energy  Regulatory   Commission   (FERC),   the  North  Carolina  Utilities
     Commission (NCUC), the Public Service Commission of South Carolina (SCPSC),
     and the U.S. Nuclear Regulatory Commission (NRC).

     The Other segment,  whose operations are primarily in the United States, is
     made up of other nonregulated  business areas including  telecommunications
     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"  and  consolidation   entities  and
     eliminations.  Included are the  telecommunications  operations of Caronet,
     Inc.,  which  recognized an $87.4 million  after-tax  asset and  investment
     impairment in September 2002.


                                       34
<PAGE>

     The  financial  information  for PEC segments for the three and nine months
     ended September 30, 2003 and 2002 is as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     (in thousands)
     Three Months Ended
     September 30,                                   2003                                         2002
                                   -----------------------------------------    ------------------------------------------
                                   PEC Electric     Other         Total         PEC Electric      Other         Total
                                   -----------------------------------------    ------------------------------------------
     Total revenues                 $ 1,009,889     $   2,392   $ 1,012,281      $ 1,045,180      $   4,304   $ 1,049,484
     Segment profit (loss)              159,998        (3,165)      156,833          179,308        (85,910)       93,398
     Total segment assets           $ 9,736,103     $ 193,030   $ 9,929,133      $ 8,785,416      $ 220,667   $ 9,006,083
     =====================================================================================================================


     (in thousands)
     Nine Months Ended September
     30,                                             2003                                         2002
                                   -----------------------------------------    ------------------------------------------
                                   PEC Electric     Other         Total         PEC Electric     Other          Total
                                   -----------------------------------------    ------------------------------------------
     Total revenues                 $ 2,751,599     $   8,211   $ 2,759,810      $ 2,691,320     $  11,127    $ 2,702,447
     Segment profit (loss)              383,262        (4,037)      379,225          396,530       (88,342)       308,188
     Total segment assets           $ 9,736,103     $ 193,030   $ 9,929,133      $ 8,785,416     $ 220,667    $ 9,006,083
     =====================================================================================================================
</TABLE>

3.   IMPACT OF NEW ACCOUNTING STANDARDS

     SFAS No. 148, "Accounting for Stock-Based Compensation"
     For  purposes  of the pro  forma  disclosures  required  by 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.  PEC's  information  related  to the pro forma  impact on  earnings
     assuming  stock  options were  expensed for the three and nine months ended
     September 30 is as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                               Three Months Ended             Nine Months Ended
                                                                  September 30,                 September 30,
     (in thousands)                                            2003           2002            2003         2002
                                                            ------------  -------------    -----------  ------------
     Earnings for common stock, as reported                   $ 156,833       $ 93,398      $ 379,225     $ 308,188
     Deduct:  Total stock option expense determined under
       fair value method for all awards, net of related
       tax effects                                                2,357          1,018          4,136         2,312
                                                            ------------  -------------    -----------  ------------
     Pro forma earnings for common stock                      $ 154,476       $ 92,380      $ 375,089     $ 305,876
                                                            ============  =============    ===========  ============

</TABLE>
     During 2003, the Financial  Accounting  Standards Board (FASB) has approved
     certain decisions in conjunction with its stock-based compensation project.
     Some of the  key  decisions  reached  by the  FASB  were  that  stock-based
     compensation  should be  recognized  statement  as an expense  and that the
     expense  should be measured  as of the grant date at fair  value.  The FASB
     continues  to  deliberate  additional  issues in this  project and plans to
     issue an exposure draft in early 2004.

     Derivative Instruments and Hedging Activities
     In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
     Derivative  Instruments and Hedging  Activities."  The statement amends and
     clarifies SFAS No. 133 on accounting for derivative instruments,  including
     certain derivative instruments embedded in other contracts, and for hedging
     activities.  The new guidance  incorporates  decisions  made as part of the
     Derivatives  Implementation  Group  (DIG)  process,  as well  as  decisions
     regarding  implementation  issues raised in relation to the  application of
     the  definition  of a derivative.  SFAS No. 149 is generally  effective for
     contracts entered into or modified after June 30, 2003. Interpretations and
     implementation issued with regard to SFAS No. 149 continue to evolve. Based
     on its analysis and  understanding  to date, and  considering  the types of
     contracts  historically  entered into,  PEC does not  anticipate  that this
     statement  will have a  significant  impact on its results of operations or
     financial position.

     In connection  with the January 2003 FASB Emerging Issues Task Force (EITF)
     meeting, the FASB was requested to reconsider an interpretation of SFAS No.
     133.  The   interpretation,   which  is   contained   in  the   Derivatives
     Implementation  Group's C11  guidance,  relates to the pricing of contracts
     that include broad market indices (e.g., CPI). In particular, that guidance
     discusses  whether the pricing in a contract  that  contains  broad  market
     indices could qualify as a normal  purchase or sale (the normal purchase or
     sale term is a defined accounting term, and may not, in all cases, indicate
     whether the contract would be "normal" from an operating entity viewpoint).

                                       35
<PAGE>

     In June 2003, the FASB issued final superseding guidance (DIG Issue C20) on
     this issue, which is significantly different from the tentative superseding
     guidance  that was issued in April  2003.  The new  guidance  is  effective
     October  1,  2003 for PEC.  DIG  Issue C20  specifies  new  pricing-related
     criteria for  qualifying  as a normal  purchase or sale,  and it requires a
     special transition adjustment as of October 1, 2003.

     PEC determined that it has one existing  "normal" contract that is affected
     by this revised  guidance.  The contract is a purchase power agreement with
     Broad River LLC, which is a subsidiary of Calpine Corporation.  Pursuant to
     the  provisions of DIG Issue C20, PEC will record a pre-tax fair value loss
     transition adjustment of $37.6 million in the fourth quarter of 2003, which
     will  be  reported  as a  cumulative  effect  of  a  change  in  accounting
     principle. The subject contract meets the DIG Issue C20 criteria for normal
     purchase or sale and, therefore,  was designated as a normal purchase as of
     October 1, 2003.  The liability of $37.6 million  associated  with the fair
     value  loss will be  amortized  to  earnings  over the term of the  related
     contract.

     SFAS  No.  150,   "Accounting  for  Certain   Financial   Instruments  with
     Characteristics of Both Liabilities and Equity"
     In May  2003,  the  FASB  issued  SFAS No.  150,  "Accounting  for  Certain
     Financial Instruments with Characteristics of Both Liabilities and Equity."
     SFAS  No.  150  establishes  standards  for how an  issuer  classifies  and
     measures  certain  financial   instruments  with  characteristics  of  both
     liabilities  and equity.  It requires  that an issuer  classify a financial
     instrument  that is within  its scope as a  liability  (or an asset in some
     circumstances).  The financial instruments within the scope of SFAS No. 150
     include  mandatorily  redeemable  stock,   obligations  to  repurchase  the
     issuer's equity shares by transferring  assets, and certain  obligations to
     issue a variable  number of shares.  SFAS No. 150 is effective  immediately
     for such  instruments  entered into or modified after May 31, 2003, and was
     effective for previously issued financial  instruments  within its scope on
     July 1, 2003.  The adoption of SFAS No. 150 did not have a material  impact
     on PEC's financial position or results of operations.

     FIN No. 46, "Consolidation of Variable Interest Entities"
     In January 2003, the FASB issued  Interpretation No. 46,  "Consolidation of
     Variable Interest Entities - an Interpretation of ARB No. 51" (FIN No. 46).
     This  interpretation  provides  guidance  related to  identifying  variable
     interest   entities  and  determining   whether  such  entities  should  be
     consolidated.  FIN No. 46 requires an enterprise to  consolidate a variable
     interest  entity when the enterprise (a) absorbs a majority of the variable
     interest entity's expected losses,  (b) receives a majority of the entity's
     expected residual returns,  or both, as a result of ownership,  contractual
     or other financial interests in the entity.  Prior to the effective date of
     FIN No. 46, entities were generally  consolidated by an enterprise that had
     control through ownership of a majority voting interest in the entity.  FIN
     No. 46  applies  immediately  to  variable  interest  entities  created  or
     obtained after January 31, 2003.  During the first nine months of 2003, PEC
     did not  participate in the creation of, or obtain a new variable  interest
     in, any variable interest entity. On October 9, 2003, the FASB issued Staff
     Position  No. FIN 46-6,  which  allowed  for the  optional  deferral of the
     effective date of FIN No. 46 from July 1, 2003 until December 31, 2003, for
     interests held by a public company in variable  interest  entities  created
     prior to February 1, 2003.  Because  PEC  expects  additional  transitional
     guidance to be issued,  it has  deferred its  implementation  of FIN No. 46
     until December 31, 2003.

     PEC has  investments  in 14 limited  partnerships  accounted  for under the
     equity  method  for  which  it  may  be  the  primary  beneficiary.   These
     partnerships  invest  in and  operate  low-income  housing  and  historical
     renovation  properties that qualify for federal and state tax credits.  PEC
     has  not  concluded  whether  it  is  the  primary   beneficiary  of  these
     partnerships.  These  partnerships are partially funded with financing from
     third party  lenders,  which is secured by the assets of the  partnerships.
     The  creditors  of the  partnerships  do not have  recourse  to PEC.  As of
     September  30,  2003,  the  maximum  exposure  to loss as a result of PEC's
     investments for these limited  partnerships is approximately $15.5 million.
     PEC expects to complete its evaluation of these  partnerships under FIN No.
     46 during the  fourth  quarter of 2003.  If PEC had  consolidated  these 14
     entities as of September  30, 2003,  it would have  recorded an increase to
     both total assets and total liabilities of approximately $45.8 million.

     PEC is also evaluating  several other potential  variable interest entities
     created  before  January 31,  2003,  for which PEC would not be the primary
     beneficiary  based on the  current  guidance.  These  arrangements  include
     equity  investments  in  approximately  14  limited  partnerships,  limited
     liability  corporation and venture  capital funds,  and two building leases
     with special purpose entities.  If all of these entities were determined to
     be variable  interest  entities,  the aggregate maximum loss exposure as of
     September  30, 2003 under these  arrangements  totals  approximately  $25.7
     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.  PEC expects to complete its  evaluation of these  entities
     under FIN No. 46 during the fourth quarter of 2003.

                                       36
<PAGE>


     EITF Issue No. 03-04, "Accounting for `Cash Balance' Pension Plans"
     In May  2003,  the  EITF  reached  consensus  in EITF  Issue  No.  03-04 to
     specifically address the accounting for certain cash balance pension plans.
     The consensus reached in EITF Issue No. 03-04 requires certain cash balance
     pension  plans to be  accounted  for as  defined  benefit  plans.  For cash
     balance plans  described in the consensus,  the consensus also requires the
     use of the  traditional  unit credit  method for purposes of measuring  the
     benefit  obligation  and annual cost of  benefits  earned as opposed to the
     projected unit credit method.  PEC has historically  accounted for its cash
     balance plans as defined benefit plans;  however,  PEC is required to adopt
     the  measurement  provisions of EITF 03-04 at its cash balance  plans' next
     measurement  date of December 31, 2003. Any  differences in the measurement
     of the  obligations  as a result of applying the consensus will be reported
     as a component of actuarial  gain or loss.  The effect of this  standard on
     PEC is dependent on other  factors  that also affect the  determination  of
     actuarial  gains and losses and the subsequent  amortization  of such gains
     and losses. However, PEC does not expect the adoption of EITF 03-04 to have
     a material effect on its results of operations or financial position.

4.   ASSET RETIREMENT OBLIGATIONS

     SFAS No.  143,  "Accounting  for Asset  Retirement  Obligations,"  provides
     accounting  and   disclosure   requirements   for  retirement   obligations
     associated with long-lived  assets and was adopted by the Company effective
     January  1,  2003.  This  statement  requires  that  the  present  value of
     retirement  costs for  which  PEC has a legal  obligation  be  recorded  as
     liabilities  with  an  equivalent  amount  added  to  the  asset  cost  and
     depreciated over an appropriate period. The liability is then accreted over
     time by  applying  an  interest  method  of  allocation  to the  liability.
     Cumulative  accretion and accumulated  depreciation were recognized for the
     time period from the date the liability  would have been recognized had the
     provisions  of this  statement  been in effect,  to the date of adoption of
     this statement.

     Upon adoption of SFAS No. 143, PEC recorded  asset  retirement  obligations
     (AROs) for nuclear  decommissioning  of irradiated  plant  totaling  $879.7
     million.  PEC  used  an  expected  cash  flow  approach  to  measure  these
     obligations.  This  amount  includes  accruals  recorded  prior to adoption
     totaling  $491.3  million,  which were  previously  recorded in accumulated
     depreciation.  The  related  asset  retirement  costs,  net of  accumulated
     depreciation, recorded upon adoption totaled $117.3 million. The cumulative
     effect of  adoption  of this  statement  had no impact on the net income of
     PEC, as the effects were offset by the  establishment of a regulatory asset
     in the amount of $271.1 million,  pursuant to SFAS No. 71,  "Accounting for
     the  Effects  of  Certain  Types  of  Regulation."   The  regulatory  asset
     represents the cumulative  accretion and accumulated  depreciation  for the
     time period from the date the liability  would have been recognized had the
     provisions of this statement  been in effect to the date of adoption,  less
     the amount previously recorded.

     Funds set aside in PEC's nuclear decommissioning trust fund for the nuclear
     decommissioning  liability totaled $480.1 million at September 30, 2003 and
     $423.3  million at December  31,  2002.  In  accordance  with SFAS No. 143,
     unrealized gains and losses on the nuclear  decommissioning  trust fund are
     now   included  in   regulatory   liabilities   rather   than   accumulated
     depreciation.  The balance of this regulatory liability as of September 30,
     2003 was $84.3 million for PEC.

     Pro forma net income has not been presented for prior years because the pro
     forma  application of SFAS No. 143 to prior years would result in pro forma
     net income not materially different from the actual amounts reported.

     PEC has identified but not recognized AROs related to electric transmission
     and distribution and  telecommunications  assets as the result of easements
     over property not owned by PEC. These easements are generally perpetual and
     only require  retirement action upon abandonment or cessation of use of the
     property for the specified purpose.  The ARO liability is not estimable for
     such easements as PEC intends to utilize these properties indefinitely.  In
     the event PEC decides to abandon or cease the use of a particular easement,
     an ARO liability would be recorded at that time.

     PEC has previously  recognized removal costs as a component of depreciation
     in accordance  with  regulatory  treatment.  As of September 30, 2003,  the
     portion of such costs not  representing  AROs under SFAS No. 143 was $908.7
     million.  This  amount  is  included  in  accumulated  depreciation  on the
     accompanying  Consolidated  Balance Sheets.  PEC has collected  amounts for
     non-irradiated  areas at nuclear  facilities,  which do not represent asset
     retirement obligations. These amounts totaled $65.7 million as of September
     30, 2003, which is included in accumulated depreciation on the accompanying
     Consolidated Balance Sheets.

     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 10 under "Air Quality" contained a prohibition  against cost deferrals
     unless certain  criteria are met, the NCUC initially denied the deferral of
     the ongoing effects. During the second quarter of 2003, PEC ceased deferral
     of the ongoing  effects for the six months  ended June 30, 2003  related to
     its North Carolina  retail  jurisdiction.  Pre-tax income for the three and


                                       37
<PAGE>

     six months ended June 30, 2003  increased by  approximately  $13.6 million,
     which represented a decrease in non-ARO cost of removal expense,  partially
     offset  by  an  increase  in   decommissioning   expense.   PEC   requested
     reconsideration  from the NCUC  regarding the ongoing  effects.  During the
     third  quarter of 2003,  the NCUC issued an order  allowing the deferral of
     the ongoing  effects and PEC reversed the second quarter  income  statement
     impact in  accordance  with the NCUC's  decision.  Therefore,  the  ongoing
     effects  of SFAS No.  143 have no impact on the  income of PEC for the nine
     months ended September 30, 2003.

     On April 8, 2003,  the SCPSC  approved a joint  request by PEC, Duke Energy
     and South  Carolina  Electric  and Gas Company for an  accounting  order to
     authorize the deferral of all cumulative and prospective effects related to
     the adoption of SFAS No. 143.

5.   COMPREHENSIVE INCOME

     Comprehensive income for the three and nine months ended September 30, 2003
     was $161.5 million and $384.7 million,  respectively.  Comprehensive income
     for the three and nine months ended  September  30, 2002 was $89.7  million
     and $307.9 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

     On April 1, 2003,  PEC  reduced  the size of its  existing  364-day  credit
     facility  from  $285  million  to $165  million.  The  other  terms of this
     facility were not changed.  On July 30, 2003,  PEC renewed its $165 million
     364-day credit  agreement.  PEC's $285 million  three-year credit agreement
     entered  into in 2002  remains  in  place,  for  total  facilities  of $450
     million.

     On May 27, 2003,  PEC redeemed $150 million of First Mortgage  Bonds,  7.5%
     Series, Due March 1, 2023 at 103.22% of the principal amount of such bonds.
     PEC funded the redemption with commercial paper.

     On July 14, 2003,  PEC  announced  the  redemption of $100 million of First
     Mortgage Bonds,  6.875% Series Due August 15, 2023 at 102.84%.  The date of
     the  redemption  was  August 15,  2003.  PEC  funded  the  redemption  with
     commercial paper.

     On September  11, 2003,  PEC issued $400 million of First  Mortgage  Bonds,
     5.125%  Series,  Due September 15, 2013 and $200 million of First  Mortgage
     Bonds,  6.125% Series, due September 15, 2033.  Proceeds from this issuance
     were used to reduce the balance of PEC's  outstanding  commercial paper and
     short-term  notes payable to affiliated  companies,  which  represent PEC's
     borrowings under an internal money pool operated by Progress Energy.

7.   RISK MANAGEMENT ACTIVITIES AND DERIVATIVE TRANSACTIONS

     PEC 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 March, April, May
     and June of  2003,  PEC  entered  into  treasury  rate  locks to hedge  its
     exposure to interest  rates with regard to a future  issuance of fixed-rate
     debt.  These  agreements had a  computational  period of ten years and were
     designated as cash flow hedges for accounting  purposes.  These agreements,
     with  a  total   notional   amount  of  $110   million,   were   terminated
     simultaneously  with  the  pricing  of the  PEC  First  Mortgage  Bonds  in
     September 2003. The $4.2 million gain on the agreements was deferred and is
     being  amortized  over the life of the bonds as these  agreements  had been
     designated as cash flow hedges for accounting purposes.

     The notional  amounts of the above  contracts  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. PEC only enters into interest rate swap agreements
     with banks with credit ratings of single A or better.

8.   REGULATORY MATTERS

     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 March 28, 2003.
     The NCUC  approved an increase of $19.6  million by order issued  September
     25, 2003.

     On October 16, 2003,  PEC made a filing with the North  Carolina  Utilities
     Commission  (NCUC)  to seek  permission  to defer  expenses  incurred  from
     Hurricane Isabel and the February 2003 winter storms. As a result of rising
     storm costs and the  frequency of major storm damage,  Progress  Energy has
     asked the NCUC to allow the  company to create a deferred  account in which
     the company  would place  expenses  incurred as a result of named  tropical
     storms,  hurricanes and significant winter storms. The future  amortization

                                       38
<PAGE>

     of such deferred costs would be includable as allowable  costs in base rate
     filings.  The Company  estimates that it would charge $23.5 million in 2003
     from  Hurricane  Isabel and from  current  year ice storms to the  deferred
     account,  if approved.  Any  additional  major storm activity in 2003 could
     cause the amount to increase.

9.   OTHER INCOME AND OTHER EXPENSE

     Other  income and expense  includes  interest  income,  gain on the sale of
     investments,  impairment of investments  and other income and expense items
     as  discussed  below.  The  components  of  other,  net  as  shown  on  the
     accompanying  Consolidated  Statements  of  Income  for the  three and nine
     months ended September 30, 2003 and 2002 are as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

                                                                Three Months Ended                  Nine Months Ended
                                                                   September 30,                      September 30,
     (in thousands)                                           2003              2002              2003              2002
                                                          --------------    --------------    -------------     -------------
     Other income
     Net financial trading gain (loss)                        $     384          $   (169)        $ (1,139)         $ (1,598)
     Net energy brokered for resale                                 246               440              516               888
     Nonregulated energy and delivery services income             1,632             4,503            5,971            10,069
     AFUDC equity                                                  (728)            2,367            1,136             6,028
     Investment gains                                                 -                 -                -             2,960
     Other                                                        4,000            (3,099)           9,522             3,098
                                                          --------------    --------------    -------------     -------------
         Total other income                                   $   5,534          $  4,042         $ 16,006          $ 21,445
                                                          --------------    --------------    -------------     -------------

      Other expense
     Nonregulated energy and delivery services expenses       $   1,979          $  4,528         $  5,974          $  9,796
     Donations                                                    1,398             1,367            4,043             3,915
     Investment losses                                              558               952            9,202             2,857
     Other                                                        4,789             2,746           10,908             8,747
                                                          --------------    --------------    -------------     -------------
        Total other expense                                   $   8,724          $  9,593         $ 30,127          $ 25,315
                                                          --------------    --------------    -------------     -------------

     Other, net                                               $  (3,190)         $ (5,551)        $(14,121)         $ (3,870)
                                                          ==============    ==============    =============     =============
</TABLE>

     Net financial trading gains and losses represent non-asset-backed trades of
     electricity and gas. Net energy brokered for resale represents  electricity
     purchased for simultaneous sale to a third party.  Nonregulated  energy and
     delivery  services  include  power  protection  services  and  mass  market
     programs (surge  protection,  appliance  services and area light sales) and
     delivery,  transmission and substation work for other utilities. Investment
     losses primarily represent losses on limited partnership investment funds.

10.  COMMITMENTS AND CONTINGENCIES

     Contingencies  existing as of the date of these  statements  are  described
     below.  No significant  changes have occurred since December 31, 2002, with
     respect to the commitments discussed in Note 18 of the financial statements
     included in PEC's 2002 Annual Report on Form 10-K/A.

     Guarantees

     In 2003, PEC determined that its external funding levels did not fully meet
     the nuclear decommissioning financial assurance levels required by the NRC.
     Therefore,  PEC obtained parent company  guarantees of $276 million to meet
     the required levels. As of September 30, 2003,  management does not believe
     conditions  are  likely  for  performance  under the  agreements  discussed
     herein.

     PEC has a small amount of guarantees  outstanding as of September 30, 2003;
     however, there have been no significant changes in these amounts since year
     end.

     Insurance

     PEC is insured against public liability for a nuclear  incident.  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),  each
     company would be subject to pro rata assessments for each reactor owned per
     occurrence.  Effective August 20, 2003, the retroactive premium assessments


                                       39
<PAGE>

     increased to $100.6  million per reactor from the previous  amount of $88.1
     million.  The total  limit  available  to cover  nuclear  liability  losses
     increased  as  well  from  $9.6  billion  to  $10.8  billion.   The  annual
     retroactive premium limit of $10 million per reactor owned did not change.

     Contingencies

     Claims and uncertainties

     a) PEC is  subject  to  federal,  state  and local  regulations  addressing
     hazardous  and solid  waste  management,  air and water  quality  and other
     environmental matters.

     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, are participating in investigating and, if necessary,
     remediating former MGP sites with several regulatory  agencies,  including,
     but  not  limited  to,  the  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 their  involvement  or potential  involvement in
     sites,  other  than  MGP  sites,  that  may  require  investigation  and/or
     remediation.

     There  are 9 former  MGP  sites  and 14  other  sites  or  groups  of 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 PEC environmental  liabilities related to its
     involvement with some MGP sites. All eligible expenses related to these are
     charged against a specific fund containing these proceeds.  As of September
     30, 2003,  approximately $8.7 million remains in this centralized fund with
     a related accrual of $8.7 million  recorded for the associated  expenses of
     environmental  issues.  As  PEC's  share  of costs  for  investigating  and
     remediating  these sites become known, the fund is assessed to determine if
     additional  accruals  will be  required.  PEC does not believe  that it can
     provide an estimate of the  reasonably  possible  total  remediation  costs
     beyond what remains in the environmental  insurance  recovery fund. This is
     due to the fact that the sites are at different  stages:  investigation has
     not begun at three sites, investigation has begun but remediation cannot be
     estimated at five sites and remediation has begun at one site. 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  potentially   responsible   parties.   Once  the
     environmental  insurance  recovery fund is depleted,  PEC will accrue costs
     for the sites to the extent its  liability is probable and the costs can be
     reasonably estimated.  Presently, PEC cannot determine the total costs that
     may be incurred in connection with the remediation of all sites.

     In September  2003, the Company sold NCNG to Piedmont  Natural Gas Company,
     Inc. As part of the sales agreement, the Company retained responsibility to
     remediate  five  former  NCNG MGP sites to state  standards  pursuant to an
     Administrative  Order by  consent.  These  sites  are  anticipated  to have
     investigation   or  remediation   costs  associated  with  them.  NCNG  had
     previously  accrued  approximately $2.2 million for probable and reasonably
     estimable  remediation  costs at these  sites.  These  accruals  have  been
     recorded on an  undiscounted  basis. At the time of the sale, the liability
     for these costs and the related  accrual was transferred to a subsidiary of
     PEC.  PEC does not believe it can  provide an  estimate  of the  reasonably
     possible total remediation costs beyond the accrual because two of the five
     sites  have not  begun  investigation  activities.  Therefore,  PEC  cannot
     currently determine the total costs that may be incurred in connection with
     the  investigation  and/or  remediation  of all sites.  Based upon  current
     information, the Company does not expect the future costs at these sites to
     be material to the Company's financial condition or results of operations.

     PEC has filed  claims  with its  general  liability  insurance  carriers to
     recover costs arising out of actual or potential environmental liabilities.
     Some claims have  settled and others are still  pending.  While  management
     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.

     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.


                                       40

<PAGE>

     Air Quality

     There has been and may be further  proposed federal  legislation  requiring
     reductions in air emissions for nitrogen  oxides,  sulfur  dioxide,  carbon
     dioxide and mercury. Some of these proposals establish nation-wide 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.  Some companies may seek recovery of the
     related  cost  through  rate  adjustments  or similar  mechanisms.  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.  During the first
     quarter of 2003, PEC responded to a supplemental  information  request from
     the  EPA.  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  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 the EPA's initiative
     or its impact, if any, on the Company.

     In 1998, the EPA published a final rule  addressing the regional  transport
     of ozone.  This rule is commonly  known as the NOx SIP Call. The EPA's rule
     requires 23  jurisdictions,  including North  Carolina,  South Carolina and
     Georgia,  to further reduce  nitrogen oxide  emissions in order to attain a
     pre-set  state  NOx  emission  levels  by May 31,  2004.  PEC is  currently
     installing controls necessary to comply with the rule. Capital expenditures
     needed to meet  these  measures  in North and South  Carolina  could  reach
     approximately  $370  million,  which has not been  adjusted for  inflation.
     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.  PEC cannot
     predict the outcome of this matter.

     In  July  1997,  the  EPA  issued  final  regulations  establishing  a  new
     eight-hour  ozone  standard.  In October  1999,  the  District  of Columbia
     Circuit  Court of Appeals  ruled against the EPA with regard to the federal
     eight-hour ozone standard.  The U.S. Supreme Court has upheld, in part, the
     District of Columbia  Circuit  Court of Appeals  decision.  Designation  of
     areas that do not attain the standard is proceeding, and further litigation
     and  rulemaking on this and other aspects of the standard are  anticipated.
     North  Carolina  adopted  the  federal  eight-hour  ozone  standard  and is
     proceeding with the implementation  process. North Carolina has promulgated
     final  regulations,  which  will  require  PEC to  install  nitrogen  oxide
     controls under the State's eight-hour standard. The costs of those controls
     are included in the $370 million cost  estimate set forth in the  preceding
     paragraph. 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.

     The EPA published a final rule approving petitions under Section 126 of the
     Clean Air Act. This rule as originally promulgated required certain sources
     to make  reductions in nitrogen  oxide  emissions by May 1, 2003. The final
     rule  also  includes  a set  of  regulations  that  affect  nitrogen  oxide
     emissions  from  sources  included  in the  petitions.  The North  Carolina
     coal-fired  electric  generating  plants are  included in these  petitions.
     Acceptable  state  plans  under the NOx SIP Call can be approved in lieu of
     the final rules the EPA approved as part of the Section 126 petitions. PEC,
     other  utilities,  trade  organizations  and other states  participated  in
     litigation  challenging the EPA's action.  On May 15, 2001, the District of
     Columbia  Circuit  Court of Appeals  ruled in favor of the EPA,  which will
     require North Carolina to make  reductions in nitrogen  oxide  emissions by
     May 1, 2003. However, the Court in its May 15th decision rejected the EPA's
     methodology  for  estimating  the  future  growth  factors  the EPA used in
     calculating the emissions  limits for utilities.  In August 2001, the Court
     granted a request by PEC and other utilities to delay the implementation of
     the Section 126 Rule for electric  generating  units pending  resolution by
     the EPA of the growth factor issue.  The Court's order tolls the three-year
     compliance  period  (originally  set to end on May 1,  2003)  for  electric
     generating units as of May 15, 2001. On April 30, 2002, the EPA published a
     final rule  harmonizing  the dates for the Section 126 Rule and the NOx SIP
     Call. In addition,  the EPA  determined in this rule that the future growth
     factor estimation methodology was appropriate.  The new compliance date for
     all affected sources is now May 31, 2004,  rather than May 1, 2003. The EPA
     has approved North  Carolina's NOx SIP Call rule and has formally  proposed
     to rescind  the  Section 126 rule.  This  rulemaking  is expected to become
     final by early 2004. PEC expects a favorable outcome of this matter.

     On June 20, 2002,  legislation was enacted in North Carolina  requiring the
     state's  electric  utilities to reduce the emissions of nitrogen  oxide and
     sulfur dioxide from coal-fired power plants.  PEC expects its capital costs
     to meet these emission targets will be approximately  $813 million by 2013.
     PEC currently has approximately 5,100 MW of coal-fired  generation in North
     Carolina that is affected by this legislation. The legislation requires the

                                       41
<PAGE>

     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  legislation  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  legislation
     allows the  utilities to recover from their retail  customers the projected
     capital costs during the first seven years of the 10-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.
     Pursuant to the new law, PEC entered  into an  agreement  with the state of
     North  Carolina to transfer  to the state any future  emissions  allowances
     acquired  as a result  of  compliance  with  the new law.  The new law also
     requires  the state to  undertake  a study of mercury  and  carbon  dioxide
     emissions  in North  Carolina.  PEC cannot  predict  the future  regulatory
     interpretation,  implementation  or  impact  of this new  law.  PEC did not
     record any clean air amortization in the third quarter of 2003 and recorded
     approximately  $54 million of clean air amortization to date in 2003. Clean
     air expenditures to date were $16.4 million as of September 30, 2003.

     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.  The United  States has not adopted the Kyoto  Protocol;
     however,  a number of carbon dioxide  emissions control proposals have been
     advanced   in   Congress   and  by  the  Bush   administration.   The  Bush
     administration  favors  voluntary  programs.  Reductions in carbon  dioxide
     emissions  to  the  levels   specified  by  the  Kyoto  Protocol  and  some
     legislative  proposals could be materially  adverse to PEC's financials and
     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.

     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,  EPA determined in
     2000 that regulation of mercury  emissions from coal-fired power plants was
     appropriate.  Pursuant to a Court  Order,  the EPA is  developing a Maximum
     Available Control  Technology (MACT) standard,  which is expected to become
     final in December 2004, with compliance in 2008.  Achieving compliance with
     the MACT standard could be materially adverse to PEC's financial  condition
     and results of operations.  However, PEC cannot predict the outcome of this
     matter.

     b) 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 April 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)  has  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. PEC is in the process of evaluating  whether it should file a
     similar action for damages.

     On July 9, 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. PEC cannot
     predict the outcome of this matter.

                                       42
<PAGE>

     With certain  modifications and additional approval by the NRC, 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
     current  operating  licenses  for  all of  its  nuclear  generating  units.
     Subsequent or prior to the expiration of these licenses,  or any renewal of
     these  licenses,  dry storage or  acquisition  of new shipping casks may be
     necessary. PEC obtained NRC approval to use additional storage space at the
     Harris  Plant in December  2000.  PEC is  currently in the design phase for
     adding dry storage capability at the Robinson Plant.

     c) On August 21,  2003,  PEC was served as a  co-defendant  in a  purported
     class action  lawsuit styled as Collins v. Duke Energy  Corporation,  Civil
     Action No.  03CP404050,  in South Carolina's  Circuit Court of Common Pleas
     for the Fifth  Judicial  Circuit.  PEC is one of three  electric  utilities
     operating in South  Carolina  named in the suit. The plaintiffs are seeking
     damages for the alleged  improper  use of electric  easements  but have not
     asserted a dollar amount for their damage  claims.  The  complaint  alleges
     that the licensing of  attachments on electric  utility  poles,  towers and
     other  structures  to  non-utility   third  parties  or   telecommunication
     companies  for other than the  electric  utilities'  internal use along the
     electric right-of-way constitutes a trespass.

     On  September  19,  2003,  PEC filed a motion to dismiss  all counts of the
     complaint on substantive  and procedural  grounds.  On October 6, 2003, the
     plaintiffs  filed a motion  to amend  their  complaint.  PEC  believes  the
     amended  complaint  asserts  the  same  factual  allegations  as are in the
     original complaint and also seeks money damages and injunctive relief.

     The court has not yet held any  hearings  or made any rulings in this case.
     PEC intends to vigorously  defend itself against the claims asserted by the
     plaintiffs.  PEC cannot  predict the outcome of any future  proceedings  in
     this case.

     d) PEC is involved in various  litigation matters in the ordinary course of
     business,  some of which  involve  claims for  substantial  amounts.  Where
     appropriate,  accruals  have  been  made in  accordance  with  SFAS No.  5,
     "Accounting for  Contingencies," to provide for such matters.  PEC believes
     the final  disposition  of  pending  litigation  would not have a  material
     adverse  effect on PEC's  consolidated  results of  operations or financial
     position.

11.  SUBSEQUENT EVENT

     On  November  3,  2003,  Progress  Telecom   Corporation  (PTC),   Progress
     Telecommunications  Corporation  (PTC  Communications),  and Caronet,  Inc.
     (Caronet),  all  of  which  are  indirectly  wholly-owned  subsidiaries  of
     Progress Energy, agreed to enter into a Contribution  Agreement (Agreement)
     with EPIK Communications, Inc. (EPIK). EPIK is a wholly-owned subsidiary of
     Odyssey  Telecorp,  Inc.  (Odyssey).  The Company plans to account for this
     transaction as a business combination.

     Under terms of the Agreement, on November 4, 2003, PTC was converted into a
     limited liability company and renamed Progress Telecom,  LLC (PTC LLC). The
     Agreement  provides  that  PTC   Communications,   Caronet  and  EPIK  will
     contribute   substantially   all  of  their  assets  and  transfer  certain
     liabilities  to PTC LLC in exchange  for  membership  interests in PTC LLC.
     Following  the   contribution   of  their   respective   net  assets,   PTC
     Communications  will  hold a 55  percent  membership  interest  in PTC LLC;
     Caronet will hold a 5 percent membership interest;  and EPIK will hold a 40
     percent membership  interest.  After the conbtribution of net assets to PTC
     LLC,  the stock of Caronet will be sold to an affiliate of Odyssey for cash
     and  Caronet  will  then  become an  indirect  wholly-owned  subsidiary  of
     Odyssey.  Following  consummation of the transactions  described above, PTC
     Communications  will hold a 55 percent  ownership  interest in PTC LLC, and
     Odyssey will hold a 45 percent  ownership  interest in PTC LLC through EPIK
     and Caronet.  The Company anticipates closing the transaction by the end of
     the year;  however,  the closing of all of these transactions is subject to
     certain conditions precedent,  including receipt of applicable governmental
     and regulatory permits and approvals.

                                       43
<PAGE>

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. Please review
"SAFE HARBOR FOR  FORWARD-LOOKING  STATEMENTS"  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 and the timing of maintenance on electric  generating  units,  among
other factors.

This discussion  should be read in conjunction with the  accompanying  financial
statements  found elsewhere in this report and in conjunction with the 2002 Form
10-K.

RESULTS OF OPERATIONS

In this section,  earnings and the factors affecting  earnings for the three and
nine months ended September 30, 2003 as compared to the same periods in 2002 are
discussed.  The  discussion  begins  with a general  overview,  then  separately
discusses earnings by business segment.

OVERVIEW

The net income and basic earnings per share of Progress Energy,  Inc.  (Progress
Energy or the Company) were $319.0 million or $1.34 per share and $151.9 million
or $0.71 per  share for the three  months  ended  September  30,  2003 and 2002,
respectively.  The Company's net income and basic earnings per share were $679.9
million  or $2.88 per share and  $405.1  million or $1.89 per share for the nine
months ended September 30, 2003 and 2002, respectively.

Net income for the three and nine months ended September 30, 2003 as compared to
the same period in 2002  increased  primarily  due to the inclusion in 2002 of a
$224.8 million impairment of assets in the telecommunications  business.  Absent
the impact of the impairment,  net income  decreased $57.7 million for the three
month period and increased $50.0 million for the nine month period. The decrease
quarter  over  quarter  was  primarily  due to milder  weather  in 2003,  higher
operations  and  maintenance  (O&M)  costs  at  the  utilities,  the  loss  from
discontinued  operations of NCNG,  and the negative  impact of the change in the
fair value of contingent  value  obligations.  These  decreases  were  partially
offset by increased sales of natural gas and higher synthetic fuel earnings. The
increase  for the nine month  period was largely  attributable  to the impact of
levelizing  the estimated  effective tax rate  throughout the year and continued
customer growth and usage,  partially  offset by the impact of the change in the
fair value of contingent value  obligations,  higher O&M costs at the utilities,
the net impact of the 2002 Florida rate settlement, and milder weather in 2003.

The Company's segments  contributed  segment profits or losses for the three and
nine months ended September 30, 2003 and 2002 as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

------------------------------------------------------------------------------------------------
(in millions)                                 Three Months Ended             Nine Months Ended
                                                 September 30,                  September 30,
------------------------------------------------------------------------------------------------
Business Segment                                2003          2002           2003         2002
------------------------------------------------------------------------------------------------
PEC Electric                                   $160.0        $179.3          $383.3      $396.5
PEF                                             114.3         123.8           246.5       258.3
Fuels                                            79.8          52.1           160.1       140.5
CCO                                              12.7          20.9            23.6        25.5
Rail                                              0.7           0.7            (0.5)        3.0
Other                                            (3.6)       (225.9)           (2.6)     (239.3)
                                        --------------------------------------------------------
    Total Segment Profit                        363.9         150.9           810.4       584.5
Corporate                                       (26.2)          6.2          (125.5)     (181.4)
                                        --------------------------------------------------------
Income from continuing operations               337.7         157.1           684.8       403.1
NCNG discontinued operations                    (18.7)         (5.2)           (4.9)        2.0
                                        --------------------------------------------------------
    Net income                                 $319.0        $151.9          $679.9      $405.1
------------------------------------------------------------------------------------------------
(Totals may not foot due to rounding.)
</TABLE>

                                       44
<PAGE>


The significant operating segments and their primary operations are:

o    PEC Electric - engaged in the generation,  transmission,  distribution  and
     sale of  electricity  primarily  in  portions of North  Carolina  and South
     Carolina  (differences  between  the  PEC  Electric  segment  and  the  PEC
     consolidated financial information relate to other non-electric  operations
     and elimination entries);
o    PEF - engaged in the  generation,  transmission,  distribution  and sale of
     electricity primarily in portions of Florida;
o    Fuels - engaged in natural gas production,  coal mining and synthetic fuels
     production;
o    Competitive   Commercial   Operations   (CCO)  -  engaged  in  nonregulated
     generation operations and energy marketing;
o    Progress Rail Services (Rail) - engaged in various rail and railcar related
     services; and
o    Other Businesses  (Other) - engaged in other  nonregulated  business areas,
     primarily telecommunications and energy services operations.

In prior  years'  reporting,  CCO and  Fuels  were  components  of the  Progress
Ventures  segment.  With the  expansion of the  nonregulated  energy  generation
facilities and the current management structure, CCO is now a distinct operating
segment.  In addition to the operating  segments  listed above,  the Company has
other corporate  activities that include  holding  company  operations,  service
company  operations  and  eliminations.  These  corporate  activities  have been
included in the Other segment in the past. Additionally, earnings from wholesale
customers on the  regulated  plants have  previously  been  reported in both the
regulated  utilities'  results and the results of  Progress  Ventures.  With the
realignment of the reportable  business segments,  this activity is now included
in the regulated  utilities'  results only. For comparative  purposes,  the 2002
results have been restated to align with the new business segments.

In 2002, the operations of NCNG,  previously reported in the Other segment, were
reclassified to  discontinued  operations and therefore were not included in the
results from continuing operations during the periods reported.

In March of 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 impact on the affiliates
is  included  in  the  segment  discussion  that  follows.  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.

In accordance with an SEC order under PUHCA,  effective in the second quarter of
2002,  tax  benefits  not  related to  acquisition  interest  expense  that were
previously  held  unallocated  at the holding  company  must be allocated to the
profitable  subsidiaries.   The  allocation  has  no  impact  on  the  Company's
consolidated tax expense or net income. The impacts on the business segments are
included in the discussions below and generally  decrease the income tax expense
for the regulated utilities, while increasing income tax expense for the holding
company. The 2002 reallocation included impacts from 2001.

REGULATED ELECTRIC SEGMENTS

The  operating  results  of both  regulated  electric  utilities  are  primarily
influenced by customer demand for electricity,  the ability to control costs and
regulatory  return on equity.  Demand for  electricity is based on the number of
customers and their usage, with usage largely impacted by weather.  In addition,
the current economic conditions in the service territories may impact the demand
for electricity.

Effective January 1, 2003, the Company implemented SFAS No. 143, "Accounting for
Asset  Retirement  Obligations,"  which  requires  that  the  present  value  of
retirement  costs for which the  Company has a legal  obligation  be recorded as
liabilities  with an equivalent  amount added to the asset cost and  depreciated
over an appropriate period. The liability is then accreted over time by applying
an interest  method of allocation  to the  liability.  Both  electric  utilities
recorded asset  retirement  obligations  (AROs) in the first quarter of 2003. At
September 30, 2003,  PEC  Electric's  AROs totaled $918.4 million and PEF's AROs
totaled $315.1 million.

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  enacted  in  North  Carolina
contained a prohibition  against cost deferrals unless certain criteria are met,

                                       45
<PAGE>

the NCUC initially denied the deferral of the ongoing effects. During the second
quarter of 2003, PEC ceased deferral of the ongoing effects related to its North
Carolina retail  jurisdiction.  Pre-tax income for the six months ended June 30,
2003 increased by approximately  $13.6 million,  which represented a decrease in
non-ARO  cost  of  removal   expense,   partially   offset  by  an  increase  in
decommissioning expense. This second quarter earnings impact was reversed in the
third quarter when the NCUC issued an order allowing the deferral of the ongoing
effects of SFAS No. 143.

On April 8, 2003,  the SCPSC  approved a joint  request  by PEC  Electric,  Duke
Energy and South  Carolina  Electric and Gas Company for an accounting  order to
authorize the deferral of all cumulative and prospective  effects related to the
adoption of SFAS No. 143.

On January 23,  2003,  the Staff of the FPSC  issued a notice of  proposed  rule
development  to adopt  provisions  relating to accounting  for asset  retirement
obligations  under  SFAS No.  143.  Accompanying  the  notice  was a draft  rule
presented  by the staff which adopts the  provisions  of SFAS No. 143 along with
the requirement to record the difference  between amounts prescribed by the FPSC
and  those  used in the  application  of SFAS No.  143 as  regulatory  assets or
regulatory  liabilities,  which was  accepted  by all  parties.  Therefore,  the
adoption  of  the  statement  had no  impact  on the  income  of PEF  due to the
establishment of a regulatory liability pursuant to SFAS No. 71, "Accounting for
the Effects of Certain Types of  Regulation."  A final order was approved in the
third quarter of 2003.

PROGRESS ENERGY CAROLINAS ELECTRIC

PEC Electric contributed segment profits of $160.0 million and $179.3 million in
the three months ended  September  30, 2003 and 2002,  respectively,  and $383.3
million  and $396.5  million for the nine months  ended  September  30, 2003 and
2002, respectively. The decrease in the three months ended September 30, 2003 as
compared  to the  same  period  in  2002  is  primarily  due to  milder  weather
conditions  which suppressed sales across most customer classes and higher storm
and other O&M costs,  partially  offset by higher  customer growth and usage and
the effect of the tax benefit  reallocation from Corporate.  The decrease in the
nine months ended  September  30, 2003 as compared to the same period in 2002 is
primarily  due to milder  weather,  O&M costs  related  to the ice storms in the
first  quarter  of 2003 and  Hurricane  Isabel in the third  quarter of 2003 and
higher benefit costs.  These unfavorable  impacts are offset partially by strong
wholesale sales, retail growth and usage and lower interest charges.

On  October  16,  2003,  PEC made a filing  with the  North  Carolina  Utilities
Commission  (NCUC) to seek permission to defer expenses  incurred from Hurricane
Isabel and the February  2003 winter  storms.  As a result of rising storm costs
and the frequency of major storm damage,  Progress  Energy has asked the NCUC to
allow the company to create a deferred  account in which the company would place
expenses  incurred  as  a  result  of  named  tropical  storms,  hurricanes  and
significant winter storms. The future  amortization of such deferred costs would
be includable as allowable  costs in base rate  filings.  The Company  estimates
that it would  charge  $23.5  million  in 2003 from  Hurricane  Isabel  and from
current year ice storms to the deferred  account,  if approved.  Any  additional
major storm activity in 2003 could cause the amount to increase.

PEC's electric  revenues for the three and nine months ended  September 30, 2003
and 2002 and the amount and percentage change by customer class are as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

------------------------------------------------------------------------------------------------------------------
(in millions of $)                 Three Months Ended September 30,           Nine Months Ended September 30,
------------------------------------------------------------------------------------------------------------------
Customer Class                 2003      Change     % Change    2002       2003     Change    % Change    2002
------------------------------------------------------------------------------------------------------------------
Residential                  $   385.5   $    0.9    0.2%     $   384.6  $   990.1    $ 37.7       4.0% $   952.3
Commercial                       250.0        5.4    2.2%         244.6      649.7      19.0       3.0%     630.8
Industrial                       178.9       (4.1)  (2.2%)        183.0      481.5      (7.4)     (1.5%)    488.9
Governmental                      23.9        0.5    2.1%          23.4       60.3       1.4       2.4%      58.9
                            ----------------------            -------------------------------           ----------
    Total retail revenues        838.3        2.7    0.3%         835.6    2,181.6      50.7       2.4%   2,130.9
Wholesale                        174.3      (19.6) (10.1%)        193.9      537.9      44.7       9.1%     493.2
Unbilled                         (24.4)     (18.6)     -           (5.8)     (31.9)    (40.4)       -         8.5
Miscellaneous                     21.7        0.2    0.9%          21.5       64.0       5.3       9.0%      58.7
                            ----------------------            -------------------------------           ----------
  Total electric revenues    $ 1,009.9   $ (35.3)   (3.4%)    $ 1,045.2  $ 2,751.6    $ 60.3       2.2% $ 2,691.3
------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       46
<PAGE>

PEC's  electric  energy sales for the three and nine months ended  September 30,
2003 and 2002 and the  amount and  percentage  change by  customer  class are as
follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

------------------------------------------------------------------------------------------------------------------------
(in thousands of mWh)              Three Months Ended September 30,              Nine Months Ended September 30,
------------------------------------------------------------------------------------------------------------------------
Customer Class                 2003       Change      % Change     2002      2003      Change     % Change      2002
--------------------------------------- ----------- ------------ -------------------- ---------- ------------ ----------
Residential                      4,424        (61)    (1.4%)         4,485    12,063        331         2.8%     11,732
Commercial                       3,687         12      0.3%          3,675     9,616        124         1.3%      9,492
Industrial                       3,414       (155)    (4.3%)         3,569     9,616       (301)       (3.0%)     9,917
Governmental                       420         (5)    (1.2%)           425     1,081         (7)       (0.6%)     1,088
                            ----------- -----------              -------------------- ----------              ----------
    Total retail energy sales   11,945       (209)    (1.7%)        12,154    32,376        147         0.5%     32,229
Wholesale                        3,950       (580)   (12.8%)         4,530    11,870        514         4.5%     11,356
Unbilled                          (465)      (247)       -            (218)     (549)      (576)          -          27
                            ----------- -----------              -------------------- ----------              ----------
    Total mWh sales             15,430     (1,036)    (6.3%)        16,466    43,697         85         0.2%     43,612
--------------------------------------- ----------- ------------ -------------------- ---------- ------------ ----------
</TABLE>

Three months ended  September 30, 2003 compared to three months ended  September
30, 2002

Milder weather in 2003 accounted for a retail revenue  decline of  approximately
$25 million, excluding fuel revenues which are primarily offset by fuel expenses
and thus have no earnings impact, with the average cooling degree days declining
16% when comparing the three months ended  September 30, 2003 to the same period
in 2002.  Retail customer growth and usage,  excluding the impact of weather and
the effect of fuel costs,  accounted for $4.8 million of  additional  revenue in
the three  months  ended  September  30,  2003 as compared to the same period in
2002. PEC Electric had approximately 1,319,000 retail customers at September 30,
2003,  which  represents  an increase of 22,000 from  September  30,  2002.  The
wholesale revenues decline is primarily  attributable to a milder summer in 2003
as compared to 2002.

O&M costs were $205.7  million for the three  months ended  September  30, 2003,
which represents a $22.0 million  increase  compared to the same period in 2002.
Included in the 2003 spending is $13.5 million  associated with Hurricane Isabel
restoration efforts. Rising benefit costs also negatively impacted O&M in 2003.

Income tax expense was $86.5  million for the three months ended  September  30,
2003,  a $23.5  million  decrease  compared  to the same  period  in 2002.  This
variance is due to an $8.0 million higher tax benefit  reallocation in the three
months ended  September  30, 2003 compared to the same period in 2002 and by the
tax impact of lower pre-tax income.

Nine months ended September 30, 2003 compared to nine months ended September 30,
2002

Mild  weather  in North and South  Carolina  during  the late  spring and summer
months  of 2003  more  than  offset  the  favorable  impact  of  colder  weather
experienced  in the first  quarter  of 2003,  with a total  unfavorable  revenue
impact in the  retail  markets  from  weather  of  approximately  $38.1  million
excluding  the effect of fuel costs.  Favorable  wholesale  revenues  and retail
customer growth and usage, excluding the effect of weather, partially offset the
unfavorable weather impact. The wholesale favorability is primarily attributable
to  weather-related  sales of energy to the  Northeastern  United States markets
during the first half of 2003.

O&M costs  increased  $34.8 million when compared to $571.0 million for the nine
months ended  September  30, 2002,  primarily  due to $10.9 million of ice storm
costs in the first quarter of 2003, $13.6 million of hurricane restoration costs
in September  2003,  $21.5 million of costs  associated  with a planned  nuclear
outage in 2003 and continued  increases in benefit costs.  These  increases were
partially  offset by a decrease in operation  and  maintenance  expense of $15.9
million related to the previously discussed reallocation of prior years' Service
Company costs, as required by the SEC.

Depreciation  and  amortization  expense  increased  $10.4  million  compared to
depreciation  and  amortization  expense of $405.4  million  for the nine months
ended September 30, 2002. This increase  results from $53.6 million of clean air
amortization  in 2003 and $15.7 million of  depreciation  on  additional  assets
placed into service.  These  increases  are partially  offset by a $54.8 million
reduction in accelerated  nuclear  amortization.  The clean air and  accelerated
nuclear  amortization  programs allow  flexibility in the amount  amortized each
year.  Both  programs  are  currently   meeting  the  appropriate   amortization
requirements.  The Company  currently  expects to  recognize  approximately  $90
million of clean air amortization in 2003.

Other  income and expense was $4.6  million of expense for the nine months ended
September  30, 2003  compared to $3.8  million of income  during the nine months
ended  September 30, 2002.  The primary driver of the  unfavorability  was $10.0
million of losses on limited  partnership  investment  funds recorded during the
nine months ended September 30, 2003.

Interest  expense was $143.3  million for the nine months  ended  September  30,
2003,  which  represents a decrease of $18.3  million.  This decrease was due to
both a decrease in average outstanding debt and slightly lower interest rates.

                                       47
<PAGE>

Income tax expense was $196.5  million for the nine months ended  September  30,
2003 as compared to $190.0 million for the nine months ended September 30, 2002.
This  variance is due to the tax impact of changes in pre-tax  income and a $9.2
million lower tax benefit  reallocation  for the nine months ended September 30,
2003 compared to the same period in 2002.

PROGRESS ENERGY FLORIDA

PEF  contributed  segment  profits of $114.3  million and $123.8  million in the
three months ended September 30, 2003 and 2002, respectively, and $246.5 million
and  $258.3  million  in the nine  months  ended  September  30,  2003 and 2002,
respectively.  The decrease in profits for the three months ended  September 30,
2003 when compared to 2002 is primarily due to increased  pension expense and an
unfavorable  impact of the tax benefit  reallocation  from Corporate,  partially
offset by favorable interest charges.  Weather had a slight negative impact, but
was offset by customer growth and usage.  The decrease in profits when comparing
the nine months periods  results  primarily from the net impact of the 2002 rate
settlement and higher pension expense,  partially offset by a slightly favorable
weather  impact,  improved  customer  growth  and usage and  favorable  interest
charges.

In March 2002, PEF settled a rate case which provided for a one-time retroactive
rate refund,  decreased  future retail rates by 9.25%  (effective  May 1, 2002),
provided for lower  depreciation  and  amortization,  provided for  increases in
certain  service  revenue rates and provided for revenue sharing with the retail
customers if certain revenue  thresholds were met. The impacts of the settlement
agreement are included below.

PEF's electric  revenues for the three and nine months ended  September 30, 2003
and 2002 and the amount and percentage change by customer class are as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

------------------------------------------------------------------------------------------------------------------
(in millions of $)              Three Months Ended September 30,             Nine Months Ended September 30,
------------------------------------------------------------------------------------------------------------------
Customer Class                 2003      Change     % Change    2002       2003     Change    % Change    2002
------------------------------------------------------------------------------------------------------------------
Residential                    $ 501.8      $32.0     6.8%        $469.8  $ 1,300.3     $55.6    4.5%    $ 1,244.7
Commercial                       214.3       14.8     7.4%         199.5      556.7       7.0    1.3%        549.7
Industrial                        56.9        4.3     8.2%          52.6      160.4       2.7    1.7%        157.7
Governmental                      49.3        4.2     9.3%          45.1      133.1       4.6    3.6%        128.5
Retroactive rate refund              -          -       -              -          -      35.0     -          (35.0)
Revenue sharing/rate
 refund                            4.1        4.1       -              -     (23.9)     (23.9)    -              -
                            ----------------------            -------------------------------           ----------
    Total retail revenues        826.4       59.4     7.7%         767.0    2,126.6      81.0    4.0%      2,045.6
Wholesale                         51.8       (6.1)  (10.5%)         57.9      172.9       6.8    4.1%        166.1
Unbilled                          (3.9)     (12.3)      -            8.4        2.7     (17.5)    -           20.2
Miscellaneous                     29.8       (0.5)   (1.7%)         30.3       96.9      12.8   15.2%         84.1
                            ----------------------            -------------------------------           ----------
    Total electric revenues    $ 904.1      $40.5     4.7%        $863.6  $ 2,399.1     $83.1    3.6%    $ 2,316.0
------------------------------------------------------------------------------------------------------------------
</TABLE>

PEF's electric  energy sales for the three and nine ended September 30, 2003 and
2002 and the amount and percentage change by customer class are as follows:
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

------------------------------------------------------------------------------------------------------------------
(in thousands of mWh)              Three Months Ended September 30,               Nine Months Ended September 30,
------------------------------------------------------------------------------------------------------------------
Customer Class                 2003      Change     % Change    2002       2003     Change    % Change    2002
------------------------------------------------------------------------------------------------------------------
Residential                      5,739        236    4.3%         5,503     14,996       918    6.5%       14,078
Commercial                       3,334        127    4.0%         3,207      8,727       208    2.4%        8,519
Industrial                       1,028         45    4.6%           983      2,951        92    3.2%        2,859
Governmental                       805         46    6.1%           759      2,204       109    5.2%        2,095
                            ----------------------            -------------------------------           ----------
    Total retail energy sakes   10,906        454    4.3%        10,452     28,878     1,327    4.8%       27,551
sales
Wholesale                        1,006        (14)  (1.4%)        1,020      3,172       196    6.6%        2,976
Unbilled                          (112)      (326)     -            214        441      (248)    -            689
                            ----------------------            -------------------------------           ----------
    Total mWh sales             11,800        114    1.0%        11,686     32,491     1,275    4.1%       31,216
------------------------------------------------------------------------------------------------------------------
</TABLE>

Three months ended  September 30, 2003 compared to three months ended  September
30, 2002

Retail  revenues,  excluding  fuel revenues of $370.0 million and $332.1 million
for the three months ended September 30, 2003 and 2002, respectively,  increased
$21.5  million as a result of favorable  customer  growth,  partially  offset by
lower customer usage. Fuel revenues, which are primarily offset by fuel expenses
and thus have no earnings impact, increased compared to the prior year primarily
due to increased generation and higher fuel prices.

                                       48
<PAGE>

Operations and maintenance (O&M) costs increased $16.7 million, when compared to
the $146.8 million  incurred  during the three months ended  September 30, 2002.
This  increase  is  primarily  related to  increased  pension  expense and other
benefit costs.

Depreciation and amortization  increased $8.7 million when compared to the $73.4
million  incurred during the three months ended September 30, 2002 primarily due
to additional depreciable assets placed in service.

Interest charges decreased $17.7 million when compared to $25.8 million incurred
in the three  months ended  September  2002  primarily  due to the reversal of a
regulatory  liability for accrued  interest  related to previously  resolved tax
matters.

Income tax  expense  increased  $6.2  million  when  compared  to $56.0  million
incurred  during three months ended  September 30, 2002 primarily from the $10.1
million  lower  tax  benefit  reallocation,  in  accordance  with an SEC  order,
partially offset by lower pretax income.

Nine months ended September 30, 2003 compared to nine months ended September 30,
2002

Retail  revenues,  excluding  fuel revenues of $945.3 million and $898.9 million
for the nine months ending September 30, 2003 and 2002, respectively,  increased
primarily  due to the impact of the $35.0 million  retroactive  rate refund that
was recognized in 2002 as part of the settlement  agreement,  continued customer
growth and usage and favorable  weather.  Partially  offsetting these gains were
the impact of the 9.25% rate  reduction,  the 2002 revenue  sharing refund which
was resolved in 2003,  and the 2003 revenue  sharing  accrual,  all of which are
discussed previously.  The average number of customers for the nine months ended
September 30, 2003 increased by approximately 35,200 or 2.4% in 2003 as compared
to the same period in 2002.

O&M costs increased  $24.8 million when compared to the $433.4 million  incurred
during the nine months  ended  September  30, 2002  primarily  due to  increased
pension expenses and other benefit costs.

Depreciation  and  amortization  increased  $23.0  million when  compared to the
$218.0  million  incurred  during  the nine  months  ended  September  30,  2002
primarily due to increased assets placed into service, which accounted for $12.1
million of the increase,  and the  amortization  of a purchased  power contract.
This  purchased  power was  completely  amortized as of September 30, 2003.  The
amortization  of the  purchased  power  contract  is  recovered  through  a cost
recovery clause and therefore has no impact on earnings.

Interest  charges  decreased  $19.6  million when  compared to the $82.1 million
incurred  during the nine months ended  September 30, 2002  primarily due to the
reversal of a regulatory  liability for accrued  interest  related to previously
resolved tax matters.

Income tax expense  decreased  $7.9 million when compared to the $135.0  million
incurred during the nine months ended September 30, 2002. Fluctuations in income
tax expense result from the tax benefit reallocation and lower pretax income.

DIVERSIFIED BUSINESSES

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

FUELS

The Fuels segment's  operations include synthetic fuels production,  natural gas
production,  coal  extraction and terminals  operations.  Fuels' results for the
three and nine months ended  September  30, 2003 as compared to the same periods
in 2002 were impacted most  significantly by the increase in gas production and,
for the nine months then ended, by the timing of synthetic fuels production.

         The following summarizes Fuels' segment profits for the three and nine
months ended September 30, 2003 and 2002.
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

-----------------------------------------------------------------------------------------------------------
                                       Three Months Ended September 30,   Nine Months Ended September 30,
-----------------------------------------------------------------------------------------------------------
(in millions)                                2003              2002             2003             2002
-----------------------------------------------------------------------------------------------------------
  Synthetic fuel operations                    $58.7          $48.7            $125.9          $131.8
  Gas production                                11.1            2.5              25.8             3.7
  Coal fuel and other operations                10.0            0.9               8.4             5.0
                                      ---------------------------------------------------------------------
     Segment Profits                           $79.8          $52.1            $160.1          $140.5
-----------------------------------------------------------------------------------------------------------
</TABLE>


                                       49
<PAGE>

Synthetic Fuel Operations

The synthetic fuels operations  generated net profits of $58.7 million and $48.7
million in the three months ended September 30, 2003 and 2002, respectively, and
$125.9  million and $131.8  million in the nine months ended  September 30, 2003
and 2002,  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.  In late June 2003,  the IRS
announced that field  auditors had raised  questions  associated  with synthetic
fuel  manufactured at the Colona facility  regarding the scientific  validity of
test procedures and results used to verify a significant  chemical change, which
is a requirement  of the synthetic  fuel program.  In October 2003, the National
Office of the IRS  informed  the Company it had  rejected  challenges  regarding
whether the synthetic  fuels produced at the Colona facility was the result of a
significant  chemical  change.  After an  extensive  review of the  process  and
analysis involved,  the National Office concluded that the experts, who test the
synthetic fuel for chemical change,  use reasonable  scientific methods to reach
their conclusions.  See Note 15 to the Progress Energy Notes to the Consolidated
Interim Financial Statements.

The following  summarizes the synthetic  fuel  operations for the three and nine
months ended September 30, 2003 and 2002.
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

-----------------------------------------------------------------------------------------------------------
                                           Three Months Ended September 30, Nine Months Ended September 30,
-----------------------------------------------------------------------------------------------------------
(in millions)                                           2003           2002          2003            2002
-----------------------------------------------------------------------------------------------------------
Tons produced                                            3.0            3.0           7.9             9.4
                                          -----------------------------------------------------------------

Operating losses, excluding tax credits              $ (34.0)       $ (30.0)       $(97.5)       $ (122.0)
Tax credits generated                                   92.7           78.7         223.4           253.8
                                          -----------------------------------------------------------------
    Net profits                                      $  58.7        $  48.7        $125.9        $  131.8
-----------------------------------------------------------------------------------------------------------
</TABLE>

The change in synthetic fuel production  between the nine months ended September
30, 2003 and the nine months ended  September  30, 2002 is  primarily  due to an
internal change in the synthetic fuel  production  pattern for 2003. The Company
anticipates total synthetic fuel production of approximately 12 million tons for
2003, which is comparable to 2002 production  levels.  The 2003 tax credits also
include a $12.7 million favorable true-up from 2002.

Gas Production

Gas operations  generated profits of $11.1 million and $2.5 million in the three
months ended  September 30, 2003 and 2002,  respectively,  and $25.8 million and
$3.7 million in the nine months ended September 30, 2003 and 2002, respectively.
The increase in production resulting from the acquisitions of Westchester Gas in
2002 and North Texas Gas in the first  quarter of 2003 drove  increased  revenue
and earnings in 2003 as compared to 2002. In October 2003, the Company completed
the sale of certain gas producing properties owned by Mesa Hydrocarbons, LLC for
net proceeds of  approximately  $97 million.  See Note 3B of the Progress Energy
Notes to the Consolidated  Interim Financial Statements for a further discussion
of this sale.  The following  summarizes the gas production and revenues for the
three and nine months ended September 30, 2003 and 2002 by production facility.
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

--------------------------------------------------------------------------------------------------------
             Gas Production         Three Months Ended September 30,   Nine Months Ended September 30,
-------------------------------------------------------------------------------------------------------
(in millions of cubic feet)                        2003         2002              2003           2002
------------------------------------------------------------------------------------------------------
  Mesa                                              1.3          1.6               4.4            4.2
  Westchester Gas                                   3.3          1.9               9.1            2.4
  North Texas Gas                                   3.0            -               4.6              -
                                    ------------------------------------------------------------------
     Total gas production                           7.6          3.5              18.1            6.6
------------------------------------------------------------------------------------------------------


--------------------------------------------------------------------------------------------------------
                Gas Sales           Three Months Ended September 30,   Nine Months Ended September 30,
------------------------------------------------------------------------------------------------------
(in millions)                                      2003         2002              2003           2002
------------------------------------------------------------------------------------------------------
  Mesa                                            $ 4.0        $ 3.7            $ 12.8          $10.3
  Westchester Gas                                  16.4          5.8              45.0            7.4
  North Texas Gas                                  14.0            -              24.4              -
  Other                                             1.8          1.6               4.4            2.4
                                    ------------------------------------------------------------------
     Total gas sales                              $36.2        $11.1            $ 86.6          $20.1
------------------------------------------------------------------------------------------------------
</TABLE>

                                       50

<PAGE>

COMPETiTIVE COMMERCIAL OPERATIONS

CCO generates and sells electricity to the wholesale market through nonregulated
plants. These operations also include marketing activities.

----------------------------------------------------------------------
                      Three Months Ended         Nine Months Ended
(in millions)            September 30,             September 30
----------------------------------------------------------------------
                      2003         2002        2003         2002
                    --------------------------------------------------
Total Sales          $ 66.7       $ 44.3     $ 137.5        $ 77.3
Segment Profits      $ 12.7       $ 20.9     $  23.6        $ 25.5
----------------------------------------------------------------------

Generating  capacity  increased  from 1,554  megawatts at September  30, 2002 to
3,100  megawatts at September 30, 2003,  with the  Effingham,  Rowan Phase 2 and
Washington plants being placed into service during 2003.

The increase in revenue for the three and nine months ended  September  30, 2003
when  compared  to the  same  periods  in 2002  is  primarily  due to  increased
contracted  capacity on newly  constructed  plants and energy revenue from a new
full-requirements  power supply  agreement.  The increase during the nine months
ended  September  30, 2003 in revenue and  earnings is also related to a tolling
agreement termination payment received in the first quarter of 2003. The revenue
increases related to higher volumes were partially offset by higher depreciation
costs of $8.6  million and $12.2  million  for the three and nine  months  ended
September 30, 2003,  when  compared to the same periods in 2002,  related to the
additional  facilities and by increases in interest  charges,  other fixed costs
and costs  allocated  from the Service  Company.  Additionally  CCO  capitalized
interest of $2.5  million and $10.5  million in the three and nine months  ended
September  30, 2003,  compared to $12.7  million and $14.5  million for the same
periods in 2002.

In the second quarter of 2003, PVI acquired from Williams  Energy  Marketing and
Trading  a  full-requirements  power  supply  agreement  with  Jackson  Electric
Membership  Corp.  (Jackson)  in Georgia  for $188  million,  which  resulted in
additional  revenues of $10.8  million and $13.4  million for the three and nine
months ended September 30, 2003 when compared to the same periods in 2002.

The Company has  contracts for 68%, 85% and 50% of planned  production  capacity
for  2003  through  2005,  respectively.  The  2005  decline  results  from  the
expiration  of  four  tolling   contracts.   The  Company  continues  to  pursue
opportunities with both current customers and other potential customers.

The  466-megawatt  Rowan  combined  cycle unit and the  600-megawatt  Washington
combustion  turbine  facilities  were  completed and placed into service in June
2003.  The  Washington  plant has a tolling  agreement with LG&E Power Trading &
Marketing through December 31, 2004. The 480-megawatt  Effingham  combined cycle
facility was placed into service in August 2003 and completes CCO's nonregulated
build-out with a total capacity of 3,100 megawatts.

RAIL

Rail's operations include railcar and locomotive repair,  trackwork,  rail parts
reconditioning and sales, scrap metal recycling,  railcar leasing and other rail
related  services.  The Company  intends to sell the assets of Railcar  Ltd.,  a
leasing  subsidiary,  in 2003 and has classified these assets as assets held for
sale at  September  30, 2003.  See Note 3C of the  Progress  Energy Notes to the
Consolidated Interim Financial Statements.

Progress  Rail  contributed  segment  profit of $0.7  million for both the three
months ended  September 30, 2003 and 2002,  respectively,  and a segment loss of
$0.5  million  and  segment  profit of $3.0  million for the for the nine months
ended  September 30, 2003 and 2002,  respectively.  As a result of an SEC order,
Rail incurred  additional Service Company  allocations during the three and nine
months ended September 30, 2003, respectively, when compared to the same periods
in 2002.  These  increased  costs were partially  offset by  improvements in the
recycling business and reduced operating costs.

An SEC order  approving the merger of FPC required the Company to divest Rail by
November 30, 2003. The Company is pursuing alternatives,  but does not expect to
find the right  divestiture  opportunity  by that date.  Therefore,  the Company
sought,  and in October 2003,  was granted  approval of, a three year  extension
from the SEC.


                                       51

<PAGE>

OTHER BUSINESSES SEGMENT

Progress  Energy's  Other segment  primarily  includes the operations of SRS and
Telecom.  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.  Telecom  provides  broadband
capacity  services,  dark fiber and wireless services in Florida and the eastern
United States.

The Other segment  contributed segment losses of $3.6 million and $225.9 million
in the three months ended  September 30, 2003 and 2002,  respectively,  and $2.6
million and $239.3 million in the nine months ended September 30, 2003 and 2002,
respectively.  Included in the 2002 segment  losses is an asset  impairment  and
other charges in the telecommunications business of $224.8 million.

CORPORATE SERVICES

Corporate  Services includes the operations of the Holding Company,  the Service
Company, and consolidation entities, as summarized below.
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

-----------------------------------------------------------------------------------------
                                       Three Months Ended           Nine Months Ended
                                          September 30,               September 30,
-----------------------------------------------------------------------------------------
Income (expense) in millions           2003          2002        2003          2002
-----------------------------------------------------------------------------------------
  Other interest expense                $ (77.5)     $ (66.6)   $ (221.8)      $ (213.3)
  Contingent value obligations             (3.9)         9.4        (3.9)          22.2
  Tax levelization                         35.4         39.1        40.8          (40.5)
  Tax reallocation                         (9.1)        (4.1)      (27.9)         (37.1)
  Other income taxes                       31.4         24.0        93.5           90.3
  Other income (expenses)                  (2.5)         4.4        (6.2)          (3.0)
                                     ----------------------------------------------------
    Segment profit (loss)               $ (26.2)     $   6.2    $ (125.5)      $ (181.4)
-----------------------------------------------------------------------------------------
</TABLE>

Progress  Energy  issued 98.6 million  contingent  value  obligations  (CVOs) in
connection  with the 2000 FPC  acquisition.  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, 2003 and 2002,
the CVOs had fair  market  values  of  approximately  $17.8  million  and  $13.8
million,  respectively.  Progress  Energy  recorded an  unrealized  loss of $3.9
million and unrealized gain of $9.4 million for the three months ended September
30,  2003 and 2002,  respectively,  to record  the  changes in fair value of the
CVOs, which had average unit prices of $0.18 and $0.20 at September 30, 2003 and
2002,  respectively.  A $3.9 million unrealized loss and a $22.2 unrealized gain
was  recorded  for the for the nine months  ended  September  30, 2003 and 2002,
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 $35.4  million  and $39.1  million for the three
months ended September 30, 2003 and 2002, respectively,  in order to maintain an
effective tax rate consistent with the estimated annual rate. Income tax expense
was decreased by $40.8  million and increased  $40.5 million for the nine months
ended September 30, 2003 and 2002, 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.

DISCONTINUED OPERATIONS

In  2002,  the  Company  approved  the  sale of NCNG  and the  Company's  equity
investment  in ENCNG to Piedmont  Natural Gas Company,  Inc. As a result of this
action,  the  operating  results  of  NCNG  were  reclassified  to  discontinued
operations for all reportable  periods. A $29.4 million after-tax estimated loss
on the sale of the assets was recognized in the fourth quarter of 2002. The sale
closed on September 30, 2003, at which time an additional after-tax loss of $8.9
million was recognized. Net proceeds of approximately $450 million from the sale
of NCNG and ENCNG were used to reduce outstanding short-term debt.

LIQUIDITY AND CAPITAL RESOURCES

Progress Energy, Inc.

Cash provided by operating activities increased $143 million for the nine months
ended September 30, 2003, when compared to the corresponding period in the prior
year. The increase in cash from operating  activities for the 2003 period is due
to reduced working  capital needs at PVI and Progress Fuels,  which offset lower
cash from  operations  at the  utility  operations.  The lower  working  capital
requirements were due largely to reduced inventory levels at Progress Fuels.

                                       52
<PAGE>


Net cash used in investing activities decreased $644 million for the nine months
ended September 30, 2003, when compared to the corresponding period in the prior
year. The decrease in cash used in investing  activities is primarily due to the
receipt  of  approximately  $450  million  from the  sale of NCNG  and  ENCNG in
September which was used to reduce debt. In addition,  lower capital spending at
PVI,  which  acquired   generating   assets  from  LG&E  in  February  2002  for
approximately $350 million, contributed to the decrease.

During the first nine  months of 2003,  $476  million  was spent in  diversified
business property additions. This amount includes the acquisition of the natural
gas reserves in February 2003 for $148 million.  In addition to the $476 million
spent on diversified business property additions, PVI also purchased a wholesale
energy supply contract for approximately $190 million.

The increase in operating cash flow and lower capital  expenditures  resulted in
an increase of $787 million of net cash flow before common dividend payments and
other  financing  activity for the nine month period  ending  September 30, 2003
compared with the corresponding period for the prior year.

On February 21, 2003,  PEF issued $425 million of First  Mortgage  Bonds,  4.80%
Series,  Due March 1,  2013 and $225  million  of First  Mortgage  Bonds,  5.90%
Series,  Due March 1, 2033.  Proceeds  from this issuance were used to repay the
balance of its  outstanding  commercial  paper,  to  refinance  its  secured and
unsecured  indebtedness,  including  $70 million of PEF's First  Mortgage  Bonds
6.125%  Series,  Due March 1, 2003,  which were retired on March 1, 2003, and to
redeem on March 24, 2003, the $150 million aggregate  outstanding balance of its
8% First  Mortgage  Bonds due 2022 at  103.75% of the  principal  amount of such
bonds.

In March 2003,  Progress Genco Ventures,  LLC (Genco), a wholly-owned subsidiary
of PVI,  terminated its $50 million working capital credit  facility.  A related
construction  facility  initially provided for Genco to draw up to $260 million.
The amount  outstanding  under this facility is $241 million as of September 30,
2003.  During the three months ended September 30, 2003 Genco  determined it did
not need to make any additional draws under this facility.

On April 1, 2003, PEF entered into a new $200 million  364-day credit  agreement
and a new $200 million  three-year credit agreement,  replacing its prior credit
facilities  (which had been a $90 million  364-day  facility  and a $200 million
five-year  facility).  The new PEF credit  facilities  contain a defined maximum
total  debt to  total  capital  ratio  of 65%;  as of  September  30,  2003  the
calculated ratio, as defined,  was 51.3%. The new credit facilities also contain
a  requirement  that the ratio of  EDITDA,  as  defined  in the  facilities,  to
interest  expense to be at least 3 to 1; as of September 30, 2003 the calculated
ratio, as defined, was 8.1 to 1.

Also on April 1, 2003,  PEC  reduced  the size of its  existing  364-day  credit
facility  from $285 million to $165  million.  The other terms of this  facility
were not changed.  On July 30, 2003, PEC renewed its $165 million 364-day credit
agreement PEC's $285 million  three-year  credit agreement  entered into in July
2002 remains in place, for total facilities of $450 million.

On May 27, 2003, PEC redeemed $150 million of First Mortgage Bonds, 7.5% Series,
Due March 1, 2023 at 103.22% of the principal  amount of such bonds.  PEC funded
the redemption with commercial paper.

On July 1, 2003,  $110 million of PEF's First Mortgage Bonds,  6.0% Series,  Due
July 1, 2003 and $35 million of PEF's medium-term notes, 6.62% Series,  matured.
PEF funded the redemption with commercial paper.

On August 15, 2003,  PEC redeemed $100 million of First Mortgage  Bonds,  6.875%
Series Due August 15, 2023 at 102.84%.

On August 27, 2003,  Standard & Poor's (S&P) credit rating agency announced that
it had lowered its corporate  credit rating on Progress  Energy Inc.,  PEC, PEF,
and Florida  Progress  to BBB from BBB+.  The outlook of the ratings was changed
from  negative to stable.  These  changes have not had a material  impact on the
companies' access to capital or their financial results.

On September 11, 2003, PEC issued $400 million of First Mortgage  Bonds,  5.125%
Series, Due September 15, 2013 and $200 million of First Mortgage Bonds,  6.125%
Series, Due September 15, 2033.  Proceeds from this issuance were used to reduce
the balance of PEC's outstanding  commercial paper, and short-term notes payable
to  affiliated  companies,  which  notes  represent  PEC's  borrowings  under an
internal money pool operated by Progress Energy.

In October 2003, the Company received net proceeds of approximately  $97 million
for the sale of its Mesa gas  properties  located in  Colorado.

                                       53

<PAGE>

On October 31, 2003,  PEF announced the  redemption of $100 million of its First
Mortgage  Bonds,  7% Series Due 2023 at 103.19% of the principal  amount of such
bonds. PEF intends to redeem the bonds on December 1, 2003 with commercial paper
proceeds.

For the three months ended September 30, 2003, the Company issued  approximately
2.7 million shares representing  approximately $112 million in proceeds from its
Investor Plus Stock Purchase Plan and its employee  benefit plans.  For the nine
months  ended  September  30,  2003,  the Company has issued  approximately  6.9
million shares through these plans,  resulting in approximately  $284 million of
cash proceeds.

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.

Future Commitments

As of September 30, 2003, the current  portion of long-term debt of $868 million
includes  $500 million of Progress  Energy's  6.55% senior  unsecured  notes due
March 1, 2004. The Company expects to have sufficient  commercial paper capacity
to retire this issue due to the  application  of net  proceeds  from the sale of
NCNG in September 2003 to reduce commercial paper balances.  The current portion
of  long-term  debt also  includes  $300  million of secured debt issued by PEC.
These amounts are expected to be refinanced or retired through commercial paper,
capital market transactions and with internally-generated funds.

As of September 30, 2003, Progress Energy's guarantees issued on behalf of third
parties were approximately $26.4 million.

OTHER MATTERS

PEF Rate Case Settlement

On March 27, 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 on April 23, 2002.  The  Agreement  provides
that PEF will operate under a Revenue Sharing  Incentive Plan (the Plan) through
2005 and thereafter until terminated by the FPSC.

The Plan provides that all retail base revenues between an established threshold
and cap will be shared on a 2/3 - 1/3,  customer/shareholder  basis.  All retail
base rate revenues above the retail base rate revenue caps  established for each
year will be refunded 100% to retail  customers on an annual  basis.  The retail
base revenue cap for 2003 is $1.393  billion and will  increase $37 million each
year  thereafter.  As of December  31,  2002,  $4.7  million was accrued and was
refunded to  customers in March 2003.  On February 24, 2003,  the parties to the
Agreement  filed a  motion  seeking  an  order  from  the  FPSC to  enforce  the
Agreement.  In this motion,  the parties  disputed  PEF's  calculation of retail
revenue  subject  to refund  and  contended  that the  refund  should  have been
approximately $23 million. On July 9, 2003, the FPSC ruled that PEF must provide
an additional $18.4 million to its retail customers  related to the 2002 revenue
sharing calculation. PEF recorded this refund in the second quarter of 2003 as a
charge against  electric  operating  revenue and refunded this amount by October
31, 2003.  For the nine months  ended  September  30, 2003,  PEF has recorded an
additional accrual of $5.4 million related to estimated 2003 revenue sharing.

Synthetic Fuels 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.  Any synthetic fuel tax credit amounts not utilized are carried
forward  indefinitely.  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  $1.121 billion, of which $489.1 million have been used and $631.9
million are being carried  forward as of September 30, 2003. The current Section
29 tax credit program expires at the end of 2007.

                                       54

<PAGE>

One  synthetic  fuel  entity,  Colona  Synfuel  Limited  Partnership,   L.L.L.P.
(Colona),  from  which  the  Company  (and FPC prior to its  acquisition  by the
Company) has been allocated approximately $286.6 million in tax credits to date,
is being  audited by the IRS. The audit of Colona was  expected.  The Company is
audited  regularly  in the  normal  course of  business,  as are most  similarly
situated companies.

In September 2002, all of the Company's  majority-owned synthetic fuel entities,
including Colona,  were accepted into the IRS Prefiling 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 June 2003,  the  Company  was  informed  that IRS field  auditors  had raised
questions  regarding the chemical change  associated  with coal-based  synthetic
fuel  manufactured  at its Colona  facility and the testing process by which the
chemical  change  is  verified.  (The  questions  arose in  connection  with the
Company's  participation  in the  PFA  program.)  The  chemical  change  and the
associated testing process were described as part of the PLR request for Colona.
Based on that application, the IRS ruled in Colona's PLR that the synthetic fuel
produced at Colona  undergoes a significant  chemical  change and thus qualifies
for tax credits under Section 29.

In October 2003, the National Office of the IRS informed the Company that it had
rejected the IRS field auditors' challenges regarding whether the synthetic fuel
produced  at the  Company's  Colona  facility  was the  result of a  significant
chemical change. The National office had concluded that the experts,  engaged by
Colona  who  test  the  synthetic  fuel  for  chemical  change,  use  reasonable
scientific methods to reach their conclusions.  Accordingly, the National Office
will not take any adverse  action on the PLR that has been issued for the Colona
facility.

A written decision  memorializing  the National Office's  conclusions  should be
available within the next two months.  At that time, the IRS field auditors will
have the right to ask for reconsideration of the National Office's decision.

Although this ruling applies only to the Colona  facility,  the Company believes
that the National Office's  reasoning should be equally  applicable to the other
Progress Energy facilities,  given that the Company applies essentially the same
chemical process and uses the same independent  laboratories to confirm chemical
change in the  synthetic  fuel  manufactured  at each of its  other  facilities.
However, the IRS has not yet formally informed the Company as to its position on
the Company's other facilities.

Although this is a significant  event, the audits of the Colona facility and the
Company's other  facilities are not yet completed.  Progress Energy continues to
believe that it operates its facilities in conformity  with its PLRs and Section
29.  Accordingly,  the Company has no current plans to alter its synthetic  fuel
production schedule as a result of these matters.

In  addition,  the  Company  has  retained  an  advisor  to assist in selling an
interest in one or more  synthetic  fuel  entities.  The Company is pursuing the
sale  of  a  portion  of  its  synthetic  fuel   production   capacity  that  is
underutilized  due to limits on the amount of credits that can be generated  and
utilized  by the  Company.  The  Company  would  expect to  retain an  ownership
interest  and to operate  any sold  facility  for a  management  fee.  The final
outcome and timing of the Company's  efforts to sell interests in synthetic fuel
facilities is uncertain and while the Company cannot predict the outcome of this
matter,  the  outcome  is  not  expected  to  have  a  material  effect  on  the
consolidated financial position, cash flows or results of operations.

Nuclear Matters

On August 9, 2002, the Nuclear Regulatory  Commission (NRC) issued an additional
bulletin  dealing  with head leakage due to cracks near the control rod nozzles.
The NRC asked  licensees  to commit to high  inspection  standards to ensure the
more susceptible  plants have no cracks.  The Robinson Plant is in this category
and had a refueling  outage in October 2002.  The Company  completed a series of
examinations  in October  2002 of the entire  reactor  pressure  vessel head and
found no indications of control rod drive mechanism  penetration  leakage and no
corrosion of the head itself.  During the outage,  a boric acid leakage walkdown
of the reactor coolant pressure boundary was also completed and no corrosion was
found.

The Company currently plans to re-inspect the Robinson Plant reactor head during
its next refueling outage in 2004 and replace the head in 2005. The Harris Plant
is ranked in the lowest susceptibility classification. During the Harris Plant's
2003  outage,  the  Company  completed  a series of  examinations  of the entire
reactor pressure vessel head and found no degradation or indication of leakage.


                                       55

<PAGE>

In October 2001,  at PEF's  Crystal  River Plant (CR3),  one nozzle was found to
have a crack and was repaired;  however,  no  degradation  of the reactor vessel
head was  identified.  The  Company  replaced  the vessel head at CR3 during its
regularly  scheduled  refueling  outage  completed on November 5, 2003, when the
unit was returned to service.

In January  2003,  the NRC issued a final order with  regard to access  control.
This order requires the Company to enhance its current access control program by
January 7, 2004. The Company expects that it will be in full compliance with the
order by the established deadline.

In February 2003, the NRC issued Order EA-03-009, requiring specific inspections
of the  reactor  pressure  vessel  head and  associated  penetration  nozzles at
pressurized water reactors (PWRs).  The Company responded to the Order,  stating
that it intends to comply with the provisions of the Order. No adverse impact is
anticipated.

In April 2003,  the STP  Nuclear  Operating  Company,  an  unaffiliated  entity,
notified  the NRC of a  potential  leak  indication  on the  bottom  head of the
reactor vessel of one of its units.  On August 21, 2003 the NRC issued  Bulletin
2003-02  requesting  PWR  licensees  to  address  inspection  plans for  reactor
pressure vessel lower head penetrations.  The Company intends to comply with the
provisions of the order.

The NRC continues to issue  additional  orders designed to increase  security at
nuclear  facilities.  In April 2003, one of the orders issued by the NRC imposes
revisions  to the Design  Basis  Threat and  requires  power plants to implement
additional  protective  actions to protect  against  sabotage by terrorists  and
other  adversaries.  The Company expects that it will be in full compliance with
the order by the established  deadline.  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

Four cities,  with a total of approximately  31,000  customers,  have litigation
pending  against PEF in various circuit courts in Florida.  As discussed  below,
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.  Five circuit  courts 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  cities to determine the value of PEF's
electric distribution system within the cities through arbitration.  Arbitration
in one of the cases (the City of Casselberry) was held in August 2002. Following
arbitration,  the parties entered settlement  discussions,  and on July 28, 2003
the City approved a settlement  agreement and a new, 30-year franchise agreement
with PEF.  The  settlement  resolves  all pending  litigation  with that city. A
second arbitration (with the 13,000-customer  City of Winter Park) was completed
in February 2003. That arbitration panel issued an award on May 29, 2003 setting
the  value of PEF's  distribution  system  within  the  City of  Winter  Park at
approximately  $31.5 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  $10.7 million in stranded
costs.  On September 9, 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. The City has not yet definitively  decided
whether  it will  acquire  the  system,  but  has  indicated  that it will  seek
wholesale  power supply bids and bids to operate and  maintain the  distribution
system.  At this  time,  whether  and when  there  will be  further  proceedings
regarding  the City of Winter Park  cannot be  determined.  A third  arbitration
(with the  2,500-customer  Town of Belleair)  was completed on June 16, 2003. On
September 2, 2003,  the  arbitration  panel issued an award in that case setting
the value of the electric  distribution  system within the Town at approximately
$6.3 million.  The panel  further  required the Town to pay to PEF its requested
$690,000 in separation and reintegration costs and approximately $1.5 million in
stranded costs.  The Town has not yet decided whether it will attempt to acquire
the system.  At this time,  whether  and when there will be further  proceedings
regarding the Town of Belleair cannot be determined.  A fourth arbitration (with
the  13,000-customer  City of  Apopka)  has been  scheduled  for  January  2004.
Arbitration  in the remaining  city's  litigation  (the  1,500-customer  City of
Edgewood) has not yet been scheduled.

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 on August 27,  2003.  Subsequently,  the Court  requested
briefing from the parties in the other appeal. Briefing likely will be completed
in the second appeal in early  November.  The Company cannot predict the outcome
of these matters at this time.

                                       56
<PAGE>

Progress Energy Carolinas, Inc.

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

RESULTS OF OPERATIONS

The results of operations for the PEC Electric segment are identical between PEC
and  Progress   Energy.   The  results  of  operations  for  PEC's   non-utility
subsidiaries  for the nine  months  ended  September  30,  2003 and 2002 are not
material to PEC's consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

Cash provided by operating  activities increased $35 million for the nine months
ended September 30, 2003, when compared to the corresponding period in the prior
year. The increase was caused primarily by changes in working capital.

Cash used in investing  activities  increased  approximately $78 million for the
nine months ended September 30, 2003, when compared to the corresponding  period
in the prior year. Excluding the $244 million in cash proceeds received in April
2002 for the sale of  generating  assets  to  Progress  Ventures,  cash  used in
investing  activities decreased $166 million primarily due to lower construction
spending.  During the first nine  months of 2003,  $418.5  million  was spent on
PEC's  construction  program,  nuclear fuel additions and  contributions  to its
nuclear  decommissioning  fund. This amount was approximately  $118 million less
than  the  corresponding  period  last  year.  The  decrease  was  due to  lower
construction  expenditures  associated with generation assets transferred to PVI
during 2002.

As of September 30, 2003,  PEC's  liquidity,  contractual  cash  obligations and
other commercial  commitments have not changed materially from what was reported
in the 2002 Annual Report on Form 10-K/A.

On April 1, 2003, PEC reduced the size of its existing  364-day credit  facility
from $285 million to $165  million.  The other terms of this  facility  were not
changed.  On July  30,  2003,  PEC  renewed  its  $165  million  364-day  credit
agreement.  PEC's $285 million  three-year credit agreement entered into in 2002
remains in place, for total facilities of $450 million.

On May 27, 2003, PEC redeemed $150 million of First Mortgage Bonds, 7.5% Series,
Due March 1, 2023 at 103.22% of the principal  amount of such bonds.  PEC funded
the redemption with commercial paper.

On July 14, 2003, PEC announced the redemption of $100 million of First Mortgage
Bonds, 6.875% Series Due August 15, 2023 at 102.84%.  The date of the redemption
was August 15, 2003 and the redemption was funded by PEC with commercial paper.

On September 11, 2003, PEC issued $400 million of First Mortgage  Bonds,  5.125%
Series, Due September 15, 2013 and $200 million of First Mortgage Bonds,  6.125%
Series, Due September 15, 2033.

The current  portion of  long-term  debt  includes  $300 million of secured debt
issued  by  PEC.  The  current  portion  of  long-term  debt is  expected  to be
refinanced or retired through commercial paper,  capital market transactions and
internally generated of funds.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Progress Energy, Inc.

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.

The   Company's   exposure   to  return  on   marketable   securities   for  the
decommissioning  trust funds has not changed materially since December 31, 2002.
The  Company's  exposure to market  value risk with respect to the CVOs has also
not changed materially since December 31, 2002.

                                       57
<PAGE>

In March,  April,  May and June of 2003, PEC entered into treasury rate locks to
hedge its exposure to interest  rates with regard to a future  issuance of debt.
These agreements had a computational  period of ten years and were designated as
cash flow hedges for accounting  purposes.  The agreements have a total notional
amount of $110 million.  The agreements were terminated  simultaneously with the
pricing of the PEC First Mortgage Bonds in September 2003. The $4.2 million gain
on the agreements was deferred and is being amortized over the life of the bonds
as these  agreements  had been  designated  as cash flow  hedges for  accounting
purposes.

The  exposure to changes in  interest  rates from the  Company's  fixed rate and
variable rate long-term debt at September 30, 2003 has changed from December 31,
2002.  The total  fixed  rate  long-term  debt at  September  30,  2003 was $9.3
billion,  with an average  interest rate of 6.60% and fair market value of $10.3
billion.  The total variable rate long-term debt at September 30, 2003, was $1.1
billion,  with an average  interest  rate of 1.29% and fair market value of $1.1
billion.

The exposure to changes in interest  rates from the Company's  commercial  paper
and FPC  mandatorily  redeemable  securities of trust at September 30, 2003, was
not materially different than at December 31, 2002.

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 return on
marketable   securities  for  the  decommission  trust  funds  has  not  changed
materially since December 31, 2002.

In March,  April,  May and June of 2003, PEC entered into treasury rate locks to
hedge its exposure to interest  rates with regard to a future  issuance of debt.
These agreements had a computational  period of ten years and were designated as
cash flow hedges for accounting purposes. The agreements,  with a total notional
amount of $110 million,  were terminated  simultaneously with the pricing of the
PEC  First  Mortgage  Bonds in  September  2003.  The $4.2  million  gain on the
agreements  was  deferred and is being  amortized  over the life of the bonds as
these  agreements  had  been  designated  as cash  flow  hedges  for  accounting
purposes.

The  exposure to changes in interest  rates from the PEC's fixed rate  long-term
debt,  variable rate long-term  debt and commercial  paper at September 30, 2003
was not materially different than at December 31, 2002.


                                       58
<PAGE>

Item 4. Controls and Procedures

Progress Energy, Inc.

Pursuant to Rule 13a-15(b) under the Securities  Exchange Act of 1934,  Progress
Energy carried out an evaluation,  with the  participation of Progress  Energy's
management,  including  Progress Energy's Chairman and Chief Executive  Officer,
and  Chief  Financial  Officer,   of  the  effectiveness  of  Progress  Energy's
disclosure  controls and procedures  (as defined under Rule 13a-15(e)  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  Chairman  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 in Progress  Energy's  internal  control over financial
reporting  during the  quarter  ended  September  30,  2003 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 Rule  13a-15(b)  under the  Securities  Exchange  Act of 1934,  PEC
carried out an evaluation, with the participation of PEC's management, including
PEC's Chairman and Chief Executive Officer,  and Chief Financial Officer, of the
effectiveness of PEC's disclosure controls and procedures (as defined under Rule
13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period
covered by this report.  Based upon that  evaluation,  PEC's  Chairman 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 in PEC's
internal control over financial reporting during the quarter ended September 30,
2003 that has materially affected, or is reasonably likely to materially affect,
PEC's internal control over financial reporting.


                                       59
<PAGE>



                           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 10
to the PEC's Consolidated Interim Financial Statements.

1.   Strategic  Resource Solutions Corp. ("SRS") v. San Francisco Unified School
     District, et al., Sacramento Superior Court, Case No. 02AS033114

In November of 2001, 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. On March 4,
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 has asserted  defenses
to the  District's  claims.  SRS has amended its claims and  asserted new claims
against the  District and other  parties,  including a former SRS employee and a
former District employee.

On March 13, 2003, the City Attorney's office announced the filing of new claims
by the City Attorney and the District 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 City Attorney's
announcement  states that the City and the District seek "more than $300 million
in damages and penalties."

The Company, SRS, and Progress Energy Solutions,  Inc. all have filed responsive
pleadings denying the allegations, and the discovery process is underway.

On  October  2,  2003,  the  District  filed a motion  for  leave  to amend  its
cross-complaint  to add PEC as an  additional  defendant  and the  parties  have
stipulated  that the  pleadings  may be so amended.  PEC will file a  responsive
pleading denying the allegations.

The Company cannot predict the outcome of this matter,  but the Company believes
that it and its  subsidiaries  have good defenses to all claims  asserted by the
District and other claimants.

2.   Collins v. Duke Energy Corporation, Civil Action No. 03CP404050

On August 21, 2003, PEC was served as a co-defendant in a purported class action
lawsuit  styled  as  Collins  v.  Duke  Energy  Corporation,  Civil  Action  No.
03CP404050,  in South  Carolina's  Circuit  Court of Common  Pleas for the Fifth
Judicial  Circuit.  PEC is one of three  electric  utilities  operating in South
Carolina named in the suit.  The plaintiffs are seeking  damages for the alleged
improper use of electric  easements  but have not  asserted a dollar  amount for
their damage claims.  The complaint alleges that the licensing of attachments on
electric utility poles, towers and other structures to non-utility third parties
or  telecommunication  companies for other than the electric utilities' internal
use along the electric right-of-way constitutes a trespass.

On September 19, 2003, PEC filed a motion to dismiss all counts of the complaint
on substantive and procedural  grounds. On October 6, 2003, the plaintiffs filed
a motion to amend their complaint.  PEC believes the amended  complaint  asserts
the same factual  allegations  as are in the original  complaint  and also seeks
money damages and injunctive relief.

The court has not yet held any  hearings or made any  rulings in this case.  PEC
intends  to  vigorously  defend  itself  against  the  claims  asserted  by  the
plaintiffs.  PEC cannot  predict the outcome of any future  proceedings  in this
case.


                                       60

<PAGE>

Item 2. Changes in Securities and Use of Proceeds


RESTRICTED STOCK AWARDS:

(a)  Securities Delivered.  On September 16, 2003 and October 1, 2003, 4,800 and
     8,000 restricted shares, respectively,  of the Company's Common Shares were
     granted to certain key  employees  pursuant  to the terms of the  Company's
     2002 Equity  Incentive  Plan (Plan),  which was  approved by the  Company's
     shareholders  on May 8,  2002.  Section  9 of the  Plan  provides  for  the
     granting of Restricted Stock by the Organization and Compensation Committee
     of the Company's  Board of Directors,  (the  Committee) to key employees of
     the Company,  including  its  Affiliates or any  successor,  and to outside
     directors of the Company.  The Common Shares delivered pursuant to the Plan
     were  acquired  in market  transactions  directly  for the  accounts of the
     recipients and do not represent newly issued shares of the Company.

(b)  Underwriters and Other Purchasers.  No underwriters were used in connection
     with the delivery of Common Shares  described above. The Common Shares were
     delivered to certain key  employees  of the Company.  The Plan defines "key
     employee"  as an officer or other  employee  of the Company who is selected
     for participation in the Plan.

(c)  Consideration.  The Common Shares were delivered to provide an incentive to
     the  employee  recipients  to exert their utmost  efforts on the  Company's
     behalf and thus  enhance  the  Company's  performance  while  aligning  the
     employee's interest with those of the Company's shareholders.

(d)  Exemption from  Registration  Claimed.  The Common Shares described in this
     Item were  delivered on the basis of an exemption from  registration  under
     Section 4(2) of the  Securities  Act of 1933.  Receipt of the Common Shares
     required no investment  decision on the part of the  recipients.  All award
     decisions  were  made  by  the  Committee,   which  consists   entirely  of
     non-employee directors.



                                       61
<PAGE>

Item 6. Exhibits and Reports on Form 8-K

(a)  Exhibits
<TABLE>
<S>     <C>    <C>    <C>    <C>    <C>    <C>

     Exhibit                                                                          Progress           Progress Energy
     Number                                  Description                            Energy, Inc.         Carolinas, Inc.

      10(i)          Progress Energy, Inc. $250,000,000 364-Day Amended and              X
                     Restated Credit Agreement dated as of November 10, 2003.

      31(a)          Certifications pursuant to Section 302 of the Sarbanes-             X                      X
                     Oxley Act of 2002 - Chairman and Chief Executive Officer

      31(b)          Certifications pursuant to Section 302 of the Sarbanes-             X                      X
                     Oxley Act of 2002 - Executive Vice President and Chief
                     Financial Officer

      32(a)          Certifications pursuant to Section 906 of the Sarbanes-             X                      X
                     Oxley Act of 2002 - Chairman and Chief Executive Officer

      32(b)          Certifications pursuant to Section 906 of the Sarbanes-             X                      X
                     Oxley Act of 2002 - Executive Vice President and Chief
                     Financial Officer


(b)  Reports filed or furnished on Form 8-K since the beginning of the quarter:

     Progress Energy, Inc.

                       Financial
         Item          Statements
       Reported         Included             Date of Event          Date Filed or Furnished
        9, 12             Yes                July 23, 2003               July 23, 2003
         7, 9             Yes               August 29, 2003             August 29, 2003
          5                No               August 29, 2003            September 2, 2003
        9, 12             Yes               October 22, 2003           October 22, 2003


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

                       Financial
         Item          Statements
       Reported         Included             Date of Event          Date Filed or Furnished
        9, 12             Yes                July 23, 2003               July 23, 2003
          5                No               August 29, 2003            September 2, 2003
         5, 7             Yes              September 8, 2003           September 8, 2003
         5, 7              No              September 8, 2003          September 12, 2003
        9, 12             Yes               October 22, 2003           October 22, 2003

</TABLE>



                                       62
<PAGE>

                                   SIGNATURES


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

                                          PROGRESS ENERGY, INC.
                                          CAROLINA POWER & LIGHT COMPANY
Date: November 12, 2003                   (Registrants)

                                          By: /s/ Peter  M.  Scott III
                                          ------------------------------
                                          Peter M. Scott III
                                          Executive Vice President and
                                          Chief Financial Officer

                                          By: /s/ Robert H. Bazemore, Jr.
                                          ------------------------------
                                          Robert H. Bazemore, Jr.
                                          Vice President and Controller
                                          Chief Accounting Officer

                                       63